Mercury Insurance 2012 Annual Report Download - page 64

Download and view the complete annual report

Please find page 64 of the 2012 Mercury Insurance annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 117

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117

43
The following table presents the composition of the total investment portfolio of the Company at December 31, 2012:
Cost(1) Fair Value
(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies $ 13,999 $ 14,204
Municipal securities 2,040,537 2,165,095
Mortgage-backed securities 27,786 30,703
Corporate securities 151,019 155,551
Collateralized debt obligations 37,562 42,801
2,270,903 2,408,354
Equity securities:
Common stock:
Public utilities 82,474 85,106
Banks, trusts and insurance companies 19,701 22,166
Energy and other 352,889 346,809
Non-redeemable preferred stock 10,895 11,701
Partnership interest in a private credit fund 10,000 11,306
475,959 477,088
Short-term investments 294,607 294,653
Total investments $ 3,041,469 $ 3,180,095
__________
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at cost.
At December 31, 2012, 67.4% of the Company’s total investment portfolio at fair value and 89.0% of its total fixed maturity
investments at fair value were invested in tax-exempt state and municipal bonds. Equity holdings consist of non-redeemable
preferred stocks, dividend-bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate
dividend received deduction, and a partnership interest in a private credit fund. At December 31, 2012, 91.7% of short-term
investments consisted of highly rated short-duration securities redeemable on a daily or weekly basis. The Company does not have
any direct investment in subprime lenders.
During 2012, the Company recognized $66.4 million in net realized investment gains, which included gains of $47.7 million
and $16.7 million related to fixed maturity and equity securities, respectively. Included in the gains were $36.3 million and $9.2
million in gains due to changes in the fair value of the Company’s fixed maturity and equity security portfolio, respectively, as a
result of applying the fair value option.
During 2011, the Company recognized $58.4 million in net realized investment gains, which included gains of $54.1 million
related to fixed maturity securities and losses of $4.9 million related to equity securities. Included in the gains and losses were
$62.1 million in gains due to changes in the fair value of the Company’s fixed maturity portfolio and $30.9 million in losses due
to changes in the fair value of the Company's equity security portfolio, as a result of applying the fair value option.
Fixed Maturity Securities
Fixed maturity securities include debt securities, which may have fixed or variable principal payment schedules, may be
held for indefinite periods of time, and may be used as a part of the Company’s asset/liability strategy or sold in response to changes
in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs, tax planning considerations, or other
economic factors. Short-term investments include money market accounts, options, and short-term bonds that are highly rated
short duration securities and redeemable within one year.
A primary exposure for the fixed maturity securities is interest rate risk. The longer the duration, the more sensitive the
asset is to market interest rate fluctuations. As assets with longer maturity dates tend to produce higher current yields, the Company’s
historical investment philosophy has resulted in a portfolio with a moderate duration. The nominal average maturities of the overall
bond portfolio were 12.2 years and 11.8 years (11.0 years and 10.8 years including all short-term instruments) at December 31,
2012 and 2011, respectively. The portfolio is heavily weighted in investment grade tax-exempt municipal bonds. Fixed maturity
investments purchased by the Company typically have call options attached, which further reduce the duration of the asset as
interest rates decline. The call-adjusted average maturities of the overall bond portfolio were 3.7 years and 4.5 years (3.3 years