Mercury Insurance 2012 Annual Report Download - page 69

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48
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2012, the Company had no off-balance sheet arrangements as defined under Regulation S-K 303(a)
(4) and the instructions thereto.
CONTRACTUAL OBLIGATIONS
The Company’s significant contractual obligations at December 31, 2012 are summarized as follows:
Contractual Obligations Total 2013 2014 2015 2016 2017 Thereafter
(Amounts in thousands)
Debt (including interest)(1) $ 141,904 $ 1,014 $ 890 $ 140,000 $ 0 $ 0 $ 0
Lease obligations(2) 41,724 14,224 10,069 6,985 5,658 3,843 945
Losses and loss adjustment
expenses(3) 1,036,123 595,847 252,302 117,971 44,699 25,304 0
Total Contractual
Obligations $1,219,751 $ 611,085 $ 263,261 $ 264,956 $ 50,357 $ 29,147 $ 945
__________
(1) The Company’s debt contains various terms, conditions and covenants which, if violated by the Company, would result in
a default and could result in the acceleration of the Company’s payment obligations. Amounts differ from the balance
presented on the consolidated balance sheets as of December 31, 2012 because the debt amounts above include interest.
(2) The Company is obligated under various non-cancellable lease agreements providing for office space, automobiles, and
office equipment that expire at various dates through the year 2019.
(3) Reserve for losses and loss adjustment expenses is an estimate of amounts necessary to settle all outstanding claims, including
IBNR as of December 31, 2012. The Company has estimated the timing of these payments based on its historical experience
and expectation of future payment patterns. However, the timing of these payments may vary significantly from the amounts
shown above. The ultimate cost of losses may vary materially from recorded amounts which are the Company’s best
estimates.
(4) The table excludes liabilities of $3.5 million related to uncertainty in tax settlements as the Company is unable to reasonably
estimate the timing and amount of related future payments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
The Company is subject to various market risk exposures primarily due to its investing and borrowing activities. Primary
market risk exposures are changes in interest rates, equity prices, and credit risk. Adverse changes to these rates and prices may
occur due to changes in the liquidity of a market, or to changes in market perceptions of creditworthiness and risk tolerance. The
following disclosure reflects estimates of future performance and economic conditions. Actual results may differ.
Overview
The Company’s investment policies define the overall framework for managing market and investment risks, including
accountability and controls over risk management activities, and specify the investment limits and strategies that are appropriate
given the liquidity, surplus, product profile, and regulatory requirements of the subsidiaries. Executive oversight of investment
activities is conducted primarily through the Company’s investment committee. The Company’s investment committee focuses
on strategies to enhance after-tax yields, mitigate market risks, and optimize capital to improve profitability and returns.
The Company manages exposures to market risk through the use of asset allocation, duration, and credit ratings. Asset
allocation limits place restrictions on the total funds that may be invested within an asset class. Duration limits on the fixed
maturities portfolio place restrictions on the amount of interest rate risk that may be taken. Comprehensive day-to-day management
of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based
upon the acceptable boundaries established by investment policies.
Credit risk
Credit risk is due to uncertainty in a counterparty’s ability to meet its obligations. Credit risk is managed by maintaining a
high credit quality fixed maturities portfolio. As of December 31, 2012, the estimated weighted-average credit quality rating of
the fixed maturities portfolio was AA-, at fair value, consistent with the average rating at December 31, 2011. Historically, the
ten-year default rate per Moody’s for AA rated municipal bonds has been less than 1%. The Company’s municipal bond holdings,
which represent 89.9% of its fixed maturity portfolio at December 31, 2012, at fair value, are broadly diversified geographically.