Mercury Insurance 2012 Annual Report Download - page 71

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50
historical investment philosophy resulted in a portfolio with a moderate duration. Bond investments made by the Company typically
have call options attached, which further reduce the duration of the asset as interest rates decline. The decrease in municipal bond
credit spreads in 2012 caused overall interest rates to decrease, which resulted in a decrease in the duration of the Company’s
portfolio. Consequently, the modified duration of the bond portfolio reflecting anticipated early calls was 3.1 years at December 31,
2012 compared to 3.7 years and 4.7 years at December 31, 2011 and 2010, respectively. Given a hypothetical parallel increase of
100 or 200 basis points in interest rates, the Company estimates that the fair value of its bond portfolio at December 31, 2012
would decrease by $75.4 million or $150.8 million, respectively. Conversely, if interest rates were to decrease, the fair value of
the Company's bond portfolio would rise, and it may cause a higher number of the Company's bonds to be called away. The
proceeds from the called bonds would likely be reinvested at lower yields which would result in lower overall investment income
for the Company.