Mercury Insurance 2013 Annual Report Download - page 57

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42
See “D. Debt” for cash flow related to outstanding debts.
C. Invested Assets
Portfolio Composition
An important component of the Company’s financial results is the return on its investment portfolio. The Company’s
investment strategy emphasizes safety of principal and consistent income generation, within a total return framework. The
investment strategy has historically focused on maximizing after-tax yield with a primary emphasis on maintaining a well
diversified, investment grade, fixed income portfolio to support the underlying liabilities and achieve return on capital and profitable
growth. The Company believes that investment yield is maximized by selecting assets that perform favorably on a long-term basis
and by disposing of certain assets to enhance after-tax yield and minimize the potential effect of downgrades and defaults. The
Company continues to believe that this strategy maintains the optimal investment performance necessary to sustain investment
income over time. The Company’s portfolio management approach utilizes a market risk and consistent asset allocation strategy
as the primary basis for the allocation of interest sensitive, liquid and credit assets as well as for determining overall below
investment grade exposure and diversification requirements. Within the ranges set by the asset allocation strategy, tactical
investment decisions are made in consideration of prevailing market conditions.
The following table presents the composition of the total investment portfolio of the Company at December 31, 2013:
Cost(1) Fair Value
(Amounts in thousands)
Fixed maturity securities:
U.S. government bonds and agencies $ 15,994 $ 16,096
Municipal securities 2,201,047 2,235,323
Mortgage-backed securities 37,848 40,247
Corporate securities 264,172 264,685
Collateralized debt obligations 3,981 4,302
2,523,042 2,560,653
Equity securities:
Common stock:
Public utilities 81,128 85,287
Banks, trusts and insurance companies 1,610 2,927
Energy and other 101,455 151,554
Non-redeemable preferred stock 29,740 29,567
Partnership interest in a private credit fund 10,000 12,548
223,933 281,883
Short-term investments 315,886 315,776
Total investments $ 3,062,861 $ 3,158,312
__________
(1) Fixed maturities and short-term bonds at amortized cost and equities and other short-term investments at cost.
At December 31, 2013, 70.6% of the Company’s total investment portfolio at fair value and 87.1% 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, 2013, 83.3% 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 2013, the Company recognized $11.4 million in net realized investment losses, which primarily included losses of
$95.2 million and gains of $80.9 million related to fixed maturity and equity securities, respectively. Included in the gains and
losses were $100.7 million in losses and $56.8 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 accounting option.
During 2012, the Company recognized $66.4 million in net realized investment gains, which primarily 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