Mercury Insurance 2015 Annual Report Download - page 64

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52
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 Company's 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 results from 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, 2015, the estimated weighted-average credit quality rating of
the fixed maturities portfolio was A+, at fair value, consistent with the average rating at December 31, 2014.
The following table presents municipal bond holdings by state in descending order of holdings at fair value at December 31,
2015:
States Fair Value Average Rating
(Amounts in thousands)
Texas 457,968 AA
California 324,529 AA-
Florida 201,146 A+
Illinois 153,727 A+
Indiana 111,550 A+
Other states 1,256,119 A+
Total $ 2,505,039
The portfolio is broadly diversified among the states and the largest holdings are in populous states such as Texas and
California. These holdings are further diversified primarily among cities, counties, schools, public works, hospitals, and state
general obligations. The Company seeks to minimize overall credit risk and ensure diversification by limiting exposure to any
particular issuer.
Taxable fixed maturity securities represented 14.4% of the Company’s fixed maturity portfolio at December 31, 2015. 6.4%
of the Company’s taxable fixed maturity securities were comprised of U.S. government bonds and agencies and mortgage-backed
securities (Agencies), which were rated AAA at December 31, 2015. 7.4% of the Company’s taxable fixed maturity securities,
representing 1.1% of its total fixed maturity portfolio, were rated below investment grade. Below investment grade issues are
considered "watch list" items by the Company, and their status is evaluated within the context of the Company’s overall portfolio
and its investment policy on an aggregate risk management basis, as well as their ability to recover their investment on an individual
issue basis.
Equity price risk
Equity price risk is the risk that the Company will incur losses due to adverse changes in the equity markets.
At December 31, 2015, the Company’s primary objective for common equity investments was current income. The fair
value of the equity investments consisted of $280.3 million in common stocks, $24.7 million in non-redeemable preferred stocks,