Mercury Insurance 2010 Annual Report Download - page 79

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value of Financial Instruments
The financial instruments recorded in the consolidated balance sheets include investments, receivables,
interest rate swap agreements, accounts payable, equity contracts, and secured and unsecured notes payable. As
discussed above, all investments are carried at fair value on the consolidated balance sheets, including $55.7
million of fixed maturities which are valued based on broker quotes for underlying debt instruments and an
estimated benchmark spread for similar assets in active markets. Management determined fair value estimates for
ARS amounting to $1.6 million using discounted cash flow models. The fair value of the Company’s $120
million and $18 million secured notes is estimated based on assumptions and inputs, such as reset rates, for
similar termed notes that are observable in the market. The fair value of the Company’s publicly traded $125
million unsecured notes is based on the unadjusted quoted price for similar notes in active markets. Further, see
Note 3 for methods and assumptions used in estimating fair values of interest rate swap agreements, and equity
contracts. Due to their short-term maturity, the carrying value of receivables and accounts payable approximate
their fair market values. The following table presents estimated fair values of financial instruments at
December 31, 2010 and 2009.
December 31,
2010 2009
(Amounts in thousands)
Assets
Investments ....................................................... $3,155,257 $3,146,857
Interest rate swap agreements ......................................... $ 4,240 $ 8,472
Liabilities
Interest rate swap agreements ......................................... $ 3,042 $ 2,364
Equity contracts .................................................... $ 2,776 $ 1,043
Secured notes ...................................................... $ 138,332 $ 138,103
Unsecured notes ................................................... $ 128,280 $ 130,666
Deferred Policy Acquisition Costs
Deferred policy acquisition costs primarily consist of commissions paid to outside agents or brokers,
premium taxes, salaries, and certain other underwriting costs that vary with and are primarily related to the
acquisition of new and renewal insurance contracts and are amortized over the life of the related policy in
relation to the amount of premiums earned. Deferred acquisition costs are limited to the amount which will
remain after deducting from unearned premiums and anticipated investment income the estimated losses and loss
adjustment expenses and the servicing costs that will be incurred as the premiums are earned. The Company does
not defer advertising expenses but expenses them as incurred. The Company recorded net advertising expenses of
$30 million, $27 million, and $26 million during the years ended December 31, 2010, 2009, and 2008,
respectively.
Fixed Assets
Fixed assets are stated at historical cost less accumulated depreciation and amortization. The useful life for
buildings is 30 to 40 years. Furniture, equipment, and purchased software are depreciated on a combination of
straight-line and accelerated methods over 3 to 7 years. The Company has capitalized certain consulting costs,
payroll, and payroll-related costs for employees related to computer software developed for internal use, which
are amortized on a straight-line method over the estimated useful life of the software, generally not exceeding 5
years. In accordance with applicable accounting standards, capitalization ceases no later than the point at which a
computer software project is substantially complete and ready for its intended use. Leasehold improvements are
amortized over the life of the associated lease.
69