Mercury Insurance 2010 Annual Report Download - page 86

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Contractual Maturity
At December 31, 2010, fixed maturity holdings rated below investment grade and non-rated comprised
5.5% of total investments at fair value. Additionally, the Company owns securities that are credit enhanced by
financial guarantors that are subject to uncertainty related to market perception of the guarantors’ ability to
perform. Determining the estimated fair value of municipal bonds could become more difficult should markets
for these securities become illiquid. The estimated fair values at December 31, 2010 by contractual maturity are
shown below. Expected maturities will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Estimated Fair Value
(Amounts in thousands)
Fixed maturities:
Due in one year or less ................................. $ 24,989
Due after one year through five years ..................... 369,863
Due after five years through ten years ..................... 613,525
Due after ten years .................................... 1,586,536
Mortgage-backed securities ................................. 57,367
Total ........................................... $2,652,280
Investment Income
A summary of net investment income is shown in the following table:
Year Ended December 31,
2010 2009 2008
(Amounts in thousands)
Fixed maturities ...................................... $136,345 $137,607 $138,287
Equity securities ...................................... 8,435 8,558 9,431
Short-term investments ................................ 1,413 1,082 5,582
Total investment income ........................... $146,193 $147,247 $153,300
Less: Investment expense ............................... 2,379 2,298 2,020
Net investment income ............................. $143,814 $144,949 $151,280
3. Fair Value Measurements
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date using
the exit price. Accordingly, when market observable data is not readily available, the Company’s own
assumptions are set to reflect those that market participants would be presumed to use in pricing the asset or
liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets at fair value
are categorized based on the level of judgment associated with inputs used to measure their fair value and the
level of market price observability, as follows:
Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the
reporting date.
Level 2 Pricing inputs are other than quoted prices in active markets, which are based on the following:
• Quoted prices for similar assets or liabilities in active markets;
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