Mercury Insurance 2010 Annual Report Download - page 88

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Level 2 Measurements—Fair values of financial assets and financial liabilities are obtained from an independent
pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or
valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or
liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the
investment portfolio.
Municipal securities: Valued based on models or matrices using inputs including quoted prices for identical or
similar assets in active markets.
Mortgage-backed securities: Comprised of securities that are collateralized by residential mortgage loans and
valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades
and broker/dealer quotes, for identical or similar assets in active markets. At December 31, 2010 and
December 31, 2009, the Company had no holdings in commercial mortgage-backed securities.
Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable
inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar
assets in active markets.
Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of
same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in
active markets.
Interest rate swap agreements: Valued based on models using inputs, such as interest rate yield curves,
observable for substantially the full term of the contract.
Level 3 Measurements—Fair values of financial assets are based on inputs that are both unobservable and
significant to the overall fair value measurement, including any items in which the evaluated prices obtained
elsewhere were deemed to be of a distressed trading level.
Municipal securities: Comprised of certain distressed municipal securities for which valuation is based on models
that are widely accepted in the financial services industry and require projections of future cash flows that are not
market observable. Included in this category are $1.6 million of ARS.
Collateralized debt obligations: Valued based on underlying debt instruments and the appropriate benchmark
spread for similar assets in active markets; taking into consideration unobservable inputs related to liquidity
assumptions.
The Company’s total financial instruments at fair value are reflected in the consolidated balance sheets on a
trade-date basis. Related unrealized gains or losses are recognized in net realized investment gains (losses) in the
consolidated statements of operations. Fair value measurements are not adjusted for transaction costs.
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