Mercury Insurance 2010 Annual Report Download - page 94

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair value amounts, and gains and losses on derivative instruments
The following tables provide the location and amounts of derivative fair values in the consolidated balance
sheets and derivative gains and losses in the consolidated statements of operations:
Asset Derivatives Liability Derivatives
December 31,
2010
December 31,
2009
December 31,
2010
December 31,
2009
(Amounts in thousands)
Hedging derivatives
Interest rate contracts—Other assets (liabilities) . . . $4,240 $8,472 $(1,139) $ (918)
Non-hedging derivatives
Interest rate contracts—Other liabilities .......... $ 0 $ 0 $(1,903) $(1,446)
Equity contracts—Short-term investments (Other
liabilities) ............................... 0 0 (2,776) (1,043)
Total non-hedging derivatives .................... $ 0 $ 0 $(4,679) $(2,489)
Total derivatives ............................... $4,240 $8,472 $(5,818) $(3,407)
The Effect of Derivative Instruments on the Statements of Operations
Loss Recognized in Income
Year Ended December 31,
Derivatives Contracts for Fair Value Hedges 2010 2009 2008
(Amounts in thousands)
Interest rate contracts—Interest expense ................ $7,103 $ 7,022 $ 4,938
Loss Recognized in Other
Comprehensive Income (Loss)
Year Ended December 31,
Derivatives Contracts for Cash Flow Hedges 2010 2009 2008
(Amounts in thousands)
Interest rate contracts—Other comprehensive loss ........ $ (220) $ (918) $(1,348)
Gain or (Loss)
Recognized in Income
Year Ended December 31,
Derivatives Not Designated as Hedging Instruments 2010 2009 2008
(Amounts in thousands)
Interest rate contract—Other revenue .................. $ (457) $(1,446) $ 0
Equity contracts—Net realized investment gains ......... 4,615 7,801 9,056
Total ............................................ $4,158 $ 6,355 $ 9,056
There were no gains or losses on derivative instruments designated as cash flow hedges reclassified from
accumulated other comprehensive income into earnings for the years ended December 31, 2010, 2009, and 2008.
Most equity contracts consist of covered calls. The Company writes covered calls on underlying equity
positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under
statutory regulations. The Company manages the risk associated with covered calls through strict capital
limitations and asset diversification throughout various industries.
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