Mercury Insurance 2015 Annual Report Download - page 78

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date of this standard to annual reporting periods beginning after December 15, 2017, including interim reporting periods within
that annual reporting period. Early adoption is now permitted only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that annual reporting period. The Company is evaluating the impact of this
standard on its consolidated financial statements and related disclosures.
2. Fair Value of Financial Instruments
The financial instruments recorded in the consolidated balance sheets include investments, receivables, options sold, total
return swaps, accounts payable,and secured and unsecured notes payable. Due to their short-term maturity, the carrying values
of receivables and accounts payable approximate their fair values. All investments are carried at fair value on the consolidated
balance sheets.
The following table presents estimated fair values of financial instruments:
December 31,
2015 2014
(Amounts in thousands)
Assets
Investments $ 3,380,642 $ 3,403,822
Liabilities
Total return swaps $ 11,525 $ 4,025
Options sold $ 260 $ 194
Secured notes $ 140,000 $ 140,000
Unsecured note $ 150,000 $ 150,000
Investments
The Company applies the fair value option to all fixed maturity and equity securities and short-term investments at the time
an eligible item is first recognized. The cost of investments sold is determined on a first-in and first-out method and realized
gains and losses are included in net realized investment (losses) gains. See Note 3. Investments for additional information.
Options Sold
The Company writes covered call options through listed and over-the-counter exchanges. When the Company writes an
option, an amount equal to the premium received by the Company is recorded as a liability and is subsequently adjusted to the
current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the
Company on the expiration date as realized gains from investments. If a call option is exercised, the premium is added to the
proceeds from the sale of the underlying security or currency in determining whether the Company has realized a gain or
loss. The Company, as writer of an option, bears the market risk of an unfavorable change in the price of the security
underlying the written option. Liabilities for covered call options of $0.3 million and $0.2 million were included in other
liabilities at December 31, 2015 and 2014, respectively.
Total Return Swaps
The fair values of the total return swaps reflect the estimated amounts that, upon termination of the contracts, would be
received for selling an asset or paid to transfer a liability in an orderly transaction at December 31, 2015 and 2014 based on
models using inputs, such as interest rate yield curves and credit spreads, observable for substantially the full term of the
contract.
Secured notes payable
The fair value of the Company's $120 million secured note and $20 million secured note, classified as Level 2 in the fair
value hierarchy described in Note 4. Fair Value Measurement, is estimated based on assumptions and inputs, such as the market
value of underlying collateral and reset rates, for similarly termed notes that are observable in the market. The fair values of
the secured notes approximated their carrying values.
Unsecured note payable
The fair value of the Company's $150.0 million unsecured note, classified as Level 2 in the fair value hierarchy described in
Note 4. Fair Value Measurement, is based on the unadjusted quoted price for similar notes in active markets. The fair value of
the unsecured note approximated its carrying value.