Mercury Insurance 2007 Annual Report Download - page 68

66 MERCURYNOW 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The Company operates primarily as a private passenger automobile insurer selling policies through a network of independent agents and brokers
in thirteen states. The Company also offers homeowners insurance, commercial automobile and property insurance, mechanical breakdown
insurance, commercial and dwelling fire insurance and umbrella insurance. The private passenger automobile lines of insurance exceeded 83% of
the Company’s net premiums written in 2007, 2006 and 2005, with approximately 79%, 75% and 73% of the private passenger automobile premiums
written in the state of California during 2007, 2006 and 2005, respectively.
The consolidated financial statements include the accounts of Mercury General Corporation (the “Company”) and its wholly-owned subsidiaries,
Mercury Casualty Company, Mercury Insurance Company, California Automobile Insurance Company, California General Underwriters Insurance
Company, Inc., Mercury Insurance Company of Georgia, Mercury Insurance Company of Illinois, Mercury Insurance Company of Florida, Mercury
Indemnity Company of Georgia, Mercury National Insurance Company, Mercury Indemnity Company of America, Mercury Insurance Services,
LLC (“MISLLC”), American Mercury Insurance Company (“AMI”), Mercury Select Management Company, Inc. (“MSMC”), American Mercury
Lloyds Insurance Company (“AML”) and Mercury County Mutual Insurance Company (“MCM”). American Mercury MGA, Inc. (“AMMGA”)
is a wholly-owned subsidiary of AMI. AML is not owned by the Company, but is controlled by the Company through its attorney-in-fact, MSMC.
MCM is not owned by the Company, but is controlled through a management contract and therefore its results are included in the consolidated
financial statements. The consolidated financial statements also include Concord Insurance Services, Inc. (“Concord”), a Texas insurance agency
owned by the Company. All of the subsidiaries as a group, including AML and MCM, but excluding MSMC, AMMGA, and MISLLC, are referred
to as the Insurance Companies. The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting
principles (“GAAP”), which differ in some respects from those filed in reports to insurance regulatory authorities. All significant intercompany
balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The most significant assumptions in the preparation of these consolidated financial
statements relate to loss and loss adjustment expenses. Actual results could differ from those estimates.
INVESTMENTS
Fixed maturities available-for-sale include those securities that management intends to hold for indefinite periods, but which may be sold in response
to changes in interest rates, tax planning considerations or other aspects of asset/liability management. Fixed maturities available-for-sale, which
include bonds and sinking fund preferred stocks, are carried at fair value. Investments in equity securities, which include common stocks and
non-redeemable preferred stocks, are carried at fair value. Short-term investments are carried at cost, which approximates fair value.
With limited exceptions, the market valuations were drawn from standard trade data sources. In no case was any valuation made by the
Company’s management using models. Fixed maturities are amortized using first call date and are adjusted for anticipated prepayments. Mortgage-
backed securities at amortized cost are adjusted for anticipated prepayment using the prospective method. Equity holdings, including non-sinking
fund preferred stocks, are, with minor exceptions, actively traded on national exchanges and were valued at the last transaction price on the
balance sheet date.
Temporary unrealized gains and losses for investments available for sale, except for those accounted for under Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) and SFAS No.
155, “Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS No. 133 and SFAS No. 140” (“SFAS No. 155”), are credited
or charged directly to shareholders’ equity as part of accumulated other comprehensive income (loss), net of applicable taxes. Changes in fair
value for those investments accounted for under SFAS No. 133 and SFAS No. 155, as well as for trading securities accounted for under SFAS No.
115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), are reflected in net realized gains or losses in the
consolidated statements of income. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is
recognized in the consolidated statements of income. Realized capital gains and losses are included in the consolidated statements of income based
upon the specific identification method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS