Mercury Insurance 2007 Annual Report Download - page 72

70 MERCURYNOW 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2007, the Company adopted the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 provides guidance on financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return related to uncertainties in income taxes.
FIN No. 48 prescribes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in the financial
statements. For a tax position that meets the recognition threshold, the largest amount of tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement is recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. The Company’s adoption of FIN No. 48 did not have a material
impact on its consolidated financial statements.
Effective January 1, 2007, the Company adopted the American Institute of Certified Public Accountants (“AICPA”) Statement of Position
05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance
Contracts” (“SOP 05-1”). SOP 05-1 provides accounting guidance for deferred policy acquisition costs associated with internal replacements of
insurance and investment contracts other than those already described in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” SOP 05-1 defines an internal replacement as
a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment,
endorsement or rider to a contract, or by the election of a feature or coverage within a contract. The provisions of SOP 05-1 are effective for internal
replacements occurring in fiscal years beginning after December 15, 2006. The Company’s adoption of SOP 05-1 did not have a material impact
on its consolidated financial statements.
Effective January 1, 2007, the Company adopted SFAS No. 155. The provisions of SFAS No. 155 are effective for all financial instruments
acquired or issued after the beginning of the first fiscal year after September 15, 2006. SFAS No. 155 amends the accounting for hybrid financial
instruments and eliminates the exclusion of beneficial interests in securitized financial assets from the guidance under SFAS No.133. It also
eliminates the prohibition on the type of derivative instruments that qualified special purpose entities may hold under SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.” Furthermore, SFAS No. 155 clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives. The Company’s adoption of SFAS No. 155 did not have a material impact
on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides a single definition
of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and
liabilities. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value
hierarchy with the highest priority being quoted prices in active markets. SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 is not expected to have a material
impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits an entity to measure certain financial assets and financial
liabilities at fair value. The main objective of SFAS No. 159 is to improve financial reporting by allowing entities to mitigate volatility in reported
earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting
provisions. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS
No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its
earnings, but does not eliminate disclosure requirements of other accounting standards. SFAS No. 159 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007.
The Company adopted SFAS No. 159 as of the beginning of 2008 and elected to apply the fair value option to all short-term investments
and all available-for-sale fixed maturity and equity securities existing at the time of adoption and similar securities acquired subsequently unless
otherwise noted at the time when the eligible item is first recognized, including hybrid financial instruments with embedded derivatives that
would otherwise need to be bifurcated. The primary reasons for electing the fair value option were simplification and cost-benefit considerations
as well as expansion of use of fair value measurement consistent with the FASB’s long-term measurement objectives for accounting for financial
instruments. As a result of adopting SFAS No. 159, a net unrealized gain of approximately $81 million, net of tax, related to available-for-sale
securities was reclassified from accumulated other comprehensive income to retained earnings on January 1, 2008.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year balances to conform to the current year presentation.