Mercury Insurance 2008 Annual Report Download - page 67

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MERCURY GENERAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(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 direct premiums written in 2008, 2007 and 2006,
with approximately 80%, 79% and 75% of the private passenger automobile premiums written in the state of California during
2008, 2007 and 2006, respectively.
The consolidated financial statements include the accounts of Mercury General and its directly and indirectly wholly
owned insurance and non-insurance subsidiaries. The insurance subsidiaries are MCC, MIC, CAIC, CGU, MIC IL, MIC GA,
MID GA, MNIC, AMI, AML, MCM, MIC FL and MID AM. The non-insurance subsidiaries are MSMC, AMMGA, Concord,
MIS LLC and MGI. 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 have been prepared in conformity with
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
Effective January 1, 2008, the Company adopted SFAS No. 159. SFAS No. 159 permits an entity to measure certain
financial assets and financial liabilities at fair value. Entities that elect the fair value option report unrealized gains and losses in
earnings at each subsequent reporting date. The Company elected to apply the fair value option of SFAS No. 159 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.
Effective January 1, 2008, the losses due to changes in fair value for items measured at fair value pursuant to election of
the fair value option are included in net realized investment gains (losses) in the Company’s consolidated statements of
operations. Interest and dividend income on the investment holdings is recognized on an accrual basis on each measurement date
and is included in net investment income in the Company’s consolidated statements of operations.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No.
155”). SFAS No. 155 permits hybrid financial instruments that contain an embedded derivative that would otherwise require
bifurcation to irrevocably be accounted for at fair value, with changes in fair value recognized in the statement of operations. The
Company adopted SFAS No. 155 on January 1, 2007. As SFAS No. 159 incorporates accounting and disclosure requirements that
are similar to those of SFAS No. 155, effective January 1, 2008, SFAS No. 159 rather than SFAS No. 155 is applied to the
Company’s fair value elections for hybrid financial instruments.
Fixed maturity securities include debt securities and redeemable preferred stocks, which may have fixed or variable
principal payment schedules, may be held for indefinite periods of time, and may be used as a part of the Company’s
asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics,
liquidity needs, tax planning considerations or other economic factors. Fixed maturity securities are reported at fair value. Prior
to the adoption of SFAS No. 159, these securities were carried at fair value with the corresponding unrealized gains (losses), net
of deferred income taxes, reported in accumulated other comprehensive income. Premiums and discounts on 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-redeemable fund preferred
stocks, are with minor exceptions, actively traded on national exchanges and are valued at the last transaction price on the balance
sheet date.