Mercury Insurance 2008 Annual Report Download - page 68

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Equity securities include common stocks, nonredeemable preferred stocks and other risk investments and are reported at
quoted fair values. Prior to the adoption of SFAS No. 159, changes in fair value of these securities, net of deferred income taxes,
were reflected as unrealized gains and losses in accumulated other comprehensive income.
Prior to the adoption of SFAS No. 159, when a decline in value of fixed maturities or equity securities was considered
other than temporary, a loss was recognized in the consolidated statements of operations. Realized capital gains and losses were
included in the consolidated statements of operations based upon the specific identification method.
Short-term investments include money market accounts, options and short-term bonds expected to mature within one
year. Prior to the adoption of SFAS No. 159, short-term bonds were carried at cost, which approximated fair value. Effective
January 1, 2008, short-term investments are reported at fair value. As of December 31, 2008, liabilities for covered call options of
$2.8 million and short sales of $2.5 million were included in other liabilities.
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.
Fair Value of Financial Instruments
As discussed above, all investments, including short-term investments, are carried on the balance sheet at fair value. The
carrying amounts and fair values for investment securities are disclosed in Note 2 of Notes to Consolidated Financial Statements
and were drawn from standard trade data sources such as market and broker quotes, with the exception of $3 million of fixed
maturities, at fair value at December 31, 2008, for which management determined fair value estimates using discounted cash flow
models. The carrying value of receivables, accounts payable and accrued expenses and other liabilities is equivalent to the
estimated fair value of those items.
Premium Income Recognition
Insurance premiums are recognized as income ratably over the term of the policies in proportion to the amount of
insurance protection provided. Unearned premiums are computed on a monthly pro rata basis. Unearned premiums are stated
gross of reinsurance deductions, with the reinsurance deduction recorded in other assets and other receivables. Net premiums of
$2.75 billion, $2.98 billion, and $3.04 billion were written in 2008, 2007 and 2006, respectively.
No agent or broker accounted for more than 2% of direct premiums written except AIS which produced approximately
15%, 14% and 13% during 2008, 2007, and 2006, respectively, of the Company’s direct premiums written. Effective January 1,
2009, MCC acquired all of the membership interests of AIS Management LLC, a California limited liability company, which is
the parent company of AIS and PoliSeek AIS Insurance Solutions, Inc.
Premium Notes
Premium notes receivable represent the balance due to the Company from policyholders who elect to finance their
premiums over the policy term. The Company requires both a down payment and monthly payments as part of its financing
program. Premium finance fees are charged to policyholders who elect to finance premiums. The fees are charged at rates that
vary with the amount of premium financed. Premium finance fees are recognized over the term of the premium note based upon
the effective yield.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, which consist of commissions, premium taxes and certain other
underwriting costs, and which vary directly with and are directly related to the production of business, are deferred and amortized
to expense ratably over the terms of the policies. Deferred acquisition costs are limited to the amount which will remain after
deducting from unearned premiums and anticipated investment income the estimated losses and loss adjustment expenses and the
servicing costs that will be incurred as the premiums are earned. The Company does not defer advertising expenses.