Mercury Insurance 2009 Annual Report Download - page 101

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Notes Payable
Notes Payable consists of the following:
Year Ended December 31,
2009 2008
(Amounts in thousands)
Unsecured notes ................................................ $133,397 $158,625
Secured notes ................................................... 138,000 —
Total ..................................................... $271,397 $158,625
Effective January 1, 2009, the Company acquired AIS for $120 million. The acquisition was financed by a
$120 million credit facility that is secured by municipal bonds held as collateral. The credit facility calls for the
collateral requirement to be greater than the loan amount. The collateral requirement is calculated as the fair
market value of the municipal bonds held as collateral multiplied by the advance rates, which vary based on the
credit quality and duration of the assets held and range between 75% and 100% of the fair value of each bond.
The loan matures on January 1, 2012 with interest payable at a floating rate of LIBOR rate plus 125 basis points.
In February 2008, the Company acquired an 88,300 square foot office building in Folsom, California for
approximately $18.4 million. The Company financed the transaction through an $18 million bank loan that is
secured by municipal bonds held as collateral. The loan matures on March 1, 2013 with interest payable quarterly
at an annual floating rate of LIBOR plus 50 basis points.
On August 7, 2001, the Company completed a public debt offering issuing $125 million of senior notes. The
notes are unsecured, senior obligations of the Company with a 7.25% annual coupon payable on August 15 and
February 15 each year commencing February 15, 2002. These notes mature on August 15, 2011. The Company
used the proceeds from the senior notes to retire amounts payable under existing revolving credit facilities, which
were terminated. The Company incurred debt issuance costs of approximately $1.3 million, inclusive of
underwriter’s fees. These costs are deferred and then amortized as a component of interest expense over the term
of the notes. The notes were issued at a slight discount of 99.723%, resulting in the effective annualized interest
rate including debt issuance costs of approximately 7.44%.
The aggregated maturities for notes payable are as follows:
Year Maturity
2010 ......................................................... $ —
2011 ......................................................... $125,000,000
2012 ......................................................... $120,000,000
2013 ......................................................... $ 18,000,000
2014 ......................................................... $ —
For additional disclosures regarding methods and assumptions used in estimating fair values of interest rate
swap agreements associated with the Company’s loans listed above, see Note 7.
7. Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks
managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts on various
equity securities are entered into to manage the price risk associated with forecasted purchases or sales of such
securities. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s loans
with fixed or floating rates.
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