Mercury Insurance 2009 Annual Report Download - page 102

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on the $120
million credit facility, which was used for the acquisition of AIS, for a fixed rate of 1.93%, resulting in a total
fixed rate of 3.18%. The purpose of the swap is to offset the variability of cash flows resulting from the variable
interest rate. The swap is not designated as a hedge and changes in the fair value are adjusted through the
consolidated statement of operations in the period of change.
Effective January 2, 2002, the Company entered into an interest rate swap on the $125 million senior notes
for a floating rate of LIBOR plus 107 basis points. The swap agreement terminates on August 15, 2011 and
includes an early termination option exercisable by either party on the fifth anniversary or each subsequent
anniversary by providing sufficient notice, as defined. The swap is designated as a fair value hedge and qualifies
for the shortcut method as the hedge is deemed to have no ineffectiveness. The swap reduced interest expense in
2009, 2008, and 2007, but does expose the Company to higher interest expense in future periods. The effective
interest rate was 1.6%, 3.3%, and 6.4% in 2009, 2008, and 2007, respectively. The fair market value of the
interest rate swap was $8.5 million and $14.4 million as of December 31, 2009 and 2008, respectively, and has
been recorded in other assets in the consolidated balance sheets with a corresponding increase in notes payable.
The Company includes the gain or loss on the hedged item in the same line item, other revenue, as the offsetting
loss or gain on the related interest rate swaps as follows:
Income Statement Classification
Year Ended December 31,
2009 2008 2007
Gain (Loss)
on Swap
Gain (Loss)
on Loan
Gain (Loss)
on Swap
Gain (Loss)
on Loan
Gain (Loss)
on Swap
Gain (Loss)
on Loan
(Amounts in thousands)
Other revenue .................... $(5,922) $5,922 $5,175 $(5,175) $3,722 $(3,722)
On March 3, 2008, the Company entered into an interest rate swap of its floating LIBOR rate on the $18
million bank loan for a fixed rate of 3.75%, resulting in a total fixed rate of 4.25%. The swap agreement
terminates on March 1, 2013. The swap is designated as a cash flow hedge. The fair market value of the interest
rate swap was $(0.9) million and $(1.3) million as of December 31, 2009 and 2008, respectively, and has been
reported as a component of other comprehensive income (loss) and amortized into earnings over the life of the
hedged transaction. The interest rate swap was determined to be highly effective, and no amount of
ineffectiveness was recorded in earnings during 2009 and 2008.
Fair value amounts, and gains and losses on derivative instruments
The following tables provide the location and amounts of derivative fair values in the consolidated balance
sheets and derivative gains and losses in the consolidated statements of operations:
Asset Derivatives Liability Derivatives
December 31, 2009 December 31, 2008 December 31, 2009 December 31, 2008
(Amounts in thousands)
Hedging derivatives
Interest rate contracts—Other assets
(liabilities) .................... $8,472 $14,394 $ (918) $(1,348)
Non-hedging derivatives
Interest rate contracts—Other
liabilities ...................... $ — $ — $(1,446) $ —
Equity contracts—Short-term
investments (Other liabilities) ..... — 78 (1,043) (2,803)
Total non-hedging derivatives ......... $ — $ 78 $(2,489) $(2,803)
Total derivatives ..................... $8,472 $14,472 $(3,407) $(4,151)
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