Mercury Insurance 2009 Annual Report Download - page 103

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Effect of Derivative Instruments on the Statements of Operations
For Years Ended December 31, 2009 and 2008
Loss Recognized in Income
Year Ended December 31,
Derivatives Contracts for Fair Value Hedges 2009 2008
(Amounts in thousands)
Interest rate contracts—Interest expense ......... $7,022 $4,938
Loss Recognized in Other
Comprehensive Income (Loss)
Derivatives Contracts for Cash Flow Hedges Year Ended December 31,
2009 2008
(Amounts in thousands)
Interest rate contracts—Other comprehensive loss . . . $(918) $(1,348)
Gain or (Loss)
Recognized in Income
Year Ended December 31,
Derivatives Not Designated as Hedging Instruments 2009 2008
(Amounts in thousands)
Interest rate contract—Other revenue ........... $(1,446) $ —
Equity contracts—Net realized investment gains . . . 7,801 9,056
Total ..................................... $6,355 $9,056
There were no gains or losses on derivative instruments designated as cash flow hedges reclassified from
accumulated other comprehensive income into earnings for the years ended December 31, 2009 and 2008.
Most equity contracts consist of covered calls. The Company writes covered calls on underlying equity
positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under
statutory regulations. The Company manages the risk associated with covered calls through strict capital
limitations and asset diversification throughout various industries.
8. Acquisition
Effective January 1, 2009, the Company acquired all of the membership interests of AISM, which is the
parent company of AIS and PoliSeek. AIS is a major producer of automobile insurance in the state of California
and was the Company’s largest independent broker. This preexisting relationship did not require measurement at
the date of acquisition as there was no settlement of executory contracts between the Company and AIS as part of
the acquisition.
Goodwill of $37.6 million arising from the acquisition consists largely of the efficiencies and economies of
scale expected from combining the operations of the Company and AIS, and is expected to be fully deductible for
income tax purposes in 2009 and future years.
85