Mercury Insurance 2009 Annual Report Download - page 93

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
hedged item; and how the instrument affects the entity’s financial position, financial performance, and cash
flows. Quantitative disclosures should include information about the fair value of the derivative instrument,
including gains and losses, and should contain more detailed information about the location of the derivative
instrument in the entity’s financial statements. Credit-risk disclosures should include information about the
existence and nature of credit-risk-related contingent features included in derivative instruments. Credit-risk-
related contingent features can be defined as those that require entities, upon the occurrence of a credit event
such as a credit rating downgrade, to settle derivative instruments or post collateral. Existing financial accounting
requirements for derivative instruments and hedging activities were not changed. The Company adopted the new
standard on January 1, 2009. The adoption of the new standard did not have a material impact on the Company’s
consolidated financial statements.
Effective January 1, 2008, the Company adopted the fair value option for financial assets and financial
liabilities, which establishes presentation and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement alternatives for similar types of financial assets and liabilities. The
standard also requires additional information to aid financial statement users’ understanding of the impacts of a
reporting entity’s decision to use fair value on its earnings and requires entities to display, on the face of the
statement of financial position, the fair value of those assets and liabilities which the reporting entity has chosen
to measure at fair value. The Company elected to apply the fair value option 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. The primary
reasons for electing the fair value option were simplification and cost-benefit considerations, as well as
expansion of use of fair value measurement consistent with the long-term measurement objectives of the FASB
for accounting for financial instruments. The transition adjustment to beginning retained earnings related to the
fair value election was a gain of $80.5 million, net of deferred taxes of $43.3 million, all of which related to
applying the fair value option to fixed maturity and equity securities available for sale. This adjustment was
reflected as a reclassification of accumulated other comprehensive income to retained earnings. Both the fair
value and carrying value of such securities were $3.3 billion on January 1, 2008, immediately prior to the
adoption of the fair value option.
2. Investments
Effective January 1, 2008, the Company elected to apply the fair value option to all available-for-sale, fixed
maturity securities, equity securities, and short-term investments existing at the time of adoption, and similar
securities acquired subsequently unless otherwise noted at the time when the eligible item is first recognized. Gains
and 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 are recognized on an accrual basis on each measurement
date and are included in net investment income in the Company’s consolidated statements of operations.
The following table reflects gains (losses) due to changes in fair value for items measured at fair value
pursuant to election of the fair value option:
Year Ended December 31,
2009 2008
(Amounts in thousands)
Fixed maturity securities ......................................... $261,866 $(274,103)
Equity securities ................................................ 133,580 (251,644)
Short-term investments .......................................... 36 3
Total ..................................................... $395,482 $(525,744)
75