Mercury Insurance 2009 Annual Report Download - page 96

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Fair Value Measurements
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The fair value of a financial instrument is the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the
exit price). Accordingly, when market observable data is not readily available, the Company’s own assumptions
are set to reflect those that market participants would be presumed to use in pricing the asset or liability at the
measurement date. Assets and liabilities recorded on the consolidated balance sheets at fair value are categorized
based on the level of judgment associated with inputs used to measure their fair value and the level of market
price observability, as follows:
Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the
reporting date.
Level 2 Pricing inputs are other than quoted prices in active markets, which are based on the following:
• Quoted prices for similar assets or liabilities in active markets;
• Quoted prices for identical or similar assets or liabilities in non-active markets; or
• Either directly or indirectly observable as of the reporting date and fair value is determined
through the use of models or other valuation
Level 3 Pricing inputs are unobservable and significant to the overall fair value measurement. The inputs
into the determination of fair value require significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its
entirety falls has been determined based on the lowest level input that is significant to the fair value measurement
in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods
of market disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for
many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2, or from
Level 2 to Level 3.
Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities
The Company obtained unadjusted fair values on approximately 98% of its portfolio from an independent
pricing service. For approximately 2% of its portfolio, the Company obtained specific unadjusted broker quotes
from at least one knowledgeable outside security broker to determine the fair value.
Level 1 Measurements—Fair values of financial assets and financial liabilities are obtained from an independent
pricing service, and are based on unadjusted quoted prices for identical assets or liabilities in active markets.
Additional pricing services and closing exchange values are used as a comparison to ensure realistic fair values
are used in pricing the investment portfolio.
U.S. government bonds and agencies: Priced using unadjusted quoted market prices for identical assets in active
markets.
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