Mercury Insurance 2010 Annual Report Download - page 87

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
• Quoted prices for identical or similar assets or liabilities in non-active markets; or
• Either directly or indirectly observable inputs 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, and the
determination of fair value requires 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 consideration of 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. The Company recognizes transfers between levels at either the actual date of the event or a
change in circumstances that caused the transfer.
Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities
The Company’s fair value measurements are based on a combination of the market approach and the income
approach. The market approach utilizes market transaction data for the same or similar instruments. The income
approach is based on a discounted cash flow methodology, where expected cash flows are discounted to present
value.
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: Valued using unadjusted quoted market prices for identical assets in active
markets.
Common stock: Comprised of actively traded, exchange listed U.S. and international equity securities and valued
based on unadjusted quoted prices for identical assets in active markets.
Money market instruments: Valued based on unadjusted quoted prices for identical assets.
Equity contracts: Comprised of free-standing exchange listed derivatives that are actively traded and valued
based on quoted prices for identical instruments in active markets.
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