Mercury Insurance 2010 Annual Report Download - page 91

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
There were no transfers between Levels 1, 2, and 3 of the fair value hierarchy in 2010. There was a $47.5
million increase in Level 3 financial assets in 2009 related to collateralized debt obligations, which include the
use of unobservable inputs related to liquidity assumptions.
At December 31, 2010, the Company did not have any nonrecurring measurements of nonfinancial assets or
nonfinancial liabilities.
4. Fixed Assets
Fixed assets consist of the following:
December 31,
2010 2009
(Amounts in thousands)
Land ........................................................ $ 26,772 $ 26,772
Buildings and improvements ..................................... 125,367 123,234
Furniture and equipment ......................................... 116,764 139,910
Capitalized software ............................................ 113,391 97,717
Leasehold improvements ........................................ 6,577 6,179
388,871 393,812
Less accumulated depreciation and amortization ...................... (192,366) (191,950)
Fixed assets, net ............................................... $196,505 $ 201,862
Depreciation expense including amortization of leasehold improvements was $33.9 million, $28.9 million,
and $27.0 million during 2010, 2009, and 2008, respectively.
5. Deferred Policy Acquisition Costs
Deferred policy acquisition costs are as follows:
December 31,
2010 2009 2008
(Amounts in thousands)
Balance, beginning of year ....................................... $175,866 $ 200,005 $ 209,805
Acquisition costs deferred(1) ...................................... 500,278 519,168 615,054
Amortization(1)(2) .............................................. (505,565) (543,307) (624,854)
Balance, end of year ............................................ $170,579 $ 175,866 $ 200,005
(1) Prior to the acquisition of AIS on January 1, 2009, the Company deferred the recognition of commissions
paid to AIS to match the earnings of the related premiums. Now that AIS is a wholly-owned subsidiary,
commissions are no longer paid or deferred, and direct expenses are reflected in the expense ratio. Certain
costs related to sales of Company policies made by AIS are considered deferrable. For the year ended
December 31, 2009, the amortization of deferred commissions related to policies written prior to January 1,
2009, offset by corresponding deferred direct sales costs, reduced pre-tax income in the statement of
operations by $15 million.
(2) Includes an establishment of a premium deficiency reserve of $6 million for the Florida homeowners line of
business during 2010.
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