Mercury Insurance 2011 Annual Report Download - page 103

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES STATEMENTS TO CONSOLIDATED FINANCIAL—(Continued)
Effective January 1, 2009, the Company acquired AIS for $120 million. The acquisition was financed by a
$120 million credit facility that is secured by municipal bonds held as collateral. The credit facility calls for the
collateral requirement to be greater than the loan amount. The collateral requirement is calculated as the fair
market value of the municipal bonds held as collateral multiplied by the advance rates, which vary based on the
credit quality and duration of the assets held and range between 75% and 100% of the fair value of each bond.
Effective August 4, 2011, the Company extended the maturity date of the $120 million credit facility from
January 1, 2012 to January 2, 2015 with interest payable at a floating rate of LIBOR plus 40 basis points.
On October 4, 2011, the Company refinanced its Bank of America $18 million LIBOR plus 50 basis points
loan that was scheduled to mature on March 1, 2013 with a Union Bank $20 million LIBOR plus 40 basis points
loan that matures on January 2, 2015.
The Company retired all of its $125 million 7.25% senior notes on their August 15, 2011 maturity date by
using a portion of the proceeds from the extraordinary dividend paid by MCC to Mercury General.
The aggregated maturities for notes payable are $140 million in 2015.
For additional disclosures regarding methods and assumptions used in estimating fair values of interest rate
swap agreements associated with the Company’s loans listed above, see Note 7.
7. Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks
managed by using derivative instruments are equity price risk and interest rate risk. Equity contracts on various
equity securities are intended to manage the price risk associated with forecasted purchases or sales of such
securities. Interest rate swaps are intended to manage the interest rate risk associated with the Company’s debts
with fixed or floating rates.
On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on a $120
million credit facility for a fixed rate of 1.93% that matured on January 3, 2012. The purpose of the swap is to
offset the variability of cash flows resulting from the variable interest rate. The swap is not designated as a hedge
and changes in the fair value are adjusted through the consolidated statement of operations in the period of
change.
Effective January 2, 2002, the Company entered into an interest rate swap on the $125 million senior notes
for a floating rate of LIBOR plus 107 basis points. The swap was designated as a fair value hedge and qualified
for the shortcut method as the hedge was deemed to have no ineffectiveness. The Company included the gain or
loss on the hedged item in the same line item, other revenue, as the offsetting loss or gain on the related interest
rate swaps as follows:
Year Ended December 31,
2011 2010 2009
Income Statement Classification
Gain (Loss)
on swap
Gain (Loss)
on senior notes
Gain (Loss)
on swap
Gain (Loss)
on senior notes
Gain (Loss)
on swap
Gain (Loss)
on senior notes
(Amounts in thousands)
Other revenue ............. $(4,240) $4,240 $(4,232) $4,232 $(5,922) $5,922
The Company retired all of its $125 million 7.25% senior notes on the August 15, 2011 maturity date. The
related interest rate swap agreement expired concurrently.
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