Mercury Insurance 2011 Annual Report Download - page 105

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES STATEMENTS TO CONSOLIDATED FINANCIAL—(Continued)
The Effect of Derivative Instruments on the Statements of Operations
Loss Recognized in Income
Year Ended December 31,
Derivatives Contracts for Fair Value Hedges 2011 2010 2009
(Amounts in thousands)
Interest rate contracts—Interest expense ............... $ 4,470 $7,103 $ 7,022
Gain (Loss) Recognized in Other
Comprehensive Income
Year Ended December 31,
Derivatives Contracts for Cash Flow Hedges 2011 2010 2009
(Amounts in thousands)
Interest rate contracts—Other comprehensive gain (loss) . . $ 1,139 $ (220) $ (918)
Gain or (Loss)
Recognized in Income
Year Ended December 31,
Derivatives Not Designated as Hedging Instruments 2011 2010 2009
(Amounts in thousands)
Interest rate contract—Other revenue (expense) ......... $ 1,232 $ (457) $(1,446)
Equity contracts—Net realized investment gains ......... 9,000 4,615 7,801
Total ........................................... $10,232 $4,158 $ 6,355
Most equity contracts consist of covered calls. The Company writes covered calls on underlying equity
positions held as an enhanced income strategy that is permitted for the Company’s insurance subsidiaries under
statutory regulations. The Company manages the risk associated with covered calls through strict capital
limitations and asset diversification throughout various industries.
8. Acquisition
Effective January 1, 2009, the Company acquired all of the membership interests of AISM, which is the
parent company of AIS and PoliSeek. AIS is a major producer of automobile insurance in the state of California
and was the Company’s largest independent broker. This preexisting relationship did not require measurement at
the date of acquisition as there was no settlement of executory contracts between the Company and AIS as part of
the acquisition.
Goodwill of $37.6 million arising from the acquisition consists largely of the efficiencies and economies of
scale expected from combining the operations of the Company and AIS, and is expected to be fully deductible for
income tax purposes.
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