Mercury Insurance 2011 Annual Report Download - page 90

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES STATEMENTS TO CONSOLIDATED FINANCIAL—(Continued)
$47.5 million and $10.0 million of fixed maturities and equity securities, respectively, which are valued based on
broker quotes for underlying debt/credit instruments and an estimated benchmark spread for similar assets in
active markets. The fair value of the Company’s $120 million and $20 million secured notes is estimated based
on assumptions and inputs, such as reset rates and the market value for underlying collateral, for similarly termed
notes that are observable in the market. The fair value of the Company’s publicly traded $125 million unsecured
notes was based on the unadjusted quoted price for similar notes in active markets. 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. See Note 3 for methods and assumptions used in estimating fair values of interest rate swap
agreements and equity contracts. Due to their short-term maturity, the carrying value of receivables and accounts
payable approximate their fair market values. The following table presents estimated fair values of financial
instruments at December 31, 2011 and 2010.
December 31,
2011 2010
(Amounts in thousands)
Assets
Investments ....................................................... $3,062,421 $3,155,257
Interest rate swap agreements ......................................... $ 0 $ 4,240
Liabilities
Interest rate swap agreements ......................................... $ 670 $ 3,042
Equity contracts .................................................... $ 655 $ 2,776
Secured notes ...................................................... $ 140,000 $ 138,332
Unsecured notes ................................................... $ 0 $ 128,280
Securities on Deposit
The Company has securities deposited by the Insurance Companies with various DOIs as required by statute
with fair values of approximately $18 million and $14 million at December 31, 2011 and 2010, respectively.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs primarily consist of commissions paid to outside agents, premium taxes,
salaries, and certain other underwriting costs that vary with and are primarily related to the acquisition of new
and renewal insurance contracts and are amortized over the life of the related policy in relation to the amount of
premiums earned. Deferred policy acquisition costs are limited to the amount which will remain after deducting
from unearned premiums and anticipated investment income the estimated losses and loss adjustment expenses
and the servicing costs that will be incurred as the premiums are earned. The Company does not defer advertising
expenses but expenses them as incurred. The Company recorded net advertising expenses of approximately $21
million, $30 million, and $27 million during the years ended December 31, 2011, 2010, and 2009, respectively.
Fixed Assets
Fixed assets are stated at historical cost less accumulated depreciation and amortization. The useful life for
buildings is 30 to 40 years. Furniture, equipment, and purchased software are depreciated on a combination of
straight-line and accelerated methods over 3 to 7 years. The Company has capitalized certain consulting costs,
payroll, and payroll-related costs for employees related to computer software developed for internal use, which
are amortized on a straight-line method over the estimated useful life of the software, generally not exceeding
70