Mercury Insurance 2011 Annual Report Download - page 99

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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES STATEMENTS TO CONSOLIDATED FINANCIAL—(Continued)
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 as of December 31, 2011.
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 that 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.
Level 2 Measurements—Fair values of financial assets and financial liabilities are obtained from an independent
pricing service or outside brokers, and are based on prices for similar assets or liabilities in active markets or
valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or
liability. Additional pricing services are used as a comparison to ensure reliable fair values are used in pricing the
investment portfolio.
Municipal securities: Valued based on models or matrices using inputs, such as quoted prices for identical or
similar assets in active markets.
Mortgage-backed securities: Comprised of securities that are collateralized by residential mortgage loans and
valued based on models or matrices using multiple observable inputs, such as benchmark yields, reported trades
and broker/dealer quotes, for identical or similar assets in active markets. At December 31, 2011 and
December 31, 2010, the Company had no holdings in commercial mortgage-backed securities.
Corporate securities/Short-term bonds: Valued based on a multi-dimensional model using multiple observable
inputs, such as benchmark yields, reported trades, broker/dealer quotes and issue spreads, for identical or similar
assets in active markets.
Non-redeemable preferred stock: Valued based on observable inputs, such as underlying and common stock of
same issuer and appropriate spread over a comparable U.S. Treasury security, for identical or similar assets in
active markets.
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