Mercury Insurance 2012 Annual Report Download - page 81

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Securities on Deposit
The Company has securities deposited by the Insurance Companies with various DOIs as required by statute with fair values
of approximately $16 million and $18 million at December 31, 2012 and 2011, respectively.
Deferred Policy Acquisition Costs
In October 2010, the FASB issued a new standard to address diversity in practice regarding the interpretation of which costs
relating to the acquisition of new or renewal insurance contracts qualify for deferral. The new standard defines acquisition costs
as those related directly to the successful acquisition of new or renewal insurance contracts. Effective January 1, 2012, the Company
adopted the new standard using the prospective method. Deferred policy acquisition costs consist of commissions paid to outside
agents, premium taxes, salaries, and certain other underwriting costs that are incremental or directly related to the successful
acquisition of new and renewal insurance contracts and are amortized over the life of the related policy in proportion to premiums
earned. Deferred policy acquisition costs are limited to the amount that 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
premiums are earned. Under the new standard, the Company’s deferred policy acquisition costs are further limited by excluding
those costs not directly related to the successful acquisition of insurance contracts. The adoption of the new standard did not have
a material impact on the Company’s consolidated financial statements. Deferred policy acquisition cost amortization was $477.8
million, $481.7 million, and $505.6 million during the years ended December 31, 2012, 2011, and 2010, respectively. The Company
does not defer advertising expenses but expenses them as incurred. The Company recorded net advertising expenses of
approximately $19 million, $21 million, and $30 million during the years ended December 31, 2012, 2011, and 2010, 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 5 years. In accordance with applicable accounting standards, capitalization ceases no later
than the point at which a computer software project is substantially complete and ready for its intended use. Leasehold improvements
are amortized over the shorter of the useful life of the assets or the life of the associated lease.
The Company periodically assesses long-lived assets or asset groups including building and equipment, for recoverability
when events or changes in circumstances indicate that their carrying amount may not be recoverable. If the Company identifies
an indicator of impairment, the Company assesses recoverability by comparing the carrying amount of the asset to the sum of the
undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized
when the carrying amount is not recoverable and is measured as the excess of carrying value over fair value. The Company recorded
no impairment charges during the three years ended December 31, 2012.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets arise as a result of business acquisitions and consist of the excess of the cost of the
acquisitions over the tangible and intangible assets acquired and liabilities assumed and identifiable intangible assets acquired.
Identifiable intangible assets consist of the value of customer relationships, trade names, software and technology, and favorable
leases, which are all subject to amortization.
The Company annually evaluates goodwill and other intangible assets for impairment. The Company also reviews its
goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that it is more likely
than not that the carrying amount of goodwill may exceed its implied fair value. The Company adopted the new standard issued
in September 2011 which does not require the two-step goodwill impairment test if the Company qualitatively determines that,
more likely than not, the fair value exceeds the carrying amount of a reporting unit. There are numerous assumptions and estimates
underlying the qualitative assessments including future earnings, long-term strategies, and the Company’s annual planning and
forecasting process. If these planned initiatives do not accomplish the targeted objectives, the assumptions and estimates underlying
the qualitative assessments could be adversely affected and have a material effect upon the Company’s financial condition and
results of operations. As of December 31, 2012 and 2011, goodwill impairment assessments indicated that there was no impairment.
Premium Revenue Recognition
Premium revenue is recognized on a pro-rata basis over the term of the policies in proportion to the amount of insurance
protection provided. Premium revenue includes installment and other fees for services which are recognized in the periods the
services are rendered. Unearned premiums represent the portion of the premium related to the unexpired policy term. Unearned