Mercury Insurance 2012 Annual Report Download - page 86

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65
Estimated Fair Value
(Amounts in thousands)
Fixed maturity securities:
Due in one year or less $ 79,344
Due after one year through five years 332,642
Due after five years through ten years 529,997
Due after ten years 1,466,371
Total $ 2,408,354
Investment Income
A summary of net investment income is shown in the following table:
Year Ended December 31,
2012 2011 2010
(Amounts in thousands)
Fixed maturity securities $ 117,557 $ 130,895 $ 136,345
Equity securities 15,831 10,869 8,435
Short-term investments 2,073 1,747 1,413
Total investment income $ 135,461 $ 143,511 $ 146,193
Less: investment expense (3,565)(2,564)(2,379)
Net investment income $ 131,896 $ 140,947 $ 143,814
3. Fair Value Measurements
The Company employs a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date using the exit price. Accordingly, when market observable
data are not readily available, the Company’s own assumptions are set to reflect those that market participants would be presumed
to use in pricing the asset or liability at the measurement date. Assets and liabilities recorded on the consolidated balance sheets
at fair value are categorized based on the level of judgment associated with inputs used to measure their fair value and the level
of market price observability, as follows:
Level 1 Unadjusted quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs are other than quoted prices in active markets, which are based on the following:
• Quoted prices for similar assets or liabilities in active markets;
• Quoted prices for identical or similar assets or liabilities in non-active markets; or
• Either directly or indirectly observable inputs as of the reporting date.
Level 3 Pricing inputs are unobservable and significant to the overall fair value measurement, and the determination of fair
value requires significant management judgment or estimation.
In certain cases, inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases,
the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the
lowest level input that is significant to the fair value measurement in its entirety. Thus, a Level 3 fair value measurement may
include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). The Company’s assessment of the significance
of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the
asset or liability.
The Company uses prices and inputs that are current as of the measurement date, including during periods of market
disruption. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This
condition could cause an instrument to be reclassified from Level 1 to Level 2, or from Level 2 to Level 3. The Company recognizes
transfers between levels at either the actual date of the event or a change in circumstances that caused the transfer.