Mercury Insurance 2012 Annual Report Download - page 90

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6. Notes Payable
Notes payable consists of two secured notes of $120 million and $20 million at both December 31, 2012 and 2011.
The $120 million credit facility is secured by municipal bonds held as collateral. The credit facility calls for the collateral
requirement to be greater than the loan amount. The collateral requirement is calculated as the fair market value of the municipal
bonds held as collateral multiplied by the advance rates, which vary based on the credit quality and duration of the assets held and
range between 75% and 100% of the fair value of each bond. Effective August 4, 2011, the Company extended the maturity date
of the $120 million credit facility from January 1, 2012 to January 2, 2015 with interest payable at a floating rate of LIBOR plus
40 basis points.
On October 4, 2011, the Company refinanced its Bank of America $18 million LIBOR plus 50 basis points loan that was
scheduled to mature on March 1, 2013 with a Union Bank $20 million LIBOR plus 40 basis points loan that matures on January 2,
2015. The $20 million loan has collateral requirements similar to those of the $120 million credit facility.
Both the $120 million credit facility and the $20 million bank loan contain financial covenants pertaining to minimum
statutory surplus, debt to capital ratio, and risk based capital ratio. The Company was in compliance with all of its loan covenants
at December 31, 2012.
The Company retired all of its $125 million 7.25% senior notes on their August 15, 2011 maturity date by using a portion
of the proceeds from the extraordinary dividend paid by MCC to Mercury General.
The aggregated maturities for notes payable are $140 million in 2015.
For additional disclosures regarding methods and assumptions used in estimating fair values of interest rate swap agreements
associated with the Company’s loans listed above, see Note 7.
7. Derivative Financial Instruments
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using
derivative instruments are equity price risk and interest rate risk. Equity contracts on various equity securities are intended to
manage the price risk associated with forecasted purchases or sales of such securities. Interest rate swaps are intended to manage
the interest rate risk associated with the Company’s debts with fixed or floating rates.
On February 6, 2009, the Company entered into an interest rate swap of its floating LIBOR rate on a $120 million credit
facility for a fixed rate of 1.93% that matured on January 3, 2012. The purpose of the swap was to offset the variability of cash
flows resulting from the variable interest rate. The swap was not designated as a hedge and changes in the fair value were adjusted
through the consolidated statement of operations in the period of change.
On March 3, 2008, the Company entered into an interest rate swap of its floating LIBOR rate on the $18 million bank loan
for a fixed rate of 4.25%. The swap was designated as a cash flow hedge and the fair market value of the interest rate swap was
reported as a component of other comprehensive income and amortized into earnings over the term of the hedged transaction. On
October 4, 2011, the Company refinanced its Bank of America $18 million LIBOR plus 50 basis points loan that was scheduled
to mature on March 1, 2013 with a Union Bank $20 million LIBOR plus 40 basis points loan that matures on January 2, 2015.
The related interest rate swap was deemed to become ineffective and is no longer designated as a hedge. Changes in the fair value
are adjusted through the consolidated statement of operations in the period of change. The fair market value of the interest rate
swap was approximately $103,000 and $670,000 as of December 31, 2012 and 2011, respectively. The swap matures on March 1,
2013.