Mercury Insurance 2013 Annual Report Download - page 74

59
December 31,
2013 2012
(Amounts in thousands)
Assets
Investments $ 3,158,312 $ 3,180,095
Total return swap $ 1,650 $ 0
Liabilities
Interest rate swap agreements $ 0 $ 103
Equity contracts $ 140 $ 175
Secured notes $ 140,000 $ 140,000
Unsecured note $ 50,000 $ 0
Total Return Swap
In 2013, the Company formed and consolidated AFL, a special purpose investment vehicle. The Company is the sole
managing member in AFL. On August 9, 2013, AFL entered into a three-year total return swap agreement with Citibank, N.A.
(“Citibank”). Under the total return swap agreement, AFL receives the income equivalent on underlying obligations and pays to
Citibank interest equal to LIBOR plus 120 basis points on the outstanding notional amount of the underlying obligations, which
was approximately $149 million as of December 31, 2013. The total return swap agreement is secured by approximately $40
million of U.S. Treasuries as collateral, which is included in short-term investments on the consolidated balance sheets. In the
event of a significant erosion in market value, AFL's position in the loan portfolio will be reduced and the Company has the option
to add additional capital or terminate the total return swap agreement.
Securities on Deposit
The Company's 13 insurance subsidiaries (referred to herein collectively as the “Insurance Companies”) have securities
deposited with the Department of Insurance or similar governmental agency of each state in which it is licensed to operate (“DOI”)
as required by statute with fair values of approximately $17 million and $16 million at December 31, 2013 and 2012, respectively.
Deferred Policy Acquisition Costs
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. The Company’s deferred policy
acquisition costs are further limited by excluding those costs not directly related to the successful acquisition of insurance contracts.
Deferred policy acquisition cost amortization was $505.5 million, $477.8 million, and $481.7 million during the years ended
December 31, 2013, 2012, and 2011, respectively. The Company does not defer advertising expenses but expenses them as incurred.
The Company recorded net advertising expenses of approximately $20 million, $19 million, and $21 million during the years
ended December 31, 2013, 2012, and 2011, 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, 2013.