Mercury Insurance 2013 Annual Report Download - page 80

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65
Summary of Significant Valuation Techniques for Financial Assets and Financial Liabilities
The Company’s fair value measurements are based on the market approach, which utilizes market transaction data for the
same or similar instruments.
The Company obtained unadjusted fair values on 99.5% of its portfolio from an independent pricing service. For 0.5% of
its portfolio, classified as Level 3, the Company obtained specific unadjusted broker quotes based on net fund value and, to a lesser
extent, unobservable inputs from at least one knowledgeable outside security broker to determine the fair value as of December 31,
2013.
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 reasonable fair values are used in pricing the investment portfolio.
U.S. government bonds and agencies/Short-term bonds: 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. The Company had holdings of $21.9 million and $4.3 million at December 31, 2013
and 2012, respectively, 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.
Total return swap/Interest rate swap: Valued based on models using inputs, such as interest rate yield curves, underlying debt/
credit instruments and the appropriate benchmark spread for similar assets in active markets, observable for substantially the full
term of the contract.
Level 3 Measurements—Fair values of financial assets are based on inputs that are both unobservable and significant to the overall
fair value measurement, including any items in which the evaluated prices obtained elsewhere were deemed to be of a distressed
trading level.
Collateralized debt obligations/Partnership interest in a private credit fund: Valued based on underlying debt and credit instruments
and the appropriate benchmark spread for similar assets in active markets; taking into consideration unobservable inputs related
to liquidity assumptions.
The Company’s financial instruments, at fair value are reflected in the consolidated balance sheets on a trade-date basis.
Related unrealized gains or losses are recognized in net realized investment (losses) gains in the consolidated statements of
operations. Fair value measurements are not adjusted for transaction costs.