Mercury Insurance 2015 Annual Report Download - page 81

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69
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 in active markets.
Options sold/Purchased options: 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 and commercial 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 $37.3 million and $32.5 million at
December 31, 2015 and 2014, 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 swaps: Valued based on multi-dimensional 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.
Collateralized loan obligations: Valued based on underlying debt instruments and the appropriate benchmark spread for similar
assets in active markets.
Other asset-backed securities: Comprised of securities that are collateralized by non-mortgage assets, such as automobile loans,
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.
Secured notes payable: Valued based on underlying collateral and reset rates for similarly termed notes that are observable in the
market.
Unsecured notes payable: Valued based on the unadjusted quoted price for similar notes in active markets.
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/Private equity funds: Valued based on underlying debt/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.