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MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15. Share-Based Compensation
In May 1995, the Company adopted the 1995 Equity Participation Plan (the “1995 Plan”) which succeeded a
prior plan. In May 2005, the Company adopted the 2005 Plan which succeeded the 1995 Plan. Share-based
compensation awards may only be granted under the 2005 Plan. A combined total of 4,937,000 shares of
common stock under the 1995 Plan and the 2005 Plan are authorized for issuance upon exercise of options, stock
appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. The maximum
number of shares that may be issued under the 2005 Plan is 4,937,000. As of December 31, 2010, only options
and restricted stock awards have been granted under these plans. Beginning January 1, 2008, options granted, for
which the Company has recognized share-based compensation expense become exercisable at a rate of 25% per
year beginning one year from the date granted, are granted at the market price on the date of grant, and expire
after 10 years. Prior to January 1, 2008, shares became exercisable at a rate of 20% per year.
Cash received from option exercises was $733,000, $393,000, and $1,286,000 during 2010, 2009, and 2008,
respectively. The excess tax benefit realized for the tax deduction from option exercises of the share-based
payment awards totaled $60,000, $5,000, and $121,000 during 2010, 2009, and 2008, respectively.
No stock options were awarded in 2010. In 2009 and 2008, the fair value of stock option awards was
estimated on the date of grant using a closed-form option valuation model (Black-Scholes) based on the
following table, which provides the weighted-average values of assumptions used in the calculation of grant-date
fair values during the years ended December 31:
2009 2008
Weighted-average grant-date fair value ............................. $3.45 $4.84
Expected volatility ............................................. 23.53%-25.58% 17.87%-19.38%
Weighted-average expected volatility ............................... 24.79% 18.65%
Risk-free interest rate ........................................... 1.98%-2.97% 2.93%-3.29%
Expected dividend yield ......................................... 6.67%-6.94% 4.54%-4.85%
Expected term in months ......................................... 72 72
Expected volatilities are based on historical volatility of the Company’s stock over the term of the options.
The Company estimated the expected term of options, which represents the period of time that options granted
are expected to be outstanding, by using historical exercise patterns and post-vesting termination behavior. The
risk free interest rate is determined based on U.S. Treasury yields with equivalent remaining terms in effect at the
time of the grant.
A summary of the stock option activity under the Company’s plans as of December 31, 2010 and changes
during the year then ended is presented below:
Shares
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual Term
(Years)
Aggregate
Intrinsic Value
(in 000’s)
Outstanding at January 1, 2010 ................... 690,200 $44.26
Granted ..................................... 0 0
Exercised .................................... (74,525) 37.71
Cancelled or expired ........................... 0 0
Outstanding at December 31, 2010 ................ 615,675 $45.06 5.9 $1,944
Exercisable at December 31, 2010 ................ 379,625 $48.14 4.7 $ 608
93