Mercury Insurance 2007 Annual Report Download - page 71

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2007 MERCURYNOW 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
Earnings per share is presented in accordance with the provisions of SFAS No. 128, “Earnings per Share,” which requires presentation of basic
and diluted earnings per share for all publicly traded companies. Note 13 of Notes to Consolidated Financial Statements contains the required
disclosures which make up the calculation of basic and diluted earnings per share.
SEGMENT REPORTING
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about
operating segments. The Company does not have any operations that require separate disclosure as operating segments.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of
the Company’s assets and liabilities and expected benefits of utilizing net operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary
differences are expected to be settled, and reflected in the financial statements in the period enacted.
REINSURANCE
Liabilities for unearned premiums and unpaid losses are stated in the accompanying consolidated financial statements before deductions for ceded
reinsurance. The ceded amounts are immaterial and are carried in other receivables. Earned premiums are stated net of deductions for ceded
reinsurance.
The Insurance Companies, as primary insurers, are required to pay losses to the extent reinsurers are unable to discharge their obligations
under the reinsurance agreements.
SUPPLEMENTAL CASH FLOW INFORMATION
A summary of interest and income taxes paid is as follows:
Year ended December 31,
Amounts in thousands 2007 2006 2005
Interest $ 8,618 $ 8,702 $ 5,649
Income taxes 100,410 73,144 105,811
In 2007, the Company issued a promissory note of $4.5 million that is due in April 2009 in connection with the acquisition of a 4.25 acre
parcel of land in Brea, California.
SHARE-BASED COMPENSATION
Prior to January 1, 2006, the Company accounted for share-based compensation plans under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Under that method, when options are granted with a strike price
equal to or greater than market price on the date of issuance, there is no impact on earnings either on the date of the grant or thereafter, absent
modification to the options. Accordingly, the Company recognized no share-based compensation expense in periods prior to January 1, 2006.
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), using the modified
prospective transition method and therefore has not restated results from prior periods. Under this transition method, share-based compensation
expense for 2006 includes compensation expense for all share-based compensation awards granted prior to, but not yet vested as of, January 1,
2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation.” Share-based compensation expense for all share-based payment awards granted or modified on or after January 1, 2006 is based
on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company recognizes these compensation costs
on a straight-line basis over the requisite service period of the award, which is the option vesting term of generally five years, for only those shares
expected to vest. The fair value of stock option awards was estimated using the Black-Scholes option pricing model with the grant-date assumptions
and weighted-average fair values, as discussed in Note 12 of Notes to Consolidated Financial Statements.