Mercury Insurance 2008 Annual Report Download - page 86

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(11) Profit Sharing Plan
The Company, at the option of the Board of Directors, may make annual contributions to an employee Profit Sharing
Plan (the “Plan”). The contributions are not to exceed the greater of the Company’s net income for the plan year or its retained
earnings at that date. In addition, the annual contributions may not exceed an amount equal to 15% of the compensation paid or
accrued during the year to all participants under the Plan. No contributions were made by the Company during 2008 compared to
$1,900,000 for each of 2007 and 2006.
The Plan includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue
Code. Company matching contributions, at a rate set by the Board of Directors, totaled $6,802,000, $5,056,000 and $4,512,000
for 2008, 2007 and 2006, respectively.
The Plan also includes an employee stock ownership plan (“ESOP”) that covers substantially all employees. The Board
of Directors authorized the Plan to purchase $1.2 million of the Company’s common stock in the open market for allocation to the
Plan participants in 2007 and 2006. Accordingly, the Company recognized $1.2 million compensation expense in those
years. The Board of Directors did not authorize the purchase of common stock for the Plan for 2008.
(12) 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 Equity Incentive Award Plan (the “2005 Plan”) which succeeded the 1995 Plan.
Share-based compensation awards may only be granted under the 2005 Plan. A combined total of 5,400,000 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 5,400,000. As of December 31, 2008, 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
generally become exercisable 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. The Company
has no restricted stock outstanding as of December 31, 2008.
Cash received from option exercises was $1,286,000, $2,173,000 and $1,943,000 during 2008, 2007 and 2006,
respectively. The excess tax benefit realized for the tax deduction from option exercises of the share-based payment awards
totaled $121,000, $273,000 and $505,000 during 2008, 2007 and 2006, respectively.
The fair value of stock option awards was estimated using the Black-Scholes option pricing model with the following
grant-date assumptions and weighted-average fair values:
2008 2007 2006
Weighted-average fair value of grants 4.84$ 7.45$ 10.62$
Expected volatility 17.87%-19.38% 17.87%-18.50% 20.56%-24.22%
Weighted-average expected volatility 18.65% 18.14% 20.56%
Risk-free interest rate 2.93%-3.29% 4.02%-4.91% 4.54%-5.00%
Expected dividend yield 4.54%-4.85% 3.77%-4.13% 3.41%-3.74%
Expected term in months 72 72 72
Year Ended December 31,
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. The expected volatility on the date of grant is calculated based on historical volatility over the expected term of
the options. The expected term computation is based on historical exercise patterns and post-vesting termination behavior.