Mercury Insurance 2010 Annual Report Download - page 83

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to
differences between the financial reporting basis and the respective tax basis of the Company’s assets and
liabilities, and expected benefits of utilizing net operating loss, capital loss, and tax-credit carryforwards. 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 effect on deferred tax assets and
liabilities of a change in tax rates or laws is recognized in earnings in the period that includes the enactment date.
At December 31, 2010, the Company’s deferred income taxes were in a net asset position partly due to a
combination of ordinary and capital deferred tax benefits. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent upon generating sufficient taxable
income of the appropriate nature within the carryback and carryforward periods available under the tax law.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income of an
appropriate nature, and tax-planning strategies in making this assessment. The Company believes that through
the use of prudent tax planning strategies and the generation of capital gains, sufficient income will be realized in
order to maximize the full benefits of its deferred tax assets. Although realization is not assured, management
believes that it is more likely than not that the Company’s deferred tax assets will be realized.
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.
Share-Based Compensation
The Company accounts for share-based compensation using the modified prospective transition method.
Under this method, share-based compensation expense includes compensation expense for all share-based
compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the estimated grant-date
fair value. Share-based compensation expense for all share-based payment awards granted or modified on or after
January 1, 2006 is based on the estimated grant-date fair value. 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 four
or five years for options granted prior to 2008 and four years for options granted subsequent to January 1, 2008,
for only those shares expected to vest. The fair value of stock option awards is estimated using the Black-Scholes
option pricing model with the grant-date assumptions and weighted-average fair values, as discussed in Note 15.
Under its 2005 Incentive Award Plan (the “ 2005 Plan”), the Compensation Committee of the Company’s
Board of Directors granted to Gabriel Tirador, the Company’s Chief Executive Officer, 10,000 shares of
restricted stock on March 23, 2010. On October 1, 2010, the Compensation Committee granted 45,000 restricted
stock units to the Company’s senior management and key employees under the 2005 Plan. The restricted stock
and restricted stock units will vest at the end of a three-year performance period, and then only if, and to the
extent that, the Company’s cumulative underwriting income during such three-year performance period ending
December 31, 2012 achieves the threshold performance levels established by the Compensation Committee.
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