Mercury Insurance 2012 Annual Report Download - page 84

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tax assets is dependent upon generating sufficient taxable income of the appropriate character within the carryback and carryforward
periods available under the tax law. Management considers the 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
Share-based compensation expense for all share-based payment awards granted or modified 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.
Under its 2005 Incentive Award Plan (the “2005 Plan”), the Compensation Committee of the Company’s Board of Directors
granted performance vesting restricted stock units to the Company’s senior management and key employees as follows:
Grant Year
2012 2011 2010
Three-year performance period ending December 31, 2014 2013 2012
Vesting shares, target (1) 89,000 80,000 55,000
Vesting shares, maximum (1) 200,250 120,000 55,000
(1) 2010 grant includes 10,000 shares of restricted stock.
The restricted stock units vest at the end of a three-year performance period beginning with the year of the grant, and then
only if, and to the extent that, the Company’s cumulative underwriting income, and with respect to the 2012 grants only, target
level of growth in net premiums written during such three-year period achieves the threshold performance levels established by
the Compensation Committee of the Company's Board of Directors.
The fair value of each restricted share grant was determined based on the market price on the date of grant. Compensation
cost has been recognized based on management’s best estimate that performance goals will be achieved. If such goals are not met,
no compensation cost would be recognized and any recognized compensation cost would be reversed. For the 2012, 2011, and
2010 grants, the achievement of the performance condition set by the Compensation Committee was no longer considered probable,
and previously recognized compensation costs were reversed as of December 31, 2012. See Note 14 for additional disclosures.
Recently Issued Accounting Standards
In June 2011, the FASB issued a new standard which revises the manner in which entities present comprehensive income
in their financial statements. The new standard removes the presentation options and requires entities to report components of
comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements.
The new standard does not change the items that must be reported in other comprehensive income. The Company adopted the
new standard which became effective for the interim period ended March 31, 2012. The adoption of the new standard did not have
a material impact on the Company’s consolidated financial statements. In December 2011, the FASB issued a new standard which
indefinitely defers certain provisions of this standard. One of this standard’s provisions required entities to present reclassification
adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented
and the statement in which other comprehensive income is presented. Accordingly, this requirement is indefinitely deferred and
will be further deliberated by the FASB at a future date.