Mercury Insurance 2013 Annual Report Download - page 77

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At December 31, 2013, the Company’s deferred income taxes were in a net asset position which included a combination
of ordinary and capital deferred tax benefits. In assessing the ability to realize 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 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 the Company's 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
2013 2012 2011
Three-year performance period ending December 31, 2015 2014 2013
Vesting shares, target 84,500 89,000 80,000
Vesting shares, maximum 190,125 200,250 120,000
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 performance during the performance period achieves the threshold established by
the Compensation Committee of the Company's Board of Directors. 2011 grants vest based on the Company's cumulative
underwriting income. 2012 grants vest based on the Company's cumulative underwriting income and net premium written growth.
2013 grants vest based on the Company's cumulative underwriting income, annual underwriting income, and net premiums written
growth.
The fair value of each restricted stock unit grant was determined based on the market price on the date of grant. Compensation
cost is 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 and 2011 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, 2013. See Note 14 for additional disclosures.
Recently Issued Accounting Standards
In July 2013, the FASB issued a new standard that requires entities to present an unrecognized tax benefit as a reduction
of a deferred tax asset for a net operating loss carryforward, or similar tax loss or tax credit carryforward, rather than as a liability
when the uncertain tax position would reduce the net operating loss or other carryforward under the tax law of the applicable
jurisdiction and when the entity intends to use the deferred tax asset for that purpose. The new standard will be effective for fiscal
years and interim periods within those years that begin after December 15, 2013. The adoption of the new standard will not have
a material impact on the Company's consolidated financial statements.