Mercury Insurance 2010 Annual Report Download - page 98

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The income tax provision reflected in the consolidated statements of operations is reconciled to the federal
income tax on income (loss) before income taxes based on a statutory rate of 35% as shown in the table below:
Year Ended December 31,
2010 2009 2008
(Amounts in thousands)
Computed tax expense (benefit) at 35% .............................. $63,837 $200,039 $(157,801)
Tax-exempt interest income ....................................... (33,966) (34,210) (33,067)
Dividends received deduction ...................................... (1,463) (1,689) (1,695)
State tax, penalty and interest refund ................................ 0 0 (17,511)
State tax (benefit) expense ......................................... (3,580) 3,688 (830)
Other, net ...................................................... 5,364 641 2,162
Income tax expense (benefit) ....................................... $30,192 $168,469 $(208,742)
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization
of deferred tax assets is dependent on generating sufficient taxable income of an appropriate nature prior to their
expiration. The Company believes it has the ability and intent, through the use of prudent tax planning strategies
and the generation of capital gains, to generate income sufficient to avoid losing the benefits of its deferred tax
assets. Significant components of the Company’s net deferred tax assets and liabilities are as follows:
December 31,
2010 2009
(Amounts in thousands)
Deferred tax assets:
20% of net unearned premium ........................................... $ 60,473 $ 61,389
Capital loss carryforward ............................................... 14,718 13,258
Discounting of loss reserves and salvage and subrogation recoverable for tax
purposes .......................................................... 15,843 16,010
Write-down of impaired investments ..................................... 5,389 7,192
Tax credit carryforward ................................................ 16,679 6,534
Expense accruals ..................................................... 14,467 17,029
Other deferred tax assets ............................................... 9,106 7,418
Total gross deferred tax assets ....................................... 136,675 128,830
Deferred tax liabilities:
Deferred acquisition costs .............................................. (59,702) (61,553)
Tax liability on net unrealized gain on securities carried at fair value ............ (18,808) (1,900)
Tax depreciation in excess of book depreciation ............................. (16,839) (15,110)
Undistributed earnings of insurance subsidiaries ............................ (4,447) (4,608)
Accounting method transition adjustments ................................. (112) (2,984)
Other deferred tax liabilities ............................................ (10,268) (6,536)
Total gross deferred tax liabilities .................................... (110,176) (92,691)
Net deferred tax assets .................................................... $ 26,499 $ 36,139
The Company has a capital loss carryforward of $42.1 million which, if unused, will begin expiring in 2015.
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