Mercury Insurance 2007 Annual Report Download - page 80

78 MERCURYNOW 2007
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
Balance at January 1, 2007 $ 7,382,000
Additions based on tax positions related to the current year 921,000
Additions for tax positions of prior years 289,000
Reductions for tax positions related to the current year —
Reductions for tax positions of prior years (4,113,000)
Decreases resulting from settlements with taxing authorities —
Reductions as a result of a lapse of the applicable statue of limitations (61,000)
Balance at December 31, 2007 $ 4,418,000
Of this total, $3,279,000 represents unrecognized tax benefits, net of federal tax benefit and accrued interest expense which, if recognized,
would affect the Company’s effective tax rate.
Management anticipates that it is reasonably possible that the Company’s total amount of unrecognized tax benefits will increase within the
next twelve months by approximately $800,000 to $1,000,000 related to its ongoing California state tax apportionment factor issues.
The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income taxes. During the years ended
December 31, 2007, 2006, and 2005, the Company recognized interest and penalty expense of $450,000, $14,432,000, and $610,000, respectively.
The Company carried an accrued interest balance of $710,000 and $260,000 at December 31, 2007 and 2006, respectively. No penalties have been
expensed in 2007.
Note 7. Reserves for Losses and Loss Adjustment Expenses
Activity in the reserves for losses and loss adjustment expenses is summarized as follows:
Year ended December 31,
Amounts in thousands 2007 2006 2005
Gross reserves, beginning of year $ 1,088,822 $ 1,022,603 $ 900,744
Less reinsurance recoverable (6,429) (16,969) (14,137)
Net reserves, beginning of year 1,082,393 1,005,634 886,607
Incurred losses and loss adjustment expenses related to:
Current year 2,017,120 2,000,357 1,909,453
Prior years 19,524 21,289 (46,517)
Total incurred losses and loss adjustment expenses 2,036,644 2,021,646 1,862,936
Loss and loss adjustment expense payments related to:
Current year 1,345,234 1,311,982 1,218,784
Prior years 674,345 632,905 525,125
Total payments 2,019,579 1,944,887 1,743,909
Net reserves, end of year 1,099,458 1,082,393 1,005,634
Reinsurance recoverable 4,457 6,429 16,969
Gross reserves, end of year $ 1,103,915 $ 1,088,822 $ 1,022,603
The increase in the provision for insured events of prior years in 2007 primarily relates to adverse development of approximately $25 million
in California mostly resulting from increases in estimates for loss severity and ultimate reported claims on the bodily injury reserves, which was
partially offset by positive development of approximately $5 million related to operations outside of California. In October 2007, the Southern
California region was devastated by sweeping fire storms. The Company recorded a pre-tax loss of approximately $23 million resulting from these
fire storms.
The increase in the provision for insured events of prior years in 2006 relates largely to the unexpected development of several large extra-
contractual claims in the state of Florida and increases in reserve estimates for the bodily injury and personal injury protection coverages in New
Jersey.