Mercury Insurance 2009 Annual Report Download - page 107

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,
2009 2008 2007
(Amounts in thousands)
Computed tax expense (benefit) at 35% .............................. $200,039 $(157,801) $110,263
Tax-exempt interest income ....................................... (40,247) (38,902) (38,254)
Dividends received deduction ...................................... (1,956) (1,966) (2,087)
Reduction of losses incurred deduction .............................. 6,304 6,106 6,014
State tax, penalty and interest refund ................................ — (17,511) —
State tax expense (benefit) ........................................ 3,688 (830) 1,989
Other, net ...................................................... 641 2,162 (721)
Income tax expense (benefit) ...................................... $168,469 $(208,742) $ 77,204
Deferred Tax Asset and Liability
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 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 asset and liabilities are as follows:
December 31,
2009 2008
(Amounts in thousands)
Deferred tax assets:
20% of net unearned premium ........................................... $ 61,389 $ 63,858
Capital loss carryforward ............................................... 13,258 —
Discounting of loss reserves and salvage and subrogation recoverable for tax
purposes ........................................................... 16,010 16,711
Write-down of impaired investments ...................................... 7,192 6,394
Tax benefit on net unrealized losses on securities carried at fair value ............ — 142,886
Tax credit carryforward ................................................. 6,534 13,024
Expense accruals ...................................................... 17,029 16,096
Other deferred tax assets ................................................ 7,418 9,360
Total deferred tax assets ............................................ 128,830 268,329
Deferred tax liabilities:
Deferred acquisition costs ............................................... (61,553) (70,002)
Tax liability on net unrealized gain on securities carried at fair value ............. (1,900) —
Tax depreciation in excess of book depreciation ............................. (15,110) (14,228)
Undistributed earnings of insurance subsidiaries ............................. (4,608) (2,804)
Accounting method transition adjustments .................................. (2,984) (5,855)
Other deferred tax liabilities ............................................. (6,536) (4,415)
Total gross deferred tax liabilities ..................................... (92,691) (97,304)
Net deferred tax assets .................................................... $ 36,139 $171,025
89