Mercury Insurance 2011 Annual Report Download - page 108

MERCURY GENERAL CORPORATION AND SUBSIDIARIES
NOTES STATEMENTS TO CONSOLIDATED FINANCIAL—(Continued)
The income tax provision reflected in the consolidated statements of operations is reconciled to the federal
income tax on income before income taxes based on a statutory rate of 35% as shown in the table below:
Year Ended December 31,
2011 2010 2009
(Amounts in thousands)
Computed tax expense at 35% ....................................... $85,785 $ 63,837 $200,039
Tax-exempt interest income ........................................ (31,414) (33,966) (34,210)
Dividends received deduction ....................................... (1,704) (1,463) (1,689)
State tax expense (benefit) .......................................... 1,299 (3,580) 3,688
Other, net ....................................................... (31) 5,364 641
Income tax expense ............................................... $53,935 $ 30,192 $168,469
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,
2011 2010
(Amounts in thousands)
Deferred tax assets:
20% of net unearned premium .......................................... $ 61,039 $ 60,473
Capital loss carryforward .............................................. 7,108 14,718
Discounting of loss reserves and salvage and subrogation recoverable for tax
purposes ......................................................... 15,034 15,843
Write-down of impaired investments ..................................... 4,638 5,389
Tax credit carryforward ............................................... 20,060 16,679
Expense accruals ..................................................... 11,632 14,467
Other deferred tax assets .............................................. 3,568 4,337
Total gross deferred tax assets ...................................... 123,079 131,906
Deferred tax liabilities:
Deferred acquisition costs ............................................. (60,000) (59,702)
Tax liability on net unrealized gain on securities carried at fair value ............ (31,997) (18,808)
Tax depreciation in excess of book depreciation ............................ (15,164) (16,839)
Undistributed earnings of insurance subsidiaries ............................ (3,962) (4,447)
Accounting method transition adjustments ................................ 0 (112)
Tax amortization in excess of book amortization ............................ (442) (24)
Other deferred tax liabilities ............................................ (5,003) (5,475)
Total gross deferred tax liabilities ................................... (116,568) (105,407)
Net deferred tax assets ................................................... $ 6,511 $ 26,499
The Company has a capital loss carryforward of $20.3 million which, if unused, will begin expiring in 2014.
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