Mercury Insurance 2012 Annual Report Download - page 94
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73
December 31,
2012 2011
(Amounts in thousands)
Deferred tax assets:
20% of net unearned premium $ 66,353 $ 61,039
Capital loss carryforward 0 7,108
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes 15,019 15,034
Write-down of impaired investments 1,723 4,638
Tax credit carryforward 37,557 20,060
Expense accruals 10,910 11,632
Other deferred tax assets 4,860 3,568
Total gross deferred tax assets 136,422 123,079
Deferred tax liabilities:
Deferred acquisition costs (65,069)(60,000)
Tax liability on net unrealized gain on securities carried at fair value (48,483)(31,997)
Tax depreciation in excess of book depreciation (10,191)(15,164)
Undistributed earnings of insurance subsidiaries (4,499)(3,962)
Tax amortization in excess of book amortization (914)(442)
Other deferred tax liabilities (7,711)(5,003)
Total gross deferred tax liabilities (136,867)(116,568)
Net deferred tax (liabilities) assets $(445) $ 6,511
Uncertainty in Income Taxes
The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return once a “more-
likely-than-not” threshold has been met. For a tax position that meets the recognition threshold, the largest amount of tax benefit
that is greater than 50% likely of being realized upon ultimate settlement is recognized in the financial statements.
There were no material changes to the total amount of unrecognized tax benefits related to tax uncertainties during 2012.
The Company does not expect any changes in such unrecognized tax benefits to have a significant impact on its consolidated
financial statements within the next 12 months.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. Tax years that
remain subject to examination by major taxing jurisdictions are 2009 through 2011 for federal taxes and 2003 through 2011 for
California state taxes. Tax year 2010 is currently under examination by the Internal Revenue Service. The Company is currently
under examination by the California Franchise Tax Board (“FTB”) for tax years 2003 through 2010. The FTB has issued Notices
of Proposed Assessments to the Company for tax years 2003 through 2006. The Company has filed protests with the FTB in
response to these assessments and presented its case in a hearing before the FTB. No assessments have been received for tax years
2007 through 2010. Management believes that the resolution of these examinations and assessments will not have a material
impact on the consolidated financial statements.
A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:
2012 2011
(Amounts in thousands)
Balance at January 1 $ 4,567 $ 3,823
Additions based on tax positions related to:
Current year 330 1,011
Prior years 1,539 0
Reductions based on tax positions related to prior years (308)(267)
Reductions as a result of as lapse of the applicable statute of limitations (202) 0
Balance at December 31 $ 5,926 $ 4,567