Mercury Insurance 2012 Annual Report Download - page 95

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As presented above, the balances of unrecognized tax benefits were $5.9 million and $4.6 million at December 31, 2012
and 2011, respectively. Of these totals, $3.5 million and $3.6 million represent unrecognized tax benefits, net of federal tax benefit
and accrued interest expense which, if recognized, would impact the Company’s effective tax rate.
Management does not expect the Company’s total amount of unrecognized tax benefits to materially increase within the
next twelve months 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, 2012, 2011, and 2010, the Company recognized net interest and penalty expense or (benefit), excluding
refunds, of $111,000, $106,000, and ($872,000), respectively. The Company carried an accrued interest and penalty balance of
$945,000 and $834,000 at December 31, 2012 and 2011, respectively.
10. Losses and Loss Adjustment Expenses
Activity in the reserves for losses and loss adjustment expenses is summarized as follows:
Year Ended December 31,
2012 2011 2010
(Amounts in thousands)
Gross reserves at January 1 $ 985,279 $ 1,034,205 $ 1,053,334
Less reinsurance recoverable (7,921)(6,805)(7,748)
Net reserves at January 1 977,358 1,027,400 1,045,586
Incurred losses and loss adjustment expenses related to:
Current year 1,919,116 1,810,711 1,838,824
Prior years 42,332 18,494 (13,058)
Total incurred losses and loss adjustment expenses 1,961,448 1,829,205 1,825,766
Loss and loss adjustment expense payments related to:
Current year 1,314,748 1,265,188 1,240,696
Prior years 600,090 614,059 603,256
Total payments 1,914,838 1,879,247 1,843,952
Net reserves at year-end 1,023,968 977,358 1,027,400
Reinsurance recoverable 12,155 7,921 6,805
Gross reserves at year-end $ 1,036,123 $ 985,279 $ 1,034,205
The increase in the provision for insured events of prior years in 2012 of approximately $42 million primarily resulted from
the re-estimate of accident years 2010 and 2011 California BI losses which have experienced higher average severities and more
late reported claims than were originally estimated at December 31, 2011. Additionally, the Company experienced unfavorable
development on the run-off of California commercial taxi business and Florida homeowners business, both of which the Company
ceased writing in 2011. 2012 accident year losses were also impacted by higher loss severity and frequency on the California
private passenger automobile line of business.
The increase in the provision for insured events of prior years in 2011 of approximately $18 million primarily resulted from
the re-estimate of accident years 2008 through 2010 California BI losses which have experienced higher average severities than
were originally estimated at December 31, 2010. Partially offsetting this increase was favorable development on loss adjustment
expenses reflecting cost savings from the transition of a large portion of litigated cases from outside counsel to in-house counsel.
The decrease in the provision for insured events of prior years in 2010 of approximately $13 million primarily resulted
from the re-estimate of accident year 2009 California BI losses. In addition, the Company experienced favorable development on
New Jersey personal automobile reserves, resulting from more aggressive handling of litigated claims, which includes a high
percentage of favorable results in cases brought to trial. The favorable development was partially offset by unfavorable development
on Florida reserves, which included approximately $3 million of unfavorable development on the homeowners line of business,
primarily related to sinkhole claims.
The Company experienced estimated pre-tax losses from severe weather events of $39 million, $18 million, and $25 million
in 2012, 2011, and 2010, respectively. The losses in 2012 were primarily due to Hurricane Sandy and wind and hail storms in the
Midwest region. The losses in 2011 related to California wind storms, Hurricane Irene, and Georgia tornadoes. The losses in 2010
primarily related to California rainstorms.