Mercury Insurance 2013 Annual Report Download - page 87

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and the generation of capital gains, sufficient income will be realized in order to maximize the full benefits of its deferred tax
assets. Significant components of the Company’s net deferred tax assets and liabilities are as follows:
December 31,
2013 2012
(Amounts in thousands)
Deferred tax assets:
20% of net unearned premium $ 68,586 $ 66,353
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes 12,810 15,019
Write-down of impaired investments 1,714 1,723
Tax credit carryforward 40,309 37,557
Expense accruals 12,497 10,910
Other deferred tax assets 5,653 4,860
Total gross deferred tax assets 141,569 136,422
Deferred tax liabilities:
Deferred acquisition costs (68,063)(65,069)
Tax liability on net unrealized gain on securities carried at fair value (33,964)(48,483)
Tax depreciation in excess of book depreciation (9,667)(10,191)
Undistributed earnings of insurance subsidiaries (4,024)(4,499)
Tax amortization in excess of book amortization (1,447)(914)
Other deferred tax liabilities (9,184)(7,711)
Total gross deferred tax liabilities (126,349)(136,867)
Net deferred tax assets (liabilities) $ 15,220 $ (445)
Uncertainty in Income Taxes
The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if, “more-
likely-than-not” the positions are sustainable. Once this threshold has been met, the Company's measurement of its expected tax
benefits is recognized in its financial statements.
There was a $4.9 million increase to the total amount of unrecognized tax benefits related to tax uncertainties during 2013.
The increase was the result of tax positions taken regarding federal tax credit carryforwards and state tax apportionment issues
based on management's best judgment given the facts, circumstances and information available at the reporting date. 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 2010 through 2012 for federal taxes and 2003 through 2012 for
California state taxes. The Company is currently under examination by the California Franchise Tax Board (“FTB”) for tax years
2003 through 2010. The FTB issued Notices of Proposed Assessments to the Company for tax years 2003 through 2006, which
were affirmed following an administrative protest process with the FTB examination. The Company is considering its options for
resolving the case. 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:
2013 2012
(Amounts in thousands)
Balance at January 1 $ 5,926 $ 4,567
Additions based on tax positions related to:
Current year 1,225 330
Prior years 3,633 1,539
Additions (reductions) based on tax positions related to prior years 0(308)
Additions (reductions) as a result of as lapse of the applicable statute of limitations 0(202)
Balance at December 31 $ 10,784 $ 5,926