Mercury Insurance 2013 Annual Report Download - page 88

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As presented above, the balances of unrecognized tax benefits were $10.8 million and $5.9 million at December 31, 2013
and 2012, respectively. Of these totals, $8.4 million and $3.5 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, 2013, 2012, and 2011, the Company recognized net interest and penalty expense, excluding refunds,
of $1,119,000, $111,000, and $106,000, respectively. The Company carried an accrued interest and penalty balance of $2,065,000
and $945,000 at December 31, 2013 and 2012, 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,
2013 2012 2011
(Amounts in thousands)
Gross reserves at January 1 $ 1,036,123 $ 985,279 $ 1,034,205
Less reinsurance recoverable (12,155)(7,921)(6,805)
Net reserves at January 1 1,023,968 977,358 1,027,400
Incurred losses and loss adjustment expenses related to:
Current year 1,959,730 1,919,116 1,810,711
Prior years 2,960 42,332 18,494
Total incurred losses and loss adjustment expenses 1,962,690 1,961,448 1,829,205
Loss and loss adjustment expense payments related to:
Current year 1,354,074 1,314,748 1,265,188
Prior years 607,527 600,090 614,059
Total payments 1,961,601 1,914,838 1,879,247
Net reserves at year-end 1,025,057 1,023,968 977,358
Reinsurance recoverable 13,927 12,155 7,921
Gross reserves at year-end $ 1,038,984 $ 1,036,123 $ 985,279
The increase in the provision for insured events of prior years in 2013 of approximately $3 million primarily resulted from
Florida claims that were re-opened from prior years due to a state supreme court ruling that was adverse to the insurance industry.
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 Company experienced estimated pre-tax losses and loss adjustment expenses from severe weather events of $17 million,
$39 million, and $18 million in 2013, 2012, and 2011, respectively. The losses in 2013 were primarily due to tornadoes in Oklahoma
and severe storms in the Midwest and the Southeast regions during the second quarter. 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.