Mercury Insurance 2015 Annual Report Download - page 88

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generating sufficient taxable income of the appropriate character within the carryback and carryforward periods available under
the tax law. Management considers the reversal of deferred tax liabilities, projected future taxable income of an appropriate nature,
and tax-planing strategies in making this assessment. The Company believes that through the use of prudent tax planning strategies
and the generation of capital gains, sufficient income will be realized in order to maximize the full benefits of its deferred tax
assets.
The following table presents the significant components of the Company’s net deferred tax assets and liabilities:
December 31,
2015 2014
(Amounts in thousands)
Deferred tax assets:
20% of net unearned premium $ 75,406 $ 71,907
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes 9,518 11,100
Write-down of impaired investments 857 942
Tax credit carryforward 36,349 31,198
Expense accruals 11,264 13,395
Other deferred tax assets 9,596 7,448
Total gross deferred tax assets 142,990 135,990
Deferred tax liabilities:
Deferred acquisition costs (70,617)(69,021)
Tax liability on net unrealized gain on securities carried at fair value (23,095)(47,333)
Tax depreciation in excess of book depreciation (10,742)(9,414)
Undistributed earnings of insurance subsidiaries (4,022)(4,486)
Tax amortization in excess of book amortization (2,514)(1,982)
Other deferred tax liabilities (8,769)(9,087)
Total gross deferred tax liabilities (119,759)(141,323)
Net deferred tax assets (liabilities) $ 23,231 $ (5,333)
The Company had an alternative minimum tax credit carryforward balance of $36.3 million and $31.2 million at December
31, 2015 and 2014, respectively, which is not subject to expiration.
Uncertainty in Income Taxes
The Company recognizes tax benefits related to positions taken, or expected to be taken, on a tax return only if, the positions
are "more-likely-than-not" 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 $0.4 million decrease to the total amount of unrecognized tax benefits related to tax uncertainties during 2015.
The decrease was the result of tax positions taken regarding 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 with the Internal Revenue Service and the taxing authorities of
various states. Tax years that remain subject to examination by major taxing jurisdictions are 2012 through 2014 for federal taxes
and 2003 through 2014 for California state taxes. The Company is currently under examination by the California Franchise Tax
Board ("FTB") for tax years 2003 through 2013. The FTB issued Notices of Proposed Assessments to the Company for tax years
2003 through 2010, which the Company formally protested. The proposed adjustments for tax years 2003 through 2006 were
affirmed following an administrative protest process with the FTB examination. The Company is in settlement discussions with
the FTB. If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with
the State Board of Equalization or litigation in superior court. Management believes that the resolution of these examinations and
assessments will not have a material impact on the consolidated financial statements.