Income Taxes

12 Months Ended

Dec. 31, 2021

Components of Income Tax Expense (Benefit), Continuing Operations [Abstract]

Income Taxes

Income Taxes

Income tax provision

The Company and its subsidiaries file a consolidated federal income tax return. The income tax expense consisted of the following components:

	Year Ended December 31,
	2021		2020		2019
	(Amounts in thousands)
Federal
Current	$	37,391	$	69,554	$	18,109
Deferred	11,349		12,340		40,413
	$	48,740	$	81,894	$	58,522
State
Current	$	1,542	$	1,172	$	(1,430)
Deferred	1,088		828		890
	$	2,630	$	2,000	$	(540)
Total
Current	$	38,933	$	70,726	$	16,679
Deferred	12,437		13,168		41,303
Total	$	51,370	$	83,894	$	57,982

In computing taxable income, property and casualty insurers reduce underwriting income by losses and loss adjustment expenses incurred. The amount of the deduction for losses incurred associated with unpaid losses is discounted at the interest rates and for the loss payment patterns prescribed by the U.S. Treasury. The Tax Cuts and Jobs Act of 2017 (the "Act") changed the prescribed interest rates to rates based on corporate bond yield curves and extended the applicable time periods for the loss payment pattern. These changes are effective for tax years beginning after 2017 and are subject to a transition rule that spreads the additional tax payments from the amount determined by applying these changes versus the previous calculated amount over the subsequent eight years beginning in 2018. The Company recorded a total deferred tax liability adjustment of approximately $8.6 million at December 31, 2018 related to the changes in discounting of unpaid losses included in the Act based on the guidance published in 2018 by the Internal Revenue Service. As of December 31, 2021 and 2020, the balance of the deferred tax liability related to changes in discounting of unpaid losses was $4.4 million, and $5.6 million, respectively.

The following table presents a reconciliation of the tax expense based on the statutory rate to the Company's actual tax expense in the consolidated statements of operations:

	Year Ended December 31,
	2021		2020		2019
	(Amounts in thousands)
Computed tax expense at 21%	$	62,854	$	96,285	$	79,394
Tax-exempt interest income	(11,577)		(12,270)		(12,909)
Dividends received deduction	(1,311)		(1,335)		(1,276)
State tax expense (benefit)	2,134		1,678		(869)
Nondeductible expenses	843		983		526
Change in federal tax contingency reserve	—		—		(2,588)
Other, net	(1,573)		(1,447)		(4,296)
Income tax expense	$	51,370	$	83,894	$	57,982

Deferred Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting basis and the respective tax basis of the Company’s assets and liabilities, and expected benefits of utilizing net operating loss, capital loss, and tax-credit carryforwards. The ultimate realization of deferred tax assets is dependent upon 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-planning 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,
	2021		2020
	(Amounts in thousands)
Deferred tax assets:
20% of net unearned premiums	$	65,978	$	61,067
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes	18,163		15,090
Write-down of impaired investments	168		293
Expense accruals	12,997		14,432
Other deferred tax assets	5,886		6,401
Total gross deferred tax assets	103,192		97,283
Deferred tax liabilities:
Deferred policy acquisition costs	(54,234)		(51,869)
Tax liability on net unrealized gain on securities carried at fair value	(70,808)		(56,531)
Tax depreciation in excess of book depreciation	(10,129)		(12,632)
Undistributed earnings of insurance subsidiaries	(3,557)		(3,382)
Tax amortization in excess of book amortization	(6,064)		(4,666)
Other deferred tax liabilities	(11,969)		(9,335)
Total gross deferred tax liabilities	(156,761)		(138,415)
Net deferred tax liabilities	$	(53,569)	$	(41,132)

Uncertainty in Income Taxes

The Company recognizes tax benefits related to positions taken, or expected to be taken, on its tax returns, 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 $0.3 million decrease to the total amount of unrecognized tax benefits related to tax uncertainties during 2021. The decrease was the result of a payment of an assessment related to a California Franchise Tax Board (“FTB”) audit for tax years 2017 through 2019. The Company does not expect any changes in unrecognized tax benefits to have a material 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 2018 through 2020 for federal taxes, and 2011 through 2013 and 2020 for California state taxes. For tax years 2011 through 2013, the Company received Notices of Proposed Assessments ("NPAs") and submitted a formal protest to the FTB in 2018. During the fourth quarter of 2021, the FTB issued the protest determination letter for the 2011 and 2013 tax years. Tax years 2014 through 2019 have been resolved with no outstanding issues.

If a reasonable settlement is not reached, the Company intends to pursue other options, including a formal hearing with the FTB, an appeal with the California Office of Tax Appeals, or litigation in Superior Court.

The Company believes that the resolution of these examinations and assessments will not have a material impact on the financial position of the Company.

The following table presents a reconciliation of the beginning and ending balances of unrecognized tax benefits:

	December 31,
	2021		2020
	(Amounts in thousands)
Balance at January 1	$	4,634	$	6,051
Additions (reductions) based on tax positions related to:
Current year	—		—
Prior years	(254)		(1,417)
Balance at December 31	$	4,380	$	4,634

If unrecognized tax benefits were recognized, approximately $6.2 million, including accrued interest, penalties and federal tax benefit related to unrecognized tax benefits, would impact the Company’s effective tax rate at December 31, 2021 and 2020.

The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income taxes. The Company recognized an accrued net expense (benefit) related to interest and penalty of approximately $0.3 million, $0.2 million, and $(0.1) million for the years ended December 31, 2021, 2020 and 2019, respectively. The net benefit for the year ended December 31, 2019 was largely due to the reversal of accrued interest and penalty following the updates from the FTB for tax years 2014 through 2016. The Company carried an accrued interest and penalty balance of approximately $3.3 million and $3.1 million at December 31, 2021 and 2020, respectively.