Income Taxes

12 Months Ended

Dec. 31, 2023

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 (benefit) consisted of the following components:

	Year Ended December 31,
	2023		2022		2021
	(Amounts in thousands)
Federal
Current	$	(3,840)	$	(62,355)	$	37,391
Deferred	10,523		(93,562)		11,349
	$	6,683	$	(155,917)	$	48,740
State
Current	$	(2,958)	$	784	$	1,542
Deferred	(633)		(2,910)		1,088
	$	(3,591)	$	(2,126)	$	2,630
Total
Current	$	(6,798)	$	(61,571)	$	38,933
Deferred	9,890		(96,472)		12,437
Total	$	3,092	$	(158,043)	$	51,370

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 Inflation Reduction Act of 2022 introduced a new Corporate Alternative Minimum Tax (“CAMT”) on the adjusted financial statement income of applicable corporations. The provision is effective for tax years beginning after December 31, 2022, and was enacted on August 16, 2022. The Company has determined that averaged adjusted financial statement income is below the thresholds such that the Company does not expect to be liable for any CAMT.

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,
	2023		2022		2021
	(Amounts in thousands)
Computed tax expense (benefit) at 21%	$	20,880	$	(140,850)	$	62,854
Tax-exempt interest income	(13,640)		(11,864)		(11,577)
Dividends received deduction	(1,237)		(1,364)		(1,311)
State tax (benefit) expense	(3,539)		(1,597)		2,134
Nondeductible expenses	639		279		843
Other, net	(11)		(2,647)		(1,573)
Income tax expense (benefit)	$	3,092	$	(158,043)	$	51,370

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,
	2023		2022
	(Amounts in thousands)
Deferred tax assets:
20% of net unearned premiums	$	75,394	$	67,285
Discounting of loss reserves and salvage and subrogation recoverable for tax purposes	25,340		21,606
Expense accruals	11,262		11,578
Tax asset on net unrealized loss on securities carried at fair value	166		22,802
Other deferred tax assets	8,743		6,511
Total gross deferred tax assets	120,905		129,782
Deferred tax liabilities:
Deferred policy acquisition costs	(61,707)		(55,960)
Tax depreciation in excess of book depreciation	(6,801)		(11,029)
Undistributed earnings of insurance subsidiaries	(1,511)		(1,898)
Tax amortization in excess of book amortization	(8,904)		(7,466)
Other deferred tax liabilities	(8,969)		(10,526)
Total gross deferred tax liabilities	(87,892)		(86,879)
Net deferred tax assets	$	33,013	$	42,903

The Company had federal net operating loss carryforwards of approximately $19.7 million and $5.7 million at December 31, 2023 and 2022, respectively. $2.1 million of the total federal net operating loss carryforward at December 31, 2023 will begin to expire in 2028 and the remaining $17.6 million can be carried forward indefinitely for federal tax purposes.

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.

The total amount of unrecognized tax benefits related to tax uncertainties decreased by approximately $2.1 million during the 12 months ended December 31, 2023. The decrease was the result of a resolution related to a California Franchise Tax Board audit for tax years 2012 and 2013.

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 2020 through 2022 for federal taxes, and 2011 and 2020 through 2022 for California state taxes. The Company has certain unresolved tax assessment issues for tax year 2011 for California state taxes that are not material to its consolidated financial statements. Tax years 2012 through 2019 for California state taxes have been resolved with no outstanding issues.

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

	December 31,
	2023		2022
	(Amounts in thousands)
Balance at January 1	$	4,380	$	4,380
Additions (reductions) based on tax positions related to:
Current year	—		—
Prior years	(2,118)		—
Balance at December 31	$	2,262	$	4,380

If unrecognized tax benefits were recognized, approximately $3.9 million and $6.6 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, 2023 and 2022, respectively.

The Company recognizes interest and penalties related to unrecognized tax benefits as a part of income taxes. The Company recognized an accrued net (benefit) expense related to interest and penalties of approximately $(1.2) million, $0.4 million, and $0.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. The Company carried an accrued interest and penalty balance of approximately $2.5 million and $3.7 million at December 31, 2023 and 2022, respectively.