FEDERAL INCOME TAX

The Tax Act was enacted on December 22, 2017. The Tax Act significantly revised the U.S. corporate income tax laws including lowering the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.

In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As of December 31, 2017 we had not completed accounting for the tax effects of enactment of the Tax Act, however for certain items, we have made a reasonable estimate of the effects on our deferred tax balances. For other items where we could not make a reasonable estimate, we are still using existing accounting guidance and the provisions of the tax laws that were in place prior to the enactment. For the items were we were able to determine a reasonable estimate, we recognized a provisional amount in income tax expense from continuing operations of $21,884. The Company will continue to refine this estimated provisional adjustment as we gain a more through understanding of the tax law and the Company will take future guidance into consideration when it becomes available.

Federal income tax expense (benefit) from both continuing and discontinued operations is composed of the following:




Years Ended December 31,	2017			2016		2015
Current	$	1,989		$	3,239	$	37,649
Deferred	(26,719		)	5,524		(5,324		)
Total	$	(24,730	)	$	8,763	$	32,325

A reconciliation of income tax expense (benefit) computed at the applicable federal tax rate of 35.0 percent to the amount recorded in the accompanying Consolidated Statements of Income and Comprehensive Income is as follows:




Years Ended December 31,	2017			2016			2015
Computed expected income tax expense	$	9,202		$	20,533		$	42,508
Impact of enactment of Tax Act	(21,884		)	—			—
Tax-exempt municipal bond interest income	(8,875		)	(8,330		)	(7,669		)
Nontaxable dividend income	(1,540		)	(1,317		)	(1,337		)
Valuation allowance reduction	(547		)	(547		)	(548		)
Other, net	(1,086		)	(1,576		)	(629		)
Consolidated federal income tax expense (benefit)	$	(24,730	)	$	8,763		$	32,325

Reconciliation of consolidated federal income tax expense (benefit) from:
Continuing operations	$	(29,220	)	$	8,379		$	30,050
Discontinued operations	4,490			384			2,275
Consolidated federal income tax expense (benefit)	$	(24,730	)	$	8,763		$	32,325

We remeasure certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which under the new Tax Act is 21.0 percent. However, we are still analyzing certain aspects of the Tax Act which could impact our calculations and the measurement of our deferred tax balances. The significant components of our net deferred tax liability from both continuing and discontinued operations at December 31, 2017 and 2016 are as follows:




December 31,	2017			2016
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities	$	50,839		$	70,640
All other securities	7,599			3,711
Deferred policy acquisition costs	30,404			52,031
Investments in partnerships	3,653			8,112
Prepaid pension cost	3,416			4,449
Net bond discount accretion	666			1,134
Depreciation	593			854
Revaluation of investment basis⁽¹⁾	545			1,342
Identifiable intangible assets ⁽¹⁾	1,838			3,311
Other	1,934			2,831
Gross deferred tax liability	$	101,487		$	148,415
Deferred tax assets
Financial statement reserves in excess of income tax reserves	$	17,036		$	29,174
Unearned premium adjustment	19,389			30,697
Net operating loss carryforwards	329			718
Underfunded benefit plan obligation	12,375			13,374
Post-retirement benefits other than pensions	11,942			20,221
Other-than-temporary impairment of investments	2,313			4,658
Contingent ceding commission accrual	317			2,769
Alternative minimum tax credit carryforward	6,011			1,194
Compensation expense related to stock options	3,289			4,578
Other	4,145			6,162
Gross deferred tax asset	$	77,146		$	113,545
Valuation allowance	(329		)	(718		)
Deferred tax asset	$	76,817		$	112,827
Net deferred tax liability	$	24,670		$	35,588

(1) Related to our acquisition of Mercer Insurance Group.

Due to our determination that we may not be able to fully realize the benefits of the net operating losses ("NOLs") acquired in the purchase of American Indemnity Financial Corporation in 1999, which are only available to offset the future taxable income of our property and casualty insurance operations and are further limited as to the amount that can be utilized in any given year, we have recorded a valuation allowance against these NOLs that totaled $329 and $718, respectively, at December 31, 2017 and 2016. Based on a yearly review, we determine whether the benefit of the NOLs can be realized, and, if so, the decrease in the valuation allowance is recorded as a reduction to current federal income tax expense. If NOLs expire during the year, the decrease in the valuation allowance is offset with a corresponding decrease to the deferred income tax asset. The valuation allowance was reduced by $547 during 2017 due to the realization of $1,565 in NOLs, partially offset by a $158 adjustment related to the enactment of the Tax Act, for a net reduction of $389. The valuation allowance was reduced by $547 in 2016 due to the realization of $1,565 in NOLs. No portion of the NOLs expired in 2017 and $1,565 will expire in 2018. At December 31, 2017, we had $6,011 of alternative minimum tax credit carryforwards.