INCOME TAXES

12 Months Ended

Dec. 31, 2019

9. INCOME TAXES

The components of income tax expense include the following:

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	Year Ended December 31,
	2019		2018		2017
	(In thousands)
Federal:
Current	$	(982)	$	5,162	$	2,431
Deferred	567		(751)		810
Federal income tax expense (benefit)	(415)		4,411		3,241
State:
Current	241		1,383		494
Deferred	(124)		(296)		(150)
State income tax expense (benefit)	117		1,087		344
Total income tax expense (benefit)	$	(298)	$	5,498	$	3,585

The actual income tax expense differs from the “expected” income tax expense (computed by applying the combined applicable effective federal and state tax rates to income before income tax expense) as follows:

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	Year Ended December 31,
	2019		2018		2017
	(In thousands)
Computed expected tax expense provision, at federal rate	$	150	$	4,244	$	3,124
State tax, net of federal tax benefit	(122)		761		187
Tax-exempt interest	(3)		(134)		(429)
Income subject to dividends-received deduction	(34)		(13)		(76)
Return to provision	(307)		158		329
Rate changes	—		—		297
Executive compensation	230		436		185
Meals and entertainment	43		28		76
Uncertain tax position	(203)		—		—
Other	(52)		18		(108)
Total income tax expense (benefit)	$	(298)	$	5,498	$	3,585

Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes. For the years ended December 31, 2019, 2018 and 2017, the effective income tax rate was (41.8)%, 27.2% and 40.2%, respectively. Differences in the effective tax and the statutory Federal income tax rate of 21% in 2019 and 2018 and 35% in 2017, are driven by state income taxes and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, executive compensation and other items.

The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%. In connection with the Company’s analysis of the impact of the Tax Act, the Company recorded a discrete provisional net tax expense of $0.3 million for the year ended December 31, 2017. This estimated net expense primarily consists of the U.S. federal rate reduction from 35% to 21% applied to the net deferred tax asset. During 2018, the impact of the Tax Legislation was not adjusted from the Company's preliminary estimates. The accounting for income tax effects of the Tax Legislation has been completed.

The Company does not have a valuation allowance on its deferred income tax asset as of December 31, 2019 and 2018.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and statements of comprehensive income (loss). A reconciliation of these uncertain tax positions was as follows:


	Year Ended December 31,
	2019		2018		2017
	(In thousands)
Balance at January 1	$	585	$	585	$	585
Increases/(decreases) for tax positions taken during the prior years	(203)		—		—
Balance at December 31	$	382	$	585	$	585

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax asset (liability) include the following:

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	As of December 31,
	2019		2018
	(In thousands)
Deferred income tax assets:
Unearned premiums	$	10,232	$	9,977
Unpaid losses and loss adjustment expenses	1,596		958
Accrued expenses	216		832
Net operating loss carryforwards	2,095		1,714
Deferred revenue	—		236
Share-based compensation	161		255
Unrealized losses on investment securities	—		1,254
Lease liability	1,655		—
Other	23		21
Total deferred income tax assets	15,978		15,247

Deferred income tax liabilities:
Deferred acquisition costs and other	(12,703)		(11,198)
Depreciation and amortization	(1,679)		(577)
Unrealized gains on investment securities	(3,270)		—
Lease asset	(1,655)		—
Other	(257)		(273)
Total deferred income tax liabilities	(19,564)		(12,048)

Deferred income tax asset (liability), net	$	(3,586)	$	3,199

The deferred income tax asset (liability), net is included in income taxes, net on our Consolidated Balance Sheets along with income tax receivable, net.

The Company files a federal income tax return and various state and local tax returns. The Company’s consolidated federal and state income tax returns for 2016 - 2018 are open for review by the Internal Revenue Service and other state taxing authorities.