Note 16 - Income Taxes

12 Months Ended

Dec. 31, 2023

Notes to Financial Statements

Income Tax Disclosure [Text Block]

16. Income Taxes

The components of the Company’s income tax expense (benefit) are as follows:

	December 31,
	2023			2022			2021
	(in thousands)
Current	$	27,267		$	18,842		$	10,650
Deferred		(2,826	)		(3,461	)		641
Income tax expense (benefit)	$	24,441		$	15,381		$	11,291

As of December 31, 2023 and 2022, significant components of the Company’s deferred tax assets and liabilities were as follows:

	December 31,
	2023			2022
	(in thousands)
Deferred tax assets:
Losses and LAE reserve discount	$	942		$	680
Net operating losses		3,486			3,070
Deferred Intercompany		656			656
Unearned premiums		13,895			11,258
Capitalized organizational costs		154			184
Unrealized losses on investments		5,829			9,891
Deferred compensation		2,425			1,585
Other		1,701			1,544
Total deferred tax assets	$	29,088		$	28,868
Deferred tax liabilities:
Deferred acquisition costs	$	(12,128	)	$	(11,922	)
Internally developed software		(1,276	)		(1,520	)
State deferred liability		(1,150	)		(1,076	)
Other		(929	)		(658	)
Total deferred tax liabilities		(15,483	)		(15,176	)
Net deferred tax asset (liability) before valuation allowance		13,605			13,692
Valuation allowance		(3,486	)		(3,070	)
Total net deferred tax assets (liabilities)	$	10,119		$	10,622

The above valuation allowance relates to state net operating losses ("NOL") carryforwards and federal net operating losses related to Laulima, which was formed in 2023. Due to the limited carryforward period these do not meet the “more likely than not” criteria and it is necessary to maintain a valuation allowance on these items. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period change or if objective negative evidence in the form of cumulative losses is no longer present.

As of December 31, 2023, there are $0.1 million of federal NOLs set to expire starting 2043 and $2.8 million of state NOLs set to expire beginning in 2023 over various periods.

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the tax years ended December 31, 2023, 2022 and 2021:

	Years Ended December 31,
	2023					2022					2021
	($ in thousands)
Expense computed at federal tax rate	$	21,765		21.00	%	$	14,186		21.00	%	$	11,999		21.00	%
Stock-based compensation and Section 162(m)		1,523		1.47	%		153		0.23	%		(1,067	)	(1.87	)%
Dividend received deduction and tax‑exempt interest		(96	)	(0.09	)%		(101	)	(0.15	)%		(81	)	(0.14	)%
Meals & entertainment, penalties & parking		261		0.25	%		180		0.27	%		91		0.16	%
State tax expense (benefit)		303		0.29	%		773		1.14	%		(1,750	)	(3.06	)%
Valuation allowance		416		0.40	%		191		0.28	%		2,199		3.85	%
Other		269		0.26	%		(1	)	—	%		(101	)	(0.18	)%
Income tax expense (benefit)	$	24,441		23.58	%	$	15,381		22.77	%	$	11,290		19.76	%

For the year ended December 31, 2023, the difference relates primarily to Section 162(m) limitations on executive compensation deductions, offset by the permanent component of employees stock option exercises. For the year ended December 31, 2022, the difference relates primarily to Section 162(m) limitations on executive compensation deductions and state taxes. For the year ended December 31, 202, the difference relates primarily to the permanent component of employee stock option exercises and state taxes. For the years ended December 31, 2022 and December 31, 2021, the Company increased its valuation allowance relating to deferred tax assets associated with state net operating losses.

As of December 31, 2023 and 2022, the Company had no uncertain tax positions that required either recognition or disclosure in the consolidated financial statements. This is not expected to change significantly during the next twelve months. The Company classifies interest and penalties, if any, related to the liability for unrecognized tax benefits as a component of the provision for income taxes. The Company’s federal income tax returns for 2020 through 2022 and state income tax returns for 2019 through 2022 remain subject to examination by the tax authorities. The 2023 income tax return is expected to be filed in 2024 and is subject to examination when filed.

The Company's PSRE entity may be subject to taxation in Bermuda in future years under the Bermuda Corporate Income Tax Act of 2023.