10. Income Taxes (Tables)

6 Months Ended

Jun. 30, 2012

Income Tax Disclosure [Abstract]

Schedule of Income Tax Rate From Continuing Operations

	For the Three Months Ended										For the Six Months Ended
	June 30,										June 30,
	2012					2011					2012					2011
Computed expected tax expense	$	294,863		34.0	%	$	393,527		34.0	%	$	689,289		34.0	%	$	450,772		34.0	%
State taxes, net of Federal benefit		17,301		2.0			(13,713	)	(1.2	)		45,798		2.3			(14,751	)	(1.1	)
Permanent differences
Dividends received deduction		(16,126	)	(1.9	)		-		-			(36,577	)	(1.8	)		(7,129	)	(0.5	)
Non-taxable investment income		(16,772	)	(1.9	)		(24,399	)	(2.1	)		(33,810	)	(1.7	)		(46,544	)	(3.5	)
Stock-based compensation expense		3,607		0.4			8,042		0.7			10,237		0.5			21,810		1.6
Other permanent differences		5,831		0.7			4,531		0.4			12,281		0.6			14,545		1.1
Other		18,224		2.1			15,513		1.3			14,367		0.7			6,541		0.5
Total tax	$	306,928		35.4	%	$	383,501		33.1	%	$	701,585		34.6	%	$	425,244		32.1	%

Schedule of Deferrred Tax Assets and Liabilities

	June 30,			December 31,
	2012			2011
	(unaudited)
Deferred tax asset:
Net operating loss carryovers (1)	$	264,293		$	276,312
Claims reserve discount		250,659			220,354
Unearned premium		720,037			647,596
Deferred ceding commission revenue		1,518,955			1,354,016
Other		7,919			4,583
Total deferred tax assets		2,761,863			2,502,861
Deferred tax liability:
Investment in KICO (2)		1,169,000			1,169,000
Deferred acquisition costs		1,731,428			1,542,163
Intangibles		1,163,757			1,244,628
Depreciation and amortization		143,586			133,411
Reinsurance recoverable		20,400			20,400
Net unrealized appreciation of securities - available for sale		420,233			172,155
Investment income		-			10,543
Total deferred tax liabilities		4,648,404			4,292,300
Net deferred income tax liability	$	(1,886,541	)	$	(1,789,439	)

(1) The deferred tax assets from net operating loss carryovers are as follows

	June 30,		December 31,
Type of NOL	2012		2011		Expiration
State only (A)	$	338,594	$	352,749	December 31, 2027
Valuation allowance		104,819		42,437
State only, net of valuation allowance		233,775		310,312
Amount subject to Annual Limitation, Federal only (B)		30,600		34,000	December 31, 2019
Total deferred tax asset from net operating loss carryovers	$	264,375	$	344,312

(A) The Company’s parent generates operating losses for state purposes and has prior year net operating loss carryovers available. KICO, the Company’s insurance underwriting subsidiary is not subject to state income taxes. KICO’s state tax obligations are paid through a gross premiums tax which is included in the Condensed Consolidated Statements of Operations and Comprehensive Income within other underwriting expenses. A valuation allowance has been recorded due to the uncertainty of generating enough state taxable income to utilize 100% of the available state net operating loss carryovers over their remaining lives which expire between 2022 and 2027.

(B) NOL is subject to Internal Revenue Code Section 382, which places a limitation on the utilization of the federal net operating loss to approximately $10,000 per year (“Annual Limitation”) as a result of a greater than 50% ownership change of the Company in 1999. The losses subject to the Annual Limitation will be available for future years, expiring through December 31, 2019.

(2)   Deferred tax liability -  investment in KICO

On July 1, 2009, the Company completed the acquisition of 100% of the issued and outstanding common stock of KICO (formerly known as Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company. Pursuant to the plan of conversion, the Company acquired a 100% equity interest in KICO, in consideration for the exchange of $3,750,000 principal amount of surplus notes of CMIC. In addition, the Company forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. As of the date of acquisition, unpaid accrued interest on the surplus notes along with the accretion of the discount on the original purchase of the surplus notes totaled $2,921,319 (together “Untaxed Interest”). As of the date of acquisition the deferred tax liability on the Untaxed Interest was $1,169,000. Under GAAP guidance for business combinations, a temporary difference with an indefinite life exists when the parent has a lower carrying value of its subsidiary for income tax purposes. The Company is required to maintain its deferred tax liability of $1,169,000 related to this temporary difference until either the stock of KICO is sold, the assets of KICO are sold or KICO and the parent are merged.

Under GAAP guidance for the “Accounting for Uncertainty in Income Taxes”, the Company had no material unrecognized tax benefit and no adjustments to liabilities or operations were required. Additionally, Accounting for Uncertainty in Income Taxes, provides guidance on the recognition of interest and penalties related to income taxes. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for six months ended June 30, 2012 and 2011. If any had been recognized these would be reported in income tax expense.

IRS Tax Audit

The Company’s Federal income tax return for the year ended December 31, 2009 has been examined by the Internal Revenue Service and was accepted as filed.