Income Tax Matters

9 Months Ended

Sep. 30, 2022

Income Tax Disclosure [Abstract]

Income Tax Matters

Note 8. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of September 30, 2022, and December 31, 2021, were as follows:

(In thousands)	September 30, 2022		December 31, 2021
Deferred tax assets:
Loss carryforwards	$	2,235	$	2,244
Capitalized costs		91		127
Stock option granted		1,001		1,060
Policy acquisition costs		5,705		3,640
Charitable contribution carryforward		—		—
General business credits		6		6
Derivative option allowance		—		510
Sec 163(j) limitation		173		171
Benefit reserves		10,871		6,720
Property and equipment		73		33
Impairments		403		—
Unrealized losses on investments		14,049		—
Other		1,464		1,464
Total deferred tax assets		36,071		15,975
Less valuation allowance		(31,363)		(14,431)
Total deferred tax assets, net of valuation allowance		4,708		1,544
Deferred tax liabilities:
Unrealized losses on investments		—		1,084
Intangible assets		147		147
Derivative option allowance		3,810		—
Bond Discount		751		313
Property and equipment		—		—
Total deferred tax liabilities		4,708		1,544
Net deferred tax assets	$	—	$	—

As of September 30, 2022, and December 31, 2021, the Company recorded a valuation allowance of $31.4 million and $14.4 million, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income.

There was income tax expense of $1.3 million and tax benefit of $0.4 million for the three months ended September 30, 2022, and 2021, respectively. There was income tax expense of $3.8 million and $1.8 million for the nine months ended September 30, 2022, and 2021, respectively. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21% to pretax income, as a result of the following:

	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2022		2021		2022		2021
Computed expected income tax benefit (expense)	$	(796)	$	749	$	(2,305)	$	1,676
Reduction (increase) in income taxes resulting from:
IMR and reinsurance		176		65		158		240
Nondeductible expenses		(3)		1		(8)		4
Change in valuation allowance		(641)		333		(1,693)		3,266
Dividends received deduction		—		(1)		—		(6)
Deferred tax adjustment		14		—		—		—
Subtotal of increases		(454)		398		(1,543)		3,504
Tax benefit (expense)	$	(1,250)	$	351	$	(3,848)	$	(1,828)

Section 382 of the Internal Revenue Code limits the utilization of U.S. net operating loss (“NOL”) carryforwards following a change of control, which occurred on June 28, 2018. As of September 30, 2022, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $6.9 million. The federal NOLs generated prior to June 28, 2018, which are subject to Section 382 limitations can be carried forward. If not utilized, the NOLs of $1.0 million prior to 2017 will expire through the year of 2032, and the NOLs generated June 28, 2018, and after, do not expire and will carry forward indefinitely, but their utilization in any carry forward year is limited to 80% of taxable income in that year. The Company believes that it is more

likely than not that the benefit from federal NOL carryforwards will not be realized; thus, we have recorded a full valuation allowance of $1.5 million on the deferred tax assets related to these federal NOL carryforwards.