Note 10. Income Taxes

12 Months Ended

Dec. 31, 2013

Notes

Note 10. Income Taxes

Note 10.          Income Taxes

IHC and its subsidiaries filed a consolidated Federal income tax return on a June 30 fiscal year. Prior to January 15, 2013, AMIC and its subsidiaries filed a separate consolidated Federal income tax return on a September 30 fiscal year. The provision for income tax expense (benefit) attributable to income from operations, as shown in the Consolidated Statements of Income, is as follows for the years indicated (in thousands):

		2013		2012		2011
CURRENT:
U.S. Federal	$	(1,500)	$	2,555	$	4,397
State and Local		1,206		648		523
		(294)		3,203		4,920
DEFERRED:
U.S. Federal		8,805		(1,188)		(912)
State and Local		(113)		(12)		(276)
		8,692		(1,200)		(1,188)
	$	8,398	$	2,003	$	3,732

In 2011, the Company recorded a deferred income tax benefit of $2,319,000 associated with IHC’s investment in AMIC. As the result of management’s intention to adopt tax planning strategies to recover IHC’s investment in AMIC in a tax-free manner, the cumulative Federal and State deferred income tax liabilities established as of December 31, 2010 for temporary differences between IHC’s book value and tax basis in AMIC became permanent. Accordingly, IHC released its previously recorded deferred income tax liabilities.

            Taxes computed at the Federal statutory rate of 35% in 2013, 2012 and 2011, attributable to pretax income, are reconciled to the Company's actual income tax expense as follows for the years indicated (in thousands):

		2013		2012		2011
Tax computed at the statutory rate	$	8,279	$	8,615	$	6,474
Dividends received deduction and tax
exempt interest		(849)		(1,336)		(600)
State and local income taxes, net of Federal effect		710		414		444
AMIC deferred income tax reversal		-		-		(2,319)
AMIC valuation allowance adjustment		-		(5,900)		-
Other, net		258		210		(267)
Income tax expense	$	8,398	$	2,003	$	3,732

Deferred income tax benefit for the year ended December 31, 2013 allocated to stockholders' equity (principally for net unrealized losses on investment securities) was $12,189,000, representing the decrease in the related net deferred tax liability of $7,451,000 at December 31, 2012 to a net deferred tax benefit of $4,738,000 at December 31, 2013.

Temporary differences between the Consolidated Financial Statement carrying amounts and tax bases of assets and liabilities that give rise to the deferred tax assets and liabilities at December 31, 2013 and 2012 are summarized below (in thousands). The net deferred tax asset or liability is included in Other Assets or Other Liabilities, as appropriate, in the Consolidated Balance Sheets. IHC and its subsidiaries, excluding AMIC, have certain tax-planning strategies that were used in determining that a valuation allowance was not necessary on its deferred tax assets at December 31, 2013 or 2012. The net deferred tax asset relative to AMIC included in other assets on IHC’s Consolidated Balance Sheets at December 31, 2013 and 2012 was $10,689,000 and $12,173,000, respectively.

		2013		2012
DEFERRED TAX ASSETS:
Deferred insurance policy acquisition costs	$	484	$	970
Unrealized losses on investment securities		5,398		146
Investment write-downs		222		1,932
Loss carryforwards		109,463		116,913
Insurance reserves		392		1,135
Other		7,222		4,820
Total gross deferred tax assets		123,181		125,916
Less AMIC valuation allowance		(76,911)		(78,572)
Net deferred tax assets		46,270		47,344
DEFERRED TAX LIABILITIES:
Deferred insurance policy acquisition costs		(10,376)		(8,984)
Insurance reserves		(6,183)		(7,129)
Unrealized gains on investment securities		-		(8,134)
Other		(13,805)		(10,668)
Total gross deferred tax liabilities		(30,364)		(34,915)
Net deferred tax asset	$	15,906	$	12,429

As of December 31, 2013, IHC and its non-life subsidiaries, excluding AMIC, had NOL carryforwards arising from limitations on offsetting non-life insurance company losses against life insurance company income. The non-life insurance company NOL carryforwards amount to approximately $30,594,000 at December 31, 2013, which expire in varying amounts between 2028 and 2032. Madison National Life had NOL carryforwards of approximately $10,081,000 at December 31, 2013 expiring in 2033 and 2034. In addition, as of December 31, 2013, IHC and its subsidiaries, excluding AMIC, had capital tax loss carryforwards of approximately $6,226,000 expiring in 2014, 2015 and 2019.

At December 31, 2013, AMIC had Federal NOL carryforwards of approximately $265,851,000 which expire in varying amounts between the years 2018 and 2028, a significant portion of which expires in the year 2020. 

AMIC’s valuation allowance at December 31, 2013 and 2012 was primarily related to net operating loss carryforwards that, in the judgment of management, were not considered realizable. During the years ended December 31, 2013 and 2012, AMIC decreased its valuation allowance by $1,661,000 and $6,093,000, respectively. The valuation allowance decrease in the year ended December 31, 2012 included $5,900,000 for the projected utilization of federal net operating losses allocated to operations.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management believes that it is more likely than not that IHC and its subsidiaries, and AMIC, will realize the benefits of these net deferred tax assets recorded at December 31, 2013. As of December 31, 2013, IHC and its subsidiaries, and AMIC, believe there were no material uncertain tax positions that would require disclosure under U.S. GAAP.

Interest expense and penalties for the years ended December 31, 2013, 2012 and 2011 are insignificant.

Net cash payments (receipts) for income taxes were $(387,000), $550,000 and $(3,626,000) in 2013, 2012 and 2011, respectively.