Note 8. Income Taxes

A reconciliation of the differences between income taxes computed at the federal statutory income tax rate and income tax expense is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Federal income tax provision at statutory rate of 35%	$	619		$	203		$	955		$	426
Dividends-received deduction		(60	)		(55	)		(130	)		(147	)
Small life insurance company deduction		(187	)		-			(187	)		-
Other permanent differences		4			16			37			29
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets		(361	)		-			(361	)		-
Adjustment for prior years' estimates to actual		49			(108	)		49			(108	)
Income tax expense	$	64		$	56		$	363		$	200

The components of the income tax expense were:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Current - Federal	$	115		$	(659	)	$	119		$	(653	)
Deferred - Federal		310			715			605			853
Change in deferred tax asset valuation allowance		(361	)		-			(361	)		-
Total	$	64		$	56		$	363		$	200

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and nine month periods ended September 30, 2011 resulted from the dividends-received deduction (“DRD”), the small life insurance company deduction (“SLD”), the change in deferred tax asset valuation allowance and the provision-to-filed return adjustments. The current estimated DRD is adjusted as underlying factors change and can vary from the estimates based on, but not limited to, actual distributions from these investments as well as appropriate levels of taxable income. The SLD varies in amount and is determined at a rate of 60 percent of the tentative life insurance company taxable income (“LICTI”). The amount of the SLD for any taxable year is reduced (but not below zero) by 15 percent of the tentative LICTI for such taxable year as it exceeds $3,000 and is ultimately phased out at $15,000. The change in deferred tax asset valuation allowance was primarily due to the utilization of certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation allowance reserve. The provision-to-filed return adjustments are generally updated at the completion of the third quarter of each fiscal year and were $49 in the three month and nine month periods ended September 30, 2011.

The primary differences between the effective tax rate and the federal statutory income tax rate for the three month and nine month periods ended September 30, 2010 resulted from the DRD and the provision-to-filed return adjustments. The provision-to-filed return adjustments of $108 for the three month and nine month periods ended September 30, 2010 were primarily due to adjustments related to the carryback and utilization of capital losses on investments in the Company's life and health operation.