Note 5.

Income Taxes

Total income taxes were allocated as follows:

			Restated
	2011		2010
Total tax expense (benefit) on income	$	25	$	(369	)

Tax expense (benefit) on components of shareholders' equity:
Net unrealized gains on investment securities		6,681		2,587
Fair value adjustment to derivative financial instrument		237		(2	)
Total tax expense on shareholders' equity		6,918		2,585
Total tax expense	$	6,943	$	2,216

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

				Restated
	2011			2010
Federal income tax provision at statutory rate of 35%	$	1,160		$	217
Dividends received deduction		(173	)		(193	)
Small life insurance company deduction		(617	)		(232	)
Other		18			39
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets		(412	)		(92	)
Adjustment for prior years' estimates to actual		49			(108	)
Income tax expense (benefit)	$	25		$	(369	)

The primary differences between the effective tax rate and the federal statutory income tax rate resulted from the dividends-received deduction (“DRD”), the small life insurance company deduction (“SLD”) and the change in deferred tax asset valuation allowance. The current year estimated DRD is adjusted as underlying factors change and can vary from 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 unanticipated utilization of certain capital loss carryforward benefits that had been previously reserved.

Deferred tax liabilities and assets at December 31, 2011 and 2010 were comprised of the following:

				Restated
	2011			2010
Deferred tax liabilities:
Deferred acquisition costs	$	(4,255	)	$	(3,501	)
Deferred and uncollected premiums		(736	)		(738	)
Net unrealized investment gains		(6,900	)		(219	)
Other		(18	)		(15	)
Total deferred tax liabilities		(11,909	)		(4,473	)
Deferred tax assets:
Net operating loss carryforwards		1,429			1,779
Insurance reserves		4,341			3,591
Capital loss carryforwards		5,675			6,068
Impaired assets		1,443			1,060
Alternative minimum tax credit		510			386
Bad debts and other		903			937
Total deferred tax assets		14,301			13,821
Asset valuation allowance		(5,708	)		(6,120	)
Net deferred tax (liabilities) assets	$	(3,316	)	$	3,228

The components of income tax expense (benefit) were:

				Restated
	2011			2010
Current - Federal	$	399		$	(597	)
Deferred - Federal		38			320
Change in deferred tax asset valuation allowance		(412	)		(92	)
Total	$	25		$	(369	)

At December 31, 2011, the Company had regular federal net operating loss carryforwards (“NOLs”) of approximately $4,082 expiring generally between 2025 and 2029. Currently, the Company believes that deferred income tax benefits relating to the NOLs will be realized. However, realization of the NOLs will be assessed periodically based on the Company's current and anticipated results of operations, and amounts could increase or decrease in the near term if estimates of future taxable income change.

As of December 31, 2011 and 2010, a valuation allowance of $5,708 and $6,120, respectively, was established against deferred income tax benefits relating primarily to capital loss carryforwards that may not be realized. The Company does not currently anticipate having sufficient future capital gains to offset certain of these capital losses during the applicable carryforward period. However, the Company continues to periodically assess the potential realization of these and all other deferred tax benefits. During 2011, the Company's valuation allowance decreased by $412. The decrease was primarily due to the unanticipated utilization of certain capital loss carryforward benefits that had been previously reduced to zero through an existing valuation allowance reserve.

The Company has formal tax-sharing agreements, and files a consolidated income tax return, with its subsidiaries.