Note 5. Income Taxes

Total income taxes were allocated as follows:

	2012		2011
Total tax expense on income	$	646	$	25

Tax expense on components of shareholders' equity:
Net unrealized gains on investment securities		3,688		6,681
Fair value adjustment to derivative financial instrument		257		237
Total tax expense on shareholders' equity		3,945		6,918
Total tax expense	$	4,591	$	6,943

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

	2012			2011
Federal income tax provision at statutory rate of 35%	$	1,779		$	1,160
Dividends received deduction		(175	)		(173	)
Small life insurance company deduction		(485	)		(617	)
Other		46			18
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets		(440	)		(412	)
Adjustment for prior years' estimates to actual		(79	)		49
Income tax expense	$	646		$	25

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 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 the amount of the Company's 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 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, 2012 and 2011 were comprised of the following:

	2012			2011
Deferred tax liabilities:
Deferred acquisition costs	$	(4,197	)	$	(4,255	)
Deferred and uncollected premiums		(743	)		(736	)
Net unrealized investment gains		(10,588	)		(6,900	)
Other		(8	)		(18	)
Total deferred tax liabilities		(15,536	)		(11,909	)
Deferred tax assets:
Net operating loss carryforwards		1,575			1,429
Insurance reserves		4,516			4,341
Capital loss carryforwards		5,236			5,675
Impaired assets		1,406			1,443
Alternative minimum tax credit		306			510
Bad debts and other		601			903
Total deferred tax assets		13,640			14,301
Asset valuation allowance		(5,268	)		(5,708	)
Net deferred tax liability	$	(7,164	)	$	(3,316	)

The components of income tax expense were:

	2012			2011
Current - Federal	$	743		$	399
Deferred - Federal		343			38
Change in deferred tax asset valuation allowance		(440	)		(412	)
Total	$	646		$	25

At December 31, 2012, the Company had regular federal net operating loss carryforwards ("NOLs") of approximately $4,500 expiring generally between 2025 and 2032. Currently, the Company believes that deferred income tax benefits relating to the NOLs will be realized. However, expected realization of the NOLs is assessed periodically based on the Company's then current and anticipated results of operations, and amounts could increase or decrease if estimates of future taxable income change.

As of December 31, 2012 and 2011, a valuation allowance of $5,268 and $5,708, 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 2012, the Company's valuation allowance decreased by $440. 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.