Note 5. Income Taxes

Total income taxes were allocated as follows:

	2013			2012
Total tax expense on income	$	184		$	646

Tax expense (benefit) on components of shareholders’ equity:
Net unrealized gains (losses) on investment securities		(7,247	)		3,688
Fair value adjustment to derivative financial instrument		49			257
Total tax expense (benefit) on shareholders’ equity		(7,198	)		3,945
Total tax expense (benefit)	$	(7,014	)	$	4,591

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

	2013			2012
Federal income tax provision at statutory rate of 35%	$	3,922		$	1,779
Dividends received deduction		(149	)		(175	)
Small life insurance company deduction		(586	)		(485	)
Other		50			46
Change in asset valuation allowance due to change in judgment relating to realizability of deferred tax assets		(3,059	)		(440	)
Adjustment for prior years’ estimates to actual		6			(79	)
Income tax expense	$	184		$	646

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 estimates based on, but not limited to, actual distributions from 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 due to the unanticipated utilization of certain capital loss carryforward benefits that had been previously reserved.

Deferred tax liabilities and assets at December 31, 2013 and 2012 were comprised of the following:

	2013			2012
Deferred tax liabilities:
Deferred acquisition costs	$	(3,766	)	$	(4,197	)
Deferred and uncollected premiums		(734	)		(743	)
Net unrealized investment gains		(3,341	)		(10,588	)
Other		(8	)		(8	)
Total deferred tax liabilities		(7,849	)		(15,536	)
Deferred tax assets:
Net operating loss carryforwards		844			1,575
Insurance reserves		5,109			4,516
Capital loss carryforwards		2,177			5,236
Impaired assets		1,406			1,406
Alternative minimum tax credit		309			306
Bad debts and other		576			601
Total deferred tax assets		10,421			13,640
Asset valuation allowance		(2,209	)		(5,268	)
Net deferred tax asset (liability)	$	363		$	(7,164	)

The components of income tax expense were:

	2013			2012
Current - Federal	$	513		$	743
Deferred - Federal		2,730			343
Change in deferred tax asset valuation allowance		(3,059	)		(440	)
Total	$	184		$	646

At December 31, 2013, the Company had regular federal net operating loss carryforwards (“NOLs”) of approximately $2,411 expiring generally between 2028 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, 2013 and 2012, a valuation allowance of $2,209 and $5,268, 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 2013, the Company’s valuation allowance decreased by $3,059. 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.