7. INCOME TAXES

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are summarized as follows:


(in thousands)	2016		2015
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses	$	17,330	$	17,866
Unearned premium offset		26,712		25,848
Deferred compensation		4,727		6,231
Stock option expense		4,114		4,482
Other		685		657
Deferred tax assets before allowance	$	53,568	$	55,084
Less valuation allowance		—		—
Total deferred tax assets	$	53,568	$	55,084

Deferred tax liabilities:
Net unrealized appreciation of securities	$	66,973	$	67,740
Deferred policy acquisition costs		25,602		24,440
Book/tax depreciation		4,819		4,613
Intangible assets		1,980		3,878
Undistributed earnings of unconsolidated investees		18,397		17,888
Other		291		518
Total deferred tax liabilities	$	118,062	$	119,077
Net deferred tax liability	$	(64,494)	$	(63,993)

Income tax expense attributable to income from operations for the years ended December 31, 2016, 2015 and 2014, differed from the amounts computed by applying the U.S. federal tax rate of 35 percent to pretax income from continuing operations as demonstrated in the following table:


(in thousands)	2016		2015		2014
Provision for income taxes at the statutory federal tax rates	$	54,979	$	68,839	$	66,320
Increase (reduction) in taxes resulting from:
Dividends received deduction		(2,216)		(2,278)		(2,390)
ESOP dividends paid deduction		(3,302)		(3,377)		(4,473)
Tax-exempt interest income		(4,263)		(4,214)		(4,118)
Unconsolidated investee dividends		(2,772)		—		(1,848)
Other items, net		(264)		168		551
Total	$	42,162	$	59,138	$	54,042

Our effective tax rates were 26.8 percent, 30.1 percent and 28.5 percent for 2016, 2015 and 2014, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was lower in 2016 due to a decline in underwriting income along with increased tax benefits associated with dividends received from unconsolidated investees.

Our net earnings include equity in earnings of unconsolidated investees, Maui Jim and Prime. The investees do not have a policy or pattern of paying dividends. As a result, we record a deferred tax liability on the earnings at the corporate capital gains rate of 35 percent. We received a $9.9 million and $6.6 million dividend from Maui Jim in the fourth quarters of 2016 and 2014, respectively. No dividend was received from any unconsolidated investee in 2015. In accordance with GAAP guidelines on income taxes, we recognized a $2.8 million and $1.8 million tax benefit for 2016 and 2014, respectively. The tax benefit is generated from applying the lower tax rate applicable to affiliated dividends (7 percent), as compared to the corporate capital gains rate on which the deferred tax liabilities were based. Standing alone, the dividend resulted in a 1.8 percent and 1.0 percent reduction to the 2016 and 2014 effective tax rates, respectively. In determining the appropriate tax rate to apply, we anticipate recovering our investments through means other than the receipt of dividends, such as a sale.

Dividends paid to our ESOP also result in a tax deduction. Dividends paid to the ESOP in 2016, 2015 and 2014 resulted in tax benefits of $3.3 million, $3.4 million and $4.5 million, respectively. These tax benefits reduced the effective tax rate for 2016, 2015 and 2014 by 2.1 percent, 1.7 percent and 2.4 percent, respectively.

We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 35 percent. We believe it is more likely than not that all deferred tax assets will be recovered, given the carry back availability as well as the results of future operations, which will generate sufficient taxable income to realize the deferred tax asset. In addition, we believe when these deferred items reverse in future years, our taxable income will be taxed at an effective rate of 35 percent.

Federal and state income taxes paid in 2016, 2015 and 2014, amounted to $26.9 million, $44.2 million and $48.5 million, respectively.

Although we are not currently under audit by the Internal Revenue Service (IRS), tax years 2013 through 2016 remain open and are subject to examination.