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)	2013			2012
Deferred tax assets:
Tax discounting of claim reserves	$	22,200		$	25,462
Unearned premium offset	23,163			20,731
Deferred compensation	6,193			5,614
Stock option expense	4,160			4,678
NOL carryforward	1,059			3,223
Other	604			433
Deferred tax assets before allowance	57,379			60,141
Less valuation allowance	—			—
Total deferred tax assets	$	57,379		$	60,141

Deferred tax liabilities:
Net unrealized appreciation of securities	$	73,198		$	77,036
Deferred policy acquisition costs	21,528			18,320
Book/tax depreciation	2,632			1,060
Intangible assets from CBIC acquisition	4,235			4,541
Undistributed earnings of unconsolidated investee	12,995			13,812
Other	592			938
Total deferred tax liabilities	115,180			115,707
Net deferred tax liability	$	(57,801	)	$	(55,566	)

Income tax expense attributable to income from operations for the years ended December 31, 2013, 2012 and 2011, 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)	2013			2012			2011
Provision for income taxes at the statutory federal tax rates	$	61,483		$	49,956		$	64,255
Increase (reduction) in taxes resulting from:
Dividends received deduction	(2,490		)	(2,630		)	(1,980		)
ESOP dividends paid deduction	(2,532		)	(3,596		)	(3,367		)
Tax-exempt interest income	(3,758		)	(2,995		)	(2,412		)
Unconsolidated investee dividends	(3,696		)	(1,848		)	—
Other items, net	404			499			492
Total	$	49,411		$	39,386		$	56,988

Our effective tax rates were 28.1 percent, 27.6 percent and 31.0 percent for 2013, 2012 and 2011, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate for 2013 was higher than 2012 due to an increase in underwriting income notwithstanding an increase in tax-exempt income and dividends qualifying for preferential tax treatment, specifically as noted below from Maui Jim.

Dividends paid to our Employee Stock Ownership Plan (ESOP) result in a tax deduction. Special dividends paid to the ESOP in 2013, 2012 and 2011 resulted in tax benefits of $1.7 million, $2.9 million and $2.7 million, respectively. These tax benefits reduced the effective tax rate for 2013, 2012 and 2011 by 1.0 percent, 2.0 percent and 1.5 percent, respectively.

Our net earnings include equity in earnings of unconsolidated investee, Maui Jim. This investee does 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. In the fourth quarters of 2013 and 2012, we received a $13.2 and $6.6 million dividend, respectively. In accordance with GAAP guidelines on income taxes, we recognized a $3.7 million tax benefit for 2013 and a $1.8 million tax benefit for 2012 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 2.1 and 1.3 percent reduction to the 2013 and 2012 effective tax rate, respectively. In determining the appropriate tax rate to apply, we anticipate recovering our investment through means other than the receipt of dividends, such as a sale.

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.

In 2011, a deferred tax asset was recorded at $5.5 million for the net operating loss (NOL) carryforward stemming from the CBIC acquisition. This NOL was primarily the result of certain transaction-related items, including employee bonuses that were incurred by CBIC in conjunction with the sale. A portion of the NOL was carried back to recover taxes paid in prior periods. The remaining NOL is being carried forward to future tax years. Due to our consistent history of taxable income, we expect to recover the remaining NOL by the end of 2014.

Federal and state income taxes paid in 2013, 2012 and 2011, amounted to $36.8 million, $25.9 million and $50.5 million, respectively.