INCOME TAXES - 10K

12 Months Ended

Dec. 31, 2014

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)	2014		2013
Deferred tax assets:
Tax discounting of claim reserves	$	19,609	$	22,200
Unearned premium offset		24,322		23,163
Deferred compensation		6,143		6,193
Stock option expense		5,046		4,160
NOL carryforward		—		1,059
Other		453		604
Deferred tax assets before allowance	$	55,573	$	57,379
Less valuation allowance		—		—
Total deferred tax assets	$	55,573	$	57,379

Deferred tax liabilities:
Net unrealized appreciation of securities	$	92,562	$	73,198
Deferred policy acquisition costs		22,793		21,528
Book/tax depreciation		3,610		2,632
Intangible assets from CBIC acquisition		3,594		4,235
Undistributed earnings of unconsolidated investees		14,728		12,995
Other		571		592
Total deferred tax liabilities	$	137,858	$	115,180
Net deferred tax liability	$	(82,285)	$	(57,801)

Income tax expense attributable to income from operations for the years ended December 31, 2014, 2013 and 2012, 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)	2014		2013		2012
Provision for income taxes at the statutory federal tax rates	$	66,320	$	61,483	$	49,956
Increase (reduction) in taxes resulting from:
Dividends received deduction		(2,390)		(2,490)		(2,630)
ESOP dividends paid deduction		(4,473)		(2,532)		(3,596)
Tax-exempt interest income		(4,118)		(3,758)		(2,995)
Unconsolidated investee dividends		(1,848)		(3,696)		(1,848)
Other items, net		551		404		499
Total	$	54,042	$	49,411	$	39,386

Our effective tax rates were 28.5 percent, 28.1 percent and 27.6 percent for 2014, 2013 and 2012, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate for 2014 was higher than 2013 due to an increase in net realized gains on investments along with a slight increase in underwriting income.

Dividends paid to our Employee Stock Ownership Plan (ESOP) result in a tax deduction. Special dividends paid to the ESOP in 2014, 2013 and 2012 resulted in tax benefits of $3.6 million, $1.7 million and $2.9 million, respectively. These tax benefits reduced the effective tax rate for 2014, 2013 and 2012 by 1.9 percent, 1.0 percent and 2.0 percent, respectively.

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. In the fourth quarters of 2014, 2013 and 2012, we received a $6.6 million, $13.2 million and $6.6 million dividend from Maui Jim, respectively. In accordance with GAAP guidelines on income taxes, we recognized a $1.8 million, $3.7 million and $1.8 million tax benefit for 2014, 2013 and 2012, 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 1.0 percent, 2.1 percent and 1.3 percent reduction to the 2014, 2013 and 2012 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.

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 2014, 2013 and 2012, amounted to $48.5 million, $36.8 million and $25.9 million, respectively.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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