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)	2015		2014
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses	$	17,866	$	19,609
Unearned premium offset		25,848		24,322
Deferred compensation		6,231		6,143
Stock option expense		4,482		5,046
Other		657		453
Deferred tax assets before allowance	$	55,084	$	55,573
Less valuation allowance		—		—
Total deferred tax assets	$	55,084	$	55,573

Deferred tax liabilities:
Net unrealized appreciation of securities	$	67,740	$	92,562
Deferred policy acquisition costs		24,440		22,793
Book/tax depreciation		4,613		3,610
Intangible assets from CBIC acquisition		3,392		3,594
Undistributed earnings of unconsolidated investees		17,888		14,728
Other		1,004		571
Total deferred tax liabilities	$	119,077	$	137,858
Net deferred tax liability	$	(63,993)	$	(82,285)

Income tax expense attributable to income from operations for the years ended December 31, 2015, 2014 and 2013, 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)	2015		2014		2013
Provision for income taxes at the statutory federal tax rates	$	68,839	$	66,320	$	61,483
Increase (reduction) in taxes resulting from:
Dividends received deduction		(2,278)		(2,390)		(2,490)
ESOP dividends paid deduction		(3,377)		(4,473)		(2,532)
Tax-exempt interest income		(4,214)		(4,118)		(3,758)
Unconsolidated investee dividends		—		(1,848)		(3,696)
Other items, net		168		551		404
Total	$	59,138	$	54,042	$	49,411

Our effective tax rates were 30.1 percent, 28.5 percent and 28.1 percent for 2015, 2014 and 2013, respectively. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher in 2015 due largely to reduced tax benefits associated with dividends paid to our Employee Stock Ownership Plan (ESOP) and received from our unconsolidated investees.

Dividends paid to our ESOP result in a tax deduction. Dividends paid to the ESOP in 2015, 2014 and 2013 resulted in tax benefits of $3.4 million, $4.5 million and $2.5 million, respectively. These tax benefits reduced the effective tax rate for 2015, 2014 and 2013 by 1.7 percent, 2.4 percent and 1.4 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 and 2013, we received a $6.6 million and $13.2 million dividend from Maui Jim, respectively. No dividend was received from any unconsolidated investee in 2015. In accordance with GAAP guidelines on income taxes, we recognized a $1.8 million and $3.7 million tax benefit for 2014 and 2013, 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 and 2.1 percent reduction to the 2014 and 2013 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 2015, 2014 and 2013, amounted to $44.2 million, $48.5 million and $36.8 million, respectively.

During 2013, the Internal Revenue Service (IRS) completed an examination of the income tax returns for the years 2010 and 2011, which produced no material change to net earnings. Tax years 2012 through 2015 remain open and are subject to examination or re-examination.