Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

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 below.

(in thousands)	2022		2021
Deferred tax assets:
Tax discounting of unpaid losses and settlement expenses	$	23,788	$	22,637
Unearned premium offset		27,158		23,080
Net unrealized depreciation of securities		19,839		—
Deferred compensation		4,058		3,469
Share-based compensation expense		3,202		3,089
Capitalized research and development costs		2,544		—
Lease liability		3,026		3,796
Other		938		367
Deferred tax assets before allowance	$	84,553	$	56,438
Less valuation allowance		—		—
Total deferred tax assets	$	84,553	$	56,438
Deferred tax liabilities:
Net unrealized appreciation of securities	$	—	$	76,533
Deferred policy acquisition costs		26,850		21,746
Lease asset		2,681		3,101
Discounting of unpaid losses and settlement expenses - Tax Cuts and Jobs Act (TCJA) implementation offset		1,909		2,545
Fixed assets		3,083		3,518
Intangible assets		1,543		1,537
Undistributed earnings of unconsolidated investees		7,399		29,515
Other		819		1,452
Total deferred tax liabilities	$	44,284	$	139,947
Net deferred tax asset (liability)	$	40,269	$	(83,509)

Income tax expense (benefit) attributable to income from operations for the years ended December 31, 2022, 2021 and 2020, differed from the amounts computed by applying the U.S. federal tax rate of 21 percent to pretax income from continuing operations as demonstrated in the following table:

(in thousands)	2022					2021					2020
Provision for income taxes at the statutory federal tax rates	$	151,342		21.0	%	$	72,307		21.0	%	$	39,867		21.0	%
Increase (reduction) in taxes resulting from:
Excess tax benefit on share-based compensation		(4,491)		(0.6)	%		(3,090)		(0.9)	%		(3,537)		(1.8)	%
Tax-exempt interest income		(1,143)		(0.2)	%		(1,219)		(0.3)	%		(1,293)		(0.7)	%
Dividends received deduction		(912)		(0.1)	%		(891)		(0.3)	%		(883)		(0.5)	%
Investment tax credit		(5,053)		(0.7)	%		(3,491)		(1.0)	%		(2,435)		(1.3)	%
ESOP dividends paid deduction		(4,171)		(0.6)	%		(1,566)		(0.5)	%		(1,083)		(0.6)	%
Unconsolidated investee dividends		—		—	%		—		—	%		(479)		(0.2)	%
Nondeductible expenses		1,263		0.2	%		3,834		1.1	%		1,878		1.0	%
Other items, net		432		0.0	%		(917)		(0.2)	%		715		0.4	%
Total	$	137,267	​	19.0	%	$	64,967	​	18.9	%	$	32,750	​	17.3	%

Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was higher in 2022 due to higher levels of pretax income, which decreased the impact of tax-favored adjustments on a percentage basis.

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 21 percent in anticipation of recovering our investments through means other than through the receipt of dividends, such as a sale. We received a $4.7 million dividend from Prime in 2020 and recognized a $0.5 million tax benefit from applying the lower tax rate applicable to affiliated dividends paid to insurance companies (10.8 percent in 2020), as compared to the corporate capital gains rate on which the deferred tax liabilities were based. Standing alone, the dividends resulted in a 0.2 percent reduction to the 2020 effective tax rate. No dividends were declared from unconsolidated investees in 2022 or 2021, therefore having no impact to the 2022 or 2021 effective tax rates.

Dividends paid to our Employee Stock Ownership Plan (ESOP) also result in a tax deduction. Dividends paid to the ESOP in 2022, 2021 and 2020 resulted in tax benefits of $4.2 million, $1.6 million and $1.1 million, respectively. These tax benefits reduced the effective tax rate for 2022, 2021 and 2020 by 0.6 percent, 0.5 percent and 0.6 percent and, respectively.

We have recorded our deferred tax assets and liabilities using the statutory federal tax rate of 21 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 projected 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 21 percent.

Federal and state income taxes paid in 2022, 2021 and 2020 amounted to $190.3 million, $38.6 million and $23.7 million, respectively. The increase in 2022 is the result of taxes paid on the sale of our investment in Maui Jim. See note 13 for more information on the sale.

Although we are not currently under audit by the IRS, tax years 2019 through 2022 remain open and are subject to examination.