Note E - Income Taxes

Deferred income taxes are calculated to account for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:

	2012			2011
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	19,098		$	14,319
Deferred acquisition costs		2,782			3,576
Salvage and subrogation		2,555			2,275
Limited partnership investments		1,554			-
Other		1,562			898
Total deferred tax liabilities		27,551			21,068

Deferred tax assets:
Loss and loss expense reserves		11,384			18,377
Unearned premiums discount		2,097			2,361
Other-than-temporary investment declines		2,733			2,902
Deferred compensation		734			845
Deferred ceding commission		1,700			1,974
Limited partnership investments		-			1,459
Other		325			269
Total deferred tax assets		18,973			28,187

Net deferred tax assets (liabilities)	$	(8,578	)	$	7,119

A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements is as follows:

	2012				2011			2010

Statutory federal income rate applied to pretax income (loss)		$	16,312		$	(15,851	)	$	12,185
Tax effect of (deduction):
Tax-exempt investment income			(933	)		(1,145	)		(1,296	)
Net reduction of tax positions			(693	)		(174	)		(826	)
Other			1			56			(265	)
Federal income tax expense (benefit)		$	14,687		$	(17,114	)	$	9,798

Federal income tax expense (benefit) consists of the following:
	2012		2011			2010
Taxes (credits) on pre-tax income (loss):
Current	$	10,819	$	(8,205	)	$	9,752
Deferred		3,868		(8,909	)		46
	$	14,687	$	(17,114	)	$	9,798

The components of the provision for deferred federal income taxes (credits) are as follows:

		2012			2011			2010
Limited partnerships		$	3,013		$	(7,196	)	$	485
Discounts of loss and loss expense reserves			(57	)		(2,546	)		(107	)
Unearned premium discount			265			(30	)		(517	)
Deferred compensation			112			499			(735	)
Other-than-temporary investment declines			169			(240	)		571
Deferred acquisitions costs and ceding commission			(520	)		(87	)		(27	)
Other			886			691			376
	Provision for deferred federal income tax (credits)	$	3,868		$	(8,909	)	$	46

Cash flows related to federal income taxes paid, net of refunds received, for 2012, 2011 and 2010 were $3,661, $2,859, and $9,000 respectively.

The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance is necessary at December 31, 2012 or 2011. As of December 31, 2012, the Internal Revenue Service had completed examinations and settled all audits through the Company's 2004 tax year.

The Company has no uncertain tax positions as of December 31, 2012. Previous tax positions were uncertain only as to the timing of deductibility and therefore, if recognized, would have had no impact on the Company's effective tax rate. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company's effective tax rate. Amounts accrued for the payment of interest at December 31, 2012, 2011 and 2010 were not material.

The table below reconciles the amount of unrecognized federal income taxes as of December 31, 2012 and 2011. The amount has no impact on the Company's effective tax rate and excludes interest, which is treated as income tax expense per the Company's accounting policy. During 2012, the Company decided it was no longer necessary to carry this amount as it was determined that the tax years to which uncertain tax positions related are now closed.

	2012			2011
Balance at January 1	$	6,000		$	6,000
Reductions for tax positions of the current year		-			-
Reductions for tax positions of prior years		(6,000	)		-
Balance at December 31	$	-		$	6,000