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:

	2013			2012
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	26,432		$	19,098
Deferred acquisition costs		1,829			2,782
Salvage and subrogation		2,638			2,555
Limited partnership investments		2,612			1,554
Other		866			1,562
Total deferred tax liabilities		34,377			27,551

Deferred tax assets:
Loss and loss expense reserves		11,071			11,384
Unearned premiums discount		2,162			2,097
Other-than-temporary investment declines		2,053			2,733
Deferred compensation		880			734
Deferred ceding commission		1,018			1,700
Other		342			325
Total deferred tax assets		17,526			18,973

Net deferred tax liabilities	$	(16,851	)	$	(8,578	)

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:

	2013			2012			2011

Statutory federal income rate applied to pretax income (loss) $ 19,218				$	16,312		$	(15,851	)	$
Tax effect of (deduction):
Tax-exempt investment income		(811	)		(933	)		(1,145	)
Net reduction of tax positions		(116	)		(693	)		(174	)
Other		31			1			56
Federal income tax expense (benefit)	$	18,322		$	14,687		$	(17,114	)

Federal income tax expense (benefit) consists of the following:
	2013		2012		2011
Taxes (credits) on pre-tax income (loss):
Current	$	17,383	$	10,819	$	(8,205	)
Deferred		939		3,868		(8,909	)
	$	18,322	$	14,687	$	(17,114	)

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

		2013			2012			2011
Limited partnerships		$	1,058		$	3,013		$	(7,196	)
Discounts of loss and loss expense reserves			313			(57	)		(2,546	)
Unearned premium discount			(65	)		265			(30	)
Deferred compensation			(146	)		112			499
Other-than-temporary investment declines			680			169			(240	)
Deferred acquisitions costs and ceding commission			(271	)		(520	)		(87	)
Other			(630	)		886			691
	Provision for deferred federal income tax (credits)	$	939		$	3,868		$	(8,909	)

Cash flows related to federal income taxes paid, net of refunds received, for 2013, 2012 and 2011 were $17,250, $3,661 and $2,859, 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, 2013 or 2012. As of December 31, 2013, the calendar years 2010 through 2013 remain subject to examination by the IRS.

The Company has no uncertain tax positions as of December 31, 2013 or 2012. 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, 2013, 2012 and 2011 were not material.

The table below reconciles the amount of unrecognized federal income taxes as of December 31, 2013 and 2012. 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.

	2013		2012
Balance at January 1	$	-	$	6,000
Reductions for tax positions of the current year		-		-
Reductions for tax positions of prior years		-		(6,000	)
Balance at December 31	$	-	$	-