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:

	2014			2013
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	27,914		$	26,432
Deferred acquisition costs		1,341			1,829
Salvage and subrogation		2,373			2,638
Limited partnership investments		4,636			2,612
Other		1,229			866
Total deferred tax liabilities		37,493			34,377

Deferred tax assets:
Loss and loss expense reserves		10,973			11,071
Unearned premiums discount		2,201			2,162
Other-than-temporary investment declines		2,049			2,053
Deferred compensation		1,565			880
Deferred ceding commission		549			1,018
Other		183			342
Total deferred tax assets		17,520			17,526

Net deferred tax liabilities	$	(19,973	)	$	(16,851	)

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:

	2014			2013			2012

Statutory federal income rate applied to pretax income	$	15,539		$	19,218		$	16,312
Tax effect of (deduction):
Tax-exempt investment income		(924	)		(811	)		(933	)
Net reduction of tax positions		(75	)		(116	)		(693	)
Other		141			31			1
Federal income tax expense	$	14,681		$	18,322		$	14,687

Federal income tax expense consists of the following:
	2014		2013		2012
Taxes on pre-tax income:
Current	$	13,041	$	17,383	$	10,819
Deferred		1,640		939		3,868
	$	14,681	$	18,322	$	14,687

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

		2014			2013			2012
Limited partnerships		$	2,025		$	1,058		$	3,013
Discounts of loss and loss expense reserves			113			313			(57	)
Unearned premium discount			(38	)		(65	)		265
Deferred compensation			(685	)		(146	)		112
Other-than-temporary investment declines			(19	)		680			169
Deferred acquisitions costs and ceding commission			(20	)		(271	)		(520	)
Other			264			(630	)		886
	Provision for deferred federal income tax	$	1,640		$	939		$	3,868

Cash flows related to federal income taxes paid, net of refunds received, for 2014, 2013 and 2012 were $11,619, $17,250 and $3,661, 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, 2014 or 2013. As of December 31, 2014, the calendar years 2011 through 2014 remain subject to examination by the IRS.

The Company has no uncertain tax positions as of December 31, 2014 or 2013. 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, 2014, 2013 and 2012 were not material.