Note E - Income Taxes

On December 22, 2017, the U.S. Tax Act was signed into law, which lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company recorded a tax benefit of $9,572 related to the remeasurement of its deferred tax assets and liabilities at December 31, 2017. As of December 31, 2017, the Internal Revenue Service ("IRS") had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while the Company had not completed its accounting for the tax effects, it made a reasonable estimate of the tax effects on its existing deferred tax balances at December 31, 2017. The Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded during 2018.

The U.S. Tax Act provides for a change in the methodology employed to calculate reserves for tax purposes. Beginning January 1, 2018, a higher interest rate assumption and longer payout patterns are used to discount these reserves. In addition, companies are no longer able to elect to use their own experience to discount reserves, but instead are required to use the industry-based tables published by the IRS annually. During 2017, the Company estimated the provisional tax impacts related to the change in methodology as $1,696. During 2018, the IRS published the discount factor tables and the Company calculated the tax impact of the methodology change and recorded an updated amount for deferred tax assets and an offsetting deferred tax liability of $2,262 at December 31, 2018. The deferred tax liability was amortized into income in the amount of $323 during 2018 in accordance with the 8-year inclusion described in the U.S. Tax Act.

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:

	2018			2017
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	4,572		$	15,086
Deferred acquisition costs		2,552			1,804
Loss and loss expense reserves		3,583			2,623
Limited partnership investments		–			3,826
Accelerated depreciation		690			492
Other		1,509			1,791
Total deferred tax liabilities		12,906			25,622

Deferred tax assets:
Loss and loss expense reserves		9,999			6,761
Limited partnership investments		3,498			–
Unearned premiums discount		2,321			1,837
Other-than-temporary investment declines		625			815
Deferred compensation		580			885
Deferred ceding commission		1,173			627
Other		972			339
Total deferred tax assets		19,168			11,264

Net deferred tax (assets) liabilities	$	(6,262	)	$	14,358

A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements as of December 31 is as follows:

	2018			2017			2016

Statutory federal income rate applied to pre-tax income (loss)	$	(9,213	)	$	3,543		$	15,069
Tax effect of (deduction):
Tax-exempt investment income		(253	)		(968	)		(938	)
Change in enacted tax rates		–			(9,572	)		–
Other		(331	)		(1,204	)		(22	)
Federal income tax expense (benefit)	$	(9,797	)	$	(8,201	)	$	14,109

Federal income tax expense (benefit) as of December 31 consists of the following:

	2018			2017			2016
Tax expense (benefit) on pre-tax income (loss):
Current	$	8,997		$	(4,335	)	$	11,271
Deferred		(18,794	)		(3,866	)		2,838
	$	(9,797	)	$	(8,201	)	$	14,109

The provision for deferred federal income taxes as of December 31 consists of the following:

	2018			2017			2016
Limited partnerships	$	(2,383	)	$	4,099		$	503
Discounts of loss and loss expense reserves		(2,704	)		1,315			(114	)
Reserves - salvage and subrogation and other		427			56			(1,110	)
Unearned premium discount		(484	)		(1,767	)		298
Deferred compensation		305			(168	)		595
Other-than-temporary investment declines		695			(127	)		2,320
Deferred acquisitions costs and ceding commission		201			1,553			(95	)
Change in enacted tax rates		–			(9,572	)		–
Unrealized gains / losses		(13,876	)		–			–
Other		(975	)		745			441
Provision for deferred federal income taxes	$	(18,794	)	$	(3,866	)	$	2,838

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, 2018 or 2017. As of December 31, 2018, calendar years 2017, 2016 and 2015 remain subject to examination by the IRS.

The Company has no uncertain tax positions as of December 31, 2018 or 2017. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit) and changes in such accruals would impact the Company's effective tax rate. There were no amounts accrued for the payment of interest at December 31, 2018, 2017 and 2016.