Federal Income Tax

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

NOTE 7. FEDERAL INCOME TAX

Federal income tax expense (benefit) is composed of the following:

(In Thousands)
Years Ended December 31	2011			2010			2009
Current	$	(3,517	)	$	11,070		$	(7,132	)
Deferred	(9,209		)	(200		)	(11,133		)
Total	$	(12,726	)	$	10,870		$	(18,265	)

A reconciliation of income tax expense (benefit) computed at the applicable federal tax rate of 35 percent to the amount recorded in the accompanying Consolidated Statements of Income is as follows:

(In Thousands)
Years Ended December 31	2011			2010			2009
Computed expected income tax expense (benefit)	$	(4,451	)	$	20,434		$	(10,048	)
Tax-exempt municipal bond interest income	(7,908		)	(7,287		)	(7,411		)
Nontaxable dividend income	(859		)	(751		)	(788		)
Valuation allowance reduction	—			(1,643		)	—
Acquisition related expenses	860			403			—
Other, net	(368		)	(286		)	(18		)
Federal income tax expense (benefit)	$	(12,726	)	$	10,870		$	(18,265	)

The significant components of the net deferred tax liability at December 31, 2011 and 2010, are as follows:

(In Thousands)
December 31	2011			2010
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities	31,812			33,448
All other securities	47,026			34,882
Deferred policy acquisition costs	32,795			26,279
Prepaid pension cost	3,053			2,709
Net bond discount accretion and premium amortization	3,678			3,161
Depreciation	2,844			632
Revaluation of investment basis (1)	5,734			—
Identifiable intangible assets (1)	5,328			—
Other	2,594			960
Gross deferred tax liability	$	134,864		$	102,071
Deferred tax assets
Financial statement reserves in excess of income tax reserves	$	42,273		$	30,476
Unearned premium adjustment	19,771			13,842
Net operating loss carryforwards	8,055			4,004
Underfunded benefit plan obligation	22,503			13,823
Postretirement benefits other than pensions	8,599			7,597
Investment impairments	8,124			8,824
Contingent ceding commission accrual (1)	6,672			—
Salvage and subrogation	1,526			1,748
Compensation expense related to stock options	3,392			2,750
Other	3,781			3,197
Gross deferred tax asset	$	124,696		$	86,261
Valuation allowance	(3,456		)	(4,004		)
Deferred tax asset	$	121,240		$	82,257
Net deferred tax liability	$	13,624		$	19,814

(1) Related to our acquisition of Mercer Insurance Group

Due to our determination that we may not be able to fully realize the benefits of the net operating losses ("NOLs") acquired in the purchase of American Indemnity Financial Corporation, which are only available to offset the future taxable income of our property and casualty insurance operations, we have recorded a valuation allowance against the NOLs that totaled $3,456,000 at December 31, 2011. Based on a yearly review, we determine whether the benefit of the NOLs can be realized, and, if so, the decrease in the valuation allowance is recorded as a reduction to current federal income tax expense. If NOLs expire during the year, the decrease in the valuation allowance is offset with a corresponding decrease to the deferred income tax asset.  The valuation allowance was reduced by $548,000 in 2011 due to the expiration of $1,643,000 in  NOLs. No portion of the NOLs will expire in 2012.