FEDERAL INCOME TAX

12 Months Ended

Dec. 31, 2013

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




Years Ended December 31,	2013		2012			2011
Current	$	19,146	$	6,644		$	(3,517	)
Deferred	6,616		(782		)	(9,209		)
Total	$	25,762	$	5,862		$	(12,726	)

A reconciliation of income tax expense (benefit) computed at the applicable federal tax rate of 35.0 percent to the amount recorded in the accompanying Consolidated Statements of Income and Comprehensive Income is as follows:




Years Ended December 31,	2013			2012			2011
Computed expected income tax expense (benefit)	$	35,666		$	16,126		$	(4,451	)
Tax-exempt municipal bond interest income	(7,732		)	(8,027		)	(7,908		)
Nontaxable dividend income	(1,053		)	(1,004		)	(859		)
Valuation allowance reduction	(548		)	(547		)	—
Acquisition related expenses	—			42			860
Other, net	(571		)	(728		)	(368		)
Federal income tax expense (benefit)	$	25,762		$	5,862		$	(12,726	)

The significant components of our net deferred tax liability at December 31, 2013 and 2012, are as follows:




December 31,	2013			2012
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities	$	55,402		$	38,582
All other securities	6,201			52,563
Deferred policy acquisition costs	47,809			32,086
Prepaid pension cost	2,556			2,271
Net bond discount accretion	2,069			3,896
Depreciation	2,355			579
Revaluation of investment basis⁽¹⁾	3,595			4,345
Identifiable intangible assets ⁽¹⁾	4,056			6,615
Other	7,530			4,414
Gross deferred tax liability	$	131,573		$	145,351
Deferred tax assets
Financial statement reserves in excess of income tax reserves	$	39,041		$	40,992
Unearned premium adjustment	23,502			21,578
Net operating loss carryforwards	2,361			3,481
Underfunded benefit plan obligation	15,858			26,335
Postretirement benefits other than pensions	12,342			10,240
Other-than-temporary impairment of investments	5,222			5,715
Contingent ceding commission accrual	3,726			4,822
Compensation expense related to stock options	4,062			3,928
AMT credit carryforward	476			7,713
Other	5,429			3,828
Gross deferred tax asset	$	112,019		$	128,632
Valuation allowance	(2,361		)	(2,909		)
Deferred tax asset	$	109,658		$	125,723
Net deferred tax liability	$	21,915		$	19,628

(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 in 1999, which are only available to offset the future taxable income of our property and casualty insurance operations and are further limited as to the amount that can be utilized in any given year, we have recorded a valuation allowance against these NOLs that totaled $2,361 and $2,909, respectively, at December 31, 2013 and 2012. 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 during 2013 due to the realization of $1,565 in NOLs. No portion of the NOLs expired in 2013 or will expire in 2014.

The alternative minimum tax (“AMT”) credit carryforward of $476 has an indefinite life. We expect to realize the benefits from the AMT credit carryforward and the NOL other than as noted above.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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