FEDERAL INCOME TAX

12 Months Ended

Dec. 31, 2014

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




Years Ended December 31,	2014		2013		2012
Current	$	15,649	$	19,146	$	6,644
Deferred	1,677		6,616		(782		)
Total	$	17,326	$	25,762	$	5,862

A reconciliation of income tax expense 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,	2014			2013			2012
Computed expected income tax expense	$	26,762		$	35,666		$	16,126
Tax-exempt municipal bond interest income	(7,417		)	(7,732		)	(8,027		)
Nontaxable dividend income	(1,232		)	(1,053		)	(1,004		)
Valuation allowance reduction	(548		)	(548		)	(547		)
Acquisition related expenses	—			—			42
Other, net	(239		)	(571		)	(728		)
Federal income tax expense	$	17,326		$	25,762		$	5,862

The significant components of our net deferred tax liability at December 31, 2014 and 2013 are as follows:




December 31,	2014			2013
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities	$	60,952		$	55,402
All other securities	24,308			6,201
Deferred policy acquisition costs	44,271			47,809
Prepaid pension cost	2,973			2,556
Net bond discount accretion	1,925			2,069
Depreciation	2,667			2,355
Revaluation of investment basis⁽¹⁾	2,611			3,595
Identifiable intangible assets ⁽¹⁾	3,808			4,056
Other	8,152			7,530
Gross deferred tax liability	$	151,667		$	131,573
Deferred tax assets
Financial statement reserves in excess of income tax reserves	$	35,800		$	39,041
Unearned premium adjustment	26,146			23,502
Net operating loss carryforwards	1,813			2,361
Underfunded benefit plan obligation	31,473			15,858
Postretirement benefits other than pensions	14,374			12,342
Other-than-temporary impairment of investments	5,222			5,222
Contingent ceding commission accrual	3,573			3,726
Compensation expense related to stock options	4,582			4,062
AMT credit carryforward	—			476
Other	4,738			5,429
Gross deferred tax asset	$	127,721		$	112,019
Valuation allowance	(1,813		)	(2,361		)
Deferred tax asset	$	125,908		$	109,658
Net deferred tax liability	$	25,759		$	21,915

(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 $1,813 and $2,361, respectively, at December 31, 2014 and 2013. 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 2014 due to the realization of $1,565 in NOLs. No portion of the NOLs expired in 2014 or will expire in 2015. At December 31, 2014, we had no alternative minimum tax ("AMT") credit carryforwards.

- 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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