FEDERAL INCOME TAX

12 Months Ended

Dec. 31, 2015

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




Years Ended December 31,	2015			2014		2013
Current	$	37,649		$	15,649	$	19,146
Deferred	(5,324		)	1,677		6,616
Total	$	32,325		$	17,326	$	25,762

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,	2015			2014			2013
Computed expected income tax expense	$	42,508		$	26,762		$	35,666
Tax-exempt municipal bond interest income	(7,669		)	(7,417		)	(7,732		)
Nontaxable dividend income	(1,337		)	(1,232		)	(1,053		)
Valuation allowance reduction	(548		)	(548		)	(548		)
Other, net	(629		)	(239		)	(571		)
Federal income tax expense	$	32,325		$	17,326		$	25,762

The significant components of our net deferred tax liability at December 31, 2015 and 2014 are as follows:




December 31,	2015			2014
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities	$	58,674		$	60,952
All other securities	11,159			24,308
Deferred policy acquisition costs	53,960			44,271
Prepaid pension cost	1,920			2,973
Net bond discount accretion	1,430			1,925
Depreciation	1,791			2,667
Revaluation of investment basis⁽¹⁾	1,824			2,611
Identifiable intangible assets ⁽¹⁾	3,560			3,808
Other	7,627			8,152
Gross deferred tax liability	$	141,945		$	151,667
Deferred tax assets
Financial statement reserves in excess of income tax reserves	$	34,535		$	35,800
Unearned premium adjustment	28,679			26,146
Net operating loss carryforwards	1,265			1,813
Underfunded benefit plan obligation	25,810			31,473
Postretirement benefits other than pensions	17,838			14,374
Other-than-temporary impairment of investments	5,609			5,222
Contingent ceding commission accrual	3,342			3,573
Compensation expense related to stock options	4,627			4,582
Other	6,852			4,738
Gross deferred tax asset	$	128,557		$	127,721
Valuation allowance	(1,265		)	(1,813		)
Deferred tax asset	$	127,292		$	125,908
Net deferred tax liability	$	14,653		$	25,759

(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 $1,265 and $1,813, respectively, at December 31, 2015 and 2014. 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 and 2015, respectively, due to the realization of $1,565 in NOLs. No portion of the NOLs expired in 2014 or 2015 or will expire in 2016. At December 31, 2015, we had no alternative minimum tax ("AMT") credit carryforwards.