FEDERAL INCOME TAX

12 Months Ended

Dec. 31, 2016

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




Years Ended December 31,	2016		2015			2014
Current	$	3,239	$	37,649		$	15,649
Deferred	5,524		(5,324		)	1,677
Total	$	8,763	$	32,325		$	17,326

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,	2016			2015			2014
Computed expected income tax expense	$	20,533		$	42,508		$	26,762
Tax-exempt municipal bond interest income	(8,330		)	(7,669		)	(7,417		)
Nontaxable dividend income	(1,317		)	(1,337		)	(1,232		)
Valuation allowance reduction	(547		)	(548		)	(548		)
Other, net	(1,576		)	(629		)	(239		)
Federal income tax expense	$	8,763		$	32,325		$	17,326

The significant components of our net deferred tax liability at December 31, 2016 and 2015 are as follows:




December 31,	2016			2015
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities	$	70,640		$	58,674
All other securities	3,711			11,159
Deferred policy acquisition costs	52,031			53,960
Prepaid pension cost	4,449			1,920
Net bond discount accretion	1,134			1,430
Depreciation	854			1,791
Revaluation of investment basis⁽¹⁾	1,342			1,824
Identifiable intangible assets ⁽¹⁾	3,311			3,560
Other	10,943			7,627
Gross deferred tax liability	$	148,415		$	141,945
Deferred tax assets
Financial statement reserves in excess of income tax reserves	$	29,174		$	34,535
Unearned premium adjustment	30,697			28,679
Net operating loss carryforwards	718			1,265
Underfunded benefit plan obligation	13,374			25,810
Post-retirement benefits other than pensions	20,221			17,838
Other-than-temporary impairment of investments	4,658			5,609
Contingent ceding commission accrual	2,769			3,342
Compensation expense related to stock options	4,578			4,627
Other	7,356			6,852
Gross deferred tax asset	$	113,545		$	128,557
Valuation allowance	(718		)	(1,265		)
Deferred tax asset	$	112,827		$	127,292
Net deferred tax liability	$	35,588		$	14,653

(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 $718 and $1,265, respectively, at December 31, 2016 and 2015. 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 $547 and $548 during 2016 and 2015, respectively, due to the realization of $1,565 in NOLs. No portion of the NOLs expired in 2015 or 2016 or will expire in 2017. At December 31, 2016, we had $1,194 of alternative minimum tax ("AMT") credit carryforwards.