FEDERAL INCOME TAX

12 Months Ended

Dec. 31, 2018

The Tax Act was enacted on December 22, 2017. The Tax Act significantly revised the U.S. corporate income tax laws including lowering the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when a company does not have the necessary information available, prepared or analyzed in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. As of December 31, 2018 we have completed accounting for the tax effects of enactment of the Tax Act and no adjustments were made during the measurement period.

Federal income tax expense (benefit) from both continuing and discontinued operations is composed of the following:




Years Ended December 31,	2018			2017			2016
Current	$	18,493		$	1,989		$	3,239
Deferred	(21,791		)	(26,719		)	5,524
Total	$	(3,298	)	$	(24,730	)	$	8,763

A reconciliation of income tax expense (benefit) computed at the applicable federal tax rate of 21.0 percent in 2018 and 35.0 percent in 2017 to the amount recorded in the accompanying Consolidated Statements of Income and Comprehensive Income is as follows:




Years Ended December 31,	2018			2017			2016
Computed expected income tax expense	$	5,114		$	9,202		$	20,533
Impact of enactment of Tax Act	—			(21,884		)	—
Tax-exempt municipal bond interest income	(4,235		)	(8,875		)	(8,330		)
Nontaxable dividend income	(591		)	(1,540		)	(1,317		)
Valuation allowance reduction	(329		)	(547		)	(547		)
Other, net	(3,257		)	(1,086		)	(1,576		)
Consolidated federal income tax expense (benefit)	$	(3,298	)	$	(24,730	)	$	8,763

Reconciliation of consolidated federal income tax expense (benefit) from:
Continuing operations	$	(11,405	)	$	(29,220	)	$	8,379
Gain on sale of discontinued operations	7,544			—			—
Discontinued operations	563			4,490			384
Consolidated federal income tax expense (benefit)	$	(3,298	)	$	(24,730	)	$	8,763

We measure certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is 21.0 percent. The significant components of our net deferred tax liability at December 31, 2018 and 2017 are as follows:




December 31,	2018			2017
Deferred tax liabilities
Net unrealized appreciation on investment securities:
Equity securities	$	38,430		$	50,839
All other securities	(2,478		)	7,599
Deferred policy acquisition costs	19,487			30,404
Investments in partnerships	2,510			3,653
Prepaid pension cost	4,158			3,416
Net bond discount accretion	296			666
Depreciation	1,063			593
Revaluation of investment basis⁽¹⁾	419			545
Identifiable intangible assets ⁽¹⁾	1,689			1,838
Other	1,639			1,934
Gross deferred tax liability	$	67,213		$	101,487
Deferred tax assets
Financial statement reserves in excess of income tax reserves	$	19,800		$	17,036
Unearned premium adjustment	20,406			19,389
Net operating loss carryforwards	—			329
Underfunded benefit plan obligation	5,622			12,375
Post-retirement benefits other than pensions	12,035			11,942
Other-than-temporary impairment of investments	2,094			2,313
Contingent ceding commission accrual	14			317
Alternative minimum tax credit carryforward	—			6,011
Compensation expense related to stock options	3,506			3,289
Other	4,648			4,145
Gross deferred tax asset	$	68,125		$	77,146
Valuation allowance	—			(329		)
Deferred tax asset	$	68,125		$	76,817
Net deferred tax liability (asset)	$	(912	)	$	24,670

(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 did not record a valuation allowance against these NOLs at December 31, 2018. At December 31, 2017 we recorded a valuation allowance against these NOLs of $329. 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 $657 during 2018 due to the realization of $3,129 in NOLs. The valuation allowance was reduced by $547 in 2017 due to no realization of NOLs. At December 31, 2018, there are no remaining NOL's. At December 31, 2018, we had no alternative minimum tax credit carryforwards.