Income Taxes

6 Months Ended

Dec. 31, 2011

Income Taxes [Abstract]

Income Taxes

11. Income Taxes

The provision for income taxes consisted of the following (in thousands).

	Six Months Ended		Year Ended June 30,
	December 31,
	2011		2011			2010		2009
Federal:
Current	$	—	$	—		$	—	$	295
Deferred		—		—			—		17,440
		—		—			—		17,735
State:
Current		146		296			441		508
Deferred		2		(98	)		—		153
		148		198			441		661
	$	148	$	198		$	441	$	18,396

The provision for income taxes differs from the amounts computed by applying the statutory federal corporate tax rate of 35% to income (loss) before income taxes as a result of the following (in thousands).

	Six Months Ended December 31, 2011			Year Ended June 30,
				2011			2010			2009
Provision (benefit) for income taxes at statutory rate	$	(10,251	)	$	(19,804	)	$	2,618		$	(17,466	)
Tax effect of:
Tax-exempt investment income		(2	)		(15	)		(16	)		(16	)
Change in the beginning of the period balance of the valuation allowance for deferred tax assets allocated to federal income taxes		4,670			4,761			(5,278	)		(6,291	)
Net operating loss carryforward expirations		—			735			2,483			24,534
Goodwill and identifiable intangible assets		5,545			14,084			—			16,724
Restricted stock		30			248			240			—
State income taxes, net of federal income tax benefit and valuation allowance		148			198			441			661
Other		8			(9	)		(47	)		250
	$	148		$	198		$	441		$	18,396

The tax effects of temporary differences that give rise to the net deferred tax assets and liabilities are presented below (in thousands).

	December 31,			June 30,
	2011			2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	8,924		$	5,272		$	3,613
Stock option compensation		4,334			4,313			4,418
Unearned premiums and loss and loss adjustment expense reserves		4,700			4,798			5,099
Goodwill and identifiable intangible assets		8,412			6,901			3,216
Alternative minimum tax (“AMT”) credit carryforwards		1,612			1,612			1,612
Accrued expenses and other nondeductible items		752			994			934
Other		3,304			2,796			2,306
		32,038			26,686			21,198
Deferred tax liabilities:
Deferred acquisition costs		(1,135	)		(1,157	)		(1,268	)
Identifiable intangible assets		(1,872	)		(1,872	)		—
Net unrealized change on investments		(3,588	)		(3,330	)		(3,025	)
		(6,595	)		(6,359	)		(4,293	)
Total net deferred tax asset		25,443			20,327			16,905
Less: Valuation allowance		(27,220	)		(22,101	)		(16,905	)
Net deferred tax liability	$	(1,777	)	$	(1,774	)	$	—

The Company had a valuation allowance of $27.2 million, $22.1 million and $16.9 million at December 31, 2011 and June 30, 2011 and 2010, respectively, to reduce deferred tax assets to the amount that is more likely than not to be realized. The change in the total valuation allowance for the six months ended December 31, 2011 was an increase of $5.1 million. For the six months ended December 31, 2011, the change in the valuation allowance included reductions of $0.3 million related to the unrealized change on investments included in other comprehensive income (loss) and increases of $0.7 million related to deferred state income taxes.

In assessing the realization of deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax assets will not be realized. The Company is required to assess whether a valuation allowance should be established against the Company’s net deferred tax assets based on the consideration of all available evidence using a more likely than not standard. In making such judgments, significant weight is given to evidence that can be objectively verified. In assessing the Company’s ability to support the realizability of its deferred tax assets, management considered both positive and negative evidence. The Company placed greater weight on historical results than on the Company’s outlook for future profitability and established a deferred tax valuation allowance at December 31, 2011 and June 30, 2011 and 2010. The deferred tax valuation allowance may be adjusted in future periods if management determines that it is more likely than not that some portion or all of the deferred tax assets will be realized. In the event the deferred tax valuation allowance is adjusted, the Company would record an income tax benefit for the adjustment.

The change in the total valuation allowance for the year ended June 30, 2011 was an increase of $5.2 million. For the year ended June 30, 2011, the change in the valuation allowance included reductions of $0.3 million related to the unrealized change on investments included in other comprehensive income (loss) and increases of $0.8 million related to deferred state income taxes. The change in the total valuation allowance for the year ended June 30, 2010 was a decrease of $8.0 million. For the year ended June 30, 2010, the change in the valuation allowance primarily included the unrealized change on investments of $3.2 million included in other comprehensive income. The change in the total valuation allowance for the year ended June 30, 2009 was a decrease of $5.2 million. The fiscal year 2009 provision was increased by a net charge of $10.2 million resulting from the $15.3 million tax effect of the goodwill impairment charge and the establishment of a full valuation allowance on the remaining net deferred tax assets offset by a tax benefit of $5.1 million related to the utilization of federal net operating loss (“NOL”) carryforwards that were to expire on June 30, 2009 that had been previously reserved for through a valuation allowance.

At December 31, 2011, the Company had gross state NOL carryforwards of $37.1 million that begin to expire in 2019 and AMT credit carryforwards of $1.6 million that have no expiration date. At December 31, 2011, the Company had gross NOL carryforwards for federal income tax purposes of $25.5 million, which are available to offset future federal taxable income. On a tax-affected basis, all remaining federal and substantially all state NOL carryforwards at December 31, 2011 have been fully reserved for through a valuation allowance.

The gross federal NOL carryforwards will expire in 2012 through 2031, as shown in the following table (in thousands).

Expiration Year Ended December 31,	Amount
2012	$	2
2013		—
2014		—
2015		—
Thereafter		25,494
Total NOL carryforwards	$	25,496