Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

11. Income Taxes

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

	Year Ended December 31,			Six Months Ended December 31,		Year Ended June 30,
	2012			2011		2011			2010
Federal:
Current	$	—		$	—	$	—		$	—
Deferred		—			—		—			—
		—			—		—			—
State:
Current		(8	)		146		296			441
Deferred		3			2		(98	)		—
		(5	)		148		198			441
	$	(5	)	$	148	$	198		$	441

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).

	Year Ended December 31,			Six Months Ended December 31,			Year Ended June 30,
	2012			2011			2011			2010
Provision (benefit) for income taxes at statutory rate	$	(3,166	)	$	(10,251	)	$	(19,804	)	$	2,618
Tax effect of:
Tax-exempt investment income		(18	)		(2	)		(15	)		(16	)
Change in the beginning of the period balance of the valuation allowance for deferred tax assets allocated to federal income taxes		580			4,670			4,761			(5,278	)
Net operating loss carryforward expirations		1			—			735			2,483
Goodwill and identifiable intangible assets		—			5,545			14,084			—
Stock-based compensation		2,552			30			248			240
State income taxes, net of federal income tax benefit and valuation allowance		(5	)		148			198			441
Other		51			8			(9	)		(47	)
	$	(5	)	$	148		$	198		$	441

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

	December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	13,091		$	8,924
Stock option compensation		1,704			4,334
Unearned premiums and loss and loss adjustment expense reserves		4,980			4,700
Goodwill and identifiable intangible assets		7,341			8,412
Alternative minimum tax (“AMT”) credit carryforwards		1,612			1,612
Accrued expenses and other nondeductible items		495			752
Other		3,456			3,304
		32,679			32,038
Deferred tax liabilities:
Deferred acquisition costs		(1,127	)		(1,135	)
Identifiable intangible assets		(1,872	)		(1,872	)
Net unrealized change on investments		(3,046	)		(3,588	)
		(6,045	)		(6,595	)
Total net deferred tax asset		26,634			25,443
Less: Valuation allowance		(28,413	)		(27,220	)
Net deferred tax liability	$	(1,779	)	$	(1,777	)

The Company had a valuation allowance of $28.4 million and $27.2 million at December 31, 2012 and 2011, 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 year ended December 31, 2012 was an increase of $1.2 million. For the year ended December 31, 2012, the change in the valuation allowance included increases of $0.5 million related to the unrealized change on investments included in other comprehensive income (loss).

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, 2012 and 2011, respectively. 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 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. 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.

At December 31, 2012, the Company had gross state NOL carryforwards of $47.5 million that begin to expire in 2020 and AMT credit carryforwards of $1.6 million that have no expiration date. At December 31, 2012, the Company had gross NOL carryforwards for federal income tax purposes of $37.4 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, 2012 have been fully reserved for through a valuation allowance. The gross federal NOL carryforwards of $37.4 million will expire in 2022 through 2032.