INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES

11. INCOME TAXES

The components of income tax expense (benefit) include the following:

	Year Ended December 31,
	2021		2020		2019
	(In thousands)
Federal:
Current	$	258	$	(29,449)	$	(982)
Deferred	198		(3,494)		567
Federal income tax expense (benefit)	456		(32,943)		(415)
State:
Current	—		(403)		241
Deferred	(140)		(150)		(124)
State income tax expense (benefit)	(140)		(553)		117
Total income tax expense (benefit)	$	316	$	(33,496)	$	(298)

The actual income tax expense (benefit) differs from the “expected” income tax expense (benefit) (computed by applying the combined applicable effective federal and state tax rates to income before income tax expense) as follows:

	Year Ended December 31,
	2021		2020		2019
	(In thousands)
Computed expected tax expense provision, at federal rate	$	(21,585)	$	(23,447)	$	150
State tax, net of federal tax benefit	(137)		(3,157)		(122)
Tax-exempt interest	(2)		(5)		(3)
Income subject to dividends-received deduction	(21)		(26)		(34)
Goodwill impairment	—		2,309		—
Return to provision	(2,036)		(3,407)		(307)
Executive compensation	30		41		230
Meals and entertainment	—		13		43
Uncertain tax position	—		(179)		(203)
Rate difference on NOL carryback	98		(8,785)		(113)
Change in valuation allowance	23,436		2,968		—
Other	533		179		61
Total income tax expense (benefit)	$	316	$	(33,496)	$	(298)

In response to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and expires with tax years ending December 31, 2020. The CARES Act contains several relief provisions for corporations and lifts certain deduction limitations originally imposed by the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) signed into law on December 22, 2017. The CARES Act, among other things, includes temporary changes regarding the prior and future utilization of net operating losses (“NOL”), temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes and the creation of certain refundable employee retention credits. The Company availed itself of the net operating loss provisions of the CARES Act and carried back 2019 and 2020 taxable loss to prior tax years. The Company is carrying forward the NOL generated in the current year.

Our effective income tax rate is the ratio of income tax expense (benefit) over our income (loss) before income taxes. For the years ended December 31, 2021, 2020 and 2019, the effective income tax rate was (0.3)%, 30.0% and (41.8)%, respectively. Differences in the effective tax and the statutory Federal income tax rate of 21% in 2021, 2020 and 2019, are driven by state income taxes and anticipated annual permanent differences, including estimates for tax-exempt interest, dividends received deduction, executive compensation as well as the NOL provision and change in the valuation allowance in the current year.

The application of GAAP requires us to evaluate the recoverability of our net deferred income tax assets, including those associated with net operating loss ("NOL") carryforwards, and establish a valuation allowance, if necessary, to reduce our deferred income tax asset to an amount that is more likely than not to be realizable. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including: the nature and character of the deferred income tax assets and liabilities; taxable income in prior carryback years, if any; future reversals of existing temporary differences; the length of time carryovers can be utilized; and any tax planning strategies we would employ to avoid a tax benefit from expiring unused. Realization is never assured and based on available information, including the financial performance of the Company during the second quarter of 2021, we determined that it was more likely than not that the net deferred income tax asset would not be realized. Therefore, during 2021, we increased the income tax valuation allowance by $27.5 million.

As of December 31, 2021, we had NOL carryforwards for Federal tax purposes of $88.8 million expiring between 2037 and 2041 and $12.7 million that do not expire. As of December 31, 2021, we had NOL carryforwards for state tax purposes of $127.7 million expiring between 2037 and 2041 and $20.8 million that do not expire. The amount and timing of realizing these NOL carryforwards depend on future taxable income and limitations imposed by tax laws.

The Company has a valuation allowance of $30.5 million and $3.0 million on its deferred income tax asset as of December 31, 2021 and 2020, respectively.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense (benefit) in the consolidated statements of operations and statements of comprehensive income (loss). A reconciliation of these uncertain tax positions was as follows:

	Year Ended December 31,
	2021		2020		2019
	(In thousands)
Balance at January 1	$	203	$	382	$	585
Increases/(decreases) for uncertain tax positions taken during the prior years	—		(179)		(203)
Balance at December 31	$	203	$	203	$	382

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax asset (liability), net include the following:

	As of December 31,
	2021		2020
	(In thousands)
Deferred income tax assets:
Unearned premiums	$	5,419	$	5,611
Unpaid losses and loss adjustment expenses	3,416		581
Accrued expenses	307		236
Net operating loss carryforwards	27,780		5,350
Share-based compensation	149		232
Depreciation and amortization	771		412
Lease liability	1,623		1,783
Other	45		69
Gross deferred income tax assets	39,510		14,274
Valuation allowance	(30,481)		(2,968)
Total deferred income tax assets	9,029		11,306
Deferred income tax liabilities:
Deferred acquisition costs and other	(3,926)		(6,387)
Unrealized gains on investment securities	(608)		(2,865)
Embedded derivative	(2,601)		—
Lease asset	(1,623)		(1,783)
Other	(271)		(213)
Total deferred income tax liabilities	(9,029)		(11,248)
Deferred income tax asset (liability), net	$	—	$	58

The deferred income tax asset (liability), net along with income tax receivable, net is included in current and deferred income taxes, net on our Consolidated Balance Sheets.

The Company files a federal income tax return and various state and local tax returns. The Company’s consolidated federal and state income tax returns for 2014, 2015 and 2017 - 2020 are open for review by the Internal Revenue Service and other state taxing authorities.