NOTE 9. INCOME TAXES

Our Company is subject to the tax laws and regulations of the U.S. and the foreign countries in which it operates. Our Company files a consolidated U.S. Federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the Internal Revenue Service (“IRS”) have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the corporate member in proportion to its participation in the relevant syndicates. Our Company’s corporate member is subject to this agreement and receives U.K. tax credits in the U.K. for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the U.S. Internal Revenue Code (“Subpart F”) since less than 50% of the Syndicate’s premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on our Company’s foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. Our Company’s effective tax rate for the Syndicate taxable income could substantially exceed 35% to the extent our Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of our Company’s foreign agencies as these earnings are subject to the active financing exception and are not includable as Subpart F income.

The components of current and deferred income tax expense (benefit) are as follows:

	Years Ended December 31,
amounts in thousands	2016			2015		2014
Current income tax expense (benefit):
Federal and foreign	$	39,900		$	27,937	$	27,290
State and local		638			1,476		1,036
Subtotal	$	40,538		$	29,413	$	28,326
Deferred income tax expense (benefit):
Federal and foreign	$	(5,755	)	$	7,004	$	16,881
State and local		—			—		—
Subtotal	$	(5,755	)	$	7,004	$	16,881
Total income tax expense (benefit)	$	34,783		$	36,417	$	45,207

A reconciliation of total income taxes applicable to pre‑tax operating income and the amounts computed by applying the federal statutory income tax rate to the pre‑tax operating income were as follows:

	Years Ended December 31,
amounts in thousands	2016					2015					2014
Computed expected tax expense	$	41,128		35.0	%	$	41,116		35.0	%	$	49,187		35.0	%
Tax-exempt interest		(4,559	)	-3.9	%		(4,987	)	-4.2	%		(4,771	)	-3.4	%
Dividends received deduction		(3,812	)	-3.2	%		(2,086	)	-1.8	%		(1,257	)	-0.9	%
Proration of DRD and Tax-exempt interest		1,256		1.1	%		1,061		0.9	%		904		0.6	%
Current state and local income taxes, net of federal income tax deduction		415		0.4	%		959		0.8	%		674		0.5	%
Other		355		0.2	%		354		0.3	%		470		0.4	%
Actual tax expense and rate	$	34,783		29.6	%	$	36,417		31.0	%	$	45,207		32.2	%

The tax effects of cumulative temporary differences that give rise to federal, foreign, state and local deferred tax assets and deferred tax liabilities were as follows:

	December 31,
amounts in thousands	2016			2015
Deferred tax assets:
Loss reserve discount	$	25,420		$	25,353
Unearned premiums		33,886			31,486
Compensation related		15,288			11,175
State and local net deferred tax assets		699			721
Net currency translation adjustments		5,363			346
Other		3,618			3,969
Total gross deferred tax assets		84,274			73,050
Less: Valuation allowance		(699	)		(721	)
Total deferred tax assets	$	83,575		$	72,329
Deferred tax liabilities:
Net unrealized gains/losses on securities	$	(10,142	)	$	(13,053	)
Deferred acquisition costs		(29,401	)		(24,037	)
Lloyd's year of account deferral		(15,471	)		(24,466	)
Net unrealized foreign exchange		(3,575	)		(4,164	)
Other		(4,048	)		(2,709	)
Total deferred tax liabilities	$	(62,637	)	$	(68,429	)
Net deferred income tax asset (liability)	$	20,938		$	3,900

Our Company has not provided for U.S. income taxes on approximately $156.6 million of undistributed earnings of our non-U.S. subsidiaries since it is intended that those earnings will be reinvested indefinitely in those subsidiaries. If a future determination is made that those earnings no longer are intended to be reinvested indefinitely in those subsidiaries, U.S. income taxes of approximately $2.7 million, assuming all foreign tax credits are realized, would be included in the tax provision at that time and would be payable if those earnings were distributed to our Company.

Unrecognized tax benefits are differences between tax positions taken in the tax returns and benefits recognized in the financial statements. Our Company has no unrecognized tax benefits as of December 31, 2016, 2015 and 2014. Our Company did not incur any interest or penalties related to unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014. Our Company is not currently under examination by the IRS; however is generally subject to U.S. Federal, state or local or foreign tax examinations by tax authorities for 2009 and subsequent years.

Our Company had state and local deferred tax assets amounting to potential future tax benefits of $0.7 million as of December 31, 2016 and 2015. Included in the deferred tax assets are minimal state and local net operating loss carry-forwards. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. Our Company’s state and local tax carry-forwards as of December 31, 2016 expire from 2026 to 2034.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that, the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not that our Company will realize the benefits of its deductible differences as of December 31, 2016, net of any valuation allowance.