INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense. The Company incurred $1,000 in interest and penalties as of December 31, 2011. The Company did not incur any interest or penalties as

of December 31, 2010. The Company files income tax returns in the U.S. federal jurisdiction and various states. The Company is not subject to examinations by authorities related to its U.S. federal or state income tax filings for years prior to 2006. Tax returns have been filed through the year 2010.

Net deferred tax liabilities are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of the enacted tax laws. Management believes that, based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its deferred tax assets. The Company recognized net deferred tax liability positions of $86,000 at December 31, 2011 and $1,043,000 at December 31, 2010.

The tax effect of significant differences representing deferred tax assets and liabilities are as follows (dollars in thousands):



	December 31, 2011			December 31, 2010
General insurance expenses	$	1,576		$	1,442
Unearned premiums	1,714			1,795
Claims liabilities	271			301
Trading securities	—			17
NOL carry forward	1,363			—
Other-than-temporary impairments on securities owned	258			115
Unrealized loss on interest rate swaps	407			77
Deferred tax assets	$	5,589		$	3,747
Depreciation	$	(144	)	$	(171	)
Deferred policy acquisition costs	(3,250		)	(2,874		)
Unrealized gains on securities available-for-sale	(2,281		)	(1,745		)
Deferred tax liabilities	$	(5,675	)	$	(4,790	)
Net deferred tax liability	$	(86	)	$	(1,043	)

The appropriate income tax effects of changes in temporary differences are as follows (dollars in thousands):



	Year ended December 31,
	2011			2010
Deferred policy acquisition costs	$	376		$	583
Other-than-temporary impairments	(143		)	387
Trading securities	17			(17		)
Unearned premiums	81			19
General insurance expenses	(134		)	(307		)
Depreciation	(27		)	45
Claim liabilities	30			(4		)
NOL carry forward	(1,363		)	—
Deferred income tax (benefit) expense	$	(1,163	)	$	706

Total income tax expense varies from amounts computed by applying current federal income tax rates to income before income taxes. The reason for these differences and the approximate tax effects are as follows (dollars in thousands):



	Year ended December 31,
	2011			2010
Federal income tax rate applied to pre-tax income	$	(2,584	)	$	1,576
Dividends received deduction and tax-exempt interest	(200		)	(188		)
Company owned life insurance	(47		)	(110		)
Small life deduction	(163		)	(175		)
Other, net	351			269
Federal income tax (benefit) expense	$	(2,643	)	$	1,372

Under pre-1984 life insurance company tax laws, a portion of NSIC's gain from operations was not subject to current income taxation, but was accumulated for tax purposes in a memorandum account designated "policyholders' surplus".

The aggregate balance in this account, $2,520,000 at December 31, 2011, would be taxed at current rates only if distributed to shareholders or if the account exceeded a prescribed minimum. The Deficit Reduction Act of 1984 eliminated additions to policyholders' surplus for 1984 and thereafter. Deferred taxes have not been provided on amounts designated as policyholders' surplus. The deferred income tax liability not recognized is approximately $857,000 at December 31, 2011.