INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense. The Company has not incurred any income tax related interest and penalties during the three month period ended March 31, 2013 and incurred no income tax related interest and penalties during 2012. 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 2011. Extensions have been filed for 2012.

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 asset positions of $5,450,000 at March 31, 2013 and $4,997,000 at December 31, 2012.

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



	Three months ended March 31, 2013			Year ended December 31, 2012
	(UNAUDITED)
General expenses	$	1,268		$	1,211
Unearned premiums	1,777			1,751
Claims liabilities	352			243
Litigation settlement	3,570			3,570
AMT credit	246			246
NOL carryforward	3,215			2,711
Other-than-temporary impairments on securities owned	164			164
Unrealized loss on interest rate swaps	491			518
Deferred tax assets	11,083			10,414

Trading securities	—			(1		)
Depreciation	(83		)	(94		)
Deferred policy acquisition costs	(3,050		)	(3,093		)
Unrealized gains on securities available-for-sale	(2,500		)	(2,229		)
Deferred tax liabilities	(5,633		)	(5,417		)

Net deferred tax asset	$	5,450		$	4,997

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



	Three months ended March 31,
	2013			2012
	(UNAUDITED)
Deferred policy acquisition costs	$	(43	)	$	(9	)
Other-than-temporary impairments	—			1
Trading securities	(1		)	—
Unearned premiums	(26		)	30
General expenses	(57		)	(143		)
Depreciation	(11		)	(10		)
Claim liabilities	(109		)	13
NOL carryforward	(504		)	115

Deferred income tax benefit	$	(751	)	$	(3	)

Total income tax (benefit) expense varies from amounts computed by applying current federal income tax rates to income or loss before income taxes. The reasons for these differences and the approximate tax effects are as follows:



	Three months ended March 31,
	2013		2012
Federal income tax rate applied to pre-tax income/loss	34.0	%	34.0	%
Dividends received deduction and tax-exempt interest	3.2	%	(8.4	)%
Company owned life insurance	1.6	%	(7.2	)%
Small life deduction	15.4	%	(9.9	)%
Other, net	6.0	%	(3.9	)%

Effective federal income tax rate	60.2	%	4.6	%