INCOME TAXES

The Company recognizes tax-related interest and penalties as a component of tax expense. 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 2009. Tax returns have been filed through the year 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 $4,654,000 at December 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):



	Year ended December 31,
	2013			2012
General expenses	$	1,326		$	1,211
Unearned premiums	1,855			1,751
Claims liabilities	700			243
Litigation settlement	3,173			3,570
AMT credit	335			246
NOL carryforward	849			2,711
Other-than-temporary impairments on securities owned	—			164
Unrealized loss on interest rate swaps	305			518
Deferred tax assets	8,543			10,414

Trading securities	—			(1		)
Depreciation	(119		)	(94		)
Deferred policy acquisition costs	(2,984		)	(3,093		)
Unrealized gains on securities available-for-sale	(786		)	(2,229		)
Deferred tax liabilities	(3,889		)	(5,417		)
Net deferred tax asset	$	4,654		$	4,997

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



	Year ended December 31,
	2013			2012
Deferred policy acquisition costs	$	(109	)	$	(157	)
Other-than-temporary impairments	164			94
Trading securities	(1		)	1
Unearned premiums	(104		)	(37		)
General expenses	(115		)	(60		)
Depreciation	25			(50		)
Claim liabilities	(457		)	28
Litigation settlement	397			(3,145		)
AMT credit	(89		)	(246		)
NOL carryforward	1,862			(1,348		)
Deferred income tax expense (benefit)	$	1,573		$	(4,920	)

Total income tax expense (benefit) 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:



	Year ended December 31,
	2013		2012
Federal income tax rate applied to pre-tax income/loss	34.0	%	(34.0	)%
Dividends received deduction and tax-exempt interest	(1.7	)%	(1.4	)%
Small life deduction	(4.0	)%	(3.2	)%
Life reserve tax adjustment	(6.7	)%	—	%
Other, net	1.1	%	(1.1	)%
Effective federal income tax rate	22.7	%	(39.7	)%

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, 2013, 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, 2013.

At December 31, 2013, the Company has approximately $2,499,000 of net operating loss carryforwards available ($849,000 tax benefit) to be applied to future periods. These carryforwards expire in 2031 and 2032.