Note E - Income Taxes

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 tax assets and liabilities as of December 31 are as follows:

	2011		2010
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	14,319	$	18,251
Limited partnership investments		-		5,737
Deferred acquisition costs		3,576		3,034
Salvage and subrogation		2,275		1,995
Other		898		449
Total deferred tax liabilities		21,068		29,466

Deferred tax assets:
Loss and loss expense reserves		18,377		14,781
Limited partnership investments		1,459		-
Unearned premiums discount		2,361		2,331
Other-than-temporary investment declines		2,902		2,661
Deferred compensation		845		1,344
Deferred ceding commission		1,974		1,345
Other		269		232
Total deferred tax assets		28,187		22,694

Net deferred tax assets (liabilities)	$	7,119	$	(6,772	)

A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements is as follows:

	2011			2010			2009

Statutory federal income rate applied to pretax income (loss)	$	(15,851	)	$	12,185		$	22,493
Tax effect of (deduction):
Tax-exempt investment income		(1,145	)		(1,296	)		(2,682	)
Net addition to (reduction of) tax positions		(174	)		(826	)		(405	)
Other		56			(265	)		58
Federal income tax expense (benefit)	$	(17,114	)	$	9,798		$	19,464

Federal income tax expense consists of the following:
	2011			2010		2009
Taxes (credits) on pre-tax income (loss):
Current	$	(8,205	)	$	9,752	$	9,903
Deferred		(8,909	)		46		9,561
	$	(17,114	)	$	9,798	$	19,464

The components of the provision for deferred federal income taxes (credits) are as follows:

		2011			2010			2009
Limited partnerships		$	(7,196	)	$	485		$	7,671
Discounts of loss and loss expense reserves			(2,546	)		(107	)		946
Unearned premium discount			(30	)		(517	)		(611	)
Deferred compensation			499			(735	)		(410	)
Other-than-temporary investment declines			(240	)		571			862
Deferred acquisitions costs and ceding commission			(87	)		(27	)		903
Other			691			376			200
	Provision for deferred federal income tax	$	(8,909	)	$	46		$	9,561

Cash flows related to federal income taxes paid, net of refunds received, for 2011, 2010 and 2009 were $2,859, $9,000, and $6,037 respectively.

The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance is necessary at December 31, 2011 or 2010. As of December 31, 2011, the Internal Revenue Service had completed examinations and settled all audits through the Company's 2004 tax year.

The Company's tax positions are uncertain only as to the timing of deductibility and therefore, if recognized would have no impact on the Company's effective tax rate. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company's effective tax rate. Amounts accrued for the payment of interest at December 31, 2011, 2010 and 2009 were not material.

A reconciliation of the beginning and ending amounts of unrecognized federal income taxes (credits), which would have no impact on the Company's effective tax rate, excludes interest, which is treated as income tax expense under the Company's accounting policy, is as follows:


	2011		2010
Balance at January 1	$	6,000	$	6,600
Reductions for tax positions of the current year		-		(271	)
Reductions for tax positions of prior years		-		(329	)
Balance at December 31	$	6,000	$	6,000

As of December 31, 2011, certain tax years remain open to examination by the IRS and various state and local authorities. While it is difficult to determine when other tax settlements will actually occur, it is reasonably possible that one could occur in the next year and the Company's unrecognized tax benefits could change within a range of approximately $0 to $6,000.