Note E - Income Taxes

Deferred income taxes are calculated to account for 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:

	2017		2016
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	15,086	$	18,335
Deferred acquisition costs		1,804		874
Loss and loss expense reserves		2,623		1,198
Limited partnership investments		3,826		2,274
Accelerated depreciation		492		1,037
Other		1,791		1,251
Total deferred tax liabilities		25,622		24,969

Deferred tax assets:
Loss and loss expense reserves		6,761		9,467
Unearned premiums discount		1,837		1,295
Other-than-temporary investment declines		815		858
Deferred compensation		885		1,097
Deferred ceding commission		627		464
Other		339		376
Total deferred tax assets		11,264		13,557

Net deferred tax liabilities	$	14,358	$	11,412

On December 22, 2017, the U.S. Tax Act was signed into law, which lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company recorded a tax benefit of $9.6 million related to the re-measurement of its deferred tax assets and liabilities. The IRS has not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore we have not completed our accounting for the tax effects, but we have made a reasonable estimate of the effects on our existing deferred tax balances at December 31, 2017. We re-measured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future, which is generally 21%. However, we are still analyzing certain aspects of the U.S. Tax Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts.

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:

	2017			2016			2015

Statutory federal income rate applied to pretax income	$	3,543		$	15,069		$	11,883
Tax effect of (deduction):
Tax-exempt investment income		(968	)		(938	)		(919	)
Change in enacted tax rates		(9,572	)		-			-
Other		(1,204	)		(22	)		(295	)
Federal income tax expense (benefit)	$	(8,201	)	$	14,109		$	10,669

Federal income tax expense (benefit) consists of the following:
	2017			2016		2015
Taxes (benefit) on pre-tax income:
Current	$	(4,335	)	$	11,271	$	12,488
Deferred		(3,866	)		2,838		(1,819	)
	$	(8,201	)	$	14,109	$	10,669

	2017			2016			2015
Limited partnerships	$	4,099		$	503		$	(2,865	)
Discounts of loss and loss expense reserves		1,315			(114	)		1,526
Reserves - salvage and subrogation and other		56			(1,110	)		29
Unearned premium discount		(1,767	)		298			608
Deferred compensation		(168	)		595			(127	)
Other-than-temporary investment declines		(127	)		2,320			(1,416	)
Deferred acquisitions costs and ceding commission		1,553			(95	)		(287	)
Change in enacted tax rates		(9,572	)		-			-
Other		745			441			713
Provision for deferred federal income tax	$	(3,866	)	$	2,838		$	(1,819	)

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, 2017 or 2016. As of December 31, 2017, calendar years 2016, 2015 and 2014 remain subject to examination by the IRS.

The Company has no uncertain tax positions as of December 31, 2017 or 2016. 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. There were no amounts accrued for the payment of interest at December 31, 2017, 2016 and 2015.