Income Taxes

12 Months Ended

Dec. 31, 2020

Income Taxes [Abstract]

Income Taxes

Note E - Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (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.  The Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded during 2018.

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, 2020 and 2019 are as follows:

	2020		2019
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	8,159	$	5,327
Deferred acquisition costs		2,538		2,821
Loss and loss expense reserves		2,222		2,701
Limited partnership investments		–		2,587
Accelerated depreciation		669		687
Other		1,495		1,361
Total deferred tax liabilities		15,083		15,484
Deferred tax assets:
Loss and loss expense reserves		12,923		11,460
Limited partnership investments		822		–
Unearned premiums discount		2,339		2,529
Impairment related investment declines		435		39
Deferred compensation		1,999		1,181
Deferred ceding commission		492		1,037
Allowance for credit losses		3,580		–
Other		1,473		1,273
Total deferred tax assets		24,063		17,519
Net deferred tax assets	$	8,980	$	2,035

A summary of the difference between federal income tax expense (benefit) computed at the statutory rate and that reported in the consolidated financial statements as of December 31, 2020, 2019 and 2018 is as follows:

	2020			2019			2018
Statutory federal income rate applied to pre-tax income (loss)	$	1,336		$	1,821		$	(9,213	)
Tax effect of (deduction):
Tax-exempt investment income		(239	)		(402	)		(253	)
Valuation allowance		1,264			–			–
Other		(461	)		(93	)		(331	)
Federal income tax expense (benefit)	$	1,900		$	1,326		$	(9,797	)

Federal income tax expense (benefit) as of December 31, 2020, 2019 and 2018 consists of the following:

	2020			2019			2018
Tax expense (benefit) on pre-tax income (loss):
Current	$	7,144		$	1,377		$	8,997
Deferred		(5,244	)		(51	)		(18,794	)
	$	1,900		$	1,326		$	(9,797	)

The provision for deferred federal income taxes as of December 31, 2020, 2019 and 2018 consists of the following:

	2020			2019			2018
Limited partnerships	$	(3,409	)	$	1,143		$	(2,383	)
Discounts of loss and loss expense reserves		(1,944	)		(2,269	)		(2,704	)
Reserves - salvage and subrogation and other		1			(74	)		427
Unearned premium discount		190			(208	)		(484	)
Deferred compensation		(818	)		(600	)		305
Impairment related investment declines		(1,400	)		(411	)		695
Deferred acquisitions costs and ceding commission		262			405			201
Unrealized gains / losses		(59	)		1,837			(13,876	)
Valuation allowance		1,264			–			–
Other		669			126			(975	)
Provision for deferred federal income taxes	$	(5,244	)	$	(51	)	$	(18,794	)

In assessing the valuation of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or availability to carryback the losses to taxable income during the periods in which those temporary differences become deductible.  The Company considered several factors when analyzing the need for a valuation allowance, including the Company's current three year cumulative GAAP loss through December 31, 2020, the increase in deferred tax assets due to the adoption of CECL at January 1, 2020 discussed in Note A, the change in unrealized gains and losses and the loss of a high taxable income year from the carryback period.  The three year cumulative loss limits the Company's ability to use projected income beyond 2020 in the analysis.  As of December 31, 2020 and 2019, the Company had no valuation allowance. However, the application of intra-period tax allocation rules to benefits associated with deferred tax assets resulted in a charge to continuing operations as of December 31, 2020 of $1,264 in the consolidated statement of operations, offset by a corresponding benefit in shareholders' equity within accumulated other comprehensive income.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), was signed into law on March 27, 2020, to provide national emergency economic relief measures.  The CARES Act, among other things, permits net operating loss (“NOL”) carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has evaluated the impact of the CARES Act, noting it does not have a material impact.

The Company has no uncertain tax positions as of December 31, 2020 or 2019.  The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit) 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, 2020, 2019 and 2018.  As of December 31, 2020, calendar years 2019, 2018 and 2017 remain subject to examination by the Internal Revenue Service.