Income Taxes
In the years 2017, 2016 and 2015, we paid $28.3 million, $6.7 million and $28.5 million, respectively, in taxes. The following is a reconciliation of income taxes at the statutory rate of 35.0% to the effective provision for income taxes as shown in the Consolidated Statements of Earnings ($ in thousands):
|
| | | | | | | | | | | |
| Twelve months ended December 31, |
| 2017 | | 2016 | | 2015 |
Earnings before income taxes | $ | 80,727 |
| | $ | 62,132 |
| | $ | 74,832 |
|
Income taxes at statutory rate | 28,254 |
| | 21,746 |
| | 26,191 |
|
Effect of: | | | | | |
Dividends-received deduction | (455 | ) | | (466 | ) | | (458 | ) |
Tax-exempt interest | (2,442 | ) | | (2,456 | ) | | (2,713 | ) |
Other | (198 | ) | | 223 |
| | 331 |
|
Deferred tax rate adjustment | 10,184 |
| | $ | 0 |
| | $ | 0 |
|
Provision for income taxes as shown on the Consolidated Statements of Earnings | $ | 35,343 |
| | $ | 19,047 |
| | $ | 23,351 |
|
GAAP effective tax rate | 43.8 | % | | 30.7 | % | | 31.2 | % |
The total income tax provision consists of ($ in thousands):
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Current | $ | 30,332 |
| | $ | 14,782 |
| | $ | 23,133 |
|
Deferred | 5,011 |
| | 4,265 |
| | 218 |
|
Provision for income taxes | $ | 35,343 |
| | $ | 19,047 |
| | $ | 23,351 |
|
Deferred income tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The significant components of deferred tax assets and liabilities included in the Consolidated Balance Sheets were as follows ($ in thousands):
|
| | | | | | | |
| As of December 31, |
2017 | | 2016 |
Deferred tax assets: | | | |
Discount on loss reserves | $ | 5,862 |
| | $ | 4,853 |
|
Unearned premium reserve | 26,358 |
| | 42,844 |
|
Bad debts | 3,205 |
| | 4,972 |
|
Accrued bonuses | 1,937 |
| | 2,250 |
|
Deferred compensation | 3,966 |
| | 6,152 |
|
Long-term incentive compensation | 740 |
| | 814 |
|
Other | 2,683 |
| | 5,089 |
|
Gross deferred tax assets | 44,751 |
| | 66,974 |
|
Valuation allowance for deferred tax assets | (195 | ) | | (326 | ) |
Total deferred tax assets | 44,556 |
| | 66,648 |
|
| | | |
Deferred tax liabilities: | | | |
Deferred policy acquisition costs | (18,543 | ) | | (31,897 | ) |
Investment securities – unrealized gains | (5,966 | ) | | (3,896 | ) |
Fixed assets | (2,379 | ) | | (5,037 | ) |
Loss reserve transition liability | (3,120 | ) | | 0 |
|
Other | (382 | ) | | (1,405 | ) |
Total deferred tax liabilities | (30,390 | ) | | (42,235 | ) |
Net deferred tax assets | 14,166 |
| | 24,413 |
|
Current income tax payable | (4,811 | ) | | (2,778 | ) |
Current and deferred income taxes | $ | 9,355 |
| | $ | 21,635 |
|
The Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017, and reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. The deferred tax assets and deferred tax liabilities as of December 31, 2017, have been calculated based on the new enacted tax rate, which resulted in a net deferred tax rate adjustment of $10.2 million recorded in the provision for income taxes. The TCJA also made changes to the way companies are allowed to calculate their tax loss reserve discount factors. The TCJA requires the use of industry payout patterns and revised the method of calculating the interest rates for purposes of tax loss reserve discounting. The TCJA requires companies to revalue their tax loss reserves as of January 1, 2018, based on December 31, 2018 discount factors. This results in a grossed up deferred tax asset relating to tax loss reserves and the establishment of a deferred tax liability for the transition loss that will be recognized ratably over eight years, both of which are reflected in the above December 31, 2017 balances. Since the December 31, 2018 discount factors, and the exact methodology used to calculate the interest rate used to determine the discount factors, have not been released, both the gross-up of the tax loss reserve deferred tax asset and the setup of the transitional loss deferred tax liability have been computed on what we believe is a reasonable estimate under SAB 118. These balances will be revised when published discount factors are made available.
An analysis is performed on a quarterly basis to determine if there is sufficient evidence that it is more likely than not that the deferred tax assets will be recognized for tax purposes. The evidence that is considered in assessing the need for a valuation allowance includes: (i) sufficient future taxable income; (ii) sufficient ordinary and capital taxable income in carryback periods; (iii) the reversals of existing taxable temporary differences; and (iv) tax planning strategies that could be utilized to accelerate the recognition of capital gains in the future. Based on this evaluation, it is management’s belief the only valuation allowance required at December 31, 2017, and December 31, 2016, relates to a net operating loss carryover generated by an inactive company that previously filed on a separate company basis. In 2016 we purchased the remaining 49% of this company’s stock resulting in their inclusion in the consolidated income tax return. Due to the limitations that will apply to utilizing the subsidiary’s net operating loss, the valuation allowance equals 100% of the subsidiary’s net operating loss, which will start expiring in the year 2028. The reduction in the valuation allowance is attributable to the reduction in the enacted tax rate.
We did not have any gross unrecognized tax benefits that would exceed a materiality threshold and therefore, there was no reduction to Retained Earnings in our Consolidated Balance Sheets at January 1, 2017. The gross unrecognized tax benefit did not exceed the materiality threshold as of December 31, 2017.
The Company is not currently under examination by the IRS and the statute of limitations has expired for all years prior to 2014.