Income Taxes
Income tax expense (benefits) consists of:
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| | | | | | | | | | | |
(In thousands) | Current Expense (Benefit) | | Deferred (Benefit) Expense | | Total |
December 31, 2017 | |
| | |
| | |
|
Domestic | $ | 225,694 |
| | $ | (27,601 | ) | | $ | 198,093 |
|
Foreign | 8,803 |
| | 12,537 |
| | 21,340 |
|
Total expense | $ | 234,497 |
| | $ | (15,064 | ) | | $ | 219,433 |
|
| | | | | |
December 31, 2016 | |
| | |
| | |
|
Domestic | $ | 259,539 |
| | $ | 3,355 |
| | $ | 262,894 |
|
Foreign | 23,634 |
| | 6,425 |
| | 30,059 |
|
Total expense | $ | 283,173 |
| | $ | 9,780 |
| | $ | 292,953 |
|
| | | | | |
December 31, 2015 | |
| | |
| | |
|
Domestic | $ | 179,150 |
| | $ | 31,145 |
| | $ | 210,295 |
|
Foreign | (2,318 | ) | | 19,946 |
| | 17,628 |
|
Total expense | $ | 176,832 |
| | $ | 51,091 |
| | $ | 227,923 |
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Income before income taxes from domestic operations was $797 million, $837 million and $689 million for the years ended December 31, 2017, 2016 and 2015, respectively. Income (loss) before income taxes from foreign operations was ($25) million, $59 million and $43 million for the years ended December 31, 2017, 2016 and 2015, respectively.
A reconciliation of the income tax expense and the amounts computed by applying the Federal and foreign income tax rate of 35% to pre-tax income are as follows:
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| | | | | | | | | | | |
(In thousands) | 2017 | | 2016 | | 2015 |
Computed “expected” tax expense | $ | 270,470 |
| | $ | 313,753 |
| | $ | 256,210 |
|
Tax-exempt investment income | (37,209 | ) | | (37,379 | ) | | (39,283 | ) |
Change in valuation allowance | 11,161 |
| | 1,420 |
| | 2,702 |
|
Impact of foreign tax rates | 3,508 |
| | 1,984 |
| | 4,447 |
|
State and local taxes | 1,644 |
| | 7,748 |
| | 940 |
|
Impact of change in U.S. tax rate | (30,531 | ) | | — |
| | — |
|
Other, net | 390 |
| | 5,427 |
| | 2,907 |
|
Total expense | $ | 219,433 |
| | $ | 292,953 |
| | $ | 227,923 |
|
At December 31, 2017 and 2016, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:
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| | | | | | | |
(In thousands) | 2017 | | 2016 |
Deferred tax asset: | |
| | |
|
Loss reserve discounting | $ | 70,206 |
| | $ | 86,659 |
|
Unearned premiums | 110,854 |
| | 187,522 |
|
Net operating losses | 33,043 |
| | 6,179 |
|
Other-than-temporary impairments | 8,204 |
| | 26,139 |
|
Employee compensation plans | 59,037 |
| | 90,998 |
|
Other | 49,346 |
| | 79,842 |
|
Gross deferred tax asset | 330,690 |
| | 477,339 |
|
Less valuation allowance | (16,619 | ) | | (5,457 | ) |
Deferred tax asset | 314,071 |
| | 471,882 |
|
Deferred tax liability: | |
| | |
|
Amortization of intangibles | 12,826 |
| | 21,192 |
|
Deferred policy acquisition costs | 100,020 |
| | 173,481 |
|
Unrealized investment gains | 151,162 |
| | 238,232 |
|
Property, furniture and equipment | 31,865 |
| | 34,857 |
|
Investment funds | 41,104 |
| | 85,075 |
|
Other | 63,858 |
| | 53,410 |
|
Deferred tax liability | 400,835 |
| | 606,247 |
|
Net deferred tax liability | $ | 86,764 |
| | $ | 134,365 |
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The Company had a current tax payable of $11,327,000 and a receivable of $14,768,000 at December 31, 2017 and 2016, respectively. At December 31, 2017, the Company had foreign net operating loss carryforwards of $6.3 million that expire beginning in 2027, and an additional $156.6 million that have no expiration date. At December 31, 2017, the Company had a valuation allowance of $16.6 million, as compared to $5.5 million at December 31, 2016. The Company has provided a valuation allowance against future tax benefits of certain foreign operations. The statute of limitations has closed for the Company’s U.S. Federal tax returns through December 31, 2013.
The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset.
The Tax Cuts and Jobs Act of 2017 (the Tax Act) was enacted on December 22, 2017. The Tax Act provides for a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also provides for a mandatory repatriation of foreign earnings, which requires companies to pay a one-time tax on the unremitted accumulated earnings of their foreign subsidiaries.
The Company has calculated the effects of the Tax Act as of December 31, 2017 and has included in its financial statements provisional estimates of its impact. The Company anticipates further guidance will be forthcoming and will continue to review and refine its calculations as guidance is provided and additional analysis of the Company's information is completed.
In 2017, the Company reported a net tax benefit related to the Tax Act in the amount of $20.7 million. This included a tax benefit due to the reduction of the tax rate as applied to the net U.S. deferred tax liability in the amount of $30.5 million. Offsetting this tax benefit, the Company recorded a provisional charge of $9.8 million on the deemed repatriation of earnings and related impact of utilization of foreign losses. The charge may be adjusted as the applicable earnings related to the foreign subsidiaries are finalized for the purpose of the mandatory repatriation inclusion computation.
As noted above, as a result of the mandatory repatriation provision of the Tax Act, the Company recognized a tax on the undistributed earnings of its foreign subsidiaries. The Company intends to continue its policy to permanently reinvest the undistributed earnings of its foreign subsidiaries.