TORCHMARK CORP

Income Taxes

The components of income taxes were as follows:



	Year Ended December 31,
	2017			2016		2015
Income tax expense (benefit) from continuing operations	$	(627,615	)	$	232,645	$	249,894

Shareholders’ equity:
Other comprehensive income (loss)	318,475			186,206		(411,646		)
Tax basis compensation expense (from the exercise of stock options and vesting of restricted stock awards) in excess of amounts recognized for financial reporting purposes	—			—		(17,577		)
	$	(309,140	)	$	418,851	$	(179,329	)

Income tax (benefit) expense from continuing operations consists of:



	Year Ended December 31,
	2017			2016		2015
Current income tax (benefit) expense	$	138,262		$	132,806	$	174,284
Deferred income tax (benefit) expense	(765,877		)	99,839		75,610
	$	(627,615	)	$	232,645	$	249,894

In each of the years 2015 through 2017, deferred income tax (benefit) expense was incurred because of certain differences between net income before income taxes as reported on the Consolidated Statements of Operations and taxable income as reported on Torchmark’s income tax returns. As explained in Note 1—Significant Accounting Policies, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.

As discussed in Note 1—Significant Accounting Policies, due to the passage of the Tax Legislation before December 31, 2017, the Company recorded $877 million reduction in deferred income tax expense related to a one-time adjustment to reduce its net deferred tax liability as of December 22, 2017, as required by ASC 740 Income Taxes, due to the reduction in the income tax rate. This adjustment to the Company's net deferred tax liability included $252 million related to items included in AOCI.

Although many aspects of the Tax Legislation are not effective until 2018, the Company recorded a reasonable estimate for the tax reform adjustment in accordance with SAB 118. We will continue to analyze relevant information to complete our accounting for income taxes which may result in an adjustment to our estimate in 2018. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed later in 2018.

The effective income tax rate differed from the expected 35% rate as shown below:



	Year Ended December 31,
	2017			%		2016			%		2015			%
Expected income taxes	$	290,727		35.0		$	270,282		35.0		$	268,165		35.0
Increase (reduction) in income taxes resulting from:
Tax reform adjustment	(877,400		)	(105.6	)	—			—		—			—
Low income housing investments	(18,515		)	(2.2	)	(18,202		)	(2.4	)	(19,031		)	(2.5	)
Share-based awards	(19,549		)	(2.4	)	(18,653		)	(2.4	)	—			—
Other	(2,878		)	(0.4	)	(782		)	(0.1	)	760			0.1
Income tax expense (benefit) from continuing operations	$	(627,615	)	(75.6	)	$	232,645		30.1		$	249,894		32.6

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:



	December 31,
	2017		2016
Deferred tax assets:
Fixed maturity investments	$	8,692	$	15,004
Carryover of tax losses	4,760		3,906
Total gross deferred tax assets	13,452		18,910
Deferred tax liabilities:
Unrealized gains	380,251		315,509
Employee and agent compensation	65,576		92,131
Deferred acquisition costs	618,889		975,873
Future policy benefits, unearned and advance premiums, and policy claims	248,752		391,451
Other liabilities	11,289		3,987
Total gross deferred tax liabilities	1,324,757		1,778,951
Net deferred tax liability	$	1,311,305	$	1,760,041

Income Tax Return: Torchmark and its subsidiaries, excluding Family Heritage Life Insurance Company (Family Heritage), file a life-nonlife consolidated federal income tax return. Family Heritage files its federal income tax return on a separate company basis. The statutes of limitations for the Internal Revenue Service's examination and assessment of additional tax are closed for all tax years prior to 2014 with respect to Torchmark’s consolidated and Family Heritage’s federal income tax returns. Management believes that adequate provision has been made in the consolidated financial statements for any potential assessments that may result from current or future tax examinations and other tax-related matters for all open years.

Valuations: Torchmark has net operating loss carryforwards of approximately $22.7 million at December 31, 2017 which will begin to expire in 2033 if not otherwise used to offset future taxable income. A valuation allowance is to be provided when it is more likely than not that deferred tax assets will not be realized by the Company. No valuation allowance has been recorded relating to Torchmark’s deferred tax assets as management believes Torchmark will more likely than not have sufficient taxable income in future periods to fully realize its existing deferred tax assets.

Torchmark’s tax liability is adjusted to include a provision for uncertain tax positions taken or expected to be taken in a tax return. However, during the years 2015 through 2017, Torchmark did not have any uncertain tax positions which resulted in unrecognized tax benefits.

Tax penalties: Torchmark’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company recognized interest income of $5 thousand, $9 thousand, and $11 thousand, net of federal income tax expense, in its Consolidated Statements of Operations for 2017, 2016, and 2015, respectively. The Company had no accrued interest or penalties at December 31, 2017 or 2016.