Federal Income TaxesOn December 22, 2017, the United States enacted the TCJA which, among other changes, reduced the U.S. federal tax rate from 35.0% to 21.0% beginning on January 1, 2018. The estimated effects of enactment of TCJA are reflected in the net deferred tax asset that is reported on the Company's balance sheet at December 31, 2017.
The following table sets forth the reconciliation between actual federal income tax (benefit) expense and the amount computed at the indicated statutory rate for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | | | | | | | | | | | |
($ millions) | 2017 | | 2016 | | 2015 |
Amount at statutory rate | $ | 11.7 |
| | 35.0 | % | | $ | 6.7 |
| | 35.0 | % | | $ | 23.5 |
| | 35.0 | % |
Tax-exempt interest and dividends received deduction | (5.7 | ) | | (17.1 | ) | | (7.1 | ) | | (37.2 | ) | | (8.7 | ) | | (13.0 | ) |
Other, net | 1.7 |
| | 5.4 |
| | (1.4 | ) | | (7.2 | ) | | 1.3 |
| | 1.9 |
|
Federal income tax expense (benefit) | 7.7 |
| | 23.3 |
| | (1.8) |
| | (9.4 | )% | | 16.1 |
| | 23.9 | % |
Impact of TCJA at enactment | 36.4 |
| | 108.7 |
| | — |
| | — |
| | — |
| | — |
|
Federal income tax expense (benefit) | $ | 44.1 |
| | 132.0 | % | | $ | (1.8 | ) | | (9.4 | )% | | $ | 16.1 |
| | 23.9 | % |
| | | | | | | | | | | |
Total income tax expense for 2017 included a provisional net charge of $36.4 million to reflect the change in tax laws and tax rates included in TCJA at the date of enactment, resulting primarily from revaluing the Company's deferred tax assets and liabilities.
In computing taxable income, property and casualty insurers are required to discount their unpaid loss reserves. TCJA changes the prescribed interest rates to rates based on corporate bond yield curves, requires the use of IRS-prescribed claims payment patterns and extends the applicable time periods for the claims payment patterns. These changes are effective for tax years beginning after 2017 and are subject to a transition rule that spreads the additional tax payment from the amount determined by applying these changes over the subsequent eight years beginning in 2018. The pre-tax provisional change in discounted loss reserves attributable to the TCJA changes to loss reserve discounting is determined to be $50.9 million. As a result of changes to the IRS Code, deferred tax assets were increased by that amount, with an offsetting deferred tax liability. The deferred tax liability will be amortized over a period of eight years beginning in 2018. This item is a taxable temporary difference and has no direct impact on total tax expense for 2017 and future years. The provisional amount will be adjusted once the IRS publishes the official discount factors that should be used.
Income taxes for the year ended December 31, 2016 reflect the impact of a correction of prior period deferred tax expense related to expired stock options. As a result of the correction, deferred federal income tax expense (“other, net” above) and additional paid-in-capital were reduced by $1.6 million, respectively.
The following table sets forth the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016:
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| | | | | | | |
($ millions) | 2017 | | 2016 |
Deferred tax assets: | | | |
Unearned premiums not currently deductible | $ | 25.5 |
| | $ | 42.6 |
|
Losses and loss expenses payable discounting | 22.0 |
| | 19.7 |
|
Postretirement and pension benefits | 13.6 |
| | 26.1 |
|
Realized loss on other-than-temporary impairment | 2.1 |
| | 5.8 |
|
Other liabilities | 9.2 |
| | 16.6 |
|
Net operating loss carryforward | 34.3 |
| | 58.9 |
|
Tax credit carryforward | 3.7 |
| | 3.3 |
|
Other | 2.5 |
| | 7.0 |
|
Total deferred tax assets | 112.9 |
| | 180.0 |
|
Deferred tax liabilities: | | | |
Deferral of policy acquisition costs | 24.7 |
| | 45.4 |
|
Net unrealized holding gains on investments | 20.3 |
| | 32.5 |
|
Losses and loss expenses payable discounting (transition rule) | 10.7 |
| | — |
|
Total deferred tax liabilities | 55.7 |
| | 77.9 |
|
Net deferred federal income taxes | $ | 57.2 |
| | $ | 102.1 |
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Deferred income tax assets and liabilities represent the tax effect of the differences between the financial statement carrying value of existing assets and liabilities and their respective tax bases. The Company periodically evaluates its deferred tax assets,
which requires significant judgment, to determine if they are realizable based upon weighing all available evidence, both positive and negative, including loss carryback potential, past operating results, existence of cumulative losses in the most recent years, projected performance of the business, future taxable income, including the ability to generate capital gains, and prudent and feasible tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
At December 31, 2017, the tax benefit of the net operating loss (“NOL”) carryforward was $34.3 million. The NOL carryforwards do not begin to expire until 2030 and will not fully expire until 2036.
At December 31, 2017, the Company carried no balance for uncertain tax positions. The Company had no accrual for the payment of interest and penalties at December 31, 2017 or 2016.
State Auto Financial and its subsidiaries file a consolidated U.S. federal income tax return. State Auto Financial and its subsidiaries also file in various state jurisdictions. The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 2014. The Company has no current U.S. federal or state and local income tax examinations on-going at this time.