EVEREST REINSURANCE HOLDINGS INC

10. INCOME TAXES

All of the income of Holdings U.S. subsidiaries, including its foreign branches, is subject to the applicable federal, foreign, state and local income taxes on corporations. The provision for income taxes in the consolidated statement of operations and comprehensive income (loss) has been determined by applying the respective tax laws to the income of each entity. The TCJA enacted on December 22, 2017 caused the Company to record an income tax benefit of $123,143 thousand in 2017. The income tax provision reflects the lower 21% tax expense/(benefit) to be realized by the Company under the TCJA upon the reversal of the temporary differences in its deferred tax inventory account versus the 35% tax expense/(benefit) that had been expected to be realized before the TCJA. The significant components of the provision are as follows for the periods indicated:


	Years Ended December 31,
(Dollars in thousands)	2017			2016		2015
Current tax expense (benefit):
U.S.	$	(123,083	)	$	16,004	$	55,354
Foreign		221			12,682		30,373
Total current tax expense (benefit)		(122,862	)		28,686		85,727
Total deferred U.S. tax expense (benefit)		(78,318	)		68,661		109,169
Total income tax expense (benefit)	$	(201,180	)	$	97,347	$	194,896

A reconciliation of the total income tax provision using the statutory U.S. Federal Income tax rate to the Company's total income tax provision is as follows for the period indicated:


	Years Ended December 31,
(Dollars in thousands)	2017			2016			2015
Expected income tax provision at the U.S. statutory tax rate	$	(43,044	)	$	139,646		$	212,548
Increase (reduction) in taxes resulting from:
Tax exempt income		(8,488	)		(9,078	)		(10,004	)
Dividend received deduction		(4,063	)		(4,335	)		(4,851	)
Proration		1,760			1,931			2,160
Creditable foreign premium tax		(7,515	)		(6,134	)		(7,492	)
Tax audit settlement		(11,565	)		(19,204	)		-
Share based compensation tax benefits formerly in APIC		(3,308	)		-			-
Impact of U.S. tax reform		(123,143	)		-			-
Other		(1,814	)		(5,479	)		2,535
Total income tax provision	$	(201,180	)	$	97,347		$	194,896

(Some amounts may not reconcile due to rounding.)

During 2016, the Internal Revenue Service ("IRS") completed its audit of the Company for the 2009 through 2013 tax years and issued a final Revenue Agent Report ("RAR"). The RAR reflected that the IRS owed the Company a net refund for the five years of $44,241 thousand plus interest of $1,326 thousand. The net refund due to the Company resulted primarily from the carryback of capital losses incurred in 2009 and 2010 to 2006 and 2007, from the conversion of foreign premium tax deductions into Foreign Tax Credits ("FTCs") and from increased utilization of such FTCs as well as the increased utilization of Alternative Minimum Tax ("AMT") credit carryforwards. The gross refunds, by year, which were $5,000 thousand or greater, had to be reviewed and approved by IRS Joint Committee and were approved in July, 2017. The Company received the expected tax refunds from the IRS in early 2018.

The company's 2014 and subsequent tax years are open to audit by the IRS.

In addition, the Company subsequently filed amended tax returns for 2006, 2007, 2008, the RAR years and 2014 and plans to file amended 2015 and 2016 tax returns for $29,385 thousand in additional net refunds plus interest. These additional net refunds also result primarily from the conversion of foreign premium tax deductions into FTCs.

The Company has no reserve for uncertain tax positions.

Deferred income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by U.S. tax laws and regulations. Under the TCJA, temporary differences at December 31, 2017, are now expected to reverse at a 21% tax rate whereas at December 31, 2016, such items were expected to reverse at a 35% tax rate. The principal items making up the net deferred income tax assets/(liabilities) are as follows for the periods indicated:


	At December 31,
(Dollars in thousands)	2017			2016
Deferred tax assets:
Unearned premium reserve	$	55,034		$	37,573
Loss reserve		52,649			104,547
Net unrecognized losses on benefit plans		19,120			35,271
Foreign tax credits		15,913			-
Benefit plan liability		10,417			14,576
Uncollectible reinsurance reserve		3,320			5,534
Deferred expenses		1,759			2,884
Investment impairments		1,144			3,093
Unrealized foreign currency losses		547			28,111
Other assets		8,633			10,845
Total deferred tax assets		168,536			242,434

Deferred tax liabilities:
Net fair value income		252,349			398,270
Deferred acquisition costs		64,997			26,652
Net unrealized investment gains		12,819			20,626
Gain on tender of debt		3,287			10,958
Partnership Investments		2,019			11,269
Bond market discount		1,243			1,092
Other liabilities		840			2,008
Total deferred tax liabilities		337,554			470,875

Net deferred tax assets/(liabilities)	$	(169,018	)	$	(228,441	)

(Some amounts may not reconcile due to rounding.)

At December 31, 2017, the Company has $15,913 thousand FTCs and no AMT credit carry forwards. The FTCs expire at the end of 2027. Management believes that it is more likely than not that the Company will realize all of its deferred tax assets. Accordingly, no valuation allowance has been recorded for the periods presented.

The Company has adopted the provisions of SAB 118 with respect to measuring the tax effects for the modifications to the determination of tax basis loss reserves enacted by the TCJA. Modifications include the extension of long-tail payment patterns out 24 years, and the use of an interest rate based upon the corporate bond yield curve. The IRS is required to provide discount factors following these new parameters based upon industry loss payment data. Because of uncertainty in how the Treasury/IRS intend to implement the modifications and the necessary transition calculation, the Company has determined that a reasonable estimate cannot be determined, and has followed the provisions of the tax laws that were in effect prior to the modifications.

The Company has made a provisional estimated tax benefit of the effects of the TCJA on its' deferred tax inventory at December 31, 2017 of $123,143 thousand. Any adjustments, if necessary, during the measurement period guidance outlined in SAB 118 will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.

Effective January 1, 2017, the Company adopted ASU 2016-09 which provided new guidance on the treatment of the tax effects of share based compensation transactions. ASU 2016-09 required that the income tax effects of restricted stock vestings and stock options exercised resulting from the change in value of share based compensation awards between the grant date and settlement (vesting/exercising) date be recorded as part of income tax expense (benefit) within the consolidated statements of operations and comprehensive income (loss). Per the new guidance, the Company recorded excess tax benefits of $3,308 thousand related to restricted stock vestings and stock option exercises as part of income tax expense (benefit) within the consolidated statements of operations and comprehensive income (loss) in 2017.

In years prior to 2017, the Company recorded tax benefits related to restricted stock vestings and stock option exercises as part of additional paid-in capital in the stockholder's equity section of the consolidated balance sheets. In 2016, the Company recorded excess tax benefits of $3,028 thousand related to restricted stock vestings and stock option exercises as part of additional paid-in capital.

The adoption of ASU 2016-09 did not impact the accounting treatment of tax benefits related to dividends on restricted stock. The tax benefits related to the payment of dividends on restricted stock have been recorded as part of additional paid-in capital in the stockholder's equity section of the consolidated balance sheets in all years. The tax benefits related to the payment of dividends on restricted stock were $287 thousand and $263 thousand in 2017 and 2016 respectively.