Note 14 – Federal Income Taxes
A reconciliation of the effective tax rate to the statutory federal tax rate is shown below (in thousands, except percentages):
| Years ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
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Income tax expense before tax on equity in earnings of unconsolidated affiliates |
$ | 108,240 | 27.3 | % | $ | 69,712 | 27.2 | % | $ | 94,041 | 27.2 | % | ||||||||||||
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Tax on equity in earnings of unconsolidated affiliates |
30,336 | 7.7 | 20,020 | 7.8 | 27,093 | 7.8 | ||||||||||||||||||
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Total expected income tax expense at the statutory rate |
138,576 | 35.0 | 89,732 | 35.0 | 121,134 | 35.0 | ||||||||||||||||||
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Tax-exempt investment income |
(6,887 | ) | (1.7 | ) | (7,834 | ) | (3.1 | ) | (7,589 | ) | (2.2 | ) | ||||||||||||
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Deferred tax change (including Tax Reform) |
(217,622 | ) | (55.0 | ) | 6,699 | 2.6 | — | — | ||||||||||||||||
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Dividend exclusion |
(8,701 | ) | (2.2 | ) | (8,490 | ) | (3.3 | ) | (8,183 | ) | (2.4 | ) | ||||||||||||
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Miscellaneous tax credits, net |
(9,524 | ) | (2.4 | ) | (9,993 | ) | (3.9 | ) | (9,103 | ) | (2.6 | ) | ||||||||||||
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Low income housing tax credit expense |
5,263 | 1.3 | 4,795 | 1.9 | 4,862 | 1.4 | ||||||||||||||||||
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Other items, net |
1,905 | 0.5 | (3,885 | ) | (1.5 | ) | 2,599 | 0.8 | ||||||||||||||||
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Provision for federal income tax before interest expense |
(96,990 | ) | (24.5 | ) | 71,024 | 27.7 | 103,720 | 30.0 | ||||||||||||||||
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Interest expense (benefit) |
(2,686 | ) | (0.7 | ) | 2,686 | 1.1 | — | — | ||||||||||||||||
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Total |
$ | (99,676 | ) | (25.2 | )% | $ | 73,710 | 28.8 | % | $ | 103,720 | 30.0 | % | |||||||||||
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On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted. Tax Reform includes numerous changes to existing federal income tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. We have recorded a provisional benefit of $206.4 million in our 2017 financial statements. As a result of the enactment of Tax Reform, we remeasured our existing deferred tax balances at the new 21% corporate income tax rate. Additionally, we have made a reasonable estimate to evaluate the impact of Tax Reform on our 2017 financial statements, including evaluating the impact of changes in calculating income tax reserves for both our life and property and casualty insurance products. Pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”) this provisional tax benefit is a reasonable estimate which may be adjusted for current and future periods, possibly materially, due to among other things, further refinement of our calculations, changes in interpretations and assumptions we have made, tax guidance that may be issued and action we may take as a result of Tax Reform.
The tax effects of temporary differences that gave rise to the deferred tax assets and liabilities are shown below (in thousands):
| December 31, | ||||||||
| 2017 | 2016 | |||||||
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DEFERRED TAX ASSETS |
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Invested assets, principally due to impairment losses |
$ | 23,570 | $ | 41,982 | ||||
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Investment in real estate and other invested assets, principally due to investment valuation allowances |
8,547 | 10,028 | ||||||
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Policyholder funds, principally due to policy reserve discount |
90,480 | 159,351 | ||||||
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Policyholder funds, principally due to unearned premium reserve |
23,001 | 35,207 | ||||||
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Participating policyholders’ surplus |
34,538 | 54,023 | ||||||
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Pension |
26,274 | 57,388 | ||||||
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Commissions and other expenses |
3,796 | 6,563 | ||||||
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Other assets |
15,745 | 37,250 | ||||||
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Tax carryforwards |
60 | 278 | ||||||
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Gross deferred tax assets |
226,011 | 402,070 | ||||||
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DEFERRED TAX LIABILITIES |
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Marketable securities, principally due to net unrealized gains |
253,526 | 329,464 | ||||||
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Investment in bonds, principally due to differences between GAAP and tax basis |
12,547 | 20,875 | ||||||
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Deferred policy acquisition costs, due to difference between GAAP and tax amortization methods |
220,809 | 342,888 | ||||||
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Property, plant and equipment, principally due to difference between GAAP and tax depreciation methods |
19,203 | 27,490 | ||||||
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Other liabilities |
36,296 | 48,840 | ||||||
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Gross deferred tax liabilities |
542,381 | 769,557 | ||||||
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Total net deferred tax liability |
$ | 316,370 | $ | 367,487 | ||||
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American National made income tax payments of $33,640,000, $33,367,000 and $80,759,000 during 2017, 2016, and 2015, respectively.
Management believes that a sufficient taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of December 31, 2017 and 2016. There are no net operating or capital loss tax carryforwards that will expire by December 31, 2017.
American National’s federal income tax returns for years 2014 to 2016 are subject to examination by the Internal Revenue Service. The years 2005 to 2009 have been closed by the Internal Revenue Service and we have received $10.8 million in refunds related to those years. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld. No provision for penalties or interest were established during 2017 relating to a dispute with the Internal Revenue Service. Management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.