Employers Holdings, Inc.

Income Taxes

The Company files a consolidated federal income tax return. The insurance subsidiaries pay premium taxes on gross premiums written in lieu of some states' income or franchise taxes.

The Tax Cuts and Jobs Act significantly revised U.S. corporate income tax law by, among other things, reducing the corporate statutory income tax rate from 35% to 21%, beginning January 1, 2018. This reduction in the corporate statutory income tax rate required the Company to re-evaluate certain of its deferred tax assets and liabilities, as of the date of Enactment, to reflect the revised income tax rates applicable to future periods.

The Company believes that it has made a reasonable estimate of the income tax effects of the Tax Cuts and Jobs Act as of and for the year ended December 31, 2017. However, the Company was required to base certain of its estimates and assumptions on incomplete information and/or preliminary interpretations of the effects of Enactment. As a result, the Company may need to reflect further adjustments to its deferred tax assets and liabilities recorded as of December 31, 2017 in future periods upon obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of that date that, if known at that time, would have affected the income tax effects initially reported. The Company does not expect the amounts of any future income tax adjustments that may be required to be made to the Company’s deferred tax assets and liabilities as of December 31, 2017 to be material.

The Company's provision for income taxes consisted of the following:



	Years Ended December 31,
	2017		2016		2015
Current tax expense:	(in millions)
Federal	$	17.9	$	20.3	$	9.5
State	0.7		0.3		1.1
Total current tax expense	18.6		20.6		10.6
Deferred federal tax expense (benefit):
Impact of tax Enactment	7.0		—		—
Other	17.2		13.4		(5.6		)
Total deferred federal tax expense (benefit)	24.2		13.4		(5.6		)
Income tax expense	$	42.8	$	34.0	$	5.0

The difference between the statutory federal tax rate of 35% and the Company's effective tax rate on net income before income taxes as reflected in the Consolidated Statements of Comprehensive Income was as follows:



	Years Ended December 31,
	2017			2016			2015
	(in millions)
Expense computed at statutory rate	$	50.4		$	49.3		$	34.8
Tax-advantaged investment income	(7.6		)	(8.5		)	(8.6		)
Pre-Privatization reserve adjustments, excluding LPT	—			—			(15.3		)
LPT deferred gain amortization	(4.0		)	(4.7		)	(4.9		)
LPT Reserve Adjustment	—			(1.1		)	(2.2		)
Stock based compensation	(3.4		)	(1.6		)	—
Impact of tax Enactment	7.0			—			—
Other	0.4			0.6			1.2
Income tax expense	$	42.8		$	34.0		$	5.0

On January 1, 2000, EICN assumed the assets, liabilities, and operations of the Fund pursuant to legislation passed in the 1999 Nevada Legislature (the Privatization). Prior to the Privatization, the Fund was a part of the State of Nevada and therefore was not subject to federal income tax; accordingly, it did not take an income tax deduction with respect to the establishment of its unpaid loss and LAE reserves. Due to favorable loss experience after the Privatization, it was determined that certain of the pre-Privatization unpaid loss and LAE reserves assumed by EICN as part of the Privatization were no longer necessary and the unpaid loss and LAE reserves were reduced accordingly. Such a downward adjustment of pre-Privatization unpaid loss reserves increased GAAP net income by $15.3 million for the year ended December 31, 2015, but did not increase taxable income. There were no downward adjustments of pre-Privatization unpaid loss reserves for the years ended December 31, 2017 and 2016. A downward adjustment of pre-Privatization unpaid loss reserves, excluding the LPT, was $56.3 million for the year ended December 31, 2015.

The LPT Reserve Adjustments for the years ended December 31, 2016 and 2015 increased GAAP net income by $3.1 million and $6.4 million, respectively, but did not increase taxable income. There were no LPT Reserve Adjustments in 2017. The LPT Contingent Commission Adjustments increased net income by $0.3 million, $1.8 million, and $2.6 million during 2017, 2016, and 2015, respectively, but did not increase taxable income.

As of December 31, 2017 and 2016, the Company had no unrecognized tax benefits.

The Company paid $21.3 million, $13.7 million and $12.7 million in income taxes during the years ended December 31, 2017, 2016, and 2015, respectively.

Tax years 2014 through 2017 remained open and are subject to full examination by the federal taxing authority. The significant components of deferred income taxes, net, were as follows as of December 31:



	2017				2016
	Deferred Tax				Deferred Tax
	Assets		Liabilities		Assets		Liabilities
	(in millions)
Unrealized capital gains, net	$	—	$	28.5	$	—	$	40.1
Deferred policy acquisition costs	—		9.7		—		15.7
Intangible assets	—		1.7		—		2.9
Loss reserve discounting for tax reporting	29.0		—		51.7		—
Unearned premiums	12.8		—		20.9		—
Allowance for bad debt	2.1		—		3.4		—
Stock-based compensation	2.5		—		4.4		—
Accrued liabilities	4.2		—		8.1		—
Minimum tax credit	20.0		—		27.8		—
Other	2.8		4.8		9.7		7.9
Total	$	73.4	$	44.7	$	126.0	$	66.6
Deferred income taxes, net	$	28.7			$	59.4

Enactment had no impact on the amount of the Company's minimum tax credit as of December 31, 2017. Despite a repeal of the corporate alternative minimum tax, the Company's minimum tax credit will be recognized (subject to annual limits) over the period from January 1, 2018 through December 31, 2021.

Deferred tax assets are required to be reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. Realization of the deferred income tax asset is dependent on the Company generating sufficient taxable income in future years as the deferred income tax charges become deductible for tax reporting purposes. Although realization is not assured, management believes that it is more likely than not that the net deferred income tax asset will be realized.