|
Note 12. |
Income Taxes |
The following table summarizes the provision for income taxes:
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
|
|
(In thousands) |
|
|||||||||
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
(24,380 |
) |
|
$ |
16,575 |
|
|
$ |
48,524 |
|
|
Deferred |
|
|
18,383 |
|
|
|
2,735 |
|
|
|
970 |
|
|
Provision for Federal income tax (benefit) expense |
|
|
(5,997 |
) |
|
|
19,310 |
|
|
|
49,494 |
|
|
State: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
(20 |
) |
|
|
2,893 |
|
|
|
8,238 |
|
|
Deferred |
|
|
1,244 |
|
|
|
335 |
|
|
|
46 |
|
|
Provision for State income tax expense |
|
|
1,224 |
|
|
|
3,228 |
|
|
|
8,284 |
|
|
(Benefit) provision for income taxes |
|
$ |
(4,773 |
) |
|
$ |
22,538 |
|
|
$ |
57,778 |
|
The income tax (benefit) expense differs from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax income as a result of the following (in thousands):
|
|
|
For the Year Ended December 31, |
|
|||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|||
|
Expected income tax expense at federal rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
State tax expense |
|
|
(22.8 |
)% |
|
|
3.7 |
% |
|
|
3.6 |
% |
|
Permanent items |
|
|
(2.3 |
)% |
|
|
0.2 |
% |
|
|
(0.1 |
)% |
|
Non-deductible conversion option liability |
|
|
(255.0 |
)% |
|
|
— |
|
|
|
— |
|
|
Non-deductible stock compensation |
|
|
(26.0 |
)% |
|
|
0.1 |
% |
|
|
— |
|
|
Tax exempt interest |
|
|
27.0 |
% |
|
|
(2.1 |
)% |
|
|
(0.6 |
)% |
|
Non-deductible acquisition costs |
|
|
(15.2 |
)% |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
Executive compensation 162(m) |
|
|
(11.5 |
)% |
|
|
1.1 |
% |
|
|
— |
|
|
Political contributions |
|
|
(7.8 |
)% |
|
|
0.7 |
% |
|
|
0.1 |
% |
|
Tax rate change |
|
|
362.3 |
% |
|
|
— |
|
|
|
— |
|
|
Other |
|
|
(2.7 |
)% |
|
|
1.1 |
% |
|
|
0.4 |
% |
|
Reported income tax expense |
|
|
81.0 |
% |
|
|
40.0 |
% |
|
|
38.5 |
% |
The effective income tax rate differs from the statutory income tax rate in 2017 primarily due to the non-deductible stock option, non-deductible valuation of the conversion option liability (refer to Note 11 - Long Term Debt) offset by the change in the tax rate change associated with the Tax Act.
The Tax Act was signed into law on December 22, 2017 and contains several key provisions that impact the Company's business, including the reduction of the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, the reduction in the amount of executive compensation that could qualify as a tax deduction, and a change in how property and casualty taxpayers discount loss reserves. Under current accounting guidance, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. However, due to the timing of the enactment of the Tax Act and its proximity to December 31, 2017, the SEC issued SAB 118 which provides a framework for companies to account for uncertainties in applying the provisions of the Tax Act. SAB 118 allows companies to record a provisional amount in situations where a company does not have the necessary information available but can make a reasonable estimate. In situations where companies cannot make a reasonable estimate due to various factors, including lack of information, a provisional amount is not recorded. Instead, companies will continue to apply current accounting guidance based on the provision of the tax laws that were in effect immediately prior to the Tax Act being enacted. The measurement period, as defined in SAB 118 for the Tax Act, begins on the enactment date of the Tax Act and ends when a company has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements under current accounting guidance. However, under no circumstances will the measurement period extend beyond one year from the enactment date of the Tax Act.
The Company has completed its accounting for the impact of the effective tax rate change from 35% to 21%. As a result, the Company recorded a $21.3 million benefit to operations for the reduction in the deferred tax liability as of December 22, 2017.
In addition, due to the lack of guidance, the Company was unable to provide a provisional estimate for the impacts of computing property and casualty reserves. The Tax Act changes the way that companies calculate their insurance reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that have not been published. Any resulting transitional deferred tax liability and offsetting increase in the Company’s property and casualty reserves will completely offset and will have no impact on the effective tax rate. In accordance with SAB 118, the reserve transitional deferred tax liability (and offsetting adjustment to the related deferred tax assets) and any other changes in deferred taxes resulting from clarification and interpretation of the Tax Act provided during 2018 will be recorded in the period in which the guidance is published.
|
|
|
For the Year Ended December 31, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Deferred tax assets: |
|
(In thousands) |
|
|||||
|
Unearned premiums |
|
$ |
12,488 |
|
|
$ |
17,209 |
|
|
Unearned commission |
|
|
11,987 |
|
|
|
— |
|
|
Net operating loss |
|
|
4,727 |
|
|
|
— |
|
|
Tax-related discount on loss reserve |
|
|
1,250 |
|
|
|
1,829 |
|
|
Unrealized loss |
|
|
— |
|
|
|
3,113 |
|
|
Stock-based compensation |
|
|
— |
|
|
|
1,604 |
|
|
Prepaid expenses |
|
|
1,950 |
|
|
|
1,482 |
|
|
Other |
|
|
331 |
|
|
|
312 |
|
|
Total deferred tax asset |
|
|
32,733 |
|
|
|
25,549 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
9,775 |
|
|
|
16,377 |
|
|
Prepaid expenses |
|
|
27,568 |
|
|
|
— |
|
|
Unrealized gain |
|
|
30 |
|
|
|
— |
|
|
Property and equipment |
|
|
— |
|
|
|
355 |
|
|
Note discount |
|
|
3,818 |
|
|
|
— |
|
|
Basis in purchased investments |
|
|
335 |
|
|
|
1,697 |
|
|
Basis in purchased intangibles |
|
|
24,250 |
|
|
|
9,791 |
|
|
Other |
|
|
1,290 |
|
|
|
332 |
|
|
Total deferred tax liabilities |
|
|
67,066 |
|
|
|
28,552 |
|
|
Net deferred tax liability |
|
$ |
(34,333 |
) |
|
$ |
(3,003 |
) |
As of December 31, 2017, the Company has net operating loss carryforwards for federal and state income tax purposes of $13.1 million and $76.2 million, respectively. The losses will expire between 2026 and 2037. In addition, the Company has a $300 thousand capital loss carryforward which will expire in 2018.
In assessing the net carrying amount of deferred tax assets, we consider whether it is more likely than not that we will not realize some portion or all of the deferred tax assets. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The remaining goodwill from asset purchases that is deductible for tax purposes over the future years totaled $6.5 million and $7 million for the years ended December 31, 2017 and 2016, respectively. We had non-deductible goodwill for $144.4 million and $38.4 million for the years ended December 31, 2017 and 2016, respectively.
The statute of limitations related to our federal and state income tax returns remains open from our filings for 2014 through 2016. For the 2014 tax year, the federal income tax return was examined by the tax authority resulting in no material adjustment. Currently, no taxing authorities are examining any of our federal or state income tax returns.
The reinsurance affiliate, which is based in Bermuda, made an irrevocable election under section 953(d) of the U.S. Internal Revenue Code of 1986, as amended, to be treated as a domestic insurance company for U.S. Federal income tax purposes. As a result of this election, our reinsurance subsidiary is subject to United States income tax as if it were a U.S. corporation.
As of December 31, 2017, the Company had no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate.