Income Taxes
FGL is a U.S. taxpayer and does not file income tax returns in any foreign jurisdiction other than Puerto Rico. FGL’s non-life subsidiaries file as part of HRG’s consolidated U.S. Federal income tax return. FGL’s insurance company subsidiaries file their own consolidated U.S. Federal life insurance tax return. The income tax liabilities of the FGL members of the consolidated HRG return are calculated using the separate return method.
Income tax (expense) benefit is calculated based upon the following components of income before income taxes:
|
| | | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
Pretax income (loss): | | | | | | |
United States | | $ | 333 |
| | $ | 153 |
| | $ | 182 |
|
Outside the United States | | — |
| | — |
| | — |
|
Total pretax income | | $ | 333 |
| | $ | 153 |
| | $ | 182 |
|
The components of income tax (expense) benefit are as follows:
|
| | | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | (114 | ) | | $ | (5 | ) | | $ | (14 | ) |
State | | — |
| | — |
| | — |
|
Total current | | $ | (114 | ) | | $ | (5 | ) | | $ | (14 | ) |
| | | | | | |
Deferred: | | | | | | |
Federal | | $ | 4 |
| | $ | (51 | ) | | $ | (50 | ) |
State | | — |
| | — |
| | — |
|
Total deferred | | $ | 4 |
| | $ | (51 | ) | | $ | (50 | ) |
| | | | | | |
Income tax (expense)/benefit | | $ | (110 | ) | | $ | (56 | ) | | $ | (64 | ) |
The difference between income taxes expected at the U.S. Federal statutory income tax rate of 35% and reported income tax (expense) benefit is summarized as follows:
|
| | | | | | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 | | 2015 |
Expected income tax (expense)/benefit at Federal statutory rate | | $ | (117 | ) | | $ | (54 | ) | | $ | (64 | ) |
Valuation allowance for deferred tax assets | | 1 |
| | 69 |
| | (1 | ) |
Amortization of low income housing tax credits | | (4 | ) | | (2 | ) | | (1 | ) |
Benefit on LIHTC under proportional amortization method | | 5 |
| | 3 |
| | 1 |
|
Write off of expired capital loss carryforward | | — |
| | (73 | ) | | — |
|
Dividends received deduction | | 4 |
| | 1 |
| | 2 |
|
Other | | 1 |
| | — |
| | (1 | ) |
Reported income tax (expense)/benefit | | $ | (110 | ) | | $ | (56 | ) | | $ | (64 | ) |
| | | | | | |
Effective tax rate | | 33 | % | | 37 | % | | 35 | % |
For the year ended September 30, 2017, the Company’s effective tax rate is 33%. The effective tax rate was positively impacted by a valuation allowance release within the non-life companies and favorable permanent adjustments, including low income housing tax credits and dividends received deduction.
For the year ended September 30, 2016, the Company’s effective tax rate was 37%. The negative impact of the valuation allowance expense of the non-life companies was partially offset by the net impact of positive permanent adjustments, including low income housing tax credits and dividends received deduction. For the year ended September 30, 2016, the remaining unutilized life company capital loss carryforwards deferred tax assets expired and were written off, resulting in $73 in deferred income tax expense which was entirely offset by a valuation allowance release of the same amount.
For the year ended September 30, 2015, the Company’s effective tax rate was 35%. The impact of valuation allowance expense was offset by the net impact of positive permanent adjustments.
For the year ended September 30, 2017, the Company recorded a net valuation allowance release of $1 related to FGL’s non-life companies). For the year ended September 30, 2016, the Company recorded net valuation allowance release of $69 (comprised of a full year valuation allowance release of $74 related to the life insurance companies, offset by a net increase to valuation allowance of $5 related to FGL’s non-life companies). During the year ended September 30, 2016, the remaining unutilized life company capital loss carryforward deferred tax assets expired and were written off, resulting in $73 in deferred income tax expense. Most of the valuation allowance release during the year was attributable to this write-off. For the year ended September 30, 2015, the Company recorded net valuation allowance expense of $1 (comprised of a full year valuation allowance release of $4 related to the life insurance companies, offset by a net increase to valuation allowance of $5 related to FGL’s non-life companies).
The Company records tax (expense) benefit that results from a change in other comprehensive income (“OCI”) directly to OCI. Tax expense recorded directly to OCI includes deferred tax expense arising from a change in unrealized gain (loss) on available-for-sale securities and the tax-effects of other income items that are recorded to OCI. Changes in valuation allowance that are solely due to a deferred tax liability related to the unrealized gain on an available-for-sale security are allocated to other comprehensive income in accordance with ASC 740-10-45-20, "Income Taxes: Other Presentation Matters". For the year ended September 30, 2017, the Company recorded $56 in deferred tax expense to OCI.
An excess tax benefit is the realized tax benefit related to the amount of deductible compensation cost reported on an employer’s tax return for equity instruments in excess of the compensation cost for those instruments recognized for financial reporting purposes. The Company adopted ASU-2016-09 (Stock Compensation) effective October 1, 2015. ASU-2016-09 eliminates the requirement for excess tax benefits to be recorded as additional paid-in capital when realized. For the year ended September 30, 2017, FGL recorded all excess tax benefits in the Consolidated Statements of Operations as a component of current income tax expense in accordance with the newly adopted guidance.
The following table is a summary of the components of deferred income tax assets and liabilities:
|
| | | | | | | | |
| | Year ended September 30, |
| | 2017 | | 2016 |
Deferred tax assets: | | | | |
Net operating loss, credit and capital loss carryforwards | | $ | 91 |
| | $ | 93 |
|
Insurance reserves and claim related adjustments | | 601 |
| | 511 |
|
Investments | | — |
| | — |
|
Other | | 75 |
| | 44 |
|
Valuation allowance | | (49 | ) | | (51 | ) |
Total deferred tax assets | | $ | 718 |
| | $ | 597 |
|
| | | | |
Deferred tax liabilities: | | | | |
Value of business acquired | | $ | — |
| | $ | (7 | ) |
Investments | | (456 | ) | | (312 | ) |
Deferred acquisition costs | | (316 | ) | | (277 | ) |
Other | | (8 | ) | | (11 | ) |
Total deferred tax liabilities | | $ | (780 | ) | | $ | (607 | ) |
| | | | |
Net deferred tax assets and (liabilities) | | $ | (62 | ) | | $ | (10 | ) |
At September 30, 2017, the Company’s valuation allowance of $49 consisted of a valuation allowance of $0 on life company deferred tax assets and a full valuation allowance of $49 on FGL’s non−life insurance net deferred taxes. At September 30, 2016, the Company’s valuation allowance of $51 consisted of a valuation allowance of $0 on life company deferred tax assets and a full valuation allowance of $51 on FGL’s non−life insurance net deferred taxes. The life company's remaining capital loss carryforwards expired on December 31, 2015, and the capital loss carryforward deferred tax assets and related valuation allowance were written off at that time.
The Company maintains a valuation allowance against the deferred tax assets of its non-life insurance company subsidiaries. The non-life insurance company subsidiaries have a history of losses and insufficient sources of future income necessary to recognize any portion of their deferred tax assets. All other deferred tax assets are more likely than not to be realized based on expectations regarding future taxable income and considering all other available evidence, both positive and negative.
The net operating losses ("NOLs"), capital losses and tax credits of FGL’s subsidiaries are subject to limitations under IRC Section 382, as a result of the change of ownership that occurred when the companies were purchased in 2011. This caused the net value of attributes that could be utilized to be limited to $5 each year, subject to increases for realized built-in gains on certain assets on the date of the change of ownership. On September 27, 2013, the Company underwent a second change of control within the meaning of IRC Section 382(g), triggered by the sale of HRG shares by Harbinger Capital Partners. At the time of this ownership change, FGL’s tax attributes consisted of capital loss carry forwards totaling approximately $350, investment tax credits of approximately $54, and alternative minimum tax ("AMT") credits of approximately $6. The second 382 annual limitation is higher than the 2011 limitation and is not expected to have an impact on the utilization of tax attributes.
At September 30, 2017 and 2016, FGL has NOL carryforwards of $95 and $92, respectively, which, if unused, will expire in years 2026 through 2037. FGL has capital loss carryforwards totaling $15 and $6 at September 30, 2017 and 2016, respectively, which if unused, will expire in years 2017 through 2022. In addition, at September 30, 2017 and 2016, FGL has low income housing tax credit carryforwards totaling $47 and $52, respectively, which, if unused, will expire in years 2020 through 2037, and alternative minimum tax credits of $6 and $6, respectively, that may be carried forward indefinitely.
FGL’s non-life subsidiaries file as part of HRG’s consolidated U.S. Federal income tax return. FGL’s insurance company subsidiaries file their own consolidated U.S. Federal life insurance tax return. The income tax liabilities of the FGL members of the consolidated HRG return are calculated using the separate return method with any payable or receivable reflecting an amount they would have recorded had they filed their own return. As of September 30, 2017 and 2016, FGL and its subsidiaries have an income tax liability totaling $0 and $2, respectively, which represents what they would have owed the IRS had they filed their own tax return.
The U.S. Federal income tax returns of FGL for years prior to 2014 are no longer subject to examination by the taxing authorities. With limited exception, FGL is no longer subject to state and local income tax audits for years prior to 2013. FGL does not have any unrecognized tax benefits (“UTBs”) at September 30, 2017 and 2016. In the event the Company has UTBs, interest and penalties related to uncertain tax positions would be recorded as part of income tax expense in the financial statements. The Company regularly assesses the likelihood of additional tax assessments by jurisdiction and, if necessary, adjusts its tax reserves based on new information or developments.