Income Taxes On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; and (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
In connection with the initial analysis of the impact of the TCJA, the Company recorded a discrete net tax benefit of $177.0 million for the corporate rate reduction in the period ending December 31, 2017. For various reasons that are discussed more fully below, the Company has not completed accounting for the income tax effects of certain elements of the TCJA. If the Company was able to make reasonable estimates of the impact of elements for which the analysis is not yet complete, the Company recorded provisional adjustments. If the Company was not yet able to make reasonable estimates of the impact of certain elements, the Company did not record any adjustments related to those elements and continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the TCJA.
Although the accounting for the following elements of the TCJA is incomplete the Company has been able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments as follows:
Reduction of US federal corporate tax rate: The TCJA reduces the corporate tax rate to 21%, effective January 1, 2018. For deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”), the Company recorded a net provisional decrease of $177.0 million to deferred income tax expense for the year ended December 31, 2017. While the Company is able to make a reasonable estimate of the impact of the reduction in corporate rate, the amount may be impacted by other analyses related to the TCJA, including, but not limited to federal temporary differences.
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of the Company’s foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company is able to make a reasonable estimate of the Transition Tax and provisionally determined that it would not have any Transition Tax obligation as the net accumulated post-1986 E&P of the Company’s foreign subsidiaries was negative as of the measurement dates for determining the Transition Tax. However, the Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax.
Global intangible low taxed income (“GILTI”): Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the TCJA and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the company’s measurement of its deferred taxes (the “deferred method”). The selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing the global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the current structure and estimated future results of global operations, but also the intent and ability to modify the structure and/or our business. As such, the Company is not yet able to reasonably estimate the impact of this provision of the TCJA. Although the Company does not expect to have a material impact from GILTI, the Company has not made any adjustments related to potential GILTI tax in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.
Valuation allowances: The Company must determine whether valuation allowance assessments are impacted by various aspects of the TCJA. Since, as discussed herein, the Company has recorded an estimate related to certain portions of the TCJA, any corresponding determination of the need for or change in a valuation allowance is estimated.
The components of income tax (benefit) expense for the years ended December 31 were as follows:
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Pre-tax income: | | | | | |
Domestic | $ | 336.3 |
| | $ | 779.0 |
| | $ | 126.8 |
|
Foreign | 108.2 |
| | 69.6 |
| | 74.4 |
|
Total pre-tax income | $ | 444.5 |
| | $ | 848.6 |
| | $ | 201.2 |
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current (benefit) expense: | | | | | |
Federal and state | $ | (111.9 | ) | | $ | 240.1 |
| | $ | 40.6 |
|
Foreign | 41.0 |
| | 18.1 |
| | 22.9 |
|
Total current (benefit) expense | (70.9 | ) | | 258.2 |
| | 63.5 |
|
Deferred (benefit) expense: | | | | | |
Federal and state | 8.7 |
| | 19.6 |
| | 0.2 |
|
Foreign | (12.9 | ) | | 5.4 |
| | (4.1 | ) |
Total deferred (benefit) expense | (4.2 | ) | | 25.0 |
| | (3.9 | ) |
Total income tax (benefit) expense | $ | (75.1 | ) | | $ | 283.2 |
| | $ | 59.6 |
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The provision for foreign taxes includes amounts attributable to income from U.S. possessions that are considered foreign under U.S. tax laws. International operations of the Company are subject to income taxes imposed by the jurisdiction in which they operate.
A reconciliation of the federal income tax rate to the Company’s effective income tax rate follows:
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| | | | | | | | |
| December 31, |
| 2017 | | 2016 | | 2015 |
Federal income tax rate: | 35.0 | % | | 35.0 | % | | 35.0 | % |
Reconciling items: | | | | | |
Non-taxable investment income | (2.3 | ) | | (1.3 | ) | | (6.8 | ) |
Foreign earnings (1) | (2.3 | ) | | (1.9 | ) | | (5.2 | ) |
Non-deductible compensation
| 0.2 |
| | (0.1 | ) | | 9.1 |
|
Non-deductible health insurer fee | — |
| | 1.8 |
| | 6.9 |
|
Change in liability for prior year tax | (6.4 | ) | | — |
| | — |
|
Tax reform deferred revaluation (2) | (39.8 | ) | | — |
| | — |
|
Sale of subsidiary | — |
| | — |
| | (8.0 | ) |
Other | (1.3 | ) | | (0.1 | ) | | (1.4 | ) |
Effective income tax rate: | (16.9 | )% | | 33.4 | % | | 29.6 | % |
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(1) | Results for all years primarily include tax benefit associated with the earnings of certain non-U.S. subsidiaries that are deemed reinvested indefinitely and the realization of foreign tax credits for certain other subsidiaries. In addition, 2017, 2016 and 2015 reflect a benefit of 1.4%, 2.2% and 6.5%, respectively, related to international reorganizations. |
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(2) | The TCJA reduces the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company has recorded a benefit related to the revaluation of DTAs and DTLs of $177.0 million which has a (39.8)% impact to the effective tax rate. |
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 is as follows:
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| | | | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of year | $ | (34.2 | ) | | $ | (37.0 | ) | | $ | (6.3 | ) |
Additions based on tax positions related to the current year | (1.0 | ) | | (1.0 | ) | | (30.7 | ) |
Reductions based on tax positions related to the current year | — |
| | — |
| | 0.1 |
|
Additions for tax positions of prior years | (0.3 | ) | | (1.4 | ) | | (2.1 | ) |
Reductions for tax positions of prior years | 28.2 |
| | 3.8 |
| | 0.4 |
|
Lapses | 0.6 |
| | 1.4 |
| | 1.6 |
|
Balance at end of year | $ | (6.7 | ) | | $ | (34.2 | ) | | $ | (37.0 | ) |
Total unrecognized tax benefits of $6.8 million, $34.5 million, and $35.6 million for 2017, 2016, and 2015, respectively, which includes interest, would impact the Company’s consolidated effective tax rate if recognized. The reduction in the unrecognized benefits for tax positions of prior years primarily relates to the resolution of an uncertain tax position related to the completion of an IRS examination in 2017. This change was reflected as a benefit within tax expense for the year ended December 31, 2017. The liability for unrecognized tax benefits is included in accounts payable and other liabilities on the consolidated balance sheets.
The Company’s accounting policy is to recognize interest expense related to income tax matters in income tax expense. During the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately $0.1 million, $0.6 million and $0.2 million, respectively, of interest expense related to income tax matters. The Company had $0.2 million, $0.2 million, and $1.7 million of interest accrued as of December 31, 2017, 2016 and 2015, respectively. No penalties have been accrued.
The Company does not anticipate any significant increase or decrease of unrecognized tax benefit within the next 12 months.
The Company and its subsidiaries file income tax returns in the U.S. and various state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2015. Substantially all non-U.S. income tax matters have been concluded for the years through 2010, and all state and local income tax matters have been concluded for the years through 2009.
The tax effects of temporary differences that result in significant deferred tax assets and deferred tax liabilities are as follows:
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| | | | | | | |
| December 31, |
| 2017 | | 2016 |
Deferred Tax Assets | | | |
Policyholder and separate account reserves | $ | 359.1 |
| | $ | 571.7 |
|
Accrued liabilities | 4.6 |
| | 39.3 |
|
Investments, net | 70.8 |
| | 102.6 |
|
Net operating loss carryforwards | 42.3 |
| | 31.7 |
|
Deferred gain on disposal of businesses | 26.9 |
| | 81.3 |
|
Compensation related | 27.2 |
| | 37.8 |
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Employee and post-retirement benefits | 35.8 |
| | 58.5 |
|
Unearned fee income | 30.0 |
| | 48.4 |
|
Other | 39.3 |
| | 78.6 |
|
Total deferred tax asset (1) | 636.0 |
| | 1,049.9 |
|
Less valuation allowance | (9.2 | ) | | (12.6 | ) |
Deferred tax assets, net of valuation allowance | 626.8 |
| | 1,037.3 |
|
Deferred Tax Liabilities | | | |
Deferred acquisition costs | (674.5 | ) | | (984.3 | ) |
Net unrealized appreciation on securities | (201.1 | ) | | (243.8 | ) |
Total deferred tax liability (1) | (875.6 | ) | | (1,228.1 | ) |
Net deferred income tax liability | $ | (248.8 | ) | | $ | (190.8 | ) |
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(1) | 2017 reflects the reduction of deferred tax assets and liabilities following the enactment of TCJA. |
A cumulative valuation allowance of $9.2 million exists as of December 31, 2017 based on management’s assessment that it is more likely than not that certain deferred tax assets attributable to international subsidiaries will not be realized.
The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income of the same character within the carryback or carryforward periods. In assessing future taxable income, the Company considered all sources of taxable income available to realize its deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of the Company’s deferred tax liabilities, the valuation allowance may need to be adjusted in the future.
Other than for certain wholly owned Canadian subsidiaries, the Company plans to indefinitely reinvest the earnings in other jurisdictions. Under current U.S. tax law, no material income taxes are anticipated on future repatriation of earnings. Therefore, deferred taxes have not been provided.
At December 31, 2017, the Company had $177.8 million of net operating loss carryforwards that will expire if unused as follows:
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| | | |
Expiration Year | Amount |
2018 - 2022 | $ | 31.4 |
|
2023 - 2027 | 11.6 |
|
2028 - 2032 | 1.0 |
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2033 - 2037 | 61.3 |
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Unlimited | 72.5 |
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| $ | 177.8 |
|