FEDERAL INCOME TAXES
Total Federal income taxes were allocated as follows:
|
| | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
| | | | | |
Taxes (benefits) on earnings from continuing operations: | | | | | |
Current | $ | 74,361 |
| | 41,544 |
| | 8,279 |
|
Deferred | (23,129 | ) | | 10,426 |
| | 39,993 |
|
Remeasurement of deferred taxes due to Tax Act | (17,098 | ) | | — |
| | — |
|
| | | | | |
Taxes on earnings | 34,134 |
| | 51,970 |
| | 48,272 |
|
| | | | | |
Taxes (benefits) on components of stockholders' equity: | |
| | |
| | |
|
Net unrealized gains and losses on securities available for sale | 2,736 |
| | 5,382 |
| | (22,014 | ) |
Foreign currency translation adjustments | (5 | ) | | (88 | ) | | 75 |
|
Change in benefit plan liability | (2,085 | ) | | (62 | ) | | (397 | ) |
| | | | | |
| | | | | |
Total Federal income taxes (benefit) | $ | 34,780 |
| | 57,202 |
| | 25,936 |
|
On December 22, 2017, the United States Congress enacted the Tax Cuts and Jobs Act ("Tax Act"). See Note 1 for further discussion. Among other things, the Tax Act reduces the federal corporate income tax rate from 35% to 21% effective in 2018. As a result of the change in the federal corporate income tax rate the Company was required to remeasure its deferred tax assets and liabilities at December 31, 2017 using the new corporate rate. This produced a one-time income tax benefit, with a corresponding decrease to the net deferred tax liability, of $17.1 million.
As a consequence of the Tax Act, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in February 2018 which provided the option for reclassification of certain stranded tax effects from accumulated other comprehensive income ("AOCI") to retained earnings. The Company elected to early adopt this standard as of December 31, 2017. Included in the remeasurement of deferred tax assets and liabilities producing the one-time income tax benefit discussed above were stranded taxes included in AOCI of $2.5 million.
The provisions for Federal income taxes attributable to earnings from continuing operations vary from amounts computed by applying the statutory income tax rate of 35% to income statement earnings before Federal income taxes due to differences between the financial statement reporting and income tax treatment of certain items. These differences and the corresponding tax effects are as follows:
|
| | | | | | | | | |
| Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
| | | | | |
Income tax expense at statutory rate of 35% | $ | 50,594 |
| | 53,502 |
| | 51,334 |
|
Dividend received deduction | (1,099 | ) | | (850 | ) | | (1,194 | ) |
Tax exempt interest | (2,276 | ) | | (2,193 | ) | | (2,195 | ) |
Tax adjustment on foreign currency | — |
| | — |
| | 618 |
|
Adjustments pertaining to prior tax years | 895 |
| | 1,076 |
| | (296 | ) |
Nondeductible insurance | 160 |
| | 160 |
| | 160 |
|
Nondeductible expenses | 178 |
| | 588 |
| | 261 |
|
Remeasurement of deferred taxes due to Tax Act | (17,098 | ) | | — |
| | — |
|
Excess premium liability | 2,870 |
| | — |
| | — |
|
Other, net | (90 | ) | | (313 | ) | | (416 | ) |
| | | | | |
Taxes on earnings from continuing operations | $ | 34,134 |
| | 51,970 |
| | 48,272 |
|
The Company's policy is to record changes to deferred taxes for rate changes in the period when changes in tax laws have been enacted. As described above there was a net decrease to the net deferred tax liability of $17.1 million recorded for the year ended December 31, 2017 caused by the rate change in the Tax Act. There were no deferred tax changes attributable to enacted tax rate changes for the years ended December 31, 2016, and 2015. The excess premium liability provision represents the nondeductible tax effect of an $8.2 million loss contingency recorded by the Company at December 31, 2017 related to excess premiums on certain of its policies.
The Company generally expects its effective tax rate to be less than the current statutory rate (35%) in the years ended December 31, 2017, 2016, and 2015) due to recurring permanent differences that reduce tax expense, principally tax exempt interest income and the dividend received deduction.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below.
|
| | | | | | |
| December 31, |
| 2017 | | 2016 |
| (In thousands) |
| | | |
Deferred tax assets: | | | |
Future policy benefits, excess of financial accounting liabilities over tax liabilities | $ | 162,424 |
| | 254,329 |
|
Investment securities write-downs for financial accounting purposes | 196 |
| | 602 |
|
Benefit plan liabilities | 10,355 |
| | 13,485 |
|
Accrued operating expenses recorded for financial accounting purposes not currently tax deductible | 6,222 |
| | 7,235 |
|
Tax reform reserve adjustment | 83,935 |
| | — |
|
Accrued and unearned investment income recognized for tax purposes and deferred for financial accounting purposes | 265 |
| | 420 |
|
Other | 94 |
| | 401 |
|
| | | |
Total gross deferred tax assets | 263,491 |
| | 276,472 |
|
| | | |
Deferred tax liabilities: | |
| | |
|
Deferred policy acquisition and sales inducement costs, principally expensed for tax purposes | (180,780 | ) | | (307,725 | ) |
Tax reform reserve adjustment | (83,935 | ) | | — |
|
Debt securities, principally due to deferred market discount for tax | (7,526 | ) | | (12,147 | ) |
Real estate, principally due to adjustments for financial accounting purposes | (5 | ) | | (498 | ) |
Net unrealized gains on securities available for sale | (8,945 | ) | | (12,174 | ) |
Foreign currency translation adjustments | (857 | ) | | (1,433 | ) |
Fixed assets, due to different depreciation bases | (6,853 | ) | | (7,468 | ) |
Other | 2 |
| | (17 | ) |
| | | |
Total gross deferred tax liabilities | (288,899 | ) | | (341,462 | ) |
| | | |
Net deferred tax liabilities | $ | (25,408 | ) | | (64,990 | ) |
Beginning January 1, 2018, the Tax Act imposes a limitation on life insurance tax reserves based upon the greater of net surrender value or 92.81% of the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract as of the date the reserve is determined. The Company has recognized the provisional tax impacts related to the change in the methodology employed to calculate tax reserves. As a result, the Company has recorded a deferred tax asset and offsetting deferred tax liability of $83.9 million in the Consolidated Financial Statements for the year ended December 31, 2017. The amount recorded by the Company is considered provisional as the Company does not have the information currently available in appropriate detail to analyze and calculate the amount required under the change in methodology. The ultimate impact may differ, potentially materially, from the provision amount due to additional analysis, changes in interpretations or assumptions made by the Company or additional regulatory guidance that may be issued, among other things. The final calculation will be reflected in financial statements for the year ending December 31, 2018.
There were no valuation allowances for deferred tax assets at December 31, 2017 and 2016. In assessing deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and available tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
In accordance with GAAP, the Company assessed whether it had any significant uncertain tax positions related to open examination or other IRS issues and determined that there were none. Accordingly, no reserve for uncertain tax positions has been recorded. Should a provision for any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company's policy to accrue for such in its income tax accounts. There were no such accruals as of December 31, 2017 or 2016. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2013.
Allocation of the consolidated Federal income tax liability amongst the Company and its consolidated subsidiaries is based on separate return calculations pursuant to the "wait-and-see" method as described in sections 1.1552-1(a)(1) and 1.1502-33(d)(2) of the current Treasury Regulations. Under this method, consolidated group members are not given current credit for net losses until future net taxable income is generated to realize such credits.