Income Taxes

Income (loss) before income taxes includes the following components.



	Years Ended December 31,
(dollars in thousands)	2018			2017			2016
Domestic operations	$	99,373		$	337,704		$	288,905
Foreign operations	(107,228		)	(250,409		)	341,015
Income (loss) before income taxes	$	(7,855	)	$	87,295		$	629,920

Income tax expense (benefit) includes the following components.



	Years Ended December 31,
(dollars in thousands)	2018			2017			2016
Current:
Domestic	$	77,936		$	(19,255	)	$	57,916
Foreign	41,833			29,882			48,203
Total current tax expense	119,769			10,627			106,119
Deferred:
Domestic	(77,255		)	(222,427		)	19,991
Foreign	79,984			(101,663		)	43,367
Total deferred tax expense (benefit)	2,729			(324,090		)	63,358
Income tax expense (benefit)	$	122,498		$	(313,463	)	$	169,477

Foreign income tax expense includes U.S. income tax expense on foreign operations, which includes U.S. income tax on the Company's United Kingdom (U.K.) and Bermuda-based operations, certain of which have elected to be taxed as domestic corporations for U.S. tax purposes.

State income tax expense is not material to the consolidated financial statements.

The Company made income tax payments of $63.1 million, $70.2 million and $142.2 million in 2018, 2017 and 2016, respectively. Income taxes payable were $83.7 million and $51.3 million at December 31, 2018 and 2017, respectively, and were included in other liabilities on the consolidated balance sheets. Income taxes receivable were $49.3 million and $64.3 million at December 31, 2018 and 2017, respectively, and were included in other assets on the consolidated balance sheets.

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (TCJA), which made significant modifications to U.S. income tax law, most of which were effective January 1, 2018. As a result, the Company recorded a one-time tax benefit of $339.9 million in the fourth quarter of 2017, a portion of which was considered provisional at December 31, 2017. The one-time benefit from the TCJA was attributable to the remeasurement of the Company’s U.S. deferred tax assets and liabilities on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases at the lower enacted U.S. corporation tax rate, partially offset by the tax on the deemed repatriation of foreign earnings. In 2018, the Company completed its determination of the accounting for the TCJA, which resulted in an additional tax benefit of $5.7 million.

After extensive discussions and analysis of the Company's overall capital and tax profile resulting from the enactment of the TCJA, in 2018 the Company decided to elect to treat its most significant U.K. subsidiaries as domestic corporations for U.S. tax purposes. As a result, the earnings and profits of those subsidiaries are no longer considered to be indefinitely reinvested and the Company recorded a one-time deferred tax charge of $103.3 million related to the book and tax basis differences attributable to those subsidiaries. The Company continues to be indefinitely reinvested in its other foreign subsidiaries, with the exception of certain Bermuda-based subsidiaries. As of December 31, 2018, the cumulative earnings of the Company's foreign subsidiaries that are considered indefinitely reinvested, and have not previously been subject to tax in the U.S., are not material.

The following table presents a reconciliation of income taxes computed using the U.S. corporate tax rate to the Company's income tax expense (benefit).



	Years Ended December 31,
	2018			2017			2016
Income taxes at U.S. corporate tax rate	$	(1,650	)	$	30,553		$	220,472
Increase (decrease) resulting from:
Change in tax status of U.K. subsidiaries	103,281			—			—
Nondeductible loss on investments managed by MCIM	26,552			16,231			—
Foreign operations	4,951			37,207			4,672
Tax-exempt investment income	(18,927		)	(41,565		)	(39,710		)
TCJA	(5,699		)	(339,899		)	—
Tax credits	(3,617		)	(10,236		)	(13,294		)
Stock based compensation	(2,635		)	(9,001		)	(5,411		)
Other	20,242			3,247			2,748
Income tax expense (benefit)	$	122,498		$	(313,463	)	$	169,477

The following table presents the components of domestic and foreign deferred tax assets and liabilities.



	December 31,
(dollars in thousands)	2018			2017
Assets:
Unpaid losses and loss adjustment expenses	$	164,497		$	144,761
Unearned premiums recognized for income tax purposes	85,952			74,282
Life and annuity benefits	78,370			77,945
Net operating loss carryforwards	46,662			29,252
Tax credit carryforwards	39,877			48,938
Accrued incentive compensation	30,308			23,167
Other differences between financial reporting and tax bases	39,763			60,995
Total gross deferred tax assets	485,429			459,340
Less valuation allowance	(36,286		)	(25,225		)
Total gross deferred tax assets, net of allowance	449,143			434,115
Liabilities:
Investments	590,250			603,523
Goodwill and other intangible assets	124,953			171,681
Deferred policy acquisition costs	89,716			90,826
Other differences between financial reporting and tax bases	90,269			73,664
Total gross deferred tax liabilities	895,188			939,694
Net deferred tax liability	$	446,045		$	505,579

The net deferred tax liability at December 31, 2018 and 2017 was included in other liabilities on the consolidated balance sheets.

At December 31, 2018, the Company had tax credit carryforwards of $39.9 million. The earliest any of these credits will expire is 2028.

At December 31, 2018, the Company also had net operating losses of $40.7 million that can be used to offset future taxable income in the U.S. The Company's ability to use the majority of these losses expires between the years 2028 and 2037. At December 31, 2018, certain branch operations in Europe and a wholly owned subsidiary in Brazil had net operating losses of $121.7 million that can be used to offset future income in their local jurisdictions. The Company's ability to use $31.4 million of these losses expires between the years 2020 and 2027. The remaining losses are not subject to expiration. As discussed below, the deferred tax assets related to losses at the Company's European branches, its Brazilian subsidiary and certain U.S. subsidiaries are offset by valuation allowances.

The Company believes that it is more likely than not that it will realize $449.1 million of gross deferred tax assets, including net operating losses at December 31, 2018, through generating taxable income or the reversal of existing temporary differences attributable to the gross deferred tax liabilities. As a result of cumulative net operating losses in certain jurisdictions, the Company has a valuation allowance of $36.3 million at December 31, 2018 that offsets the deferred tax assets primarily related to losses incurred at European branches of one of the Company's U.K. subsidiaries, at one of the Company's Brazilian subsidiaries and at certain U.S. subsidiaries.

At December 31, 2018, the Company did not have any material unrecognized tax benefits. The Company does not anticipate any changes in unrecognized tax benefits during 2019 that would have a material impact on the Company's income tax provision.

The Company is subject to income tax in the U.S. and in foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by tax authorities for years ended before January 1, 2015.