Income Taxes

12 Months Ended

Dec. 31, 2019

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



	Years Ended December 31,
(dollars in thousands)	2019		2018			2017
Domestic operations	$	1,664,762	$	99,373		$	337,704
Foreign operations	621,046		(107,228		)	(250,409		)
Income (loss) before income taxes	$	2,285,808	$	(7,855	)	$	87,295

Income tax expense (benefit) includes the following components.



	Years Ended December 31,
(dollars in thousands)	2019		2018			2017
Current:
Domestic	$	139,597	$	77,936		$	(19,255	)
Foreign	23,364		41,833			29,882
Total current tax expense	162,961		119,769			10,627
Deferred:
Domestic	217,928		(77,255		)	(222,427		)
Foreign	105,457		79,984			(101,663		)
Total deferred tax expense (benefit)	323,385		2,729			(324,090		)
Income tax expense (benefit)	$	486,346	$	122,498		$	(313,463	)

Foreign income tax expense includes U.S. income tax expense on foreign operations, which includes U.S. income tax on the Company's 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 net income tax payments of $128.2 million, $63.1 million and $70.2 million in 2019, 2018 and 2017, respectively. Income taxes payable were $64.1 million and $83.7 million at December 31, 2019 and 2018, respectively, and were included in other liabilities on the consolidated balance sheets. Income taxes receivable were $6.3 million and $49.3 million at December 31, 2019 and 2018, respectively, and were included in other assets on the consolidated balance sheets.

In December 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 2017, a portion of which was considered provisional. The one-time benefit from the TCJA was primarily 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.

In 2018, the Company decided to elect to treat its two most significant U.K. subsidiaries as domestic corporations for U.S. tax purposes. As a result, the earnings and profits from those subsidiaries are no longer considered to be indefinitely reinvested, and during 2018, 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. For subsidiaries the Company did not elect to treat as domestic corporations for U.S. tax purposes, the Company is subject to the U.S. Global Intangible Low Taxes Income (GILTI) tax. The Company recognizes the impact of the GILTI tax as incurred, and therefore has not recorded deferred taxes on the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. For the years ended December 31, 2019 and 2018, GILTI tax was not material to the consolidated financial statements.

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,
(dollars in thousands)	2019			2018			2017
Income taxes at U.S. corporate tax rate	$	480,020		$	(1,650	)	$	30,553
Increase (decrease) resulting from:
Foreign operations	14,718			4,951			37,207
Tax-exempt investment income	(18,430		)	(18,927		)	(41,565		)
Change in tax status of U.K. subsidiaries	(6,658		)	103,281			—
Tax credits	(4,104		)	(3,617		)	(10,236		)
Nondeductible loss on investments managed by MCIM	—			26,552			16,231
TCJA	—			(5,699		)	(339,899		)
Other	20,800			17,607			(5,754		)
Income tax expense (benefit)	$	486,346		$	122,498		$	(313,463	)

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



	December 31,
(dollars in thousands)	2019			2018
Assets:
Unpaid losses and loss adjustment expenses	$	163,522		$	164,497
Unearned premiums recognized for income tax purposes	102,020			85,952
Life and annuity benefits	84,890			78,370
Lease liabilities	55,362			—
Tax credit carryforwards	47,233			39,877
Net operating loss carryforwards	39,429			46,662
Accrued incentive compensation	35,132			30,308
Other differences between financial reporting and tax bases	52,604			39,763
Total gross deferred tax assets	580,192			485,429
Less valuation allowance	(45,544		)	(36,286		)
Total gross deferred tax assets, net of allowance	534,648			449,143
Liabilities:
Investments	996,543			590,250
Goodwill and other intangible assets	134,573			124,953
Deferred policy acquisition costs	113,243			89,716
Right-of-use lease assets	49,583			—
Other differences between financial reporting and tax bases	101,426			90,269
Total gross deferred tax liabilities	1,395,368			895,188
Net deferred tax liability	$	860,720		$	446,045

As of December 31, 2019 and 2018, the Company's consolidated balance sheets included net deferred tax liabilities of $883.0 million and $481.9 million, respectively, in other liabilities and net deferred tax assets of $22.3 million and $35.9 million, respectively, in other assets.

At December 31, 2019, the Company had tax credit carryforwards of $47.2 million, all of which the Company expects to utilize before expiration. The earliest any of these credits will expire is 2028.

At December 31, 2019, the Company also had net operating losses of $33.5 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, 2019, certain branch operations in Europe and a wholly owned subsidiary in Brazil had net operating losses of $109.3 million that can be used to offset future income in their local jurisdictions. The Company's ability to use $33.0 million of these losses expires between the years 2020 and 2029. The remaining losses are not subject to expiration. As discussed below, the deferred tax assets related to losses at certain of the Company's subsidiaries and branches are offset by valuation allowances.

At December 31, 2019, the Company had total gross deferred tax assets of $580.2 million. The Company has a valuation allowance of $45.5 million to offset gross deferred tax assets primarily attributable to cumulative net operating losses at certain of the Company's subsidiaries and branches. The Company believes that it is more likely than not that it will realize the remaining $534.6 million of gross deferred tax assets through generating taxable income or the reversal of existing temporary differences attributable to the gross deferred tax liabilities.

At December 31, 2019, the Company did not have any material unrecognized tax benefits. The Company does not anticipate any changes in unrecognized tax benefits during 2020 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. The Internal Revenue Service is currently examining the Company’s 2017 U.S. federal income tax return. The Company believes its income tax liabilities were adequate as of December 31, 2019, however, these liabilities could be adjusted as a result of this examination. With few exceptions, the Company is no longer subject to income tax examination by tax authorities for years ended before January 1, 2016.