Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Note 10. Income Taxes

The Company and its eligible subsidiaries file a consolidated federal income tax return. The Company has entered into a separate tax allocation agreement with CNA, a majority-owned subsidiary in which its ownership exceeds 80%. The agreement provides that the Company will: (i) pay to CNA the amount, if any, by which the Company’s consolidated federal income tax is reduced by virtue of inclusion of CNA in the Company’s return or (ii) be paid by CNA an amount, if any, equal to the federal income tax that would have been payable by CNA if it had filed a separate consolidated return. The agreement may be canceled by either of the parties upon thirty days written notice.

For 2017 through 2019, the Internal Revenue Service (“IRS”) has accepted the Company into the Compliance Assurance Process (“CAP”), which is a voluntary program for large corporations. Under CAP, the IRS conducts a real-time audit and works contemporaneously with the Company to resolve any issues prior to the filing of the tax return. The Company believes this approach should reduce tax-related uncertainties, if any. Although the outcome of tax audits is always uncertain, the Company believes that any adjustments resulting from audits will not have a material impact on its results of operations, financial position or cash flows. The Company and/or its subsidiaries also file income tax returns in various state, local and foreign jurisdictions. These returns, with few exceptions, are no longer subject to examination by the various taxing authorities before 2015.

Diamond Offshore, which is not included in the Company’s consolidated federal income tax return, files income tax returns in the U.S. federal and various state and foreign jurisdictions. Tax years that remain subject to examination by these jurisdictions include years 2009 to 2018.

On December 22, 2017, H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” previously known as “The Tax Cuts and Jobs Act” was signed into law (the “Tax Act”). The Tax Act provided for a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, among other provisions, including the elimination of the corporate alternative minimum tax (“AMT”) and a change to how existing AMT credits can be realized, and a one-time mandatory deemed repatriation of accumulated earnings of foreign subsidiaries as of December 31, 2017, inclusive of the utilization of certain tax attributes offset by a provisional liability for uncertain tax positions related to such attributes.

The Company was required to recognize the effect of the Tax Act in the period the tax rate change was signed into law. Consequently, the Company recorded a one-time non-cash provisional $200 million increase to net income (net of noncontrolling interests) for the year ended December 31, 2017 related to the Tax Act. This increase included a $268 million income tax benefit due to the adjustment of net deferred tax assets and liabilities related to the reduction of the U.S. federal corporate income tax rate from 35% to 21% partially offset by a $78 million charge mostly related to the one-time mandatory repatriation of previously deferred earnings of certain of Diamond Offshore’s non-U.S. subsidiaries inclusive of the utilization of certain tax attributes and a provisional liability for uncertain tax positions. In 2018 and 2019, the U.S. Department of the Treasury and Internal Revenue Service issued final regulations and additional guidance, and consequently, during 2018 and 2019, the Company recorded a $6 million and $14 million increase to net income (net of noncontrolling interests) respectively.

The current and deferred components of income tax expense (benefit) are as follows:

Year Ended December 31	2019		2018		2017
(In millions)
Income tax expense (benefit):
Federal:
Current	$	108	$	6	$	157
Deferred		47		85		(63	)
State and city:
Current		18		15		22
Deferred		22		9		17
Foreign		53		13		37
Total	$	248	$	128	$	170

The components of U.S. and foreign income before income tax and a reconciliation between the federal income tax expense at statutory rates and the actual income tax expense (benefit) is as follows:

Year Ended December 31	2019			2018			2017
(In millions)
Income (loss) before income tax:
U.S.	$	1,145		$	775		$	1,322
Foreign		(26	)		59			260
Total	$	1,119		$	834		$	1,582
Income tax expense at statutory rate	$	235		$	175		$	554
Increase (decrease) in income tax expense resulting from:
Effect of the Tax Act		(14	)		(6	)		(190	)
Exempt investment income		(50	)		(64	)		(134	)
Foreign related tax differential		(55	)		1			(36	)
Taxes related to domestic affiliate		(15	)		(7	)		1
Partnership earnings not subject to taxes					(14	)		(51	)
Valuation allowance		12			12			7
Unrecognized tax positions, settlements and adjustments relating to prior years		97			2			(8	)
State taxes		37			20			23
Other		1			9			4
Income tax expense	$	248		$	128		$	170

The deferred foreign earnings of certain international subsidiaries were deemed to be repatriated under the Tax Act and consequently the Company will no longer permanently reinvest earnings of its foreign subsidiaries. The Company has not provided income tax on the outside basis difference of its foreign subsidiaries since there is no intention to dispose of these subsidiaries and structuring alternatives exist to mitigate any potential liability. The potential unrecorded liability associated with the outside basis difference is approximately $95 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding tax carryforwards and interest and penalties, is as follows:

Year Ended December 31	2019			2018			2017
(In millions)
Balance at January 1	$	58		$	84		$	35
Additions for tax positions related to the current year		86			3			51
Additions for tax positions related to a prior year		2			20			5
Reductions for tax positions related to a prior year		(23	)		(48	)		(1	)
Lapse of statute of limitations		(2	)		(1	)		(6	)
Balance at December 31	$	121		$	58		$	84

The $86 million 2019 addition to current year tax positions is primarily due to a recent change in Switzerland tax legislation. Due to the uncertainties regarding the application of the Swiss Tax Reform, including the values to be used to measure depreciable property, a liability for uncertain tax positions was recorded. The 2019 reduction for prior year tax is primarily due to the reversal of uncertain tax positions recorded for the mandatory repatriation provision of the Tax Act following the issuance of final regulations. The addition for prior year tax positions in 2018 and the $51 million addition for current year tax positions in 2017, as well as the $49 million reduction for prior year tax positions in 2018 are all primarily due to uncertainty associated with the enactment of the Tax Act and subsequent clarification issued by the IRS. At December 31, 2019, 2018 and 2017, $149 million, $82 million and $102 million of unrecognized tax benefits related to Diamond Offshore would affect the effective tax rate if recognized.

At December 31, 2019, the amount of accrued interest and penalties related to uncertain tax positions was $4 million and $17 million, respectively. At December 31, 2018, the amount of accrued interest and penalties related to uncertain tax positions was $3 million and $16 million, respectively.

The Company recognizes interest accrued related to unrecognized tax benefits and tax refund claims in Income tax expense (benefit) on the Consolidated Statements of Income. The Company recognizes penalties in Income tax expense (benefit) on the Consolidated Statements of Income. Interest expense (benefit) amounts recorded by the Company were insignificant for the years ended December 31, 2019, 2018 and 2017. Penalty amounts recorded by the Company were insignificant for the years ended December 31, 2019, 2018, and 2017.

The following table summarizes deferred tax assets and liabilities:

December 31	2019			2018
(In millions)
Deferred tax assets:
Insurance reserves:
Property and casualty claim and claim adjustment expense reserves	$	129		$	108
Unearned premium reserves		153			108
Receivables		11			13
Employee benefits		212			222
Deferred retroactive reinsurance benefit		82			79
Net operating loss carryforwards		275			251
Tax credit carryforwards		47			101
Net unrealized losses					24
Basis differential in investment in subsidiary		8			8
Disallowed interest deduction		41			16
Other		179			181
Total deferred tax assets		1,137			1,111
Valuation allowance		(187	)		(175	)
Net deferred tax assets		950			936
Deferred tax liabilities:
Deferred acquisition costs		(83	)		(78	)
Net unrealized gains		(263	)
Property, plant and equipment		(848	)		(840	)
Basis differential in investment in subsidiary		(679	)		(586	)
Other liabilities		(208	)		(236	)
Total deferred tax liabilities		(2,081	)		(1,740	)
Net deferred tax liabilities (a)	$	(1,131	)	$	(804	)

(a) Includes $37 of deferred tax assets reflected in Other assets in the Consolidated Balance Sheets at December 31, 2019 and 2018.

Federal net operating loss carryforwards of $70 million expire between 2034 and 2038 and $88 million can be carried forward indefinitely. Net operating loss carryforwards in foreign tax jurisdictions of $38 million expire between 2021 and 2028, $2 million expire between 2035 and 2039, and $77 million can be carried forward indefinitely. Foreign tax credit carryforwards of $45 million will expire between 2020 and 2030, and $2 million can be carried forward indefinitely.

Although realization of deferred tax assets is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized through recoupment of ordinary and capital taxes paid in prior carryback years and through future earnings, reversal of existing temporary differences and available tax planning strategies. As of December 31, 2019, Diamond Offshore recorded a valuation allowance of $187 million related to net operating losses, foreign tax credits, and other deferred tax assets.