Note 12. Income Taxes

12 Months Ended

Dec. 31, 2016

Notes

Note 12. Income Taxes

Note 12.          Income Taxes

IHC and its subsidiaries file a consolidated Federal income tax return on a June 30 fiscal year. Prior to January 15, 2013, AMIC and its subsidiaries filed a separate consolidated Federal income tax return on a September 30 fiscal year. The provision for income tax expense (benefit) attributable to income from continuing operations, as shown in the Consolidated Statements of Income, is as follows for the years indicated (in thousands):

		2016		2015		2014
CURRENT:
U.S. Federal	$	4,637	$	14,278	$	(58)
State and Local		473		1,012		743
		5,110		15,290		685
DEFERRED:
U.S. Federal		4,390		673		5,205
State and Local		55		(59)		218
		4,445		614		5,423
	$	9,555	$	15,904	$	6,108

            Taxes computed at the Federal statutory rate of 35% in 2016, 2015 and 2014, attributable to pretax income, are reconciled to the Company's actual income tax expense as follows for the years indicated (in thousands):

		2016		2015		2014
Tax computed at the statutory rate	$	11,223	$	15,357	$	7,395
Dividends received deduction and tax
exempt interest		(641)		(796)		(1,384)
State and local income taxes, net of Federal effect		331		619		625
Subsidiary stock basis write-off		(3,903)		-		-
Health insurance excise tax		146		526		696
Health insurer compensation limit		594		379		583
AMIC valuation allowance adjustment		-		-		(1,881)
Other, net		1,805		(181)		74
Income tax expense	$	9,555	$	15,904	$	6,108

As a result of the dissolution of Health Plan Administrators, Inc. (“HPA”), a subsidiary of IHC, tax benefits of approximately $3,903,000 were recognized for IHC’s unrecovered investment in HPA in 2016.

Temporary differences between the Consolidated Financial Statement carrying amounts and tax bases of assets and liabilities that give rise to the deferred tax assets and liabilities at December 31, 2016 and 2015 are summarized below (in thousands). The net deferred tax asset or liability is included in Other Assets or Other Liabilities, as appropriate, in the Consolidated Balance Sheets. IHC and its subsidiaries, excluding AMIC and its subsidiaries, have certain tax-planning strategies that were used in determining that a valuation allowance was not necessary on their deferred tax assets at December 31, 2016 or 2015. The net deferred tax asset relative to AMIC and its subsidiaries included in other assets on IHC’s Consolidated Balance Sheets at December 31, 2016 and 2015 was $15,427,000 and $13,944,000, respectively.

		2016		2015
DEFERRED TAX ASSETS:
Unrealized losses on investment securities	$	3,851	$	1,935
Investment write-downs		596		205
Loss carryforwards		50,735		91,558
Insurance reserves		-		461
Other		4,322		3,287
Total gross deferred tax assets		59,504		97,446
Less AMIC valuation allowance		(35,918)		(74,087)
Net deferred tax assets		23,586		23,359
DEFERRED TAX LIABILITIES:
Deferred insurance policy acquisition costs		(114)		(111)
Insurance reserves		(4,947)		(4,180)
Goodwill and intangible assets		(5,274)		(6,119)
Other		(4,097)		(3,213)
Total gross deferred tax liabilities		(14,432)		(13,623)
Net deferred tax asset	$	9,154	$	9,736

As of December 31, 2016, IHC and its non-life subsidiaries, excluding AMIC and its subsidiaries, had NOL carryforwards arising from limitations on offsetting non-life insurance company losses against life insurance company income. The non-life insurance company Federal NOL carryforwards amount to approximately $432,000 at December 31, 2016, which expire in 2033.

At December 31, 2016, AMIC had Federal NOL carryforwards of approximately $144,525,000, which expire in varying amounts through the year 2028, with a significant portion expiring in 2020.   

As a result of the Risk Solutions Sale and Coinsurance Transaction (see Note 3), AMIC utilized approximately $109,055,000 of its operating loss carryforwards. AMIC’s valuation allowance at December 31, 2016 and 2015 was primarily related to net operating loss carryforwards that, in the judgment of management, were not considered realizable.

In assessing the realizability of 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 dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management believes that it is more likely than not that IHC and its subsidiaries, including AMIC and its subsidiaries, will realize the benefits of these net deferred tax assets recorded at December 31, 2016. As of December 31, 2016, IHC and its subsidiaries, and AMIC and its subsidiaries, believe there were no material uncertain tax positions that would require disclosure under U.S. GAAP.

Interest expense and penalties for the years ended December 31, 2016, 2015 and 2014 are insignificant. Tax years ending June 30, 2013 and forward are subject to examination by the Internal Revenue Service.

Net cash payments (receipts) for income taxes were $12,585,000, $10,974,000 and $(2,448,000) in 2016, 2015 and 2014, respectively.