Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

The following schedule discloses significant components of income tax expense (benefit) for each year presented:



	Year Ended December 31,
	2019			2018			2017
	(in thousands)
Current tax expense (benefit):
U.S. Federal	$	56,371		$	36,739		$	(52,502	)
Total	56,371			36,739			(52,502		)
Deferred tax expense (benefit):
U.S. Federal	(115,503		)	(89,380		)	(104,326		)
Total	(115,503		)	(89,380		)	(104,326		)
Total income tax expense (benefit) on income (loss) before equity in earnings of operating joint ventures	(59,132		)	(52,641		)	(156,828		)
Income tax expense (benefit) on equity in earnings of operating joint ventures(1)	(1,773		)	648			0
Income tax expense (benefit) reported in equity related to:
Other comprehensive income (loss)	81,281			(55,174		)	43,372
Additional paid-in capital	0			0			824
Total income tax expense (benefit)	$	20,376		$	(107,167	)	$	(112,632	)

(1) Prior period amounts have been updated to conform to current period presentation.

Reconciliation of Expected Tax at Statutory Rates to Reported Income Tax Expense (Benefit)

The differences between income taxes expected at the U.S. federal statutory income tax rate of 21% applicable for 2019 and 2018 and 35% applicable for 2017, and the reported income tax expense (benefit) are provided in the following table:



	Year Ended December 31,
	2019			2018			2017
	(in thousands)
Expected federal income tax expense	$	33,345		$	12,136		$	60,007
Non-taxable investment income	(52,291		)	(49,845		)	(157,408		)
Tax credits	(40,602		)	(40,272		)	(29,506		)
Domestic production activities deduction, net	0			0			(10,447		)
Changes in tax law	0			3,618			(20,165		)
Settlements with taxing authorities	0			20,984			0
Other	416			738			691
Reported income tax expense (benefit)	$	(59,132	)	$	(52,641	)	$	(156,828	)
Effective tax rate	(37.2		)%	(91.1		)%	(91.5		)%

The effective tax rate is the ratio of “Income tax expense (benefit)” divided by “Income (loss) from operations before income taxes and equity in earnings of operating joint venture.” The Company’s effective tax rate for fiscal years 2019, 2018 and 2017 was (37.2)%, (91.1)% and (91.5)%, respectively. The following is a description of items that had the most significant impact on the difference between the Company’s statutory U.S. federal income tax rate of 21% applicable for 2019 and 2018 and 35% applicable for 2017, and the Company’s effective tax rate during the periods presented:

Changes in Tax Law. The following is a list of notable changes in tax law that impacted the Company’s effective tax rate for the periods presented:

Tax Act of 2017 - On December 22, 2017, the Tax Act of 2017 was enacted into U.S. law. As a result, the Company recognized a $20 million tax benefit in “Income tax expense (benefit)” in the Company’s Consolidated Statements of Operations for the year ended December 31, 2017. In accordance with SEC Staff Accounting Bulletin 118, in 2017 the Company recorded the effects of the Tax Act of 2017 using reasonable estimates due to the need for further analysis of the provisions within the Tax Act of 2017 and collection, preparation and analysis of relevant data necessary to complete the accounting. During 2018, the Company completed the collection, preparation and analysis of data relevant to the Tax Act of 2017, and interpreted any additional guidance issued by the IRS, U.S. Department of the Treasury or other standard-setting organizations, and recognized a $1 million increase in income tax benefit for a total of $21 million recognized from the reduction in net deferred tax liabilities to reflect the reduction in the U.S. tax rate from 35% to 21%.

2018 Industry Issue Resolution (IIR). In August 2018, the IRS released a Directive to provide guidance on the tax reserving for guaranteed benefits within variable annuity contracts and principle-based reserves on certain life insurance contracts. Adopting the methodology specified in the Directive resulted in an acceleration of taxable income for the Company's 2017 tax return for which the tax expense was calculated at 35% and an increase in future tax deduction for the same amount to be realized at 21% netting to a $5 million increase to income tax expense.

Non-Taxable Investment Income. The U.S. Dividends Received Deduction (“DRD”) reduces the amount of dividend income subject to U.S. tax and accounts for most of the non-taxable investment income shown in the table above. More specifically, the U.S. DRD constitutes $50 million of the total $52 million of 2019 non-taxable investment income, $47 million of the total $50 million of 2018 non-taxable investment income, and $155 million of the total $157 million of 2017 non-taxable investment income. The DRD for the current period was estimated using information from 2018, current year investment results, and current year’s equity market performance. The actual current year DRD can vary based on factors such as, but not limited to, changes in the amount of dividends received that are eligible for the DRD, changes in the amount of distributions received from fund investments, changes in the account balances of variable life and annuity contracts, and the Company’s taxable income before the DRD.

Tax credits. These amounts primarily represent tax credits relating to foreign taxes withheld on the Company’s separate account investments.

Other. This line item represents insignificant reconciling items that are individually less than 5% of the computed expected federal income tax expense (benefit) and have therefore been aggregated for purposes of this reconciliation in accordance with relevant disclosure guidance.

Schedule of Deferred Tax Assets and Deferred Tax Liabilities



	As of December 31,
	2019		2018
	(in thousands)
Deferred tax assets:
Insurance reserves	$	427,843	$	245,488
Net unrealized loss on securities	0		8,283
Employee benefits	7,141		0
Other	1,969		1,897
Deferred tax assets	436,953		255,668
Deferred tax liabilities:
Deferred policy acquisition cost	67,431		55,030
Net unrealized gain on securities	83,801		0
Investments	142,028		95,294
Deferred tax liabilities	293,260		150,324
Net deferred tax asset (liability)	$	143,693	$	105,344

The application of U.S. GAAP requires the Company to evaluate the recoverability of deferred tax assets and establish a valuation allowance if necessary to reduce the deferred tax asset to an amount that is more likely than not expected to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) in which tax jurisdictions they were generated and the timing of their reversal; (4) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (5) the length of time that carryovers can be utilized in the various taxing jurisdictions; (6) any unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured, management believes it is more likely than not that the deferred tax assets, net of valuation allowances, will be realized.

The Company had no valuation allowance as of December 31, 2019 and 2018. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of deferred tax asset that is realizable.

The Company’s “Income (loss) from operations before income taxes and equity in earnings of operating joint venture” includes income from domestic operations of $159 million, $58 million and $170 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Tax Audit and Unrecognized Tax Benefits

The Company’s liability for income taxes includes the liability for unrecognized tax benefits and interest that relate to tax years still subject to review by the IRS or other taxing authorities. The completion of review or the expiration of the Federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.

The following table reconciles the total amount of unrecognized tax benefits at the beginning and end of the periods indicated.



	2019		2018			2017
	(in thousands)
Balance at January 1,	$	0	$	30,196		$	9,488
Increases in unrecognized tax benefits-prior years	0		0			12,373
(Decreases) in unrecognized tax benefits-prior years	0		0			0
Increases in unrecognized tax benefits-current year	0		0			8,335
(Decreases) in unrecognized tax benefits-current year	0		0			0
Settlements with taxing authorities	0		(30,196		)	0
Balance at December 31,	$	0	$	0		$	30,196
Unrecognized tax benefits that, if recognized, would favorably impact the effective rate	$	0	$	0		$	30,196

The Company does not anticipate any significant changes within the next twelve months to its total unrecognized tax benefits related to tax years for which the statute of limitations has not expired.

The Company classifies all interest and penalties related to tax uncertainties as income tax expense (benefit).

At December 31, 2019, the Company remains subject to examination in the U.S. for tax years 2015 through 2019.

The Company participates in the IRS’s Compliance Assurance Program. Under this program, the IRS assigns an examination team to review completed transactions as they occur in order to reach agreement with the Company on how they should be reported in the relevant tax returns. If disagreements arise, accelerated resolution programs are available to resolve the disagreements in a timely manner.