Income Taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

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

	Year Ended December 31,
	2021		2020		2019
	(in thousands)
Current tax expense (benefit):
U.S. federal	$	440,649	$	(358,548)	$	56,371
State and local	5,002		0		0
Total	445,651		(358,548)		56,371
Deferred tax expense (benefit):
U.S. federal	(1,137,090)		228,300		(115,503)
Total	(1,137,090)		228,300		(115,503)
Total income tax expense (benefit) on income (loss) before equity in earnings of operating joint ventures	(691,439)		(130,248)		(59,132)
Income tax expense (benefit) on equity in earnings of operating joint ventures	(147)		(518)		(1,773)
Income tax expense (benefit) reported in equity related to:
Other comprehensive income (loss)	(52,374)		70,806		81,281
Total income tax expense (benefit)	$	(743,960)	$	(59,960)	$	20,376

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 2021, 2020 and 2019, and the reported income tax expense (benefit) are summarized as follows:

	Year Ended December 31,
	2021			2020			2019
	(in thousands)
Expected federal income tax expense (benefit)	$	(609,393)		$	14,308		$	33,345
Non-taxable investment income	(48,662)			(46,836)			(52,291)
Tax credits	(36,806)			(27,980)			(40,602)
Changes in tax law	(3,644)			(70,121)			0
Other	7,066			381			416
Reported income tax expense (benefit)	$	(691,439)		$	(130,248)		$	(59,132)
Effective tax rate	23.8		%	(191.2)		%	(37.2)		%

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 2021, 2020 and 2019 was 23.8%, (191.2)% and (37.2)%, 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 2021, 2020 and 2019, and the Company’s effective tax rate during the periods presented:

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 $46 million of the total $49 million of 2021 non-taxable investment income, $45 million of the total $47 million of 2020 non-taxable investment income, and $50 million of the total $52 million of 2019 non-taxable investment income. The DRD for the current period was estimated using information from 2020, 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.

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

The CARES Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted into law. One provision of the CARES Act amends the Tax Act of 2017 and allows companies with net operating losses (“NOLs”) originating in 2020, 2019 or 2018 to carry back those losses for up to five years. For 2020, the Company recorded an income tax benefit of $70 million from carrying the estimated 2020 NOL back to tax years that have a 35% tax rate.

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,
	2021		2020
	(in thousands)
Deferred tax assets:
Insurance reserves	$	2,391,739	$	296,635
Other	2,894		0
Deferred tax assets	2,394,633		296,635
Deferred tax liabilities:
Deferred policy acquisition cost	1,003,301		142,147
Deferred sales inducements	78,676		0
Net unrealized gain on securities	114,705		180,067
Investments	155,891		124,821
Other	0		4,032
Deferred tax liabilities	1,352,573		451,067
Net deferred tax asset (liability)	$	1,042,060	$	(154,432)

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, 2021 and 2020. 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 $(2,902) million, $68 million and $159 million for the years ended December 31, 2021, 2020 and 2019, 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 Company had no unrecognized tax benefits as of December 31, 2021, 2020, and 2019. 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). The company did not recognize tax related interest and penalties.

At December 31, 2021, the Company remains subject to examination in the U.S. for tax years 2014 through 2021.

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.