Income Taxes

12 Months Ended

Dec. 31, 2022

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,
	2022		2021		2020
	(in thousands)
Current tax expense (benefit):
U.S. federal	$	(345,263)	$	440,649	$	(358,548)
State and local	4,479		5,002		0
Total	(340,784)		445,651		(358,548)
Deferred tax expense (benefit):
U.S. federal	339,902		(1,137,090)		228,300
Total	339,902		(1,137,090)		228,300
Total income tax expense (benefit) on income (loss) before equity in earnings of operating joint ventures	(882)		(691,439)		(130,248)
Income tax expense (benefit) on equity in earnings of operating joint ventures	(193)		(147)		(518)
Income tax expense (benefit) reported in equity related to:
Other comprehensive income (loss)	(510,840)		(52,374)		70,806
Total income tax expense (benefit)	$	(511,915)	$	(743,960)	$	(59,960)

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 2022, 2021 and 2020, and the reported income tax expense (benefit) are summarized as follows:

	Year Ended December 31,
	2022			2021			2020
	(in thousands)
Expected federal income tax expense (benefit)	$	87,361		$	(609,393)		$	14,308
Non-taxable investment income	(46,426)			(48,662)			(46,836)
Tax credits	(47,544)			(36,806)			(27,980)
Changes in tax law	0			(3,644)			(70,121)
Other	5,727			7,066			381
Reported income tax expense (benefit)	$	(882)		$	(691,439)		$	(130,248)
Effective tax rate	(0.2)		%	23.8		%	(191.2)		%

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 2022, 2021 and 2020 was (0.2)%, 23.8% and (191.2)%, respectively. The following is a description of items that had a significant impact on the difference between the Company’s statutory U.S. federal income tax rate of 21% applicable for 2022, 2021 and 2020, 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 is included in most of the non-taxable investment income shown in the table above. More specifically, the U.S. DRD constitutes $44 million of the total $46 million of 2022 non-taxable investment income, $46 million of the total $49 million of 2021 non-taxable investment income, and $45 million of the total $47 million of 2020 non-taxable investment income. The DRD for the current period was estimated using information from 2021, 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 2020 NOL back to tax years that have a 35% tax rate.

Other. This line item represents 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,
	2022		2021
	(in thousands)
Deferred tax assets:
Insurance reserves	$	1,338,174	$	2,391,739
Investments	343,012		0
Net unrealized loss on securities	481,763		0
Other	2,800		2,894
Deferred tax assets	2,165,749		2,394,633
Deferred tax liabilities:
Deferred policy acquisition cost	888,944		1,003,301
Deferred sales inducements	57,870		78,676
Net unrealized gain on securities	0		114,705
Investments	0		155,891
Deferred tax liabilities	946,814		1,352,573
Net deferred tax asset (liability)	$	1,218,935	$	1,042,060

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.

Changes in market conditions during 2022, including rising interest rates, resulted in the recording of deferred tax assets related to net unrealized tax capital losses. When assessing recoverability of these deferred tax assets, we consider our ability and intent to hold the underlying securities to recovery in value, if necessary, as well as other factors as noted above. As of December 31 2022, based on all available evidence, including capital loss carryback capacity, we concluded that the deferred tax assets related to the unrealized tax capital losses on the available for sale securities portfolios are, more likely than not, expected to be realized.

The Company had no valuation allowance as of December 31, 2022 and 2021. 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 $416 million, $(2,902) million and $68 million for the years ended December 31, 2022, 2021 and 2020, 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, 2022, 2021, and 2020. 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, 2022, the Company remains subject to examination in the U.S. for tax years 2014 through 2022.

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 resolutions programs are available to resolve the disagreements in a timely manner.