Income Taxes

12 Months Ended

Dec. 31, 2018

Note 8 - Income Taxes

As the result of the Tax Cuts and Jobs Act (Tax Act) enacted December 2017, the Company had recorded provisional amounts for the taxes associated with its partnership investments and the changes in discounting unpaid loss reserves based on information available at December 31, 2017. As a result of the guidance issued in 2018, the Company has determined there is no change in its estimates related to partnership investments. Updated estimates of the transition liability related to loss reserve discounting were less than the provisional amounts by approximately $1.1 million. Updated estimates of the transition liability related to life insurance reserves decreased the liability by approximately $6.8 million. The adjustments to the Company’s provisional amounts for the year ended December 31, 2018 did not impact the effective tax rate. As of December 31, 2018, there are no provisional amounts related to the impact of the Tax Act that remain in the Company’s Consolidated Financial Statements.

The income tax assets and liabilities included in Other assets and Other liabilities, respectively, in the Consolidated Balance Sheets were as follows:



($ in thousands)	December 31,
	2018			2017
Income tax (asset) liability
Current	$	(20,793	)	$	(16,266	)
Deferred	103,686			157,775

Deferred tax assets and liabilities are recognized for all future tax consequences attributable to "temporary differences" between the financial statement carrying value of existing assets and liabilities and their respective tax bases. There are no deferred tax liabilities that have not been recognized. The "temporary differences" that gave rise to the deferred tax balances were as follows:



($ in thousands)	December 31,
	2018		2017
Deferred tax assets
Unearned premium reserve reduction	$	12,112	$	11,472
Compensation accruals	6,866		8,359
Impaired securities	1,295		2,240
Other comprehensive income - net funded status of benefit plans	3,254		3,526
Discounting of unpaid claims and claim expense tax reserves	2,772		3,889
Postretirement benefits other than pensions	302		321
Charitable contributions carryforwards	89		62
Net operating loss carryforwards	10,969		148
Total gross deferred tax assets	37,659		30,017
Deferred tax liabilities
Other comprehensive income - net unrealized gains on securities	32,897		95,583
Deferred policy acquisition costs	60,330		52,438
Life insurance future policy benefit reserve	9,304		102
Life insurance future policy benefit reserve (transitional rule)	14,910		23,869
Discounting of unpaid claims and claim expense tax reserves (transitional rule)	1,203		2,513
Investment related adjustments	17,531		8,661
Intangibles	2,557		2,557
Other, net	2,613		2,069
Total gross deferred tax liabilities	141,345		187,792
Net deferred tax liability	$	103,686	$	157,775

The Company evaluated sources and character of income, including historical earnings, loss carryback potential, taxable income from future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income from prudent and feasible tax planning strategies. Although realization of deferred tax assets is not assured, the Company believes it is more likely than not that gross deferred tax assets will be fully realized and that a valuation allowance with respect to the realization of the total gross deferred tax assets was not necessary as of December 31, 2018 and 2017.

At December 31, 2018, the Company had available the following carryforwards or credits.

The components of the provision for income tax expense were as follows:



($ in thousands)	Years Ended December 31,
	2018			2017			2016

Current	$	4,152		$	3,813		$	26,359
Deferred	(2,958		)	(84,585		)	4,108
Total income tax expense (benefit)	$	1,194		$	(80,772	)	$	30,467

Income tax expense for the following periods differed from the expected tax computed by applying the federal corporate tax rate of 21% for 2018 and 35% for 2017 and 2016 to income before income taxes as follows:



($ in thousands)	Years Ended December 31,
	2018			2017			2016

Expected federal tax on income	$	4,103		$	31,041		$	39,981
Add (deduct) tax effects of:
Tax-exempt interest	(3,726		)	(5,335		)	(5,789		)
Dividend received deduction	(412		)	(4,810		)	(5,751		)
Tax Act DTL re-measurement	—			(98,988		)	—
Employee share-based compensation	(1,134		)	(3,258		)	127
Compensation deduction limitation	1,754			326			—
Prior year adjustments	300			(293		)	91
Other, net	309			545			1,808
Income tax expense (benefit) provided on income	$	1,194		$	(80,772	)	$	30,467

The Company's federal income tax returns for years prior to 2014 are no longer subject to examination by the Internal Revenue Service (IRS).

The Company recognizes tax benefits from tax return positions only if it is more likely than not the position will be sustainable, upon examination, on its technical merits and any relevant administrative practices or precedents. As a result, the Company applies a more likely than not recognition threshold for all tax uncertainties.

The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based upon changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.

HMEC and its subsidiaries file a consolidated federal income tax return. The federal income tax sharing agreements between HMEC and its subsidiaries, as approved by the Board, provide that tax on income is charged to each subsidiary as if it were filing a separate tax return with the limitation that each subsidiary will receive the benefit of any losses or tax credits to the extent utilized in the consolidated tax return. Intercompany balances are settled quarterly with a final settlement after filing the consolidated federal income tax return with the IRS.

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



($ in thousands)	Years Ended December 31,
	2018			2017			2016

Balance as of the beginning of the year	$	1,790		$	1,594		$	1,039
Increases related to prior year tax positions	—			101			348
Decreases related to prior year tax positions	(152		)	—			—
Increases related to current year tax positions	96			422			283
Settlements	—			—			—
Lapse of statute	—			(327		)	(76		)
Balance as of the end of the year	$	1,734		$	1,790		$	1,594

The Company's effective tax rate would be affected to the extent there were unrecognized tax benefits that could be recognized. There are no positions for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly change within the next 12 months.

The Company classifies all tax related interest and penalties as income tax expense.

Interest and penalties were both immaterial in each of the years ended December 31, 2018, 2017 and 2016.

($ in thousands)

Pretax Amount

Expiration Years

Operating loss carryforwards

Charitable contributions carryforwards