Income Taxes

12 Months Ended

Dec. 31, 2019

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,
	2019			2018
Income tax (asset) liability
Current	$	(12,184	)	$	(20,793	)
Deferred	160,624			103,686

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,
	2019		2018
Deferred tax assets
Unearned premium reserve reduction	$	12,103	$	12,112
Compensation accruals	8,866		6,866
Reinsurance commissions	6,804		—
Impaired securities	1,245		1,295
Other comprehensive income - net funded status of benefit plans	2,875		3,254
Discounting of unpaid claims and claim expense tax reserves	2,530		2,772
Postretirement benefits other than pensions	285		302
Charitable contributions carryforwards	—		89
Net operating loss carryforwards	3,803		10,969
Total gross deferred tax assets	38,511		37,659
Deferred tax liabilities
Other comprehensive income - net unrealized gains on securities	74,645		32,897
Deferred policy acquisition costs	49,326		60,330
Life insurance future policy benefit reserve	38,210		9,304
Life insurance future policy benefit reserve (transitional rule)	12,786		14,910
Discounting of unpaid claims and claim expense tax reserves (transitional rule)	947		1,203
Investment related adjustments	15,718		17,531
Intangibles	2,021		2,557
Other, net	5,482		2,613
Total gross deferred tax liabilities	199,135		141,345
Net deferred tax liability	$	160,624	$	103,686

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, 2019 and 2018.

At December 31, 2019, the Company had available the following carryforwards or credits.

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



($ in thousands)	Years Ended December 31,
	2019		2018			2017
Current	$	31,518	$	4,152		$	3,813
Deferred	20,488		(2,958		)	(84,585		)
Total income tax expense (benefit)	$	52,006	$	1,194		$	(80,772	)

Income tax expense for the following periods differed from the expected tax computed by applying the federal corporate tax rate of 21% for 2019 and 2018 and 35% for 2017 to income before income taxes as follows:



($ in thousands)	Years Ended December 31,
	2019			2018			2017
Expected federal tax on income	$	49,654		$	4,103		$	31,041
Add (deduct) tax effects of:
Tax-exempt interest	(4,159		)	(3,726		)	(5,335		)
Dividend received deduction	(1,392		)	(412		)	(4,810		)
Goodwill impairment	5,885			—			—
Tax Act DTL re-measurement	—			—			(98,988		)
Employee share-based compensation	272			(1,134		)	(3,258		)
Compensation deduction limitation	680			1,754			326
Prior year adjustments	(716		)	300			(293		)
Other, net	1,782			309			545
Income tax expense (benefit) provided on income	$	52,006		$	1,194		$	(80,772	)

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. National Teachers Associates Life Insurance Company and NTA Life Insurance Company of New York are not included in the consolidated federal income tax return and will file separate federal income tax returns until they are eligible to participate in the consolidated federal income tax return. This is expected to occur in 2025.

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,
	2019		2018			2017
Balance as of the beginning of the year	$	1,734	$	1,790		$	1,594
Increases related to prior year tax positions	109		—			101
Decreases related to prior year tax positions	—		(152		)	—
Increases related to current year tax positions	123		96			422
Settlements	—		—			—
Lapse of statute	—		—			(327		)
Balance as of the end of the year	$	1,966	$	1,734		$	1,790

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, 2019, 2018 and 2017.

($ in thousands)

Pretax Amount

Expiration Year

Operating loss carryforwards

Operating loss carryforwards

Indefinite