NOTE 15. INCOME TAXES

On December 22, 2017, Public Law 115-97, more commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), was enacted. The Tax Act includes numerous changes to existing federal income tax law, including a permanent reduction in the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. In 2017, pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recorded certain provisional amounts for estimated income tax effects of the Tax Act on deferred income taxes.

In 2018, the Company finalized its determination of the effects of the Tax Act on deferred income taxes based on information received from third parties, completion of actuarial tax computations that impact the amount of deductions related to reserves reportable for federal income tax purposes for tax years prior to 2018, and other items. As a result, the Company recorded a benefit of $26.4 million during the year ended December 31, 2018, which was primarily attributable to the effect of updated actuarial tax computations.

The tax effects of temporary differences that give rise to significant portions of the Company’s Net Deferred Income Tax Assets and Deferred Income Tax Liabilities at December 31, 2018 and 2017 were:



DOLLARS IN MILLIONS	2018			2017
Deferred Income Tax Assets:
Insurance Reserves	$	17.0		$	55.7
Unearned Premium Reserves	59.1			26.7
Tax Capitalization of Policy Acquisition Costs	44.0			41.9
Payroll and Employee Benefit Accruals	49.6			37.2
Net Operating Loss Carryforwards	5.5			31.8
Other	11.2			3.7
Total Deferred Income Tax Assets	186.4			197.0
Deferred Income Tax Liabilities:
Investments	33.2			90.6
Deferred Policy Acquisition Costs	98.7			76.8
Life VIF and P&C Customer Relationships	6.0			6.9
Goodwill and Other Intangible Assets Acquired	45.2			22.3
Depreciable Assets	27.1			12.1
Other	2.4			3.1
Total Deferred Income Tax Liabilities	212.6			211.8
Net Deferred Income Tax Assets (Liabilities)	$	(26.2	)	$	(14.8	)

NOTE 15. INCOME TAXES (Continued)

The expiration of federal net operating loss (“NOL”) carryforwards and their related deferred income tax assets at December 31, 2018 is presented below by year of expiration.



DOLLARS IN MILLIONS	NOL Carry-forwards		Deferred Tax Asset
Expiring in:
2026	$	3.9	$	0.8
2027	17.8		3.8
2028	4.4		0.9
Total All Years	$	26.1	$	5.5

The NOL carryforwards were acquired in connection with business acquisitions made in prior years and are subject to annual usage limitations under the Internal Revenue Code. The Company expects to fully utilize these federal NOL carryforwards.

A reconciliation of the beginning and ending amount of Unrecognized Tax Benefits for the years ended December 31, 2018, 2017 and 2016 is presented below.



DOLLARS IN MILLIONS	2018			2017			2016
Liabilities for Unrecognized Tax Benefits at Beginning of Year	$	8.1		$	5.1		$	3.8
Additions for Tax Positions of Current Year	0.7			3.1			1.5
Additions (Reductions) for Tax Positions of Prior Years	(4.4		)	—			—
Reduction for Expiration of Federal Statute of Limitations	—			(0.1		)	(0.2		)
Liabilities for Unrecognized Tax Benefits at End of Year	$	4.4		$	8.1		$	5.1

The Company’s consolidated federal income tax returns from 2012-2017 are subject to examination by the Internal Revenue Service.

Unrecognized Tax Benefits at December 31, 2018, 2017 and 2016 include $3.7 million, $7.6 million and $4.6 million, respectively, for tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred income tax accounting, other than for interest and penalties, the disallowance of the shorter deductibility period would not affect the effective income tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The liability for Unrecognized Tax Benefits included accrued interest of $0.7 million, $0.5 million and $0.5 million at December 31, 2018, 2017 and 2016, respectively. Net interest related to unrecognized tax benefits for the years ended December 31, 2018, 2017, and 2016 were insignificant.

The statute of limitations related to Kemper and its eligible subsidiaries’ consolidated Federal income tax returns is closed for all tax years up to and including 2011. As a result of the Company filing amended federal income tax returns resulting from an election to update interest rates used to compute the tax basis of reserves on life insurance contracts issued prior to 2018, tax years 2012 and 2013 are under limited examination with respect to carryback adjustments associated with the amended returns. The statute of limitations related to tax years 2014 and 2015 has been extended to December 31, 2019.

The expiration of the statute of limitations related to the various state income tax returns that Kemper and its subsidiaries file varies by state.

NOTE 15. INCOME TAXES (Continued)

The components of Income Tax Expense from Continuing Operations for the years ended December 31, 2018, 2017 and 2016 were:



DOLLARS IN MILLIONS	2018			2017			2016
Current Income Tax Benefit (Expense)	$	32.2		$	(23.1	)	$	8.2
Deferred Income Tax Benefit (Expense)	(46.5		)	(15.1		)	2.3
(Increase) Decrease Unrecognized Tax Benefits	3.6			(3.0		)	(1.3		)
Income Tax Benefit (Expense)	$	(10.7	)	$	(41.2	)	$	9.2

Income taxes paid, net of income tax refunds received, were $0.2 million in 2018. Income tax paid, net of refunds received, were $13.0 million in 2017. Income tax refunds received, net of income tax paid, were $0.5 million 2016.

A reconciliation of the Statutory Federal Income Tax Expense and Rate to the Company’s Effective Income Tax Expense and Rate from Continuing Operations for the years ended December 31, 2018, 2017 and 2016 is presented below.



DOLLARS IN MILLIONS	2018					2017					2016
DOLLARS IN MILLIONS	Amount			Rate		Amount			Rate		Amount			Rate
Statutory Federal Income Tax Expense	$	(41.8	)	21.0	%	$	(56.4	)	35.0	%	$	(1.2	)	35.0	%
Tax-exempt Income and Dividends Received Deduction	4.8			(2.4	)	9.8			(6.0	)	9.8			(279.5	)
Indemnification Recoveries	—			—		—			—		0.2			(6.5	)
State Income Taxes	(0.1		)	0.1		0.1			(0.1	)	(0.6		)	16.9
Tax Reform	26.4			(13.3	)	7.4			(4.6	)	—			—
Other, Net	—			—		(2.1		)	1.3		1.0			(28.9	)
Effective Income Tax Benefit (Expense) from Continuing Operations	$	(10.7	)	5.4	%	$	(41.2	)	25.6	%	$	9.2		(263.0	)%

Comprehensive Income Tax Benefit (Expense) included in the Consolidated Financial Statements for the years ended December 31, 2018, 2017 and 2016 was:



DOLLARS IN MILLIONS	2018			2017			2016
Income Tax Benefit (Expense):
Continuing Operations	$	(10.7	)	$	(41.2	)	$	9.2
Discontinued Operations	(0.6		)	(0.5		)	(2.2		)
Unrealized Depreciation (Appreciation) on Securities	49.6			(25.9		)	0.9
Foreign Currency Translation Adjustments on Investments	(0.1		)	(0.6		)	0.1
Tax Effects from Postretirement Benefit Plans	1.5			(0.6		)	(7.3		)
Tax Effects from Cash Flow Hedge	(0.3		)	2.4			(0.6		)
Tax Effects from Long-term Equity-based Compensation included in Paid-in Capital	—			—			(1.1		)
Comprehensive Income Tax Benefit (Expense)	$	39.4		$	(66.4	)	$	(1.0	)