INCOME TAX

The Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”) was signed into law on December 22, 2017. U.S. Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (5) creating the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (6) establishing a new provision designed to tax global intangible low-taxed income (“GILTI”), which allows for the possibility of using foreign tax credits and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); and (7) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

In connection with the Company’s initial analysis of the impact of U.S. Tax Reform, it recorded a discrete provisional net tax benefit of $1,033.8 million in the period ending December 31, 2017. This estimated net benefit primarily consists of the U.S. federal rate reduction from 35 percent to 21 percent applied to the net deferred tax liability. The Company provisionally estimates there would be no one-time transition tax on unrepatriated earnings of foreign subsidiaries. However, this tax could change based on future clarification of U.S. Tax Reform, as well as due to the Company gathering additional information to more precisely compute the transition tax. Further, as a result of U.S. Tax Reform, the Company established a valuation allowance of $58.9 million related to U.S. foreign tax credit carryforwards. The valuation allowance relates to the Company’s interpretation of the changes in the ability to use existing foreign tax credit carryforwards against future foreign branch profits. The valuation allowance could change based on future interpretation and analysis of U.S. Tax Reform.

Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of U.S. Tax Reform and the application of Accounting Standards Codification 740 (“ASC 740”). Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to the GILTI as a current-period expense when incurred (“the period cost method”) or (2) factoring such amounts into a Company’s measurement of its deferred taxes (“the deferred method”). The Company’s selection of an accounting policy with respect to new GILTI tax rules will depend, in part, on analyzing its global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only its current corporate structure, its intercompany reinsurance business flows and estimated future results of global operations, but also its intent and ability to modify its structure and/or its business, the Company is not yet able to reasonably estimate the effect of this provision of U.S. Tax Reform. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI.

The SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of U.S. Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from U.S. Tax Reform enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of U.S. Tax Reform for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of U.S. Tax Reform is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of U.S. Tax Reform.

The Company calculated a provisional estimate of the impact of U.S. Tax Reform. The actual adjustment may vary from this estimate due to a number of uncertainties and factors, including changes in interpretations and assumptions made by the Company, gathering additional information to more precisely compute the pretax deferred tax items upon which the change in rate was applied, and may change due to future further clarification of the new law regulatory and accounting guidance. The Company is still analyzing U.S. Tax Reform and refining its calculations, which could potentially impact the measurement of recorded tax balances as of December 31, 2017. This provisional amount is based on the best information currently available and may be revised and is subject to change. The provisional impact of the enactment of U.S. Tax Reform is reflected in the tables below.

Pre-tax income for the years ended December 31, 2017, 2016 and 2015 consists of the following (dollars in thousands):



	2017		2016		2015
Pre-tax income - U.S.	$	870,532	$	758,496	$	493,328
Pre-tax income - foreign	272,283		285,450		251,467
Total pre-tax income	$	1,142,815	$	1,043,946	$	744,795

The provision for income tax expense for the years ended December 31, 2017, 2016 and 2015 consists of the following (dollars in thousands):



	2017			2016		2015
Current income tax expense (benefit):
U.S.	$	131,108		$	1,020	$	1,588
Foreign	36,830			47,706		92,045
Total current	167,938			48,726		93,633
Deferred income tax expense (benefit):
U.S.	159,853			273,928		193,204
U.S. Tax Reform provisional estimate	(1,033,755		)	—		—
Foreign	26,598			19,849		(44,208		)
Total deferred	(847,304		)	293,777		148,996
Total provision for income taxes	$	(679,366	)	$	342,503	$	242,629

The Company’s effective tax rate differed from the U.S. federal income tax statutory rate of 35% as a result of the following for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):



	2017			2016			2015
Tax provision at U.S. statutory rate	$	399,985		$	365,381		$	260,678
Increase (decrease) in income taxes resulting from:
U.S. Tax Reform provisional estimate	(1,033,755		)	—			—
Foreign tax rate differing from U.S. tax rate	(21,867		)	(13,974		)	(9,950		)
Differences in tax basis in foreign jurisdictions	(23,324		)	(17,770		)	(32,472		)
Deferred tax valuation allowance	29,458			10,963			19,157
Amounts related to audit contingencies	(7,184		)	111			88
Equity compensation excess benefit	(10,532		)	—			—
Corporate rate changes	(6,065		)	—			—
Subpart F for non-full inclusion companies	1,528			1,783			3,473
Foreign tax Credits	(1,681		)	(1,683		)	(1,936		)
Return to provision Adjustments	(4,674		)	(1,473		)	1,482
Other, net	(1,255		)	(835		)	2,109
Total provision for income taxes	$	(679,366	)	$	342,503		$	242,629
Effective tax rate	(59.4		)%	32.8		%	32.6		%

Total income taxes for the years ended December 31, 2017, 2016 and 2015 were as follows (dollars in thousands):



	2017			2016			2015
Provision for income taxes	$	(679,366	)	$	342,503		$	242,629
Income tax from OCI and additional paid-in-capital:
Net unrealized holding gain (loss) on debt and equity securities recognized for financial reporting purposes	306,849			157,929			(339,889		)
Exercise of stock options	—			(162		)	(2,963		)
Foreign currency translation	(42,153		)	21,081			16,478
Unrealized pension and post retirement	404			1,772			1,726
Total income taxes provided	$	(414,266	)	$	523,123		$	(82,019	)

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities at December 31, 2017 and 2016, are presented in the following tables (dollars in thousands):



	2017			2016
Deferred income tax assets:
Nondeductible accruals	$	80,905		$	125,879
Differences between tax and financial reporting amounts concerning certain reinsurance transactions	96,043			87,688
Differences in the tax basis of cash and invested assets	557			775
Investment income differences	43,230			35,192
Deferred acquisition costs capitalized for tax	88,531			143,003
Net operating loss carryforward	535,374			325,806
Capital loss and tax credit carryforwards	102,143			101,223
Subtotal	946,783			819,566
Valuation allowance	(226,884		)	(133,354		)
Total deferred income tax assets	719,899			686,212
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting	627,378			1,013,642
Differences between tax and financial reporting amounts concerning certain reinsurance transactions	1,547,101			1,773,929
Differences in the tax basis of cash and invested assets	674,569			505,841
Investment income differences	1,858			5,635
Differences in foreign currency translation	33,803			91,067
Prepaid expenses	—			—
Total deferred income tax liabilities	2,884,709			3,390,114
Net deferred income tax liabilities	$	2,164,810		$	2,703,902
Balance sheet presentation of net deferred income tax liabilities:
Included in other assets	$	33,499		$	66,738
Included in deferred income taxes	2,198,309			2,770,640
Net deferred income tax liabilities	$	2,164,810		$	2,703,902

As of December 31, 2017, a valuation allowance against deferred tax assets was approximately $226.9 million. During 2017, a valuation allowance was established on the U.S. Foreign tax credit carryforwards of $65.1 million, RGA Reinsurance Company of Australia Limited’s, (“RGA Australia”) net operating losses of $20.1 million, as well as on the deferred tax assets of other jurisdictions of $3.3 million. Further movement in the valuation allowance includes foreign currency translation and reclassifications with other deferred tax assets of $10.6 million and ($5.6) million, respectively. The other significant components of the valuation allowance relate to a partial valuation allowance on the net operating loss carryforwards in RGA Australia and the foreign tax credit carryforwards in RGA International Reinsurance Company dac (“RGA International”). A valuation allowance also exists against the deferred tax assets of other branches and legal entities most of which there is no history of earnings in recent years.

As of December 31, 2016, a valuation allowance for deferred tax assets of approximately $133.4 million was provided on the total deferred tax assets in certain jurisdictions. The valuation allowance is primarily related to numerous branches and legal entities for which there is no history of earnings in recent years. Further there is a partial valuation allowance on RGA South Africa, RGA Australia, and Aurora National net operating losses, as well as RGA International’s foreign tax credit. The Company utilizes valuation allowance when it believes, based on the weight of the available evidence, that it is more likely than not that the deferred income tax asset will not be utilized.

The earnings of substantially all of the Company’s foreign subsidiaries have been permanently reinvested in foreign operations. No provision has been made for U.S. tax or foreign withholding taxes that may be applicable upon any repatriation or sale. At December 31, 2017 and 2016, the financial reporting basis in excess of the tax basis for which no deferred taxes have been recognized was approximately $1,442.9 million and $1,147.2 million, respectively. As U.S. Tax Reform generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, the Company does not expect to incur material income taxes if these funds are repatriated.

During 2017, 2016 and 2015, the Company received federal and foreign income tax refunds of approximately $11.6 million, $6.9 million and $136.8 million, respectively. The Company made cash income tax payments of approximately $48.7 million, $68.0 million and $178.4 million in 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, the Company recognized gross deferred tax assets associated with net operating losses of approximately $2,715.8 million and $1,353.6 million, respectively. The earliest expiration date for any significant net operating losses is 2029. Net operating losses of $181.2 million, $451.4 million, and $1,557.1 million would expire in 2029, 2030, and 2032, respectively if unutilized. The remaining losses where a valuation allowance has not been established that are subject to expiration are $48.0 million and would expire between 2034 and 2036. These net operating losses, other than the net operating losses for which there is a valuation allowance, are expected to be utilized in the normal course of business during the period allowed for carryforwards and in any event, are not expected to be lost, due to the application of tax planning strategies that management would utilize.

At December 31, 2017 and 2016, the Company also has foreign tax credit carryforwards of $152.0 million and $100.9 million, respectively, in the U.S. and Ireland. During 2017 the Company established a valuation allowance of $65.1 million on the U.S. foreign tax credits and the remaining U.S. foreign tax credits of $57.0 million reduced the uncertain tax liabilities. The Ireland foreign tax credit of $29.9 million has a full valuation allowance. The Company also has AMT carryforwards of $25.9 million and $21.3 million, respectively. As a result of U.S. Tax Reform, the AMT credits are fully refundable if unutilized by 2021. The Company has recorded these credits as deferred tax assets.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is under continuous examination by the Internal Revenue Service and is subject to audit by taxing authorities in other foreign jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2014, Canadian tax authorities for years prior to 2013 and with a few exceptions, the Company is no longer subject to state and foreign income tax examinations by tax authorities for years prior to 2012.

As of December 31, 2017, the Company’s total amount of unrecognized tax benefits was $321.2 million and the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $10.9 million. Management believes there will be no material impact to the Company’s effective tax rate related to unrecognized tax benefits over the next 12 months.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015, is as follows (dollars in thousands):



	Total Unrecognized Tax Benefits
	2017			2016			2015
Beginning balance, January 1	$	297,290		$	296,213		$	274,661
Additions for tax positions of prior years	247,596			226,720			26,170
Reductions for tax positions of prior years	(246,894		)	(229,719		)	(7,820		)
Additions for tax positions of current year	36,438			4,186			3,396
Settlements with tax authorities	(13,206		)	(110		)	(194		)
Ending balance, December 31	$	321,224		$	297,290		$	296,213

The Company recognized interest expense (benefit) associated with uncertain tax positions in 2017, 2016 and 2015 of $(5.0) million, $(8.4) million and $8.2 million, respectively. Additionally, the Company recognized penalties of $0.3 million in 2016. As of December 31, 2017 and 2016, the Company had $15.1 million and $20.4 million, respectively, of accrued interest related to unrecognized tax benefits. There are no penalties accrued as of December 31, 2017.