Income Tax

12 Months Ended

Dec. 31, 2019

INCOME TAX

The effective tax rate for 2019 was higher than the U.S. Statutory rate of 21.0% primarily as a result of valuation allowance increases in various jurisdictions and tax expense related to uncertain tax positions, which were partially offset by foreign bases differences, excess tax benefit of equity compensation and tax benefit from foreign tax credits. The effective tax rate for 2018 was lower than the U.S. Statutory rate of 21% primarily as a result of the release of a valuation allowance on foreign tax credits and foreign bases differences, which was partially offset by tax expense related to GILTI and valuation allowance increases. The 2017 effective tax rate includes the tax effects of U.S. Tax Reform. See the table below for additional information.

Pre-tax income for the years ended December 31, 2019, 2018 and 2017 consists of the following (dollars in millions):



	2019		2018		2017
Pre-tax income - U.S.	$	871	$	626	$	871
Pre-tax income - foreign	261		220		272
Total pre-tax income	$	1,132	$	846	$	1,143

The provision for income tax expense for the years ended December 31, 2019, 2018 and 2017 consists of the following (dollars in millions):



	2019			2018			2017
Current income tax expense (benefit):
U.S.	$	(9	)	$	78		$	131
U.S. Tax Reform	—			(68		)	—
Foreign	60			43			37
Total current	51			53			168
Deferred income tax expense (benefit):
U.S.	182			63			160
U.S. Tax Reform	—			6			(1,034		)
Foreign	29			8			27
Total deferred	211			77			(847		)
Total provision for income taxes	$	262		$	130		$	(679	)

The Company’s effective tax rate differed from the U.S. federal income tax statutory rate of 21%, 21%, and 35% as a result of the following for the years ended December 31, 2019, 2018 and 2017 (dollars in millions):



	2019			2018			2017
Tax provision at U.S. statutory rate	$	238		$	178		$	400
Increase (decrease) in income taxes resulting from:
U.S. Tax Reform	—			(62		)	(1,034		)
Foreign tax rate differing from U.S. tax rate	2			4			(22		)
Differences in tax basis in foreign jurisdictions	(23		)	(23		)	(23		)
Deferred tax valuation allowance	56			23			29
Amounts related to audit contingencies	8			1			(7		)
Equity compensation excess benefit	(8		)	(6		)	(10		)
Corporate rate changes	(1		)	1			(6		)
GILTI, net of credits	—			10			—
Subpart F for non-full inclusion companies	1			1			2
Foreign tax credits	(6		)	(3		)	(2		)
Return to provision adjustments	(6		)	(1		)	(5		)
Other, net	1			7			(1		)
Total provision for income taxes	$	262		$	130		$	(679	)
Effective tax rate	23.1		%	15.4		%	(59.4		)%

Total income taxes for the years ended December 31, 2019, 2018 and 2017 were as follows (dollars in millions):



	2019			2018			2017
Provision for income taxes	$	262		$	130		$	(679	)
Income tax from OCI and additional paid-in-capital:
Net unrealized holding gain (loss) on debt and equity securities recognized for financial reporting purposes	681			(368		)	307
Foreign currency translation	3			19			(42		)
Unrealized pension and post retirement	(5		)	—			—
Total income taxes provided	$	941		$	(219	)	$	(414	)

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities at December 31, 2019 and 2018, are presented in the following tables (dollars in millions):



	2019			2018
Deferred income tax assets:
Nondeductible accruals	$	100		$	86
Differences between tax and financial reporting amounts concerning certain reinsurance transactions	105			102
Differences in the tax basis of cash and invested assets	—			28
Investment income differences	7			80
Deferred acquisition costs capitalized for tax	127			125
Net operating loss carryforward	330			406
Capital loss and tax credit carryforwards	38			33
Subtotal	707			860
Valuation allowance	(236		)	(181		)
Total deferred income tax assets	471			679
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting	797			843
Differences between tax and financial reporting amounts concerning certain reinsurance transactions	1,293			1,152
Differences in the tax basis of cash and invested assets	991			346
Investment income differences	—			9
Differences in foreign currency translation	52			53
Anticipated future tax credit reduction	26			25
Total deferred income tax liabilities	3,159			2,428
Net deferred income tax liabilities	$	2,688		$	1,749
Balance sheet presentation of net deferred income tax liabilities:
Included in other assets	$	24		$	50
Included in deferred income taxes	2,712			1,799
Net deferred income tax liabilities	$	2,688		$	1,749

As of December 31, 2019, the valuation allowance against deferred tax assets was $236 million. During 2019 there was a $44 million increase to the valuation allowance related to the tax losses of RGA Reinsurance Company of Australia Limited ("RGA Australia"). RGA Australia's tax loss primarily relates to income on internal retrocession that is not taxable in RGA Australia. The RGA Australia deferred tax asset has been reduced to the amount more likely than not to be realized considering the projected future earnings. The valuation allowance also increased due to losses in jurisdictions where the company does not have a recent history of earnings including China and Spain. These increases were partially offset by a release of a valuation allowance in New Zealand due to taxable income in recent years.

As of December 31, 2018, the valuation allowance against deferred tax assets was $181 million. During 2018, a valuation allowance on the U.S. Foreign tax credit carryforwards of $65 million was released. This release partially offset a $25 million increase to the valuation allowance related to the net operating losses of RGA Australia and increases and decreases to the valuation allowance in jurisdictions where the Company does not have a history of earnings. Further decreases to the valuation allowance include foreign currency translation and reclassifications with other deferred tax assets of $13 million.

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, 2019 and 2018, the financial reporting basis in excess of the tax basis for which no deferred taxes have been recognized was approximately $1,642 million and $1,364 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 were repatriated.

During 2019, 2018, and 2017, the Company received federal and foreign income tax refunds of approximately $22 million, $2 million, and $12 million, respectively. The Company made cash income tax payments of approximately $66 million, $144 million, and $49 million, in 2019, 2018, and 2017, respectively.

The following table presents consolidated net operating losses (“NOL”) as of December 31, 2019 (dollars in millions):



	2019
NOL with no expiration and with no valuation allowance	$	129
NOL with a full valuation allowance	140
NOL with no expiration and a partial valuation allowance	513
NOL with expiration dates between 2029 & 2038 with no valuation allowance	530
Total net operating loss carryforwards	$	1,312

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.

As of December 31, 2019 the Company had foreign tax credit carryforwards of $28 million in Ireland for which there is a full valuation allowance.

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 2016, Canadian tax authorities for years prior to 2015 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 2014.

As of December 31, 2019, the Company’s total amount of unrecognized tax benefits was $333 million and the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $21 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, 2019, 2018 and 2017, is as follows (dollars in millions):



	Total Unrecognized Tax Benefits
	2019			2018			2017
Beginning balance, January 1	$	325		$	321		$	297
Acquisition Accounting	—			1			—
Additions for tax positions of prior years	264			256			248
Reductions for tax positions of prior years	(262		)	(257		)	(247		)
Additions for tax positions of current year	6			4			36
Settlements with tax authorities	—			—			(13		)
Ending balance, December 31	$	333		$	325		$	321

The Company recognized interest expense (benefit) associated with uncertain tax positions in 2019, 2018 and 2017 of $12 million, $(3) million, and $(5) million, respectively. As of December 31, 2019 and 2018, the Company had $23 million and $12 million, respectively, of accrued interest related to unrecognized tax benefits. There are no penalties accrued as of December 31, 2019 or December 31, 2018.