Federal Income Taxes

12 Months Ended

Dec. 31, 2019

A reconciliation of the effective tax rate to the statutory federal tax rate is shown below (in thousands, except percentages):



	Years ended December 31,
	2019					2018					2017
	Amount			Rate		Amount			Rate		Amount			Rate
Income tax expense before tax on equity in earnings of unconsolidated affiliates	$	145,819		18.3	%	$	29,643		18.2	%	$	114,921		27.7	%
Tax on equity in earnings of unconsolidated affiliates	21,735			2.7		4,469			2.8		30,336			7.3
Total expected income tax expense at the statutory rate	167,554			21.0		34,112			21.0		145,257			35.0
Tax-exempt investment income	(3,969		)	(0.5	)	(3,323		)	(2.0	)	(6,887		)	(1.7	)
Deferred tax change	(519		)	(0.1	)	(4,354		)	(2.7	)	(217,622		)	(52.4	)
Dividend exclusion	(3,628		)	(0.5	)	(4,080		)	(2.5	)	(8,701		)	(2.1	)
Miscellaneous tax credits, net	(7,090		)	(0.9	)	(7,802		)	(4.8	)	(9,524		)	(2.3	)
Low income housing tax credit expense	6,394			0.8		6,231			3.8		5,263			1.3
Change in valuation allowance	383			—		2,700			1.7		—			—
Tax accrual adjustment	5,350			0.7		(2,893		)	(1.8	)	—			—
Return to provision	1,007			0.1		(20,301		)	(12.5	)	—			—
Other items, net	(65		)	(0.1	)	1,155			0.6		1,905			0.5
Provision for federal income tax before interest expense	165,417			20.5		1,445			0.8		(90,309		)	(21.7	)
Interest benefit	—			—		—			—		(2,686		)	(0.6	)
Total	$	165,417		20.5	%	$	1,445		0.8	%	$	(92,995	)	(22.3	)%

During 2018, American National recorded an income tax benefit of $20,301,000 related to the filing of its 2017 tax return. The tax benefit was primarily a result of tax deductions taken at the prior year federal tax rate of 35% as opposed to the new federal tax rate of 21% primarily due to a pension plan contribution, depreciation on fixed assets and changes in our estimated income from joint ventures.

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform”) was enacted. The Tax Reform included numerous changes to existing federal income tax laws, including a permanent reduction in the federal corporate income tax rate from 35% to 21%. In addition, there were several changes that were specific to insurance companies, namely changes to the proration formula used to determine the amount of dividends eligible for the dividends-received deduction, and changes to the calculation of tax reserves associated with policyholder liabilities. As a result of the Tax Reform, we recorded a provisional tax benefit of $206.4 million in our 2017 financial statements. This tax benefit was primarily due to the remeasurement of our existing deferred tax balances to the 21% corporate income tax rate. There were no adjustments to the provisional tax benefit we recorded in 2017.

The tax effects of temporary differences that gave rise to the deferred tax assets and liabilities are shown below (in thousands):



	December 31,
	2019			2018
DEFERRED TAX ASSETS
Invested assets, principally due to impairment losses	$	16,760		$	18,148
Investment in real estate and other invested assets, principally due to investment valuation allowances	9,680			8,424
Policyholder funds, principally due to policy reserve discount	76,506			91,362
Policyholder funds, principally due to unearned premium reserve	25,726			24,586
Participating policyholders’ surplus	41,533			32,785
Pension	—			3,598
Commissions and other expenses	3,495			3,108
Other assets	11,291			9,756
Tax carryforwards	2,344			138
Gross deferred tax assets before valuation allowance	187,335			191,905
Valuation allowance	(3,083		)	(2,700		)
Gross deferred tax assets after valuation allowance	184,252			189,205

DEFERRED TAX LIABILITIES
Marketable securities, principally due to net unrealized gains	278,144			161,256
Investment in bonds, principally due to differences between GAAP and tax basis	15,004			13,088
Deferred policy acquisition costs, due to difference between GAAP and tax amortization methods	218,795			240,731
Property, plant and equipment, principally due to difference between GAAP and tax depreciation methods	20,812			22,204
Pension	1,833			—
Other liabilities	44,192			16,111
Gross deferred tax liabilities	578,780			453,390
Total net deferred tax liability	$	394,528		$	264,185

American National made income tax payments of $86,440,000, $22,234,000 and $33,640,000 during 2019, 2018, and 2017, respectively.

US GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance, if necessary, to reduce our deferred tax assets to an amount that is more-likely-than-not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. There were no material valuation allowances recorded during the years ended December 31, 2019 and 2018. Although realization is not assured, management believes it is more-likely-than-not that our remaining deferred tax assets will be realized and that no additional valuation allowance is necessary at this time.

As of December 31, 2019, American National had no material net operating loss or tax credit carryforwards.

American National’s federal income tax returns for years 2016 to 2018 are subject to examination by the Internal Revenue Service. Tax returns for 2013 to 2015 are subject to examination with certain limitations. In April 2019, American National received notice from the Internal Revenue Service of its intent to audit tax years 2013 to 2016. The audit is ongoing. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld. No provision for penalties or interest were established during 2019 or 2018 relating to a dispute with the Internal Revenue Service. As of December 31, 2019, American National had no provision for uncertain tax positions.