Income Taxes

12 Months Ended

Dec. 31, 2019

INCOME TAXES

Significant components of the income tax provision are as follows for the periods presented (in thousands):



	For the Years Ended December 31,
	2019		2018			2017
Current:
Federal	$	12,328	$	31,981		$	53,962
State and local	2,703		7,581			8,278
Total current expense	15,031		39,562			62,240
Deferred:
Federal	1,622		(3,487		)	851
State and local	350		(253		)	458
Total deferred expense (benefit)	1,972		(3,740		)	1,309
Income tax expense	$	17,003	$	35,822		$	63,549

The following table reconciles the statutory federal income tax rate to the Company’s effective income tax rate for the periods presented:



	For the Years Ended December 31,
	2019		2018		2017
Expected provision at federal statutory tax rate	21.0	%	21.0	%	35.0	%
Increases (decreases) resulting from:
State income tax, net of federal tax benefit	3.7	%	3.8	%	3.2	%
Effect of change in tax rate	0.3	%	—		2.8	%
Disallowed meals & expenses	0.7	%	0.3	%	0.4	%
Disallowed compensation	3.2	%	1.3	%	0.4	%
Excess tax benefit	(1.0	)%	(3.5	)%	(3.4	)%
Other, net	(1.1	)%	0.5	%	(1.1	)%
Total income tax expense (benefit)	26.8	%	23.4	%	37.3	%

The Company recognized excess income tax benefit of $0.6 million and $5.4 million from stock-based compensation awards that vested and/or were exercised during the years ended December 31, 2019 and 2018, respectively. Excess income tax benefits are reflected as an income tax benefit in the consolidated statements of income as a component of the provision for income taxes.

Changes in federal tax law have affected the Company’s balances of deferred income tax assets and liabilities. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“Tax Act”) was signed into law. The Tax Act amended the definition of annual rate and the computational rules for loss payment patterns. The Tax Act also provided transitional rules for the application of the amendments in the first taxable year beginning after December 31, 2017. Under the transitional rules, the Company is required to revalue discounted loss reserves under the new computational rules of the Tax Act and include in income that adjustment over an eight-year period in gross income of the Company. The effect of this change in tax law resulted in an immaterial adjustment to income tax in 2019 and 2018.

Additional factors giving rise to the differences in the Company’s effective tax rate, when compared to statutory rates in the current and prior years, include non-deductible executive compensation, tax-exempt interest income, and the current expansion outside of Florida into non-income taxing state jurisdictions.

The Company accounts for income taxes using a balance sheet approach. As of December 31, 2019 and 2018, the significant components of the Company’s deferred income taxes consisted of the following (in thousands):



	As of December 31,
	2019			2018
Deferred income tax assets:
Unearned premiums	$	23,925		$	22,700
Advanced premiums	1,493			1,269
Unpaid losses and LAE	1,660			820
Share-based compensation	3,837			3,237
Accrued wages	189			332
Allowance for uncollectible receivables	212			203
Additional tax basis of securities	33			33
Capital loss carryforwards	3,143			1,298
Unrealized gain/loss	—			4,246
Other comprehensive income	—			4,086
Other	—			9
Total deferred income tax assets	34,492			38,233
Valuation allowance	—			(781		)
Deferred income tax assets, net of valuation allowance	34,492			37,452
Deferred income tax liabilities:
Deferred policy acquisition costs, net	(22,613		)	(20,944		)
Prepaid expenses	—			(677		)
Fixed assets	(959		)	(992		)
Unrealized gain/loss	(1,480		)	—
Other comprehensive income	(5,197		)	—
Unpaid loss and LAE transition adjustment	(563		)	(78		)
Other	(329		)	(175		)
Total deferred income tax liabilities	(31,141		)	(22,866		)
Net deferred income tax asset	$	3,351		$	14,586

At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred income tax assets when it is more likely than not that all, or some portion, of the deferred income tax assets will not be realized. A valuation allowance would be based on all available information including the Company’s assessment of uncertain tax positions and projections of future taxable income and capital gain from each tax-paying component in each jurisdiction, principally derived from business plans and available tax planning strategies.

Management has reviewed all available evidence, both positive and negative, in determining the need for a valuation allowance with respect to the gross deferred tax assets. In determining the manner in which available evidence should be weighted, management has determined that the need for a valuation allowance is not warranted as of December 31, 2019.

The Company has adopted Accounting for Uncertainty in Income Taxes (“ASC 740”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 provides a threshold for the financial statement recognition and measurement of an income tax position taken or expected to be taken in an income tax return. The Company’s policy is to classify interest and penalties related to unrecognized tax positions, if any, in its provision for income taxes. As of December 31, 2019, 2018 and 2017, the Company determined that no uncertain tax liabilities are required.

The Company filed a consolidated federal income tax return for the tax years ended December 31, 2018, 2017 and 2016 and intends to file the same for the tax year ended December 31, 2019. The tax allocation agreement between the Company and the Insurance Entities provides that they will incur income taxes based on a computation of taxes as if they were stand-alone taxpayers. The computations are made utilizing the financial statements of the Insurance Entities prepared on a statutory basis of accounting and prior to consolidating entries which include the conversion of certain balances and transactions of the statutory financial statements to a U.S. GAAP basis.

The Company files its income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. During the 2018 tax year, the Company’s 2015 tax return was subject to audit by the Internal Revenue Service. The audit subsequently concluded during the 2018 tax year with no change to the income tax return. The Company’s 2016 through 2018 tax years are still subject to examination by the Internal Revenue Service and various tax years remain open to examination in certain state jurisdictions.