Income Taxes

12 Months Ended

Dec. 31, 2019

We file consolidated federal income tax returns that include all of our wholly-owned subsidiaries. Our income tax expense as presented in the consolidated financial statements is summarized as follows:



	Year Ended December 31,
	2019		2018			2017
	(Dollars in thousands)
Consolidated statements of operations:
Current income taxes	$	12,528	$	120,289		$	188,356
Deferred income taxes (benefits)	56,947		(12,563		)	(46,730		)
Total income tax expense included in consolidated statements of operations	69,475		107,726			141,626
Stockholders' equity:
Expense (benefit) relating to:
Change in net unrealized investment losses	412,117		(240,459		)	177,162
Total income tax expense (benefit) included in consolidated financial statements	$	481,592	$	(132,733	)	$	318,788

Income tax expense in the consolidated statements of operations differed from the amount computed at the applicable statutory federal income tax rates of 21% for the years ended December 31, 2019 and 2018, and 35% for the year ended December 31, 2017 as follows:



	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Income before income taxes	$	315,565		$	565,742		$	316,271

Income tax expense on income before income taxes	$	66,269		$	118,806		$	110,695
Tax effect of:
State income taxes	5,111			5,777			1,961
Tax exempt net investment income	(4,385		)	(4,223		)	(4,288		)
Impact of Tax Reform	—			—			35,932
Worthless stock deduction	—			(7,448		)	—
Other	2,480			(5,186		)	(2,674		)
Income tax expense	$	69,475		$	107,726		$	141,626
Effective tax rate	22.0		%	19.0		%	44.8		%

Tax Reform was enacted on December 22, 2017, reducing the statutory federal income tax rate from 35% to 21% effective January 1, 2018. The primary impact on our 2017 financial results was the impact of the reduction in the U.S. statutory tax rate from 35% to 21% on our deferred tax balances as of December 31, 2017.

Deferred income tax assets or liabilities are established for temporary differences between the financial reporting amounts and tax bases of assets and liabilities that will result in deductible or taxable amounts, respectively, in future years. The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2019 and 2018, are as follows:



	December 31,
	2019			2018
	(Dollars in thousands)
Deferred income tax assets:
Policy benefit reserves	$	1,733,672		$	1,538,371
Other than temporary impairments	15,166			9,804
Net unrealized losses on available for sale fixed maturity securities	—			19,928
Derivative instruments	—			141,075
Amounts due reinsurer	8,784			—
Other policyholder funds	4,359			3,368
Deferred compensation	3,705			3,334
Share-based compensation	2,775			3,169
Net operating loss carryforwards	37,509			2,286
Other	14,677			9,439
Gross deferred tax assets	1,820,647			1,730,774
Deferred income tax liabilities:
Deferred policy acquisition costs and deferred sales inducements	(1,303,385		)	(1,214,998		)
Net unrealized gains on available for sale fixed maturity securities	(392,189		)	—
Derivative instruments	(109,287		)	—
Policy benefit reserves	(147,924		)	(172,578		)
Investment income items	(42,105		)	(37,795		)
Amounts due reinsurer	—			(12,620		)
Other	(3,654		)	(1,614		)
Gross deferred tax liabilities	(1,998,544		)	(1,439,605		)
Net deferred income tax asset (liability)	$	(177,897	)	$	291,169

Included in deferred income taxes is the expected income tax benefit attributable to unrealized losses on available for sale fixed maturity securities. There is no valuation allowance provided for the deferred income tax asset attributable to unrealized losses on available for sale fixed maturity securities. Management expects that the passage of time will result in the reversal of these unrealized losses due to the fair value increasing as these securities near maturity. We have the intent and ability to hold these securities to maturity and do not believe it would be necessary to liquidate these securities at a loss. In addition, we have the ability to sell fixed maturity securities in unrealized gain positions to offset realized deferred income tax assets attributable to unrealized losses on available for sale fixed maturity securities.

Realization of our deferred income tax assets is more likely than not based on expectations as to our future taxable income and considering all other available evidence, both positive and negative. Therefore, no valuation allowance against deferred income tax assets has been established as of December 31, 2019 and 2018.

There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2019. We are no longer subject to income tax examinations by tax authorities for years 2015 and prior.

At December 31, 2019, we have an estimated $178.6 million net operating loss carryforward for federal income tax purposes, which does not expire.