Income Taxes

12 Months Ended

Dec. 31, 2018

The components of income tax expense (benefit) were as follows for the periods indicated:



	Years Ended December 31,
	2018		2017		2016
Pre-tax income:
Domestic	$	215.8	$	336.3	$	779.0
Foreign	117.7		108.2		69.6
Total pre-tax income	$	333.5	$	444.5	$	848.6



	Years Ended December 31,
	2018			2017			2016
Current expense (benefit):
Federal and state	$	5.7		$	(111.9	)	$	240.1
Foreign	53.8			41.0			18.1
Total current expense (benefit)	59.5			(70.9		)	258.2
Deferred (benefit) expense:
Federal and state	31.0			8.7			19.6
Foreign	(9.6		)	(12.9		)	5.4
Total deferred expense (benefit)	21.4			(4.2		)	25.0
Total income tax expense (benefit)	$	80.9		$	(75.1	)	$	283.2

The provision for foreign taxes includes amounts attributable to income from U.S. possessions that are considered foreign under U.S. tax laws. International operations of the Company are subject to income taxes imposed by the jurisdiction in which they operate.

A reconciliation of the federal income tax rate to the Company’s effective income tax rate follows for the periods indicated:



	Years Ended December 31,
	2018		2017		2016
Federal income tax rate:	21.0	%	35.0	%	35.0	%
Reconciling items:
Non-taxable investment income	(1.2	)	(2.3	)	(1.3	)
Foreign earnings (1)	3.5		(2.3	)	(1.9	)
Non-deductible compensation	0.9		0.2		(0.1	)
Non-deductible health insurer fee	—		—		1.8
Change in liability for prior year tax	(0.5	)	(6.4	)	—
Tax reform deferred revaluation (2)	0.5		(39.8	)	—
Other	0.1		(1.3	)	(0.1	)
Effective income tax rate:	24.3	%	(16.9	)%	33.4	%


(1)	Results for all years primarily include tax benefits associated with the earnings of certain non-U.S. subsidiaries that are deemed reinvested indefinitely and the realization of foreign tax credits for certain other subsidiaries. In addition, 2018, 2017 and 2016 reflect a benefit of 2.8%, 1.4% and 2.2%, respectively, related to international reorganizations.


(2)	The TCJA reduced the corporate tax rate to 21%, effective January 1, 2018. Consequently, the Company has recorded a benefit related to the revaluation of deferred tax assets and deferred tax liabilities of $177.0 million in 2017, which had a 39.8% impact to the effective tax rate, and a SAB118 expense of $1.5 million in 2018, which has a 0.5% impact to the effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2018, 2017 and 2016 is as follows:



	Years Ended December 31,
	2018			2017			2016
Balance at beginning of year	$	(6.7	)	$	(34.2	)	$	(37.0	)
Additions based on tax positions related to the current year	(2.5		)	(1.0		)	(1.0		)
Reductions based on tax positions related to the current year	—			—			—
Additions for tax positions of prior years	(4.1		)	(0.3		)	(1.4		)
Reductions for tax positions of prior years	0.6			28.2			3.8
Lapses	0.9			0.6			1.4
Balance at end of year	$	(11.8	)	$	(6.7	)	$	(34.2	)

Total unrecognized tax benefits of $13.0 million, $6.8 million and $34.5 million for the years ended December 31, 2018, 2017 and 2016, respectively, which includes interest and penalties, would impact the Company’s consolidated effective tax rate if recognized. The liability for unrecognized tax benefits is included in accounts payable and other liabilities on the consolidated balance sheets.

The Company’s continuing practice is to recognize interest expense related to income tax matters in income tax expense. During the years ended December 31, 2018, 2017 and 2016, the Company recognized approximately $0.4 million, $0.1 million and $0.6 million, respectively, of interest expense related to income tax matters. The Company had $0.5 million, $0.2 million and $0.2 million of interest accrued as of December 31, 2018, 2017 and 2016, respectively. The Company had $0.8 million of penalties accrued as of December 31, 2018 and none as of December 31, 2017 and 2016.

The Company does not anticipate any significant increase or decrease of unrecognized tax benefit within the next 12 months.

The Company and its subsidiaries file income tax returns in the U.S. and various state and foreign jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2014. Substantially all non-U.S. income tax matters have been concluded for years through 2010, and all state and local income tax matters have been concluded for years through 2008.

The tax effects of temporary differences that result in significant deferred tax assets and deferred tax liabilities are as follows as of the dates indicated:



	December 31,
	2018			2017
Deferred Tax Assets
Policyholder and separate account reserves	$	1,301.8		$	359.1
Net operating loss carryforwards	192.2			42.3
Investments, net	53.9			70.8
Credit carryforwards	36.4			19.4
Employee and post-retirement benefits	35.8			35.8
Compensation related	29.7			27.2
Capital loss carryforwards	23.2			0.6
Other	37.4			83.3
Total deferred tax assets (1)	1,710.4			638.5
Less valuation allowance	(26.4		)	(9.2		)
Deferred tax assets, net of valuation allowance	1,684.0			629.3
Deferred Tax Liabilities
Deferred acquisition costs	(1,658.7		)	(674.5		)
Net unrealized appreciation on securities	(92.5		)	(201.1		)
Intangible assets	(76.2		)	(2.5		)
Total deferred tax liabilities (1)	(1,827.4		)	(878.1		)
Net deferred income tax liabilities	$	(143.4	)	$	(248.8	)


(1)	2017 reflects the reduction of deferred tax assets and liabilities following the enactment of the TCJA.

A cumulative valuation allowance of $26.4 million existed as of December 31, 2018 based on management’s assessment that it is more likely than not that certain deferred tax assets attributable to international subsidiaries will not be realized.

The Company’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income of the same character within the carryback or carryforward periods. In assessing future taxable income, the Company considered all sources of taxable income available to realize its deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in carryback years and tax-planning strategies. If changes occur in the assumptions underlying the Company’s tax planning strategies or in the scheduling of the reversal of the Company’s deferred tax liabilities, the valuation allowance may need to be adjusted in the future.

Other than for certain wholly owned Canadian subsidiaries, the Company plans to indefinitely reinvest the earnings in other jurisdictions. Under current U.S. tax law, no material income taxes are anticipated on future repatriation of earnings. Therefore, deferred taxes have not been provided.

Global intangible low taxed income (“GILTI”): The TCJA creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the U.S. shareholder’s “net CFC tested income” over 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder. Under GAAP, the Company is allowed to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into the company’s measurement of its deferred taxes. As of December 31, 2018, the Company has elected to recognize the current tax on GILTI as a period expense in the period the tax is incurred. Under this policy, the Company has not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. The GILTI current period expense is immaterial.

At December 31, 2018, the Company had $892.7 million of net operating loss carryforward that will expire if unused as follows:



Expiration Year	Amount
2019 - 2023	$	33.6
2024 - 2028	11.4
2029 - 2033	0.7
2034 - 2038	450.2
Unlimited	396.8
	$	892.7