Federal Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Federal Income Taxes

FEDERAL INCOME TAXES

Total Federal income taxes were allocated as follows:

	Years Ended December 31,
	2020		2019	2018
	(In thousands)
Taxes (benefits) on earnings from continuing operations:
Current	$	(275)	58,834	(1,697)
Deferred	20,031		(25,294)	26,446
Taxes on earnings	19,756		33,540	24,749
Taxes (benefits) on components of stockholders' equity:
Net unrealized gains and losses on securities available-for-sale	92,528		26,836	(15,870)
Foreign currency translation adjustments	4		139	360
Change in benefit plan liability	(3,398)		(1,158)	3,003
Change in accounting	(806)		—	—
Total Federal income taxes	$	108,084	59,357	12,242

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The provisions for Federal income taxes attributable to earnings from continuing operations vary from amounts computed by applying the statutory income tax rate to income statement earnings before Federal income taxes due to differences between the financial statement reporting and income tax treatment of certain items. These differences and the corresponding tax effects are as follows:

	Years Ended December 31,
	2020		2019	2018
	(In thousands)
Income tax expense at statutory rate of 21%	$	23,534	34,683	29,716
Dividend received deduction	(401)		(493)	(820)
Tax exempt interest	(1,436)		(1,564)	(1,416)
Non deductible salary expense	351		294	54
Adjustments pertaining to prior tax years	(8)		459	(3,071)
Nondeductible insurance	96		96	96
Nondeductible expenses	44		117	198
Tax rate differential for loss carryback	(2,497)		—	—
Other, net	73		(52)	(8)
Taxes on earnings from continuing operations	$	19,756	33,540	24,749

The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020 to provide relief to businesses impacted by the Coronavirus pandemic. The CARES Act included a temporary reprieve from the carryback limitation on the use of net operating losses, allowing taxpayers to carryback certain net operating losses generated from 2018 through 2020 for up to five years in order to claim a refund of taxes paid in prior years. Accordingly, the Company was permitted to carryback the taxable loss generated in the year ended December 31, 2020 to tax years when the corporate tax rate was 35%. This resulted in a permanent tax benefit equal to the 14% corporate tax rate differential between the carryback rate of 35% and the current statutory rate of 21%. The permanent tax benefit of $2.5 million is reflected as a component in the reconciliation of the tax rate for the year ended December 31, 2020.

The Company's policy is to record changes to deferred taxes for rate changes in the period when changes in tax laws have been enacted. Included in the 2018 adjustments pertaining to prior tax years is $0.5 million related to the writedown of deferred taxes due to the rate change in the Tax Cuts and Jobs Act enacted in December 2017 ("Tax Act") adjusted in the tax return. 

The Company generally expects its effective tax rate to be less than the current statutory rate due to recurring permanent differences that reduce tax expense, principally tax exempt interest income and the dividend received deduction.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 are presented below.

	December 31,
	2020		2019
	(In thousands)
Deferred tax assets:
Future policy benefits, excess of financial accounting liabilities over tax liabilities	$	188,635	190,230
Investment securities write-downs for financial accounting purposes	649		293
Benefit plan liabilities	14,714		9,259
Accrued operating expenses recorded for financial accounting purposes not currently tax deductible	3,346		3,658
Accrued and unearned investment income recognized for tax purposes and deferred for financial accounting purposes	85		101
Other	2,172		636
Total gross deferred tax assets	209,601		204,177
Deferred tax liabilities:
Deferred policy acquisition costs, sales inducement costs, and VOBA, principally expensed for tax purposes	(153,742)		(154,873)
Tax reform reserve adjustment	(43,687)		(52,432)
Debt securities, principally due to deferred market discount for tax	(8,338)		(8,051)
Real estate, principally due to adjustments for financial accounting purposes	(2,245)		(45)
Net unrealized gains on debt and equity securities	(112,500)		(20,188)
Foreign currency translation adjustments	(1,360)		(1,356)
Fixed assets, due to different depreciation bases	(10,645)		(6,177)
Cost of reinsurance	(21,596)		—
Other	(614)		(962)
Total gross deferred tax liabilities	(354,727)		(244,084)
Net deferred tax liabilities	$	(145,126)	(39,907)

Beginning January 1, 2018, the Tax Cuts and Jobs Act imposed a limitation on life insurance tax reserves based upon the greater of net surrender value or 92.81% of the reserve method prescribed by the National Association of Insurance Commissioners which covers such contract as of the date the reserve is determined. The Company determined that this limitation resulted in a tax reserve decrease of $332.9 million which the Tax Act allowed to be recognized over an eight-year period. At the statutory rate of 21%, the Company recorded a deferred tax liability as of December 31, 2017 of $69.9 million. This amount has been incorporated into the periodic measurement of net deferred tax liabilities. The total tax reserve adjustment of $332.9 million resulting from the limitation imposed under the Tax Act is being recognized as an increase of $41.6 million in taxable income per year through the year 2025. At the statutory rate of 21%, this results in additional tax of $8.7 million per year.

There were no valuation allowances for deferred tax assets at December 31, 2020 and 2019. In assessing deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and available tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

In accordance with GAAP, the Company assessed whether it had any significant uncertain tax positions related to open examination or other IRS issues and determined that there were none. Accordingly, no reserve for uncertain tax positions has been recorded. Should a provision for any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company's policy to accrue for such in its income tax accounts. There were no such accruals as of December 31, 2020 or 2019. The Company and its corporate subsidiaries file a consolidated U.S. Federal income tax return, which is subject to examination for all years after 2016.

The Company's federal income tax return is consolidated with the entities listed below.

•National Western Life Group, Inc. (NWLGI)

•National Western Life Insurance Company (NWLIC, a subsidiary of NWLGI)

•The Westcap Corporation (subsidiary of NWLIC)

•Braker P III, LLC (subsidiary of NWLIC)

•NWL Financial, Inc. (subsidiary of NWLIC)

•NWLSM, Inc. (subsidiary of NWLIC)

•NWL Services, Inc. (subsidiary of NWLGI)

•Regent Care Operations General Partner, Inc. (subsidiary of NWL Services, Inc.)

•Regent Care Operations Limited Partner, Inc. (subsidiary of NWL Services, Inc.)

•Regent Care General Partner, Inc. (subsidiary of NWL Services, Inc.)

•Regent Care Limited Partner, Inc. (subsidiary of NWL Services, Inc.)

•N.I.S. Financial Services, Inc. (NIS, a subsidiary of NWLGI)

Ozark National will not be consolidated with NWLGI for federal tax filings until it has been a member of the affiliated group for five full years, per section 1504(c)(2) of the Internal Revenue Code.

Allocation of the consolidated Federal income tax liability amongst the Company and its consolidated subsidiaries is based on separate return calculations pursuant to the "wait-and-see" method as described in sections 1.1552-1(a)(1) and 1.1502-33(d)(2) of the current Treasury Regulations. Under this method, consolidated group members are not given current credit for net losses until future net taxable income is generated to realize such credits.