Income Taxes

12 Months Ended

Dec. 31, 2017

Note 20 – Income Taxes

U.S. Tax Reform Legislation

Major U.S. tax reform legislation was signed into law on December 22, 2017. The legislation is highlighted by a reduction in the corporate income tax rate from the current 35% to 21% effective January 1, 2018. The Company expects a significant decline in its effective tax rate beginning in 2018 as a result of the rate reduction. The remaining provisions of the law, most of which take effect on January 1, 2018, are not expected to have a material impact on the Company’s results of operations beginning in 2018.

The Company recorded additional tax expense of $232 million in 2017 resulting from this legislation, comprised of $144 million due to the revaluation of net deferred tax assets to reflect the reduction in the corporate tax rate and $88 million due to the assessment of U.S. taxes related to the Company’s accumulated unremitted foreign earnings. The legislation provides an election to pay these taxes over eight years, and we expect to adopt this election. Both the revaluation of deferred tax assets and liabilities and the taxes on accumulated unremitted foreign earnings are considered provisional as permitted under SAB 118 (see Note 2) because certain adjustments used to calculate the taxes at year-end were based on estimates.

Also as a result of tax reform, the Company recorded a reduction in operating expenses of $56 million ($36 million after-tax) reflecting a decrease in a liability to reimburse a reinsurer for taxes related to a block of business sold through reinsurance. An offsetting tax effect is included in the $144 million charge discussed above, resulting in no after-tax effect for this item.

Accounting policy. Deferred income tax assets and liabilities are recognized for differences between the financial and income tax reporting bases of the underlying assets and liabilities and established based upon enacted tax rates and laws, including the U.S. tax reform legislation enacted in December 2017. Deferred income tax assets are recognized when available evidence indicates that realization is more likely than not. The deferred income tax provision generally represents the net change in deferred income tax assets and liabilities during the year, excluding amounts reported as adjustments to accumulated other comprehensive income or amounts initially recorded due to business combinations. The current income tax provision generally represents estimated amounts due on various income tax returns for the year reported plus the effect of any uncertain tax positions. Uncertain tax positions are evaluated in accordance with GAAP.

Income taxes for the Company’s foreign operations are provided using the respective foreign jurisdictions’ tax rate.

The Company’s foreign operations continue to retain a significant portion of their earnings overseas. These undistributed earnings are deployed outside of the United States in support of the liquidity and capital needs of our foreign operations as well as to support growth initiatives overseas. The Company does not intend to repatriate these earnings.

Income Tax Expense

The components of income taxes for the years ended December 31 were as follows:

(In millions)	2017		2016		2015
Current taxes
U.S. income taxes	$	974	$	935	$	1,076
Foreign income taxes		122		95		93
State income taxes		36		32		60
Total current taxes		1,132		1,062		1,229
Deferred taxes (benefits)
U.S. income taxes		204		69		22
Foreign income taxes (benefits)		39		9		(6)
State income taxes (benefits)		(1)		(4)		5
Total deferred taxes		242		74		21
Total income taxes	$	1,374	$	1,136	$	1,250

Total income taxes for the years ended December 31 were different from the amount computed using the nominal federal income tax rate of 35% for the following reasons:

(In millions)	2017		2016		2015
Tax expense at nominal rate	$	1,262	$	1,043	$	1,164
Effect of U.S. tax reform legislation		232		-		-
Effect of undistributed foreign earnings		(70)		(57)		(67)
Health insurance industry tax		-		108		109
State income tax (net of federal income tax benefit)		23		18		42
Other		(73)		24		2
Total income taxes	$	1,374	$	1,136	$	1,250

Consolidated pre-tax income from the Company’s foreign operations was approximately 14% of the Company’s pre-tax income in 2017. The comparable amount in prior years was 11% in 2016 and 2015. South Korean operations produced approximately 13% of the Company’s pre-tax income in 2017, 11% in 2016 and 8% in 2015.

The consolidated effective tax rate was 38.1% in both 2017 and 2016. The additional tax expense associated with the recently enacted U.S. tax reform legislation was offset by the favorable effects of the one-year moratorium on the non-deductible health insurance industry tax and recognizing an incremental tax benefit associated with transaction-related costs that is included in “Other” in the above table.

The Company retains a significant portion of its foreign earnings overseas. If the Company intended to remit these earnings it would have recorded additional deferred tax liabilities of approximately $120 million for foreign withholding taxes. A portion of these taxes may be eligible for credit against the Company’s U.S. tax liability.

Deferred Income Taxes

Deferred income tax assets and liabilities as of December 31 were as follows:

(In millions)	2017		2016
Deferred tax assets
Employee and retiree benefit plans	$	279	$	481
Other insurance and contractholder liabilities		352		460
Net operating losses		105		128
Other accrued liabilities		101		166
Other		91		140
Deferred tax assets before valuation allowance		928		1,375
Valuation allowance for deferred tax assets		(72)		(87)
Deferred tax assets, net of valuation allowance		856		1,288
Deferred tax liabilities
Depreciation and amortization		496		781
Unrealized appreciation on investments and foreign currency translation		102		149
Other		225		54
Total deferred tax liabilities		823		984
Net deferred income tax assets	$	33	$	304

Deferred income tax balances as of December 31, 2017 have been adjusted to reflect the reduced statutory tax rate that took effect as of January 1, 2018 pursuant to the recently enacted U.S. tax reform legislation. The Company has recorded incremental tax expense of $144 million including the adjustment of deferred tax balances related to items reported in accumulated other comprehensive income.

Included in the consolidated net deferred tax asset of $33 million is approximately $175 million of deferred tax liabilities attributable to foreign jurisdictions, most notably South Korea and Taiwan.

Management believes that future results will be sufficient to realize the Company’s deferred tax assets. With the exception of certain net operating loss related tax benefits, the Company’s deferred tax benefits may be carried forward indefinitely. Net operating loss benefits are primarily attributable to foreign jurisdictions. The Company establishes a valuation allowance when it determines that realization of a deferred tax asset does not meet the more likely than not standard. Valuation allowances have been established against certain federal, foreign and state deferred tax assets, generally when there is a requirement to assess them on a separate entity basis.

C. Uncertain Tax Positions

A reconciliation of unrecognized tax benefits for the years ended December 31 was as follows:

(In millions)	2017		2016		2015
Balance at January 1,	$	31	$	31	$	26
Increase due to current year positions		7		10		7
Reduction related to settlements with taxing authorities		(1)		(2)		-
Reduction related to lapse of applicable statute of limitations		(2)		(8)		(2)
Balance at December 31,	$	35	$	31	$	31

D. Other Tax Matters

The Internal Revenue Service has completed review of the Company’s consolidated income tax returns through 2012. The statute of limitations for 2013 has expired, but the Company has filed an amended return for which the pending refund is subject to review. The Company conducts business in a number of state and foreign jurisdictions, and may be engaged in multiple audit proceedings at any given time. Generally, no further state or foreign audit activity is expected for tax years prior to 2011.