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Income Taxes
 12 Months Ended
Dec. 31, 2018
Income Taxes
9. Income Taxes
The following table presents income tax expense (benefit) for 2018, 2017 and 2016:
 
 
 
Federal
 
 
State
 
 
Foreign
 
 
Total
 
 
 
($ in millions)
 
Year ended December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
$
(83.3
)
 
$
5.6
 
 
$
32.0
 
 
$
(45.7
)
Deferred
 
 
29.9
 
 
 
0.9
 
 
 
(0.1
)
 
 
30.7
 
 
 
$
(53.4
)
 
$
6.5
 
 
$
31.9
 
 
$
(15.0
)
Year ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
$
(41.3
)
 
$
2.7
 
 
$
41.0
 
 
$
2.4
 
Deferred
 
 
(66.6
)
 
 
0.6
 
 
 
(0.2
)
 
 
(66.2
)
 
 
$
(107.9
)
 
$
3.3
 
 
$
40.8
 
 
$
(63.8
)
Year ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current
 
$
49.4
 
 
$
4.9
 
 
$
23.4
 
 
$
77.7
 
Deferred
 
 
109.6
 
 
 
0.3
 
 
 
(0.5
)
 
 
109.4
 
 
 
$
159.0
 
 
$
5.2
 
 
$
22.9
 
 
$
187.1
 
Earnings (losses) before income taxes from domestic operations were ($46.4) million, ($132.7) million and $407.7 million in 2018, 2017 and 2016, respectively. Earnings before income taxes from foreign operations were $86.0 million, $169.4 million and $240.1 million in 2018, 2017 and 2016, respectively. Foreign tax expense was primarily attributable to the U.K., Canada and Germany.
The following table presents the difference between the federal income tax rate and the effective income tax rate:
 
 
 
Year Ended December 31,
 
 
 
2018
 
 
2017
 
 
2016
 
Federal income tax rate
 
 
21.0
%
 
 
35.0
%
 
 
35.0
%
Foreign tax credits
 
 
(0.3
)
 
 
(6.4
)
 
 
(0.6
)
Income subject to dividends-received deduction
 
 
(18.3
)
 
 
(25.5
)
 
 
(1.6
)
Tax-exempt interest
 
 
(36.0
)
 
 
(94.1
)
 
 
(6.5
)
State taxes, net of federal tax benefit
 
 
13.8
 
 
 
6.5
 
 
 
0.6
 
Prior period adjustment
 
 
(0.1
)
 
 
(3.3
)
 
 
2.4
 
Tax benefit from sale of subsidiary
 
 
-
 
 
 
(54.1
)
 
 
-
 
Other, net
 
 
(18.1
)
 
 
(32.0
)
 
 
(0.4
)
Effective tax rate
 
 
(38.0
)%
 
 
(173.9
)%
 
 
28.9
%
The Tax Act was signed into law on December 22, 2017. Among other provisions, the Tax Act reduced the corporate federal income tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018, for the 2018 tax year. As a result, the value of Alleghany’s deferred tax assets and liabilities as of December 31, 2017 was reduced. 
Alleghany has reflected the impact of the Tax Act in its financial statements. 
The net impact of this reduction to Alleghany’s consolidated 2017 tax expense was not material.
The decrease in the effective tax rate in 2018 from 2017
primarily reflects the decrease in the U.S. corporate federal income tax rate due to the Tax Act, as well as new limitations on certain deductions as a result of the Tax Act and a tax benefit associated with the sale of PacificComp.
The effective tax rate in 2017 compared with 2016 primarily reflected income tax benefits from taxable losses arising from Hurricanes Irma, Harvey and Maria in 2017 and, to a lesser extent, a tax benefit associated with the sale of PacificComp, as well as prior period income tax expense adjustments in 2016, which included $16.1 million of 
out-of-period
 reductions to current and deferred TransRe tax assets recorded in 2016 that related primarily to periods prior to Alleghany’s merger with TransRe in 2012.
 
 
The following table presents the tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 31, 2018 and 2017:
 
 
 
As of December 31,
 
 
 
2018
 
 
2017
 
 
 
($ in millions)
 
Deferred tax assets:
 
 
 
 
 
 
 
 
Loss and LAE reserves
 
$
122.9
 
 
$
114.2
 
Minimum tax credit carry forward
 
 
68.8
 
 
 
137.2
 
Compensation accruals
 
 
88.1
 
 
 
97.4
 
Unearned premiums
 
 
85.9
 
 
 
84.2
 
OTTI losses
 
 
5.4
 
 
 
9.6
 
State net operating loss carry forward
 
 
23.5
 
 
 
18.3
 
Other
 
 
89.8
 
 
 
73.7
 
Gross deferred tax assets before valuation allowance
 
 
484.4
 
 
 
534.6
 
Valuation allowance
 
 
(23.5
)
 
 
(18.3
)
Gross deferred tax assets
 
 
460.9
 
 
 
516.3
 
Deferred tax liabilities:
 
 
 
 
 
 
 
 
Net unrealized gains on investments
 
 
127.2
 
 
 
227.5
 
Deferred acquisition costs
 
 
101.1
 
 
 
98.7
 
Purchase accounting adjustments
 
 
11.3
 
 
 
13.5
 
Other
 
 
56.4
 
 
 
40.1
 
Gross deferred tax liabilities
 
 
296.0
 
 
 
379.8
 
Net deferred tax assets
 
$
164.9
 
 
$
136.5
 
A valuation allowance is provided against deferred tax assets when, in the opinion of management, it is more likely than not that a portion of the deferred tax asset will not be realized. As of December 31, 2018 and 2017, Alleghany recognized $23.5 million and $18.3 million, respectively, of deferred tax assets for certain state net operating and capital loss carryovers, and a valuation allowance of $23.5 million and $18.3 million, respectively, has been established against these deferred tax assets as Alleghany does not currently anticipate it will generate sufficient income in these states to absorb such loss carryovers.
Alleghany’s income tax return is currently under examination by the Internal Revenue Service for the 2016 tax year. The following table presents the tax years of Alleghany and TransRe tax returns that remain subject to examination by major tax jurisdictions as of December 31, 2018.
 
Major Tax Jurisdiction
  
Open Tax Years
Australia
  
2014 - 2017
Canada
  
2014 - 2017
France
  
2009, 2010 and 2017
Germany
  
2013 - 2017
Hong Kong
  
2014 - 2017
Japan
  
2010 - 2017
Singapore
  
2014 - 2018
Switzerland
  
2016 - 2017
U.K.
  
2016 - 2017
U.S.
  
2015 - 2017
 
Alleghany believes that, as of December 31, 2018, it had no material uncertain tax positions. Interest and penalties related to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable. There were no material liabilities for interest or penalties accrued as of December 31, 2018.