Income Taxes

3 Months Ended

Mar. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes [Text Block]

The Company’s effective tax rate was 13.4% and 15.9% for the three months ended March 31, 2020 and 2019, respectively.

The effective tax rate for the three months ended March 31, 2020 is lower than the statutory rate primarily due to recent tax law changes that resulted in a $144 million tax benefit related to the forecasted utilization of a 2020 net operating loss (“NOL”) in our life insurance entities that will be applied to previous tax filings, low income housing tax credits and other tax preference items. The Company has determined the NOL benefit is attributable to current year losses; accordingly, the benefit is recorded in the annual effective tax rate.

The effective tax rate for the three months ended March 31, 2019 is lower than the statutory rate as a result of tax preferred items including foreign tax credits and low income housing tax credits, partially offset by lower income in the quarter relative to income expected for the full year.

The lower effective tax rate for the three months ended March 31, 2020 compared to March 31, 2019 is primarily the result of the NOL benefit, partially offset by higher pretax income in the current period compared to the prior period.

Included in the Company’s deferred income tax assets are tax benefits related to state net operating losses of $31 million, net of federal benefit, which will expire beginning December 31, 2020.

The Company is required to establish a valuation allowance for any portion of the deferred tax assets that management believes will not be realized. Significant judgment is required in determining if a valuation allowance should be established, and the amount of such allowance if required. Factors used in making this determination include estimates relating to the performance of the business. Consideration is given to, among other things in making this determination, (i) future taxable income exclusive of reversing temporary differences and carryforwards, (ii) future reversals of existing taxable temporary differences, (iii) taxable income in prior carryback years, and (iv) tax planning strategies. Based on analysis of the Company’s tax position, management believes it is more likely than not that the Company will not realize certain state net operating losses of $13 million and state deferred tax assets of $3

million; therefore a valuation allowance has been established. The valuation allowance was $16 million and $19 million as of March 31, 2020 and December 31, 2019, respectively.

As of March 31, 2020 and December 31, 2019, the Company had $98 million and $100 million, respectively, of gross unrecognized tax benefits. If recognized, approximately $68 million and $67 million, net of federal tax benefits, of unrecognized tax benefits as of March 31, 2020 and December 31, 2019, respectively, would affect the effective tax rate.

It is reasonably possible that the total amount of unrecognized tax benefits will change in the next 12 months. The Company estimates that the total amount of gross unrecognized tax benefits may decrease by nil to $10 million in the next 12 months primarily due to Internal Revenue Service (“IRS”) settlements and state exams.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net increase of $1 million in interest and penalties for both the three months ended March 31, 2020 and 2019. As of March 31, 2020 and December 31, 2019, the Company had a payable of $9 million and $8 million, respectively, related to accrued interest and penalties.

The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The federal statute of limitations are closed on years through 2015, except for one issue for 2014 and 2015 which was claimed on amended returns. The IRS is currently auditing the Company’s U.S. income tax returns for 2016, 2017 and 2018. The Company’s state income tax returns are currently under examination by various jurisdictions for years ranging from 2010 through 2018. In the United Kingdom (“UK”), Her Majesty’s Revenue and Customs is performing a business risk review of the Company’s UK subsidiaries for the 2016 tax year.