• Filing Date: 2019-03-08
  • Form Type: 10-K
  • Description: Annual report
v3.10.0.1
Income Taxes
12 Months Ended
Dec. 31, 2018
Income Tax Disclosure [Abstract]  
Income Taxes
Note 18 — Income Taxes
A summary of income tax expense is as follows:

 
 
 
Years Ended December 31,
 
 
 
2018
 
 
2017
 
 
2016
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
$
7,443
 
 
$
(3,933
)
 
$
14,918
 
State
 
 
1,490
 
 
 
34
 
 
 
2,666
 
Foreign
 
 
104
 
 
 
81
 
 
 
96
 
Total current taxes
 
 
9,037
 
 
 
(3,818
)
 
 
17,680
 
Deferred:
 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 
(245
)
 
 
(4,144
)
 
 
182
 
State
 
 
392
 
 
 
(757
)
 
 
(9
)
Foreign
 
 
(7
)
 
 
(12
)
 
 
(18
)
Total deferred taxes
 
 
140
 
 
 
(4,913
)
 
 
155
 
Income tax (benefit) expense
 
$
9,177
 
 
$
(8,731
)
 
$
17,835
 
The reasons for the differences between the statutory Federal income tax rate and the effective tax rate are summarized as follows:

 
 
 
Years Ended December 31,
 
 
 
2018
 
 
2017
 
 
2016
 
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
 
Amount
 
 
%
 
Income taxes at statutory rate
 
$
5,649
 
 
 
21.0
 
 
$
(5,468
)
 
 
35.0
 
 
$
16,395
 
 
 
35.0
 
Increase (decrease) in income taxes resulting from:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal tax benefits
 
 
1,303
 
 
 
4.8
 
 
 
(657
)
 
 
4.2
 
 
 
1,710
 
 
 
3.6
 
Effects of tax rate changes
 
 
 
 
 
 
 
 
(1,400
)
 
 
9.0
 
 
 
 
 
 
 
Share-based compensation
 
 
2,156
 
 
 
8.0
 
 
 
(705
)
 
 
4.5
 
 
 
 
 
 
 
Other
 
 
69
 
 
 
0.3
 
 
 
(501
)
 
 
3.2
 
 
 
(270
)
 
 
(0.5
)
Income tax (benefit) expense
 
$
9,177
 
 
 
34.1
 
 
$
(8,731
)
 
 
55.9
 
 
$
17,835
 
 
 
38.1
 
 
The Company has no uncertain tax positions or unrecognized tax benefits that, if recognized, would impact the effective income tax rate. The tax returns filed for the years ending December 31, 2017, 2016, and 2015 remain subject to examination by the Company’s major taxing jurisdictions. The Company elected to classify, if any, interest, and penalties arising from uncertain tax positions as income tax expense as permitted by current accounting standards. There have been no material amounts of interest or penalties for the years ended December 31, 2018, 2017 and 2016.
In July 2017, the Company received notice from the Internal Revenue Service stating the Company’s 2015 federal income tax return would be examined. In August 2018, the Internal Revenue Service notified the Company that the examination of the Company’s 2015 federal income tax return was completed with no change to the Company’s reported tax.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was passed and signed into law. Key components of the 2017 Tax Act are: a permanent reduction to the federal corporate income tax rate from a bracket system with a top tax rate of 35% to a flat rate of 21% beginning on January 1, 2018; implementation of a territorial tax system; an amendment to Internal Revenue Code Section 965 that requires U.S. shareholders (10% or greater) of controlled foreign corporations and other specified foreign corporations to include in income, for the last taxable year of such foreign corporation beginning before January 1, 2018, such U.S. shareholder’s pro rata share of a deemed repatriation amount; and changes to carryback and carryforward rules for net operating losses arising after December 31, 2017. Under U.S. GAAP, the tax effects of changes in tax laws or rates need to be recognized in the period in which the law is enacted.
For the year ended December 31, 2018, the Company recorded approximately $9,177 of income taxes, which resulted in an effective tax rate of 34.1%. For the year ended December 31, 2017, the Company recorded approximately $8,731 of income tax benefits, which resulted in an effective tax rate of 55.9%. The decrease in the effective tax rate in 2018 as compared with the prior year was primarily attributable to the reduction of the federal corporate income tax rate from 35% to 21%, offset by the negative effect of the derecognition of deferred tax assets of $1,825 for restricted stock awards of which market conditions will not be met prior to their expiry date, the disallowance of the deductibility of the $1,887 expense representing dividends cumulatively paid on such restricted stock awards which were reclassified from retained income (see
 
Restricted Stock Awards
 
in Note 21 — “Stock-Based Compensation”), and an increase in nondeductible compensation expenses due to the elimination of the deductibility of most performance-based compensation.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
 
Significant components of the Company’s net deferred income tax assets are as follows:
 
 
 
December 31,
 
 
 
2018
 
 
2017
 
Deferred tax assets:
 
 
 
 
 
 
 
 
Unearned premiums
 
$
5,455
 
 
$
5,753
 
Losses and loss adjustment expenses
 
 
3,001
 
 
 
3,154
 
Stock-based compensation
 
 
716
 
 
 
2,455
 
Net unrealized investment losses
 
 
1,641
 
 
 
 
Other-than-temporary impairment losses
 
 
6
 
 
 
386
 
Organizational costs
 
 
76
 
 
 
90
 
Accrued expenses
 
 
78
 
 
 
 
Unearned revenue
 
 
231
 
 
 
339
 
State net operating losses
 
 
 
 
 
333
 
State capital loss carryforwards
 
 
 
 
 
175
 
Bad debt reserve
 
 
20
 
 
 
2
 
Other
 
 
26
 
 
 
 
Total deferred tax assets
 
 
11,250
 
 
 
12,687
 
 
 
 
 
 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
 
 
 
 
Property and equipment
 
 
(1,430
)
 
 
(1,517
)
Intangible assets
 
 
(1,841
)
 
 
(1,541
)
Deferred policy acquisition costs
 
 
(4,347
)
 
 
(4,365
)
Net unrealized investment gains
 
 
 
 
 
(1,907
)
Basis difference related to partnership investments
 
 
(1,193
)
 
 
(599
)
Basis difference related to convertible senior notes
 
 
(2,429
)
 
 
(4,099
)
Prepaid expenses
 
 
(394
)
 
 
(312
)
Accrued expenses
 
 
 
 
 
(37
)
Other
 
 
(684
)
 
 
(200
)
Total deferred tax liabilities
 
 
(12,318
)
 
 
(14,577
)
Net deferred tax liabilities
 
$
(1,068
)
 
$
(1,890
)
State net operating loss carryforwards were fully utilized in 2018 and as such, there are no state net operating loss carryforwards as of December 31, 2018.
A valuation allowance is established if, based upon the relevant facts and circumstances, management believes any portion of the deferred tax assets will not be realized. Although realization of deferred income tax assets is not certain, management believes it is more likely than not that deferred tax assets will be realized. Thus, the Company did not have a valuation allowance established as of December 31, 2018 or 2017.
The 2017 Tax Act implemented a mandatory 
one-time
 tax of eight percent on illiquid assets and 15.5% percent on cash and cash equivalents attributable to the accumulated earnings of controlled foreign companies and other specified foreign corporations on U.S. shareholders owning ten percent or greater of the foreign company. The Company included this 
one-time
 federal income tax and the corresponding state taxes attributable to this deemed repatriation amount in the net income tax benefit for the year ended December 31, 2017. In addition to this mandatory 
one-time
 deemed repatriation, the 2017 Tax Act also implemented a territorial system which exempts U.S. corporations from U.S. taxes on most future foreign profits. Since all accumulated earnings of the Company’s foreign subsidiary at December 31, 2017 were subjected to federal and state income taxes as a result of the 
one-time
 mandatory deemed repatriation and all earnings of its foreign subsidiaries after December 31, 2017 will not be subject to U.S. income taxes, the Company will no longer be required to consider the establishment of a deferred tax liability related to the undistributed earnings of its foreign subsidiary.