• Filing Date: 2020-03-06
  • Form Type: 10-K
  • Description: Annual report
v3.19.3.a.u2
Income Taxes
12 Months Ended
Dec. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

Note 18 -- Income Taxes

A summary of income tax expense is as follows:

 

 

 

Years Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$

6,177

 

 

$

7,443

 

 

$

(3,933

)

State

 

 

1,362

 

 

 

1,490

 

 

 

34

 

Foreign

 

 

107

 

 

 

104

 

 

 

81

 

Total current taxes

 

 

7,646

 

 

 

9,037

 

 

 

(3,818

)

Deferred:

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

1,586

 

 

 

(245

)

 

 

(4,144

)

State

 

 

287

 

 

 

392

 

 

 

(757

)

Foreign

 

 

(2

)

 

 

(7

)

 

 

(12

)

Total deferred taxes

 

 

1,871

 

 

 

140

 

 

 

(4,913

)

Income tax expense (benefit)

 

$

9,517

 

 

$

9,177

 

 

$

(8,731

)

 

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,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

 

 

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Income taxes at statutory rate

 

$

7,579

 

 

 

21.0

 

 

$

5,649

 

 

 

21.0

 

 

$

(5,468

)

 

 

35.0

 

Increase (decrease) in income taxes

   resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State income taxes, net of federal

   tax benefits

 

 

1,362

 

 

 

3.8

 

 

 

1,303

 

 

 

4.8

 

 

 

(657

)

 

 

4.2

 

Effects of tax rate changes

 

 

(37

)

 

 

 

 

 

 

 

 

 

 

 

(1,400

)

 

 

9.0

 

Share-based compensation

 

 

(159

)

 

 

(0.4

)

 

 

2,156

 

 

 

8.0

 

 

 

(705

)

 

 

4.5

 

Non-deductible executive compensation

 

 

685

 

 

 

1.9

 

 

 

306

 

 

 

1.1

 

 

 

244

 

 

 

(1.6

)

Other

 

 

87

 

 

 

0.1

 

 

 

(237

)

 

 

(0.8

)

 

 

(745

)

 

 

4.8

 

Income tax (benefit) expense

 

$

9,517

 

 

 

26.4

 

 

$

9,177

 

 

 

34.1

 

 

$

(8,731

)

 

 

55.9

 

 

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, 2018, 2017, and 2016 remain subject to examination by the Company’s major taxing jurisdictions. The Company elected to classify interest and penalties, if any, 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, 2019, 2018 and 2017.

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 years ended December 31, 2019 and 2018, the Company recorded income taxes of $9,517 and $9,177, respectively, resulting in effective tax rates of 26.4% and 34.1%, respectively. 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 2019 as compared with 2018 was primarily attributable to the unfavorable factors in 2018 consisting of the negative effect of the derecognition of deferred tax assets of $1,825 for restricted stock awards of which market conditions would 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”), offset by an increase in nondeductible performance-based compensation expenses for 2019. The decrease in the effective tax rate in 2018 as compared with 2017 was primarily attributable to the reduction of the federal corporate income tax rate from 35% to 21%, offset by the opposing factors in 2018 as described earlier.

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,

 

 

 

2019

 

 

2018

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Unearned premiums

 

$

6,272

 

 

$

5,455

 

Losses and loss adjustment expenses

 

 

2,838

 

 

 

3,001

 

Stock-based compensation

 

 

878

 

 

 

716

 

Net unrealized investment losses

 

 

 

 

 

1,641

 

Other-than-temporary impairment losses

 

 

77

 

 

 

6

 

Organizational costs

 

 

63

 

 

 

76

 

Accrued expenses

 

 

86

 

 

 

78

 

Unearned revenue

 

 

120

 

 

 

231

 

Bad debt reserve

 

 

9

 

 

 

20

 

Other

 

 

 

 

 

26

 

Total deferred tax assets

 

 

10,343

 

 

 

11,250

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Property and equipment

 

 

(1,661

)

 

 

(1,430

)

Intangible assets

 

 

(2,214

)

 

 

(1,841

)

Deferred policy acquisition costs

 

 

(5,469

)

 

 

(4,347

)

Net unrealized investment gains

 

 

(1,547

)

 

 

 

Basis difference related to partnership investments

 

 

(1,188

)

 

 

(1,193

)

Basis difference related to convertible senior notes

 

 

(1,256

)

 

 

(2,429

)

Prepaid expenses

 

 

(392

)

 

 

(394

)

Other

 

 

(624

)

 

 

(684

)

Total deferred tax liabilities

 

 

(14,351

)

 

 

(12,318

)

Net deferred tax liabilities

 

$

(4,008

)

 

$

(1,068

)

 

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, 2019 or 2018.

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.