Income Taxes

We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 2011, which exempts us from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, at least until the year 2035.

We do not consider ourselves to be engaged in a trade or business in the United States or the United Kingdom and, accordingly, do not expect to be subject to direct United States or United Kingdom income taxation.

We have subsidiaries based in the United Kingdom that are subject to the tax laws of that country. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Eight of the United Kingdom subsidiaries are deemed to be engaged in business in the United States, and therefore, are subject to United States corporate tax in respect of a proportion of their United States underwriting business only. Relief is available against the United Kingdom tax liabilities in respect of overseas taxes paid that arise from the underwriting business. Our United Kingdom subsidiaries file separate United Kingdom income tax returns.

We have subsidiaries based in the United States that are subject to United States tax laws. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Our United States subsidiaries generally file a consolidated United States federal income tax return.

We also have operations in Belgium, Brazil, France, Ireland, Italy, Luxembourg, Malta, Spain, and Switzerland, which also are subject to income taxes imposed by the jurisdiction in which they operate. We have operations in Barbados and the United Arab Emirates, which are not subject to income tax under the laws of those countries.

On December 22, 2017, U.S. tax legislation referred to as the TCJA was enacted. The effects of changes in tax laws and tax rates are recognized in the period of enactment. Accordingly, we recorded the impacts of the TCJA in our 2017 consolidated financial statements which, among other changes, primarily includes the remeasurement of our deferred tax assets and liabilities for the reduced US federal tax rate from 35% to 21% beginning on January 1, 2018, and the computation of a provisional amount for the loss reserve discounting modifications. We are still analyzing certain aspects of the TCJA and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. We have not made any adjustments to the provisional amounts we recorded during the year ended December 31, 2017. Beginning in 2018, the TCJA introduces an additional Base Erosion and Anti-abuse Tax (“BEAT”) provision computed to be an additional liability in excess of the regular US tax liability based upon an alternative BEAT computation. At this time, we have not recorded any provisional amounts for BEAT as we are awaiting information from Lloyd’s to determine the effect of BEAT on our US branches within our UK operations. Thus, our 2018 consolidated financial statements reflect a reasonably estimated provisional amount based on information available and in accordance with SAB 118. SAB 118 provides guidance on accounting for the effects of the U.S. tax reform where our determinations are incomplete but we are able to determine a reasonable estimate. A final determination is required to be made within a measurement period not to extend beyond one year from the enactment date of the U.S. tax reform. As additional guidance is released, the estimate will be updated as necessary.

Our expected income tax provision computed on pre-tax income (loss) at the weighted average tax rate has been calculated as the sum of the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. For the three and six months ended June 30, 2018 and 2017, pre-tax income (loss) attributable to our operations and the operations’ effective tax rates were as follows:



	For the Three Months Ended June 30,
(in millions)	2018						2017
	Pre-Tax Income (Loss)				Effective Tax Rate		Pre-Tax Income (Loss)				Effective Tax Rate
Bermuda	$	(33.6	)		—	%	$	25.3			—	%
United States	85.7				17.1	%	34.7				23.3	%
United Kingdom	6.6				10.1	%	(6.5		)		52.8	%
Belgium	(0.1		)		36.4	%	0.1				36.6	%
Brazil	0.1				—	%	0.6				—	%
United Arab Emirates	0.2				—	%	(2.2		)		—	%
Ireland	(0.1		)		—	%	—			⁽¹⁾	—	%
Italy	(1.1		)		—	%	—				—	%
Malta	(0.6		)		(0.2	)%	0.5				—	%
Luxembourg	—			⁽¹⁾	—	%	(1.7		)		—	%
Switzerland	—			⁽¹⁾	20.8	%	—			⁽¹⁾	22.1	%
Pre-tax income	$	57.1			26.9	%	$	50.8			9.4	%



	For the Six Months Ended June 30,
(in millions)	2018						2017
	Pre-Tax Income (Loss)				Effective Tax Rate		Pre-Tax Income (Loss)				Effective Tax Rate
Bermuda	$	(8.4	)		—	%	$	51.7			—	%
United States	79.5				16.6	%	58.7				24.8	%
United Kingdom	12.7				17.1	%	(12.0		)		32.3	%
Belgium	—			⁽¹⁾	—	%	0.1				36.2	%
Brazil	(1.3		)		—	%	(0.2		)		—	%
United Arab Emirates	0.4				—	%	(3.5		)		—	%
Ireland	(0.1		)		—	%	—			⁽¹⁾	—	%
Italy	(1.1		)		—	%	—				—	%
Malta	0.4				0.2	%	1.1				—	%
Luxembourg	—			⁽¹⁾	—	%	(2.4		)		—	%
Switzerland	—			⁽¹⁾	20.8	%	—			⁽¹⁾	20.8	%
Pre-tax income	$	82.1			18.9	%	$	93.5			11.5	%


⁽¹⁾	Pre-tax income for the respective year was less than $0.1 million.

Our effective tax rate may vary significantly from period to period depending on the jurisdiction generating the pre-tax income (loss) and its corresponding statutory tax rate. The geographic distribution of pre-tax income (loss) can fluctuate significantly between periods given the inherit nature of our business. A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate is as follows:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in millions)	2018			2017			2018			2017
Income tax (benefit) provision at expected rate	$	18.8		$	10.8		$	18.4		$	18.0
Tax effect of:
Nontaxable investment income	(0.5		)	(1.1		)	(1.0		)	(2.4		)
Foreign exchange adjustments	—			(0.9		)	(0.2		)	(0.3		)
Withholding taxes	0.2			0.2			0.3			0.3
Change in valuation allowance	(0.7		)	(1.0		)	(3.4		)	(1.1		)
Other	(2.5		)	(3.2		)	1.4			(3.7		)
Income tax provision	$	15.3		$	4.8		$	15.5		$	10.8

Our gross deferred tax assets are supported by taxes paid in previous periods, reversal of taxable temporary differences and recognition of future taxable income. Management regularly evaluates the recoverability of the deferred tax assets and makes any necessary adjustments to them based upon any changes in management’s expectations of future taxable income. Realization of deferred tax assets is dependent upon our generation of future taxable income sufficient to recover tax benefits that cannot be recovered from taxes paid in the carryback period, generally for our US property and casualty insurers two years for net operating losses and for all our US subsidiaries three years for capital losses. If a company determines that any of its deferred tax assets will not result in future tax benefits, a valuation allowance must be established for the portion of these assets that are not expected to be realized. The net change in valuation allowance for deferred tax assets was a decrease of $3.4 million in 2018 relating to the items discussed below. Based upon a review of our available evidence, both positive and negative discussed above, our management concluded that it is more-likely-than-not that the other deferred tax assets will be realized.

Management has determined that a valuation allowance is required for a portion of the tax-effected net operating loss carryforward included as part of the United States consolidated group of $6.9 million generated from PXRE Corporation and for the tax effected net operating loss carryforward of $0.6 million from ARIS. The valuation allowances have been established as Internal Revenue Code Section 382 limits regarding the application of net operating loss carryforwards following an ownership change. The loss carryforwards available per year for both of these items are $2.8 million, as required by Internal Revenue Code Section 382.

Furthermore, due to cumulative losses incurred since inception, management has concluded that a valuation allowance is required for the full amount of the tax-effected net operating losses generated by our Brazil and Malta entities. Additionally, valuation allowances were established for our Luxembourg and US affiliates acquired in the Maybrooke transaction as well as our Italian operations acquired in the Ariscom transaction.

Accordingly, a valuation allowance is required as of June 30, 2018 of which $6.6 million relates to Brazil operations, $5.8 million relates to Italian operations and $1.2 million relates to Malta operations. During the six months ended June 30, 2018, the affiliates of Maybrooke Holdings SA have a valuation allowance established in the amount of $1.2 million. The change from 2017 was primarily driven from the liquidation of our Luxembourg affiliate as of March 23, 2018.

For any uncertain tax positions not meeting the “more-likely-than-not” recognition threshold, accounting standards require recognition, measurement and disclosure in a company’s financial statements. We had no material unrecognized tax benefits as of June 30, 2018 and 2017. Our United States subsidiaries are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2014. Our United Kingdom subsidiaries are no longer subject to United Kingdom income tax examinations by Her Majesty’s Revenue and Customs for years before 2016.