Income Taxes

12 Months Ended

Dec. 31, 2019

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. As such, these subsidiaries are now subject to the minimum BEAT computation imposed by the TCJA on this underwriting business. Relief, exclusive of any BEAT, 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, 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, the TCJA was signed into law making significant changes to the Internal Revenue Code. The Company provided its best estimate of the impact of the TCJA at December 31, 2017 and during 2018 completed its analysis as provided by SAB 118.

The following table presents the components of income tax provision (benefit) included in the amounts reported in our consolidated financial statements:



	For the Years Ended December 31,
(in millions)	2019			2018			2017
Current income tax provision (benefit) related to:
United States	$	36.5		$	13.4		$	(0.3	)
United Kingdom	(1.5		)	3.2			7.6
Other jurisdictions	0.1			0.1			0.2
Total current income tax provision	35.1			16.7			7.5
Deferred income tax provision (benefit) related to:
United States	(19.3		)	(13.8		)	(0.3		)
United Kingdom	(7.2		)	1.1			(17.6		)
Other jurisdictions	—			0.1			—
Total deferred income tax (benefit)	(26.5		)	(12.6		)	(17.9		)
Income tax provision (benefit)	$	8.6		$	4.1		$	(10.4	)

Our expected income tax provision (benefit) 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 years ended December 31, 2019, 2018 and 2017, pre-tax income (loss) attributable to our operations and the operations’ effective tax rates were as follows:



(in millions)	2019							2018							2017
	Pre-Tax Income (Loss)				Effective Tax Rate			Pre-Tax Income (Loss)				Effective Tax Rate			Pre-Tax Income (Loss)				Effective Tax Rate
Bermuda	$	(34.8	)		—	%		$	26.0			—	%		$	30.2			—	%
United States	85.2				19.7	%		13.9				(5.5	)%		67.5				(0.9	)%
United Kingdom	(46.1		)		17.9	%		25.0				18.8	%		(53.8		)		18.7	%
Belgium	—			(1)	15.8	%		—			(1)	—	%	(2)	0.1				75.0	%
Brazil	5.2				—	%		(0.5		)		—	%		0.8				—	%
United Arab Emirates	0.4				—	%		0.8				—	%		0.2				—	%
Ireland	(0.1		)		—	%		(0.2		)		—	%		(0.2		)		—	%
Italy	(7.4		)		—	%		0.9				—	%		—				—	%
Malta	(2.0		)		—	%		1.7				—	%		0.3				—	%
Luxembourg	—				—	%		—			(1)	—	%		(5.2		)		—	%
Switzerland	(0.2		)		(0.2	)%		0.1				18.4	%		—			(1)	21.1	%
Pre-tax income	$	0.2			—	%	(2)	$	67.7			6.1	%		$	39.9			(26.1	)%

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

⁽²⁾Not Meaningful.

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 inherent nature of our business. A reconciliation of the difference between the provision for income taxes and the expected tax provision (benefit) at the weighted average tax rate is as follows:



	For the Years Ended December 31,
(in millions)	2019			2018			2017
Income tax provision (benefit) at expected rate	$	9.0		$	8.2		$	12.7
Tax effect of:
Nontaxable investment income	(1.2		)	(1.9		)	(4.7		)
Foreign exchange adjustments	(0.1		)	(0.6		)	2.1
Impairment of goodwill	2.9			—			—
Withholding taxes	0.2			0.4			0.4
Change in valuation allowance	(1.1		)	(1.5		)	(0.9		)
Impact of change in tax rate related to TCJA	—			(1.6		)	(20.2		)
Other	(1.1		)	1.1			0.2
Income tax provision (benefit)	$	8.6		$	4.1		$	(10.4	)

The net deferred tax asset (liability) comprises the tax effects of temporary differences related to the following assets and liabilities:



	December 31,
(in millions)	2019				2018
Deferred tax assets:
Losses and loss adjustment expense reserve discounting	$	22.8			$	19.3
Unearned premiums	25.3				23.2
Net operating loss carryforwards	30.6				31.6
Investment in limited partnership interests	7.1				12.0
Unrealized losses on fixed maturities and other investment securities	—				9.0
Investment	2.4				1.3
Right of use assets	14.5				—
Accrued bonus	2.2				4.5
Stock option expense	1.1				1.7
United Kingdom underwriting results	5.9				—
Other	5.7				6.3
Deferred tax assets, gross	117.6				108.9
Deferred tax liabilities:
Unrealized gains on equity securities	(3.0		)		(13.1		)
Unrealized gains on fixed maturities and other investment securities	(5.3		)		—
Unrealized gains on limited partnership interests	(15.6		)		(17.3		)
Depreciable fixed assets	(22.4		)		(27.0		)
Deferred acquisition costs	(18.6		)		(18.1		)
Lease liability	(14.0		)		—
TCJA reserve transitional liability	(3.2		)		(4.5		)
United Kingdom underwriting results	—				(0.6		)
Other	(0.6		)		(4.6		)
Deferred tax liabilities, gross	(82.7		)		(85.2		)
Deferred tax assets, net before valuation allowance	$	34.9			$	23.7
Valuation allowance	(28.8		)		(29.9		)
Deferred tax asset (liabilities), net	$	6.1			$	(6.2	)
Net deferred tax assets (liabilities) - Other jurisdictions	$	6.1			$	(0.6	)
Net deferred tax liabilities - United States	—			⁽¹⁾	(5.6		)
Deferred tax asset (liabilities), net	$	6.1			$	(6.2	)

⁽¹⁾Net deferred tax liability for the respective year was less than $0.1 million.

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 U.S. property and casualty insurers two years for net operating losses and for all our U.S. 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 $1.1 million in 2019, relating to the following: Internal Revenue Code Section 382 limited net operating loss carryforwards within the United States, cumulative losses incurred since inception, and valuation allowances acquired through or related to acquisitions. 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.

For tax return purposes, as of December 31, 2019, we had NOL carryforwards in Brazil, Italy, Malta, and the United States. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitations imposed by tax laws. Only a portion of the United States NOL carryforwards has been recognized as mentioned above in the consolidated financial statements and is included in net deferred tax liabilities. The NOL amounts by jurisdiction and year of expiration are as follows:



(in millions)	December 31, 2019		Expiration
Net operating loss carryforwards by jurisdiction:
Brazil	$	4.3	Indefinite
Italy	45.9		Indefinite
Malta	8.2		Indefinite
United States	46.1		2025 - 2037

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 December 31, 2019, 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.