Income Taxes

3 Months Ended

Mar. 31, 2020

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. Certain 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, 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.

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 months ended March 31, 2020 and 2019, pre-tax income (loss) attributable to our operations and the corresponding operations’ effective tax rates were as follows:


	For the Three Months Ended March 31,
	2020								2019
(in millions)	Pre-Tax Income (Loss)			Effective Tax Rate		Pre-Tax Income (Loss)			Effective Tax Rate
Bermuda	$	(21.7)		—	%	$	32.0		—	%
United States	(10.7)			55.0	%	69.4			14.4	%
United Kingdom	1.7			183.2	%	(3.5)			31.5	%
Belgium	—		⁽¹⁾	68.8	%	—		⁽¹⁾	30.8	%
Brazil	2.2			—	%	1.8			—	%
United Arab Emirates	0.9			—	%	0.2			—	%
Ireland	—		⁽¹⁾	—	%	—		⁽¹⁾	—	%
Italy	3.4			—	%	(0.7)			—	%
Malta	2.6			—	%	0.9			—	%
Luxembourg	—			—	%	—			—	%
Switzerland	—		⁽¹⁾	—	%	—		⁽¹⁾	—	%
Pre-tax (loss) income	$	(21.6)		12.8	%	$	100.1		8.9	%

⁽¹⁾Pre-tax income (loss) 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 March 31,
(in millions)	2020			2019
Income tax provision (benefit) at expected rate	$	0.8		$	14.9
Tax effect of:
Nontaxable investment income	(0.1)			(0.4)
Foreign exchange adjustments	(2.0)			0.5
Withholding taxes	—		⁽¹⁾	—		⁽¹⁾
Prior period adjustments	—		⁽¹⁾	—
Change in valuation allowance	—		⁽¹⁾	(0.6)
Other	(1.5)			(5.5)
Income tax (benefit) provision	$	(2.8)		$	8.9

⁽¹⁾Tax effect of the adjustment 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 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 during 2020, which was negligible, related 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 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 March 31, 2020 and 2019. Our United States subsidiaries are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2015. 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.