Income Taxes

3 Months Ended

Mar. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

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 Amendment 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 U.S. or the U.K. and, accordingly, do not expect to be subject to direct U.S. or U.K. income taxation.

We have subsidiaries based in the U.K. 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 U.K. subsidiaries are deemed to be engaged in business in the U.S., and therefore, are subject to U.S. corporate tax in respect of a proportion of their U.S. underwriting business only. Relief is available against the U.K. tax liabilities in respect of overseas taxes paid that arise from the underwriting business. Our U.K. subsidiaries file separate U.K. income tax returns.

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

We also have operations in Brazil, France, Ireland, Italy, Malta, and Switzerland, which also are subject to income taxes imposed by the jurisdiction in which they operate. During the period ending March 31, 2022, our operations in Brazil were divested. We also have operations in Barbados and the United Arab Emirates, which are not subject to income tax under the laws of those countries.

On June 10, 2021, U.K. tax legislation referred to as Finance Act 2021 received Royal Assent and 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 Finance Act 2021 in our June 30, 2021 consolidated financial statements which primarily includes the remeasurement of our deferred tax assets and liabilities for the increased U.K. federal tax rate from 19% to 25% beginning on April 1, 2023.

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, 2022 and 2021, 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,
	2022				2021
(in millions)	Pre-Tax Income (Loss)		Effective Tax Rate		Pre-Tax Income (Loss)		Effective Tax Rate
Bermuda	$	(0.2)	—	%	$	5.0	—	%
United States	38.8		21.9	%	41.3		15.7	%
United Kingdom	5.0		80.8	%	(18.3)		28.1	%
Brazil	(0.1)		(422.4)	%	1.6		—	%
United Arab Emirates	0.6		—	%	0.3		—	%
Ireland	(33.3)		—	%	(0.1)		—	%
Italy	0.1		138.1	%	0.9		—	%
Malta	1.1		—	%	0.5		—	%
Pre-tax income	$	12.0	109.7	%	$	31.2	4.3	%

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)	2022		2021
Income tax provision at expected rate	$	9.4	$	6.3
Tax effect of:
Nontaxable investment income	(0.1)		(0.2)
Foreign exchange adjustments	0.1		(0.2)
Sale of Brazil Operations	1.6		—
Change in uncertain tax position liability	0.1		(2.4)
Change in valuation allowance	(1.8)		(0.8)
Impact of change in tax rate related to Finance Act 2021	0.5		—
Lease termination	2.0		—
Other	1.2		(1.3)
Income tax provision	$	13.0	$	1.4

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. For the three months ended March 31, 2022, the net change in valuation allowance for deferred tax assets decreased $1.8 million 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 or disposals. 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. For the three months ended March 31, 2022, the uncertain tax positions liability increased in the amount of $0.1 million. A net increase of interest in the amount of $0.1 million has been recorded in the line item Interest expense in our Consolidated Statements of Income (Loss) for the three months ended March 31, 2022.

Our U.S. subsidiaries are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2018. Our U.K. subsidiaries are no longer subject to U.K. income tax examinations by Her Majesty’s Revenue and Customs for years before 2020.

Numerous foreign jurisdictions in which we operate have provided or proposed income-tax relief in response to the COVID-19 pandemic. The Company does not anticipate any of the recent legislative initiatives to have a material impact on its financial statements and will continue to analyze these initiatives in response to the COVID-19 pandemic.