Income Taxation

12 Months Ended

Dec. 31, 2019

20. INCOME TAXATION

Enstar Group Limited is incorporated under the laws of Bermuda and under Bermuda law is not required to pay taxes in Bermuda based upon income or capital gains. The Company, under the Exempted Undertakings Tax Protection Act of 1966, is protected against any legislation that may be enacted in Bermuda which would impose any tax on profits, income, or gain until March 31, 2035.

We have foreign operating subsidiaries and branch operations principally located in the United States, United Kingdom, Continental Europe and Australia that are subject to federal, foreign, state and local taxes in those jurisdictions. Deferred tax liabilities have not been accrued with respect to the undistributed earnings of our foreign subsidiaries. If the earnings were to be distributed, as dividends or other distributions, withholding taxes may be imposed by the jurisdiction of the paying subsidiary. For our U.S. subsidiaries, we have not currently accrued any withholding taxes with respect to unremitted earnings as management has indefinitely reinvested these earnings. For our United Kingdom subsidiaries, there are no withholding taxes imposed. For our other foreign subsidiaries, it would not be practicable to compute such amounts due to a variety of factors, including the amount, timing, and manner of any repatriation. Because we operate in many jurisdictions, our net earnings are subject to risk due to changing tax laws and tax rates around the world. The current, rapidly changing economic environment may increase the likelihood of substantial changes to tax laws in the jurisdictions in which we operate.

The following table presents earnings (loss) before income taxes by jurisdiction from continuing operations, including earnings (loss) from equity method investments, for the years ended December 31, 2019, 2018 and 2017:



	2019		2018			2017
Domestic (Bermuda)	$	576,339	$	(232,743	)	$	167,263
Foreign	356,317		14,347			147,148
Total earnings (loss) before income tax on continuing operations	$	932,656	$	(218,396	)	$	314,411

The following table presents our current and deferred income tax expense (benefit) from continuing operations by jurisdiction for the years ended December 31, 2019, 2018 and 2017:



	2019			2018			2017
Current:
Domestic (Bermuda)	$	—		$	—		$	—
Foreign	18,433			(3,632		)	10,299
	18,433			(3,632		)	10,299
Deferred:
Domestic (Bermuda)	—			—			—
Foreign	(13,996		)	(2,492		)	(16,694		)
	(13,996		)	(2,492		)	(16,694		)
Total income tax expense (benefit) on continuing operations	$	4,437		$	(6,124	)	$	(6,395	)

The actual effective income tax rate differs from the statutory rate of 0% under Bermuda law to earnings (loss) from continuing operations before income taxes, including earnings (loss) from equity method investments for the years ended December 31, 2019, 2018 and 2017 as shown in the following reconciliation:



	2019			2018			2017
Earnings (loss) before income tax	$	932,656		$	(218,396	)	$	314,411
Bermuda income taxes at statutory rate	0.0		%	0.0		%	0.0		%
Foreign income tax rate differential	8.6		%	0.7		%	13.1		%
Change in valuation allowance	(8.2		)%	(0.3		)%	(34.9		)%
Effect of change in foreign (U.S.) tax rate	—		%	—		%	20.3		%
U.S. base erosion and anti-abuse tax	0.5		%	(0.6		)%	—		%
Other	(0.4		)%	3.0		%	(0.5		)%
Effective tax rate	0.5		%	2.8		%	(2.0		)%

Our effective tax rate is generally driven by the geographical distribution of our pre-tax net earnings between our taxable and non-taxable jurisdictions.

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities reflect the tax effect of the differences between the financial statement carrying amount and the income tax bases of assets and liabilities. Significant components of the deferred tax assets and deferred tax liabilities as of December 31, 2019 and 2018 were as follows:



	2019			2018
Deferred tax assets:
Net operating loss carryforwards	$	159,436		$	183,633
Insurance reserves	14,104			18,677
Unearned premiums	7,131			11,314
Lloyd's underwriting losses taxable in future periods	—			6,201
Provisions for bad debt	6,172			2,594
Unrealized losses on investments	—			5,160
Defendant asbestos and environmental liabilities ⁽¹⁾	140,000			—
Other deferred tax assets	—			183
Gross deferred tax assets	326,843			227,762
Valuation allowance	(117,390		)	(212,113		)
Deferred tax assets	209,453			15,649

Deferred tax liabilities:
Unrealized gains on investments	(10,107		)	—
Lloyd's underwriting profit taxable in future periods	(8,852		)	—
Deferred policy acquisition cost	(8,267		)	—
Other deferred tax liabilities	(27,317		)	(16,067		)
Deferred tax liabilities	(54,543		)	(16,067		)

Net deferred tax asset (liability)	$	154,910		$	(418	)

⁽¹⁾ Relates to the Morse TEC acquisition as described in Note 3 - "Acquisitions".

Net Deferred Tax Asset (Liability) Balance by Major Jurisdiction:



	December 31,
	2019			2018
	Net Deferred Tax Asset			Net Deferred Tax Liability
United States	$	169,891		$	5,151
United Kingdom	(16,074		)	(8,377		)
Other	1,093			2,808
Total	$	154,910		$	(418	)

Net Operating Loss Carryforwards:

As of December 31, 2019, we had net operating loss carryforwards that could be available to offset future taxable income, as follows:



Tax Jurisdiction	Loss Carryforwards		Tax effect		Expiration
Operating and Capital Loss Carryforwards:
United States - Net operating loss	$	513,476	$	107,830	2024-2038
United Kingdom	224,150		38,106		Indefinitely
Other	52,484		13,500		Various

The U.S. net operating loss carryforwards are also subject to certain utilization limitations based upon their nature and the specific legal entity that holds them.

Assessment of Valuation Allowance on Deferred Tax Assets

As of December 31, 2019 and 2018, we had deferred tax asset valuation allowances of $117.4 million and $212.1 million, respectively, related to foreign subsidiaries. We recorded a decrease of $94.7 million in our deferred tax valuation allowance primarily due to utilization of deferred tax asset in the amount of $69.7 million as well as a partial deferred tax asset valuation allowance release in the amount of $25.0 million during 2019.

The realization of deferred tax assets is dependent on generating sufficient taxable income in future periods in which the tax benefits are deductible or creditable. The amount of the deferred tax asset considered realizable, however, could be revised in the future if estimates of future taxable income change. Taxes are determined and assessed jurisdictionally by legal entity or by filing group. Certain jurisdictions require or allow combined or consolidated tax filings. We have estimated future taxable income of our foreign subsidiaries and provided a valuation allowance in respect of those assets where we do not expect to realize a benefit. We have considered all available evidence using a “more likely than not” standard in determining the amount of the valuation allowance. We considered the following evidence: (i) net earnings or losses in recent years; (ii) the future sustainability and likelihood of positive net earnings of our subsidiaries; (iii) the carryforward periods of tax losses including the effect of reversing temporary differences; and (iv) tax planning strategies, in making our determination. The assumptions used in determining future taxable income require significant judgment and any changes in these assumptions could have an impact on earnings.

During the years ended December 31, 2019, 2018 and 2017, there were no unrecognized tax benefits. There were no accruals for the payment of interest and penalties related to unrecognized tax benefits as of December 31, 2019, 2018 and 2017.

Our operating subsidiaries may be subject to audit by various tax authorities and may have different statutes of limitations expiration dates. Tax authorities may propose adjustments to our income taxes. Listed below are the tax years that remain subject to examination by a major tax jurisdiction as of December 31, 2019:



Major Tax Jurisdiction		Open Tax Years
United States		2016-2019
United Kingdom		2016-2019
Australia		2014-2019

Impact of U.S. Tax Reform

On December 22, 2017, the U.S. Government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Act"). The Tax Act resulted in a reduction of the U.S. Federal Tax rate to 21% from 35% effective for tax years beginning after December 31, 2017. Consequently, we recorded a $63.8 million reduction of our U.S. deferred tax asset fully offset by a reduction in our valuation allowance in 2017. The Tax Act also repealed the corporate AMT. Taxpayers with AMT credit carryovers in excess of their tax liability may have the credits refunded over multiple years between 2018 and 2021. For the year ended December 31, 2017, we had recorded a reduction to our valuation allowance of $7.4 million and reclassified our AMT credit carryforward to other assets on our consolidated balance sheet. The AMT carryforward has been refunded 50% each tax year beginning in 2018 with any remaining balance expected to be fully refunded in 2021.

Australia

The Company’s Australian insurance subsidiary is regulated and subject to prudential supervision by the Australian Prudential Regulation Authority (“APRA”). APRA is the primary regulatory body responsible for regulating compliance with the Insurance Act 1973. APRA’s prudential standards require that all insurers maintain and meet

prescribed capital adequacy requirements to enable their insurance obligations to be met under a wide range of circumstances.

A run-off insurer must obtain APRA’s written consent prior to making any capital releases, including any payment of dividends, not from current year profits. The Company’s insurance subsidiary must provide APRA a valuation prepared by its Appointed Actuary that demonstrates that the tangible assets of the insurer, after the proposed capital reduction, are sufficient to cover its insurance liabilities.