TAXATION

The following table presents earnings before income taxes by jurisdiction:



	2015		2014		2013
Domestic (Bermuda)	$	61,695	$	154,453	$	193,063
Foreign	166,464		83,925		66,378
Total	$	228,159	$	238,378	$	259,441

The following table presents our current and deferred income tax expense (benefit) by jurisdiction:



	2015			2014			2013
Current:
Domestic (Bermuda)	$	—		$	—		$	—
Foreign	39,396			39,455			30,787
	39,396			39,455			30,787
Deferred:
Domestic (Bermuda)	—			—			—
Foreign	(21,578		)	(28,313		)	4,832
	(21,578		)	(28,313		)	4,832
Total tax expense	$	17,818		$	11,142		$	35,619

The actual income tax rate differs from the amount computed by applying the effective rate of 0% under Bermuda law to earnings before income taxes as shown in the following reconciliation:



	2015			2014			2013
Earnings before income tax	$	228,159		$	238,378		$	259,441
Bermuda income taxes at statutory rate	0.0		%	0.0		%	0.0		%
Foreign income tax rate differential	18.0		%	12.3		%	5.1		%
Change in unrecognized tax benefits	—		%	(0.9		)%	(1.0		)%
Benefit of loss carryovers	—		%	(1.2		)%	—		%
Change in valuation allowance	(8.3		)%	(12.6		)%	7.2		%
Investment write-off	—		%	2.3		%	—		%
Foreign currency translation	(0.3		)%	0.8		%	(0.3		)%
Other	(1.6		)%	4.0		%	2.7		%
Effective tax rate	7.8		%	4.7		%	13.7		%

Our effective tax rate is driven by the geographical distribution of our pre-tax net earnings between our taxable and non-taxable jurisdictions. Under current Bermuda law, we are exempted from paying any taxes in Bermuda on income or capital gains until March 2035. The local expected rates for foreign taxes, in the table above, were computed as the sum of the calculations of pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable weighted-average statutory tax rate.

We have foreign operating subsidiaries and branch operations principally located in the United Kingdom, Australia, the United States and Continental Europe which are subject to federal, foreign, state and local taxes in those jurisdictions. We have undistributed earnings in these foreign subsidiaries which, if distributed as dividends or otherwise, may be subject to income or withholding taxes. 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.

Deferred Tax Assets (Liabilities)

Deferred tax assets and liabilities reflect the tax effect of the differences between the financial reporting and income tax bases of assets and liabilities. Significant components of the deferred tax assets and deferred tax liabilities were as follows:



	As of December 31,
	2015			2014
Deferred tax assets:
Net operating loss carryforwards	$	259,851		$	255,151
Tax credits and other carryforwards	6,354			6,363
Insurance reserves	160,554			167,338
Lloyd's underwriting losses taxable in future periods	17,768			19,193
Provisions for bad debt	17,694			22,102
Other deferred tax assets	26,805			25,855
Gross deferred tax assets	489,026			496,002
Valuation allowance	(367,991		)	(408,394		)
Deferred tax assets	121,035			87,608
Deferred tax liabilities:
Unrealized gains on investments	(49,649		)	(63,060		)
Intangible assets	(20,895		)	(18,000		)
Other deferred tax liabilities	(22,044		)	—
Deferred tax liabilities	(92,588		)	(81,060		)
Net deferred tax assets	$	28,447		$	6,548

As of December 31, 2015, we had net operating loss carry forwards that could be available to offset future taxable income, as follows:



Tax Jurisdiction	Loss Carryforwards		Tax effect		Expiration
United States	$	522,366	$	182,727	2022-2035
United Kingdom	333,814		66,763		None
Other	30,803		10,361		None

Assessment of Valuation Allowance on Deferred Tax Assets

As of December 31, 2015 and 2014, we had deferred tax asset valuation allowances of $368.0 million and $408.4 million respectively related to foreign subsidiaries. The valuation allowances are maintained primarily due to the inability to demonstrate that it was more likely than not that the related deferred tax assets would be realized. The change in the valuation allowance is due primarily to the reduction in gross deferred tax assets partially offset by the change in net operating loss carryforwards.

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. 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. Our assessment weighs both positive and negative evidence and considers the extent to which the evidence can be objectively verified. When negative evidence outweighs positive evidence then it can be difficult to support a conclusion that a valuation allowance is not needed. We consider 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.

Uncertainty in Income Taxes

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:



	2015		2014			2013
Balance, beginning of year	$	—	$	2,249		$	5,821
Gross increases — tax positions related to prior years	—		—			114
Gross decreases — tax positions related to prior years	—		—			(3,346		)
Lapse of statute of limitations	—		(2,249		)	(340		)
Balance, end of year	$	—	$	—		$	2,249

We recognize accrued interest and penalties related to unrecognized tax benefits as a part of income tax expense. During the years ended December 31, 2015, 2014 and 2013, we recognized a benefit for the reversal of interest and penalties related to unrecognized tax benefits due to the expiration of the statute of limitations in the amount of $2.2 million, $nil and $0.2 million, respectively. We had approximately $nil, $nil and $0.7 million accrued for the payment of interest and penalties related to unrecognized tax benefits at December 31, 2015, 2014 and 2013, respectively.

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 major tax jurisdiction as of December 31, 2015:



Major Tax Jurisdiction					Open Tax Years
United States					2012-2014
United Kingdom					2012-2014
Australia					2009-2014