10.

Income Taxes

The statutory income tax rates of the countries where the Company does business are 35% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 0% in Gibraltar, 29.22% in the Duchy of Luxembourg, 0.25% to 2.5% in Barbados, and 25% on non-trading income, 33% on capital gains and 12.5% on trading income in the Republic of Ireland. The statutory income tax rate of each country is applied against the annual taxable income of each country to calculate the annual income tax expense.

The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, including the results of the quota share and stop-loss agreements between Global Indemnity Reinsurance and the Insurance Operations, for the years ended December 31, 2016, 2015, and 2014 were as follows:


Year Ended December 31, 2016: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	201,726		$	506,061		$	(141,942	)	$	565,845

Net premiums written	$	201,690		$	269,250		$	—		$	470,940

Net premiums earned	$	212,325		$	256,140		$	—		$	468,465
Net investment income		48,807			19,341			(34,165	)		33,983
Net realized investment gains		(89	)		21,810			—			21,721
Other income (loss)		(224	)		10,569			—			10,345

Total revenues		260,819			307,860			(34,165	)		534,514
Losses and Expenses:
Net losses and loss adjustment expenses		95,812			168,191			—			264,003
Acquisition costs and other underwriting expenses		94,749			101,901			—			196,650
Corporate and other operating expenses		9,035			8,303			—			17,338
Interest expense		8,312			34,758			(34,165	)		8,905

Income (loss) before income taxes	$	52,911		$	(5,293	)	$	—		$	47,618


Year Ended December 31, 2015: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	345,392		$	540,500		$	(295,659	)	$	590,233

Net premiums written	$	345,342		$	155,902		$	—		$	501,244

Net premiums earned	$	283,448		$	220,695		$	—		$	504,143
Net investment income		44,534			18,011			(27,936	)		34,609
Net realized investment losses		(1,039	)		(2,335	)		—			(3,374	)
Other income (loss)		(93	)		3,493			—			3,400

Total revenues		326,850			239,864			(27,936	)		538,778
Losses and Expenses:
Net losses and loss adjustment expenses		141,444			133,924			—			275,368
Acquisition costs and other underwriting expenses		122,999			78,304			—			201,303
Corporate and other operating expenses		5,928			18,520			—			24,448
Interest expense		4,492			28,357			(27,936	)		4,913

Income (loss) before income taxes	$	51,987		$	(19,241	)	$	—		$	32,746


Year Ended December 31, 2014: (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	173,563		$	229,979	$	(112,289	)	$	291,253

Net premiums written	$	172,504		$	100,677	$	—		$	273,181

Net premiums earned	$	168,743		$	99,776	$	—		$	268,519
Net investment income		31,420			16,715		(19,314	)		28,821
Net realized investment gains		926			34,934		—			35,860
Other income (loss)		(65	)		620		—			555

Total revenues		201,024			152,045		(19,314	)		333,755
Losses and Expenses:
Net losses and loss adjustment expenses		62,669			74,892		—			137,561
Acquisition costs and other underwriting expenses		70,479			39,140		—			109,619
Corporate and other operating expenses		5,243			9,316		—			14,559
Interest expense		852			19,284		(19,314	)		822

Income (loss) before income taxes	$	61,781		$	9,413	$	—		$	71,194

The following table summarizes the components of income tax expense (benefit):


	Years Ended December 31,
(Dollars in thousands)	2016			2015			2014
Current income tax expense (benefit):
Non-resident withholding	$	—		$	—		$	6,250
Foreign		330			263			129
U.S. Federal		147			(1,785	)		2,787

Total current income tax expense (benefit)		477			(1,522	)		9,166
Deferred income tax benefit:
U.S. Federal		(2,727	)		(7,201	)		(828	)

Total deferred income tax benefit		(2,727	)		(7,201	)		(828	)

Total income tax expense (benefit)	$	(2,250	)	$	(8,723	)	$	8,338

The weighted average expected tax provision has been calculated using income (loss) before income taxes in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.

The following table summarizes the differences between the tax provision for financial statement purposes and the expected tax provision at the weighted average tax rate:


	Years Ended December 31,
(Dollars in thousands)	2016						2015						2014
	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income
Expected tax provision at weighted average	$	(1,496	)		(3.1	%)	$	(6,434	)		(19.6	%)	$	3,465			4.9	%
Adjustments:
Non-resident withholding		—			—			—			—			6,250			8.8
Tax exempt interest		(394	)		(0.8	)		(441	)		(1.3	)		(472	)		(0.7	)
Dividend exclusion		(617	)		(1.3	)		(784	)		(2.4	)		(1,340	)		(1.9	)
Other		257			0.5			(1,064	)		(3.3	)		435			0.6

Actual taxes on continuing operations	$	(2,250	)		(4.7	%)	$	(8,723	)		(26.6	%)	$	8,338			11.7	%

The effective income tax benefit rate for 2016 was 4.7%, compared with an effective income tax benefit rate of 26.6% for 2015 and an effective income tax rate of 11.7% for 2014. The increase in the effective income tax rate in 2016 compared to 2015 is primarily due to capital gains in 2016. The decrease in the effective income tax rate in 2015 compared to 2014 is primarily due to incurring acquisition expenses related to American Reliable, a decrease in capital gains in 2015, and a $6.3 million withholding tax paid in 2014 in connection with the $125 million dividend from Global Indemnity Group Inc. to U.A.I. Luxembourg S.à.r.l.

The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2016 and 2015 are presented below:


(Dollars in thousands)	2016		2015
Deferred tax assets:
Discounted unpaid losses and loss adjustment expenses	$	7,015	$	8,222
Unearned premiums		8,802		7,884
Section 163(j) carryforward		8,075		3,135
Alternative minimum tax credit carryover		10,957		10,868
Net operating loss carryforward		3,205		1,934
Partnership K1 basis differences		238		245
Capital gain on derivative instruments		4,033		5,340
Investment impairments		3,419		2,635
Stock options		2,820		2,635
Stat-to-GAAP reinsurance reserve		1,337		1,364
Intercompany transfers		808		1,612
Depreciation and amortization		—		36
Other		4,986		4,545

Total deferred tax assets		55,695		50,455

Deferred tax liabilities:
Purchase accounting adjustment for American Reliable		6,095		6,095
Intangible assets		3,942		3,893
Unrealized gain on securities available-for-sale and investments in limited partnerships included in accumulated other comprehensive income		352		3,896
Investment basis differences		484		1,034
Deferred acquisition costs		2,941		642
Depreciation and amortization		119		—
Other		805		208

Total deferred tax liabilities		14,738		15,768

Total net deferred tax assets	$	40,957	$	34,687

The deferred tax assets and deferred tax liabilities listed in the table above relate to temporary differences between the Company’s accounting and tax carrying values and carryforwards for its companies in the United States.

Management believes it is more likely than not that the deferred tax assets will be completely utilized in future years. As a result, the Company has not recorded a valuation allowance at December 31, 2016 and 2015.

The Company has an alternative minimum tax (“AMT”) credit carryforward of $11.0 million and $10.9 million as of December 31, 2016 and 2015, respectively, which can be carried forward indefinitely. The Company has a net operating loss (“NOL”) carryforward of $3.2 million, as of December 31, 2016, which will expire in 2036 and a NOL carryforward of $1.9 million, as of December 31, 2015. The Company has a Section 163(j) (“163(j)”) carryforward of $8.1 million and $3.1 million as of December 31, 2016 and 2015, respectively, which can be carried forward indefinitely. The 163(j) carryforward is for disqualified interest paid or accrued to a related entity that is not subject to U.S. tax.

The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2013.

Should the Company’s subsidiaries that are subject to income taxes imposed by the U.S. authorities pay a dividend to their foreign affiliates, withholding taxes would apply. The Company has not recorded deferred taxes for potential withholding tax on undistributed earnings. The Company believes, although there can be no assurances, that it qualifies for treaty benefits under the Tax Convention with Luxembourg and would be subject to a 5% withholding tax if it were to pay a dividend. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the complexities with its hypothetical calculation. In December, 2014, Global Indemnity Group, Inc. paid a dividend of $125 million to U.A.I. (Luxembourg) S.à.r.l. and paid a 5% withholding tax of $6.3 million. The Company did not pay any dividends from a U.S. subsidiary to a foreign affiliate during 2016 or 2015.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby it only recognizes those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The Company had no unrecognized tax benefits during 2016 or 2015.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. The Company did not incur any interest and penalties related to uncertain tax positions during the years ended December 31, 2016, 2015 and 2014. As of December 31, 2016, the Company did not record any liabilities for tax-related interest and penalties on its consolidated balance sheets.