Income Taxes

9 Months Ended

Sep. 30, 2019

5.	Income Taxes

As of September 30, 2019, the statutory income tax rates of the countries where the Company conducts business are 21% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 26.01% for companies with a registered office in Luxembourg City, 1.0% 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 expected annual taxable income of the Company in each country to estimate the annual income tax expense.

The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries for the quarters and nine months ended September 30, 2019 and 2018 were as follows:

Quarter Ended September 30, 2019 (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	19,980		$	137,197		$	—		$	157,177
Net premiums written	$	19,990		$	118,846		$	—		$	138,836
Net premiums earned	$	19,512		$	113,800		$	—		$	133,312
Net investment income		7,212			7,732			(3,596	)		11,348
Net realized investment gains (losses)		375			(3,065	)		—			(2,690	)
Other income (loss)		(234	)		498			—			264
Total revenues		26,865			118,965			(3,596	)		142,234
Losses and Expenses:
Net losses and loss adjustment expenses		7,628			65,955			—			73,583
Acquisition costs and other underwriting expenses		6,201			47,165			—			53,366
Corporate and other operating expenses		1,514			2,344			—			3,858
Interest expense		351			8,268			(3,596	)		5,023
Income (loss) before income taxes	$	11,171		$	(4,767	)	$	—		$	6,404

Quarter Ended September 30, 2018 (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	9,361		$	126,245		$	—		$	135,606
Net premiums written	$	9,356		$	106,877		$	—		$	116,233
Net premiums earned	$	30,220		$	90,308		$	—		$	120,528
Net investment income		12,013			7,204			(7,467	)		11,750
Net realized investment gains (losses)		(273	)		5,592			—			5,319
Other income (loss)		(82	)		493			—			411
Total revenues		41,878			103,597			(7,467	)		138,008
Losses and Expenses:
Net losses and loss adjustment expenses		14,877			65,616			—			80,493
Acquisition costs and other underwriting expenses		13,188			35,492			—			48,680
Corporate and other operating expenses		1,237			2,238			—			3,475
Interest expense		356			12,035			(7,467	)		4,924
Income (loss) before income taxes	$	12,220		$	(11,784	)	$	—		$	436

Nine Months Ended September 30, 2019 (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries		Eliminations			Total
Revenues:
Gross premiums written	$	69,588		$	409,111	$	—		$	478,699
Net premiums written	$	69,591		$	351,730	$	—		$	421,321
Net premiums earned	$	52,798		$	330,804	$	—		$	383,602
Net investment income		22,254			20,824		(10,685	)		32,393
Net realized investment gains		1,768			9,522		—			11,290
Other income (loss)		(256	)		1,530		—			1,274
Total revenues		76,564			362,680		(10,685	)		428,559
Losses and Expenses:
Net losses and loss adjustment expenses		24,076			177,903		—			201,979
Acquisition costs and other underwriting expenses		16,556			137,087		—			153,643
Corporate and other operating expenses		4,822			6,880		—			11,702
Interest expense		1,059			24,714		(10,685	)		15,088
Income before income taxes	$	30,051		$	16,096	$	—		$	46,147

Nine Months Ended September 30, 2018 (Dollars in thousands)	Non-U.S. Subsidiaries			U.S. Subsidiaries			Eliminations			Total
Revenues:
Gross premiums written	$	39,976		$	378,694		$	—		$	418,670
Net premiums written	$	39,970		$	320,587		$	—		$	360,557
Net premiums earned	$	115,353		$	227,094		$	—		$	342,447
Net investment income		39,527			21,428			(26,847	)		34,108
Net realized investment gains (losses)		(437	)		8,270			—			7,833
Other income (loss)		(179	)		1,468			—			1,289
Total revenues		154,264			258,260			(26,847	)		385,677
Losses and Expenses:
Net losses and loss adjustment expenses		48,210			147,216			—			195,426
Acquisition costs and other underwriting expenses		50,475			90,721			—			141,196
Corporate and other operating expenses		10,550			13,103			—			23,653
Interest expense		6,749			34,823			(26,847	)		14,725
Income (loss) before income taxes	$	38,280		$	(27,603	)	$	—		$	10,677

The following table summarizes the components of income tax benefit:

	Quarters Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2019			2018			2019			2018
Current income tax expense (benefit):
Foreign	$	(17	)	$	62		$	(35	)	$	326
U.S. Federal		—			(732	)		—			—
Total current income tax expense (benefit)		(17	)		(670	)		(35	)		326
Deferred income tax expense (benefit):
U.S. Federal		(300	)		(2,622	)		5,198			(6,270	)
Total deferred income tax expense (benefit)		(300	)		(2,622	)		5,198			(6,270	)
Total income tax expense (benefit)	$	(317	)	$	(3,292	)	$	5,163		$	(5,944	)

The weighted average expected tax provision has been calculated using income 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:

	Quarters Ended September 30,
	2019						2018
(Dollars in thousands)	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income
Expected tax provision at weighted average tax rate	$	(1,001	)		(15.6	%)	$	(2,494	)		(571.9	%)
Adjustments:
Tax exempt interest		—			—			—			—
Dividend exclusion		(33	)		(0.5	)		(68	)		(15.6	)
Base Erosion Anti-Abuse Tax		—			—			(731	)		(167.7	)
Non-deductible interest		695			10.8			—			—
Other		22			0.3			1			0.2
Effective income tax benefit	$	(317	)		(5.0	%)	$	(3,292	)		(755.0	%)

The effective income tax benefit rate for the quarter ended September 30, 2019 was 5.0%, compared with an effective income tax benefit rate of 755.0% for the quarter ended September 30, 2018. The decrease in the effective income tax benefit rate in the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 is due to higher pretax income in the U.S. in 2019.

	Nine Months Ended September 30,
	2019						2018
(Dollars in thousands)	Amount			% of Pre- Tax Income			Amount			% of Pre- Tax Income
Expected tax provision at weighted average tax rate	$	3,380			7.3	%	$	(5,527	)		(51.8	%)
Adjustments:
Tax exempt interest		(1	)		—			(5	)		—
Dividend exclusion		(256	)		(0.6	)		(203	)		(1.9	)
Base Erosion Anti-Abuse Tax		—			—			—			—
Non-deductible interest		2,063			4.5			—			—
Other		(23	)		—			(209	)		(2.0	)
Effective income tax expense (benefit)	$	5,163			11.2	%	$	(5,944	)		(55.7	%)

The effective income tax expense rate for the nine months ended September 30, 2019 was 11.2%, compared with an effective income tax benefit rate of 55.7% for the nine months ended September 30, 2018. The increase in the effective income tax expense rate in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 is due to higher pretax income in the U.S. in 2019.

The Company has a net operating loss (“NOL”) carryforward of $24.7 million as of September 30, 2019, which begins to expire in 2036 based on when the original NOL was generated. The Company’s NOL carryforward as of December 31, 2018 was $29.5 million.

The Company has a Section 163(j) (“163(j)”) carryforward of $11.1 million as of September 30, 2019 and December 31, 2018, which can be carried forward indefinitely. The 163(j) carryforward relates to the limitation on the deduction for business interest expense paid or accrued.

The Company had an alternative minimum tax (“AMT”) credit carryforward of $11.0 million as of December 31, 2017. The Tax Cuts and Jobs Act repealed the corporate AMT. The AMT credit carryforward of $11.0 million was reclassed to federal income taxes receivable at December 31, 2017 and will be fully refunded by the end of 2021.