Income taxes

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

Income taxes

17. Income taxes

The Company provides for income tax expense or benefit based upon pre-tax income or loss reported in the consolidated statements of income and the provisions of currently enacted tax laws.  The Company and its Bermuda subsidiaries are incorporated under the laws of Bermuda and are subject to Bermuda law with respect to taxation.  Under current Bermuda law, the Company and its Bermuda subsidiaries are not subject to any income or capital gains taxes in Bermuda. In the event that such taxes are imposed, the Company and its Bermuda subsidiaries would be exempted from any such taxes until March 2035 under the Tax Assurance Certificates issued to such entities pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966, as amended.

The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The jurisdictions in which the Company's subsidiaries and branches are subject to tax are Australia, Belgium, Canada, Germany, Hong Kong (China), Ireland, Luxembourg, Malaysia, Singapore, Sweden, Switzerland, the United Kingdom, and the United States.

The following is a summary of the Company’s income before income tax (expense) benefit by jurisdiction for the years ended December 31, 2021, 2020 and 2019:

	2021		2020		2019
Bermuda	$	178.5	$	113.6	$	198.0
U.S.	21.8		38.1		3.2
U.K.	1.9		0.2		0.1
Sweden	(138.1)		—		—
Luxembourg	(20.5)		—		—
Other	1.5		—		—
Income before income tax (expense) benefit	$	45.1	$	151.9	$	201.3

For the years ended December 31, 2021, 2020 and 2019, income tax (expense) benefit consisted of the following:

	2021		2020		2019
Current tax expense:
U.S. Federal	$	(3.5)	$	(0.1)	$	(0.1)
State	(1.8)		—		—
Non-U.S.	(18.2)		—		—
Total current tax expense	(23.5)		(0.1)		(0.1)
Deferred tax (expense) benefit:
U.S. Federal	(13.1)		(8.0)		(0.6)
State	(4.8)		—		—
Non-U.S.	52.1		—		—
Total deferred tax (expense)	34.2		(8.0)		(0.6)
Total income tax (expense) benefit	$	10.7	$	(8.1)	$	(0.7)

Effective Rate Reconciliation

The following table presents a reconciliation of expected income taxes to income tax (expense) benefit for the years ended December 31, 2021, 2020 and 2019:

	2021		2020		2019
Tax (expense) benefit at the 0% Bermuda statutory rate	$	—	$	—	$	—
Differences in taxes resulting from:
Non-Bermuda earnings	17.6		(8.0)		(0.7)
Foreign currency effects	(19.0)		—		—
Change in valuation allowance	10.5		—		—
Change in uncertain tax positions	(8.0)		(0.1)		—
Non-taxable/deductible income	7.2		—		—
Tax rate change	4.3		—		—
Tax on Safety Reserve	(1.0)		—		—
State taxes expense	(0.9)		—		—
Provision-to-return true up	(0.5)		—		—
Other, net	0.5		—		—
Total income tax (expense) benefit	$	10.7	$	(8.1)	$	(0.7)

The non-Bermuda component of pre-tax income (loss) was $(133.5) million, $38.3 million and $3.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

The TCJA includes a BEAT provision, which is essentially a minimum tax on certain otherwise deductible payments made by U.S. entities to non-U.S. affiliates, including cross-border interest payments and reinsurance premiums paid or ceded. The statutory BEAT rate is 10% through 2025, and then rises to 12.5% in 2026 and thereafter. The TCJA also includes provisions

for GILTI) under which taxes on foreign income are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries. Consistent with accounting guidance, the Company will treat BEAT as an in period tax charge when incurred in future periods for which no deferred taxes need to be provided and has made an accounting policy election to treat GILTI taxes in a similar manner. No provision for income taxes related to BEAT or GILTI was recorded as of December 31, 2021 and December 31, 2020.

The Company has capital and liquidity in many of its subsidiaries, some of which may reflect undistributed earnings. If such capital or liquidity were to be paid or distributed to the Company or to one of its intermediary subsidiaries as dividends or otherwise, they may be subject to withholding tax by the source country and/or income tax by the recipient country. The Company generally intends to operate, and manage its capital and liquidity, in a tax-efficient manner. However, the applicable tax laws in relevant countries are still evolving, including in connection with guidance and proposals from the Organization for Economic Cooperation and Development (OECD). Accordingly, such payments or distributions may be subject to income or withholding tax in jurisdictions where they are not currently taxed or at higher rates of tax than currently taxed, and the applicable tax authorities could attempt to apply income or withholding tax to past earnings or payments.

Deferred Tax Inventory

The following table presents the tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 31, 2021, 2020 and 2019:

	2021		2020		2019
Deferred tax assets:
Non-U.S. net operating loss carryforwards	$	273.3	$	—	$	—
Tax credit carryforwards	26.2		—		—
U.S. federal net operating loss and capital carryforwards	19.4		10.1		9.3
Purchase accounting	17.8		—		—
Unearned premiums	13.4		5.5		1.8
Discounting of loss and loss adjustment expense reserves	7.6		1.0		0.8
Investment basis differences	5.9		—		—
Deferred interest	3.9		—		—
Incentive compensation and benefit accruals	5.7		2.6		1.2
Allowance for doubtful accounts	2.9		—		—
Other items	5.2		—		—
Total gross deferred tax assets	381.3		19.2		13.1
Valuation allowance	(113.3)		—		—
Total adjusted deferred tax asset	$	268.0	$	19.2	$	13.1
Deferred tax liabilities:
Safety reserve	$	150.1	$	—	$	—
Intangible assets	14.3		—		—
Deferred acquisition costs	6.7		8.3		1.4
Unrealized gains on investments	3.8		10.5		3.4
Foreign currency translation on investments	1.7		—		—
Other Items	4.8		—		—
Total deferred tax liabilities	181.4		18.8		4.8
Net deferred tax assets	$	86.6	$	0.4	$	8.3

Of the net deferred tax asset, net of valuation allowance, of $86.6 million as of December 31, 2021, $53.5 million relates to net deferred tax assets in U.S. subsidiaries, $128.5 million relates to net deferred tax assets in Luxembourg subsidiaries, $5.2 million relates to net deferred tax liabilities in UK subsidiaries, $90.9 million relates to net deferred tax liabilities in Sweden subsidiaries, and $0.7 million relates to net deferred tax assets in other jurisdictions.

The Company records a valuation allowance against deferred tax assets if it becomes more likely than not that all or a portion of deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in income tax

expense in the period of change. In determining whether or not a valuation allowance, or change therein, is warranted, the Company considers factors such as prior earnings history, expected future earnings, carryback and carryforward periods and strategies that if executed would result in the realization of a deferred tax asset. It is possible that certain planning strategies or projected earnings in certain subsidiaries may not be feasible to utilize the entire deferred tax asset, which could result in material changes to the Company's deferred tax assets and tax expense.

Based on this approach, for the year ended December 31, 2021, the Company recorded $113.3 million in the valuation allowance applicable to deferred tax assets. Of the $113.3 million, $62.1 million relates to net operating loss carryforwards in Luxembourg subsidiaries, $37.8 million relates primarily to net operating loss carryforward in the United Kingdom and $13.4 million relates to foreign tax credits in the United States.

Net Operating Loss and Capital Loss Carryforwards

Net operating loss and capital loss carryforwards as of December 31, 2021, the expiration dates and the deferred tax assets thereon are as follows:

	2021
	United States		Luxembourg		Sweden		U.K.		Total
2022-2026	$	4.7	$	—	$	—	$	—	$	4.7
2027-2041	107.8		43.3		—		—		151.1
No expiration date	21.1		724.1		217.4		148.0		1,110.6
Total	133.6		767.4		217.4		148.0		1,266.4
Gross deferred tax asset	19.4		191.4		44.8		37.0		292.6
Valuation allowance	—		(62.1)		—		(37.0)		(99.1)
Net deferred tax asset	$	19.4	$	129.3	$	44.8	$	—	$	193.5

The Company expects to utilize net operating loss carryforwards in Luxembourg of $521.6 million but does not expect to utilize the remainder based on forecasted taxable income. The U.S. net operating loss carryforwards of $133.6 million are subject to an annual limitation on utilization under Internal Revenue Code Section 382. Of this amount, $11.0 million are also subject to separately return limitation year ("SRLY") provisions of the consolidated return regulations. Of the Section 382 limited loss carryforwards, $4.7 million will expire between 2022 and 2025, $107.8 million will expire between 2031 and 2039 and the remaining $21.1 million does not expire. The SRLY limited losses will expire between 2036 and 2037. The Company expects to utilize all of the U.S. net operating loss carryforwards.

Foreign Tax Credits

As of December 31, 2021, there are U.S. foreign tax credits carryforwards available of $17.0 million, of which $9.5 million expires in 2022 and the remaining will expire between 2023 and 2030. As of December 31, 2021, there are alternative minimum tax credit carryforwards of $0.1 million which do not expire and are expected to become fully refundable beginning in the 2023 tax year under the TCJA. Further, there are Swedish foreign tax credits carryforwards available of $9.1 million and will expire in 2026.

Uncertain tax positions

Recognition of the benefit of a given tax position is based upon whether a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more likely than not recognition threshold, the Company must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.

The following table is a reconciliation of the beginning and ending unrecognized tax benefits for the years ended December 31, 2021 and 2020:

	Permanent differences (1)		Temporary differences (2)		Interest and penalties (3)		Total
Balance as of January 1, 2020	$	1.0	$	—	$	0.5	$	1.5
Changes in prior year tax positions	0.1		—		—		0.1
Balance as of December 31, 2020	1.1		—		0.5		1.6
Acquisition of Sirius Group	0.7		0.1		0.1		0.9
Changes in prior year tax positions	(0.1)		(0.1)		0.1		(0.1)
Tax positions taken during the current year	8.0		0.3		—		8.3
Balance as of December 31, 2021	$	9.7	$	0.3	$	0.7	$	10.7

(1)Represents the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate.

(2)Represents the amount of unrecognized tax benefits that, if recognized, would create a temporary difference between the reported amount of an item in the consolidated balance sheets and its tax basis.

(3)Net of tax benefit.

As of December 31, 2021, the total reserve for unrecognized tax benefits is $10.7 million. If the Company determines in the future that its reserves for unrecognized tax benefits on permanent differences and interest and penalties are not needed, the reversal of $9.7 million of such reserves as of December 31, 2021 would be recorded as an income tax benefit and would impact the effective tax rate. If the Company determines in the future that its reserves for unrecognized tax benefits on temporary differences are not needed, the reversal of $0.3 million of such reserves as of December 31, 2021 would not impact the effective tax rate due to deferred tax accounting but would accelerate the payment of cash to the taxing authority.

The Company classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. During the years ended December 31, 2021, 2020, and 2019, the Company recognized $0.1 million, $nil, and $nil in interest expense, respectively, net of any tax benefit. The balance of accrued interest as of December 31, 2021 and 2020 is $0.7 million and $0.5 million, respectively, net of any tax benefit.

Tax Examinations

With few exceptions, which are not material, the Company is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2017.