Income Taxes

12 Months Ended

Dec. 31, 2019

Under current Bermuda law, James River Group Holdings, Ltd. and its Bermuda based subsidiaries, JRG Re and Carolina Re, are not required to pay any Bermuda taxes on their income or capital gains. Those companies have received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2035.

Distributions from the Company’s U.S. subsidiaries to its U.K. intermediate holding company, James River UK, are generally subject to a 5% dividend withholding tax. James River Group paid a $21.1 million dividend to James River UK during 2017 and remitted $1.1 million of dividend withholding taxes to the U.S. tax authorities for the year ending December 31, 2017. No similar distributions occurred in 2019 or 2018.

The Company’s U.S. subsidiaries are subject to federal, state and local corporate income taxes, and other taxes applicable to U.S. corporations. In addition, Carolina Re is subject to Federal income taxes as a result of its irrevocable election to be taxed as a U.S. domestic corporation under Section 953(d) of the Code. The Company’s U.S.-domiciled subsidiaries and Carolina Re file a consolidated U.S. federal income tax return.

The Company’s U.S.-based subsidiaries are generally no longer subject to income tax examination by U.S. income tax authorities for the tax years ending before January 1, 2016.

Financial results for 2017 reflect provisional amounts related to the December 2017 enactment of the Tax Act.

The Company did not record any amounts related to the changes in loss reserve discounting required by the Tax Act during 2017. These changes required the Internal Revenue Service to publish new discount factors based on loss payment patterns and interest rates determined under the Tax Act. During 2018, factors were published that allowed the Company to adjust its current and deferred tax liabilities based on the provisions of the Tax Act. The Tax Act has specific transition provisions associated with reserve discounting. The initial impact of the proposed regulations in 2018 was an increase to our deferred tax asset for the additional discount as of December 31, 2017 of $8.8 million offset by an increase to our deferred tax liability of $8.8 million representing the 8 year transition provision required by the Tax Act. During 2018, $1.1 million of this transition provision was recognized in our current provision and adjusted out of our deferred tax liability. The regulations were finalized in 2019, and the remaining reserve adjustment at December 31, 2019 based on these final regulations is $5.7 million to be recognized over the next six years at $950,000 per year. There were other provisions of the Tax Act for which the Company finalized its estimates during 2018, and the impact of these was immaterial.

The expected income tax provision computed from pre-tax income at the weighted-average tax rate has been calculated as the sum of the pre-tax income in each jurisdiction multiplied by that jurisdiction’s applicable Federal statutory tax rate. Federal statutory tax rates of 0% and 21% have been used in 2019 and 2018 for Bermuda and the U.S., respectively. A Federal statutory rate of 35% has been used for the U.S. in 2017. U.S. deferred taxes were remeasured at 21% at December 31, 2017. U.S. income before Federal income taxes was $70.7 million, $37.5 million, and $50.1 million for the years ending December 31, 2019, 2018, and 2017, respectively. A reconciliation of the difference between the Company’s Federal income tax provision on U.S. income and the expected Federal tax provision on U.S. income using the weighted-average tax rate as well as a reconciliation to total tax expense is as follows:



	Year Ended December 31,
	2019			2018			2017
	(in thousands)
Federal income tax expense at applicable statutory rates	$	14,843		$	7,875		$	17,541
Tax-exempt investment income	(230		)	(272		)	(586		)
Dividends received deduction	(307		)	(307		)	(792		)
Excess tax benefits on share based compensation	(1,099		)	(567		)	(2,114		)
Effect of tax rate reduction on deferred tax liability	—			220			(3,498		)
Other	99			145			(90		)
Federal income tax expense	$	13,306		$	7,094		$	10,461
U.S. state income tax expense (benefit)	222			(86		)	65
U.S. dividend withholding tax	—			—			1,053
Total income tax expense	$	13,528		$	7,008		$	11,579

The significant components of net deferred tax assets (liabilities) at the corporate income tax rate of 21% for the years ended December 31, 2019 and 2018 are summarized as follows:



	December 31,
	2019		2018
	(in thousands)
Deferred tax assets:
Accrued compensation expenses	$	2,563	$	2,456
Reserve for losses and loss adjustment expenses	12,286		7,482
Unearned premiums	8,226		5,711
Share based compensation	1,482		1,352
Allowance for doubtful accounts	1,188		829
Property and equipment	16		1,909
Other	1,974		1,903
Total deferred tax assets	27,735		21,642
Deferred tax liabilities:
Intangible assets	7,381		7,461
Net unrealized gains	5,792		887
Deferred policy acquisition costs	4,448		3,491
Equity method investments	9,316		8,582
Other	134		167
Total deferred tax liabilities	27,071		20,588
Net deferred tax assets	$	664	$	1,054

Deferred income taxes have not been accrued with respect to certain undistributed earnings of foreign subsidiaries. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding taxation in the jurisdiction of the paying entity. The Company asserts that U.S. unremitted earnings as of December 31, 2019 will be permanently reinvested in the U.S. and, accordingly, no provision for withholding taxes arising in respect to U.S. unremitted earnings has been made.

The Company had no reserve for future tax contingencies or liabilities (“unrecognized tax benefits”) at December 31, 2019 or 2018.

The U.S. imposes a 1% excise tax on reinsurance premiums paid to non-U.S. reinsurers with respect to risks located in the U.S. The rates of tax are established based on the nature of the risk, unless reduced by an applicable U.S. tax treaty. For the years ended December 31, 2019, 2018, and 2017, the Company paid $586,000, $823,000, and $3.4 million, respectively, of federal excise taxes on its intercompany reinsurance transactions. The Company also paid excise taxes of $1.5 million, $2.1 million, and $2.2 million for the years ended December 31, 2019, 2018, and 2017, respectively, on written premiums assumed from third-party insurers with respect to risks located in the U.S. These excise taxes are reflected as “other operating expenses” in the Company’s consolidated income statements.