Following completion of the Redomestication, with effect from July 1, 2010, the Company is subject to income and capital gains tax in Ireland under applicable Irish law. Prior to July 1, 2010, the Company was resident for tax purposes in the Cayman Islands and in accordance with Cayman law, was not subject to any taxes in the Cayman Islands on either income or capital gains.

The Company's Bermuda subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law. In the event that there is a change such that these taxes are imposed, the Bermuda subsidiaries would be exempted from any such tax until March 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and the Exempted Undertakings Tax Protection Amendment Act 2011.

The Company's U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the U.S. Internal Revenues (“IRS”) Code and Regulations thereunder.

The Company has operations in subsidiary and branch form in various other jurisdictions around the world, including but not limited to the U.K., Switzerland, Ireland, Germany, France, Canada, Brazil and various other countries in Latin America and Asia that are subject to relevant taxes in those jurisdictions.

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. During 2010, the Company revised its capital strategy such that it is no longer able to positively assert that all earnings arising in the U.S. will be permanently reinvested in that jurisdiction and, accordingly, a provision for withholding taxes arising in respect of U.S. earnings has been made. No withholding taxes are accrued with respect to the earnings of the Company's subsidiaries arising outside the U.S., as it is the intention that all such earnings will remain reinvested indefinitely.

The Company's current corporate structure is such that distribution of earnings from subsidiaries located outside of the United States would not be subject to significant incremental taxation. It is not practicable to estimate the amount of additional withholding taxes that might be payable on such earnings due to a variety of factors, including the timing, extent and nature of any repatriation.

The Company adopted the provisions of the final authoritative guidance on accounting for uncertainty in income taxes, on January 1, 2007. The Company did not recognize any liabilities for unrecognized tax benefits as a result of its implementation and has not recognized any liabilities in subsequent accounting periods. The Company's policy is to recognize any interest accrued related to unrecognized tax benefits as a component of interest expense and penalties accrued related to unrecognized tax benefits in the tax charge. At December 31, 2012 and 2011, the Company has no accrued liabilities for tax, interest and penalties relating to unrecognized tax benefits.

The Company has open examinations by tax authorities in the U.S. (2010), Ireland (2006 to 2009), the U.K. (2007 to 2010), Germany (2006 to 2009), Switzerland (2009 and 2010), India (2006 to 2011) and Singapore (2010). The Company believes that these examinations will be concluded within the next 24 months; however, it is not currently possible to estimate the outcome of these examinations.

The Company has open tax years that are potentially subject to examinations by local tax authorities, in the following major tax jurisdictions: the U.S. 2011 and 2012; the U.K., 2011 and 2012; Switzerland, 2008 to 2012; Ireland, 2008 to 2012; Germany, 2010 to 2012; and France, 2008 to 2012.

The Company's income (loss) before income tax was distributed for the years ended December 31, 2012, 2011 and 2010 as follows:

The income tax provisions for the years ended December 31, 2012, 2011 and 2010 are as follows:

(U.S. dollars in thousands)	2012		2011		2010
Current expense:
U.S.	$	13,105	$	9,138	$	40,413
Non U.S.		44,475		87,220		35,113
Total current expense	$	57,580	$	96,358	$	75,526
Deferred expense (benefit):
U.S.	$	(56,646)	$	(5,550)	$	18,225
Non U.S.		33,094		(31,101)		68,986
Total deferred expense (benefit)	$	(23,552)	$	(36,651)	$	87,211
Total tax expense	$	34,028	$	59,707	$	162,737

The weighted average expected tax provision has been calculated using the pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate. The applicable statutory tax rates of the most significant jurisdictions contributing to the overall taxation of the Company are: Ireland 12.5% and 25%, Bermuda 0%, the U.S. 35%, the U.K. 24.5%, Switzerland 7.83% and 21.2%, Germany 15%, and France 36.13%. Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the years ended December 31, 2012, 2011 and 2010 is provided below:

(U.S. dollars in thousands)		2012		2011		2010
Expected tax provision at weighted average rate		$	53,358	$	(66,493)	$	80,225
Permanent differences:
	Non-taxable investment income (loss)		(16,717)		(14,246)		(10,176)
	Non-taxable income (loss)		(25,711)		(3,265)		3,838
	Prior year adjustments		(622)		(9,206)		16,594
	Prior year adjustments on completion of IRS examinations		(19,192)		-		-
	State, local and foreign taxes		18,312		42,581		44,122
	Valuation allowance		(16,644)		24,990		1,346
	Allocated investment income		41,727		21,483		12,386
	Stock options		4,749		5,840		3,323
	Non-deductible expenses		16,145		12,901		11,079
	Realized capital loss carry-forward valuation allowance reduction		(24,473)		-		-
	Non-deductible goodwill impairment		-		57,069		-
	Non-taxable reserve release		3,096		(11,947)		-
Total tax expense		$	34,028	$	59,707	$	162,737

Significant components of the Company's deferred tax assets and liabilities at December 31, 2012 and 2011 were as follows:


(U.S. dollars in thousands)	2012		2011
Deferred tax asset:
Net unpaid loss reserve discount	$	108,285	$	108,981
Net unearned premiums		70,071		62,162
Compensation liabilities		56,245		35,830
Net operating losses		83,061		263,600
Investment adjustments		12,927		12,861
Pension		11,976		9,753
Bad debt reserve		14,901		10,829
Amortizable goodwill		8,958		10,732
Net unrealized depreciation on investments		38,652		320
Stock options		13,035		13,842
Depreciation		1,910		4,072
Net realized capital losses		98,971		119,307
Deferred intercompany capital losses		97,566		117,892
Other		9,392		7,573
Deferred tax asset, gross of valuation allowance	$	625,950	$	777,754
Valuation allowance		297,637		497,236
Deferred tax asset, net of valuation allowance	$	328,313	$	280,518
Deferred tax liability:
Net unrealized appreciation on investments	$	106,520	$	96,797
Deferred acquisition costs		16,135		12,787
Currency translation adjustments		11,225		8,062
Regulatory reserves		146,101		125,249
Untaxed Lloyd's result		10,155		8,340
Other		13,838		4,786
Deferred tax liability	$	303,974	$	256,021
Net Deferred Tax Asset	$	24,339	$	24,497

The deferred tax asset and liability balances presented above represent the gross deferred tax asset and liability balances across each tax jurisdiction. The deferred tax asset balances of $166.1 million and $115.6 million at December 31, 2012 and 2011, respectively, and deferred tax liability balances of $141.8 million and $91.1 million at December 31, 2012 and 2011, respectively, as disclosed on the consolidated balance sheets include netting of certain deferred tax assets and liabilities within a tax jurisdiction to the extent such netting is consistent with the regulations of the tax authorities in those jurisdictions.

The valuation allowance at December 31, 2012 and 2011 of $297.6 million and $497.2 million, respectively, related primarily to net operating loss carry forwards in Switzerland ($9.9 million and $183.1 million at December 31, 2012 and 2011 respectively), net operating loss and capital loss carry forwards in Ireland ($59.2 million and $53.1 million at December 31, 2012 and 2011 respectively), and net unrealized capital losses and realized capital loss carry forwards in the U.S. that may not be realized within a reasonable period ($196.5 million and $237.2 million at December 31, 2012 and 2011 respectively). The reduction in the valuation allowance in 2012 was primarily due to the expiration of $784.8 million of Swiss net operating losses, with a related valuation allowance of $166.4 million, and the release of certain valuation allowances held against capital loss carry-forwards in the U.S

At December 31, 2012, the Company had realized capital loss carry forwards of approximately $282.8 million in the U.S. ($99.0 million tax effected). The 5 year limitation for the utilization of realized capital losses applies to this balance. Losses of $54.1 million will expire at the end of 2013 with another $228.7 million of realized capital losses expiring in future years through 2016. A valuation allowance ($99.0 million) has been established in respect of all of these realized capital losses. At December 31, 2012, the Company also had $278.8 million of U.S. capital losses arising from the sale of investments to a group company ($97.6 million tax effected), against which a valuation allowance of $97.6 million has been established. These losses cannot be utilized to offset any future U.S. realized capital gains, and will not begin to expire, until the underlying assets have been sold to unrelated parties.

At December 31, 2012, net operating loss carry forwards in the U.K. were approximately $45.2 million ($10.5 million tax effected) and have no expiration. A valuation allowance of $1.8 million has been established in respect of $7.8 million of these U.K. losses given management's expectation that losses in specific U.K. entities will not be utilized in the future. At December 31, 2012, net operating loss carry forwards in Switzerland were approximately $68.3 million, of which $7.1 million will expire at the end of 2013 with the balance expiring in future years through 2019. A valuation allowance of $9.9 million has been established in respect of $62.8 million of the Swiss net operating losses which includes the $7.1 million of Swiss net operating losses that will expire in 2013. At December 31, 2012, net operating loss carry forwards in Ireland were approximately $150.9 million, with a further $122.1 million of capital losses carried forward. Although these Irish losses may be carried forward indefinitely, a valuation allowance ($59.2 million) has been established in respect of all of these Irish losses due to the uncertainty surrounding any future loss utilization.

Management has reviewed historical taxable income and future taxable income projections for its U.K. group and has determined that in its judgment substantially all of the U.K. net operating losses ($37.4 million) will more likely than not be realized as reductions to future taxable income within a reasonable period. Management will continue to evaluate income generated in future periods by the U.K. group in determining the reasonableness of its position. If management determines that future income generated by the U.K. group is insufficient to cause the realization of the net operating losses within a reasonable period, a valuation allowance would be required for the U.K. portion of the deferred tax asset balance related to net operating losses in the amount of $8.7 million.

Management believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized.

Shareholders' equity at December 31, 2012 and 2011 reflected tax benefits of nil and nil, respectively, related to compensation expense deductions for stock options exercised by the Company's U.S. subsidiaries.