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Income Taxes | 12 Months Ended
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Dec. 31, 2019
Income Taxes [Abstract] |
Income Taxes | 10. INCOME TAXES Under Bermuda law, no income or capital gains taxes are imposed on Group and its Bermuda Subsidiaries. The Minister of Finance of Bermuda has assured Group and its Bermuda subsidiaries that, pursuant to The Exempted Undertakings Tax Protection Amendment Act of 2011, they will be exempt until 2035 from imposition of any such taxes. All of the income of Group's non-Bermuda subsidiaries is subject to the applicable federal, foreign, state and local taxes on corporations. Additionally, the income of the foreign branches of the Company's insurance operating companies, in particular the UK branch of Bermuda Re, is subject to various rates of income tax. Group's U.S. subsidiaries conduct business in and are subject to taxation in the U.S. Should the U.S. subsidiaries distribute current or accumulated earnings and profits in the form of dividends or otherwise, the Company would be subject to an accrual of 5% U.S. withholding tax. Currently, however, no withholding tax has been accrued with respect to such un-remitted earnings as management has no intention of remitting them. The cumulative amount that would be subject to withholding tax, if distributed, is not practicable to compute. The provision for income taxes in the consolidated statement of operations and comprehensive income (loss) has been determined in accordance with the individual income of each entity and the respective applicable tax laws. The provision reflects the permanent differences between financial and taxable income relevant to each entity. The TCJA, enacted on December 22, 2017, caused the Company to record income tax expense of $8,246 thousand in 2017. The income tax expense reflects the lower 21% tax benefit to be realized by the Company under the TCJA upon the reversal of the temporary differences in its deferred tax inventory account versus the 35% tax benefit that had been expected to be realized before TCJA. The significant components of the provision are as follows for the periods indicated:
| Years Ended December 31,
(Dollars in thousands) | 2019 |  | 2018 |  | 2017
Current tax expense (benefit): |  |  |  |  |  |  |  |
U.S. | $ | (5,044) |  | $ | (38,625) |  | $ | (117,173)
Non-U.S. |  | 14,420 |  |  | 6,497 |  |  | 2,849
Total current tax expense (benefit) |  | 9,376 |  |  | (32,128) |  |  | (114,324)
Deferred tax expense (benefit): |  |  |  |  |  |  |  |
U.S. |  | 80,247 |  |  | (298,998) |  |  | 50,207
Non-U.S. |  | (97) |  |  | (97) |  |  | 777
Total deferred tax expense (benefit) |  | 80,150 |  |  | (299,095) |  |  | 50,984
Total income tax expense (benefit) | $ | 89,526 |  | $ | (331,223) |  | $ | (63,340)
(Some amounts may not reconcile due to rounding.)
The weighted average expected tax provision has been calculated using the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate. Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the periods indicated is provided below:
| Years Ended December 31,
| 2019 |  | 2018 |  | 2017
(Dollars in thousands) | U.S. |  | Non-U.S. |  | U.S. |  | Non-U.S. |  | U.S. |  | Non-U.S.
Underwriting gain (loss) | $ | 38,964 |  | $ | 297,199 |  | $ | (1,407,020) |  | $ | 796,745 |  | $ | (516,167) |  | $ | 308,646
Net investment income |  | 325,179 |  |  | 321,960 |  |  | 283,569 |  |  | 297,614 |  |  | 255,310 |  |  | 287,588
Net realized capital gains (losses) |  | 155,609 |  |  | 29,394 |  |  | (90,033) |  |  | (37,103) |  |  | 148,099 |  |  | 5,095
Net derivative gain (loss) |  | - |  |  | 6,374 |  |  | - |  |  | 520 |  |  | - |  |  | 9,581
Corporate expenses |  | (13,063) |  |  | (19,903) |  |  | (11,035) |  |  | (19,637) |  |  | (7,394) |  |  | (18,529)
Interest, fee and bond issue cost amortization expense |  | (34,931) |  |  | 3,239 |  |  | (30,611) |  |  | (420) |  |  | (31,183) |  |  | (420)
Other income (expense) |  | (1,976) |  |  | (9,057) |  |  | (5,894) |  |  | (18,877) |  |  | 32,441 |  |  | (53,656)
Pre-tax income (loss) | $ | 469,782 |  | $ | 629,206 |  | $ | (1,261,024) |  | $ | 1,018,842 |  | $ | (118,894) |  | $ | 538,305
Expected tax provision at the applicable statutory rate(s) |  | 98,766 |  |  | 17,205 |  |  | (264,912) |  |  | 9,647 |  |  | (41,614) |  |  | 6,843
Increase (decrease) in taxes resulting from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tax exempt income |  | (3,680) |  |  | - |  |  | (3,824) |  |  | - |  |  | (8,488) |  |  | -
Dividend received deduction |  | (998) |  |  | - |  |  | (1,520) |  |  | - |  |  | (4,639) |  |  | -
Proration |  | 1,050 |  |  | - |  |  | 1,150 |  |  | - |  |  | 1,760 |  |  | -
Affiliated preferred stock dividends |  | 6,517 |  |  | - |  |  | 6,517 |  |  | - |  |  | 10,861 |  |  | -
Creditable foreign premium tax |  | (9,852) |  |  | - |  |  | (13,475) |  |  | - |  |  | (7,515) |  |  | -
Tax audit settlement |  | (1,576) |  |  | - |  |  | (2,094) |  |  | - |  |  | (11,516) |  |  | -
U.S. rate differential on carryback of net operation losses to PY |  | - |  |  | - |  |  | (43,734) |  |  | - |  |  | - |  |  | -
U.S. rate differential on deferred tax 2017 return to provision |  | - |  |  | - |  |  | (28,411) |  |  | - |  |  | - |  |  | -
Share based compensation tax benefits formerly in APIC |  | (2,984) |  |  | (373) |  |  | (3,333) |  |  | (120) |  |  | (6,716) |  |  | (235)
Impact of U.S. tax reform |  | - |  |  | - |  |  | - |  |  | - |  |  | 8,246 |  |  | -
Impact of prior year accounting adjustment |  | - |  |  | - |  |  | - |  |  | - |  |  | (8,986) |  |  | -
Change in uncertain tax positions |  | (8,434) |  |  | - |  |  | 8,434 |  |  | - |  |  | - |  |  | -
Other |  | (3,606) |  |  | (2,509) |  |  | 7,579 |  |  | (3,127) |  |  | 1,641 |  |  | (2,982)
Total income tax provision | $ | 75,203 |  | $ | 14,323 |  | $ | (337,623) |  | $ | 6,400 |  | $ | (66,966) |  | $ | 3,626
(Some amounts may not reconcile due to rounding.)
Reconciliation of the beginning and ending unrecognized tax benefits, for the periods indicated, is as follows:
(Dollars in thousands) | 2019 |  | 2018 |  | 2017
Balance at January 1 | $ | 8,434 |  | $ | - |  | $ | -
Additions based on tax positions related to the current year |  | - |  |  | - |  |  | -
Additions for tax positions of prior years |  | - |  |  | 8,434 |  |  | -
Reductions for tax positions of prior years |  | (8,434) |  |  | - |  |  | -
Settlements with taxing authorities |  | - |  |  | - |  |  | -
Lapses of applicable statutes of limitations |  | - |  |  | - |  |  | -
Balance at December 31 | $ | - |  | $ | 8,434 |  | $ | -
At December 31, 2019, the Company’s unrecognized tax benefits, excluding interest and penalties, that would impact the effective tax rate was $0 thousand. Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2019, the Company accrued $0 thousand for the payment of interest (net of the federal benefit) and penalties. At December 31, 2019 and 2018, there were no accrued liabilities, respectively, for the payment of interest and penalties. The Company’s 2014 and subsequent U.S. tax years are open to audit by the IRS. In 2018, the IRS opened an audit of the 2014 tax year. To date, the Company has received only one notice of proposed adjustment for an immaterial amount of tax. The Company did propose affirmative beneficial tax return adjustments to the IRS at the start of the audit. In total, the Company expects a net tax refund of $34,972 thousand plus net interest of $2,421 thousand for the 2014 tax year. The refund is subject to IRS Joint Committee review and approval. In 2019, the IRS opened an audit of the 2015 through 2017 tax years. To date, the Company has not received any Information Document Requests or notices of proposed adjustment. The Company had filed amended tax returns for 2015 and 2016 for $1,519 thousand and $4,685 thousand respectively. Those refunds, plus accrued interest of $978 thousand and $247 thousand respectively, will be settled at the conclusion of the audit. Deferred Income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the U.S. tax laws and regulations. The principal items making up the net deferred income tax assets/(liabilities) are as follows for the periods indicated:
| Years Ended December 31,
(Dollars in thousands) | 2019 |  | 2018
Deferred tax assets: |  |  |  |  |
Foreign Tax Credits | $ | 186,706 |  | $ | 167,685
Unearned premium reserves |  | 75,130 |  |  | 63,309
Loss reserves |  | 66,025 |  |  | 64,135
Net operating loss carryforward |  | 31,698 |  |  | 106,543
Net unrealized losses on benefit plans |  | 19,818 |  |  | 17,921
Unrealized foreign currency losses |  | 7,964 |  |  | 12,596
Investment impairments |  | 3,961 |  |  | 1,291
Uncollectible reinsurance reserves |  | 3,142 |  |  | 3,142
Other Tax Credits |  | 2,294 |  |  | -
Net unrealized investment losses |  | - |  |  | 10,815
Net fair value losses |  | - |  |  | 7,196
Other assets |  | 13,869 |  |  | 11,521
Total deferred tax assets |  | 410,607 |  |  | 466,154
Deferred tax liabilities: |  |  |  |  |
Deferred acquisition costs |  | 81,931 |  |  | 74,736
Net unrealized investment gains |  | 39,413 |  |  | -
Net fair value income |  | 25,936 |  |  | -
Partnership investments |  | 15,039 |  |  | 14,936
Benefit plan asset |  | 2,333 |  |  | 3,600
Other liabilities |  | 4,937 |  |  | 3,868
Total deferred tax liabilities |  | 169,589 |  |  | 97,140
Net deferred tax assets |  | 241,018 |  |  | 369,014
Less: Valuation allowance |  | (12,997) |  |  | (9,309)
Total net deferred tax assets | $ | 228,021 |  | $ | 359,705
(Some amounts may not reconcile due to rounding.)
At December 31, 2019, the Company has $186,706 thousand of Foreign Tax Credits (“FTCs”). The FTCs expire in various amounts between 2020 and 2029. The Company also has a tax-effected U.S. Net Operating Loss (“NOL”) carryforward of $19,027 thousand. This NOL carryforward expires in 2038. In performing our assessment of the recoverability of the Company’s deferred tax assets pursuant to ASC 740, we considered the tax laws governing the utilization of the NOL and FTC carryforwards as well as our other deferred tax assets in each applicable tax jurisdiction. We then evaluated all the positive and negative evidence impacting the realizability of the Company’s deferred tax assets as of December 31, 2019 in the U.S. tax jurisdiction. Evidence considered in the analysis included the Company’s ability to carryback the net operating losses generated in 2017 and 2018 as well as that a company generally must use any remaining net operating loss carryforward before it can utilize its foreign tax credit carryforwards. Consequently, the Company implemented planning actions during 2018, 2019 and early 2020 to increase its planned U.S. source and foreign source income to better enable it to utilize its U.S. deferred tax assets and tax attributes. As of December 31, 2019, based on all available evidence, the Company concluded that it is “more likely than not” that it will use its U.S. NOL and FTC carryforwards prior to their respective expirations and, thus, no valuation allowance has been established in the U.S. jurisdiction. With respect to operations in foreign tax jurisdictions, a valuation allowance of $12,671 thousand and $9,309 thousand has been recorded in 2019 and 2018, respectively, against the NOL deferred tax assets in its Canadian and UK subsidiaries. The tax-effected Canadian NOLs of $2,511 begin to expire in 2035 and the UK NOLs of $10,160 do not expire. As a result of the TCJA, the Company recognized an $8,246 thousand tax expense in the Company’s Consolidated Statements of Operations for the year ended December 31, 2017. In accordance with SEC Staff Accounting Bulletin 118, in 2017 the Company recorded the effects of the TCJA at that time using reasonable estimates due to the need for further analysis to complete the accounting. During 2018, the Company completed its accounting, including interpretation of additional guidance issued by the IRS and U.S. Department of the Treasury, and recognized an income tax benefit of $28,411 thousand primarily related to the 2017 tax return to tax provision true-up recorded in 2018. Effective January 1, 2017, the Company adopted ASU 2016-09 which provided new guidance on the treatment of the tax effects of share based compensation transactions. ASU 2016-09 required that the income tax effects of restricted stock vestings and stock option exercises resulting from the change in value of share based compensation awards between the grant date and settlement (vesting/exercise) date be recorded as part of income tax expense (benefit) within the consolidated statements of operations and comprehensive income (loss). Per the new guidance, the Company recorded excess tax benefits of $3,357 thousand, $3,453 thousand and $6,951 thousand related to restricted stock vestings and stock option exercises as part of income tax expense (benefit) within the consolidated statements of operations and comprehensive income (loss) in 2019, 2018 and 2017, respectively. In years prior to 2017, the Company recorded tax benefits related to restricted stock vestings and stock option exercises as part of additional paid-in capital in the shareholders' equity section of the consolidated balance sheets. The adoption of ASU 2016-09 did not impact the accounting treatment of tax benefits related to dividends on restricted stock. The tax benefits related to the payment of dividends on restricted stock have been recorded as part of additional paid-in capital in the shareholders' equity section of the consolidated balance sheets in all years. The tax benefits related to the payment of dividends on restricted stock were $484 thousand, $403 thousand and $626 thousand in 2019, 2018 and 2017, respectively.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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