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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes Aspen Holdings and Aspen Bermuda are incorporated under the laws of Bermuda. Under Bermuda law, the corporate tax rate is zero and, as a result, Aspen Holdings and Aspen Bermuda are not taxed on any Bermudian income or capital gains. In the event of any Bermudian income or capital gains taxes being imposed, Aspen Holdings and Aspen Bermuda have received an undertaking from the Bermudian Minister of Finance that such entities will be exempt from those taxes until March 31, 2035. The Company’s U.S. operating companies were subject to a U.S. federal income tax rate of 34% prior to January 1, 2018. Effective January 1, 2018, the Company’s U.S. operating companies are subject to a U.S. federal income tax rate of 21%. The reduction in U.S. federal income tax has been reflected in measuring the Company’s deferred taxes. The Company’s U.K. operating companies are taxed at the U.K. corporate tax rate of 19%, which reduced from 20% effective April 1, 2017. The U.K. corporate tax rate will decrease further to 17% effective April 1, 2020. The reduction in the U.K. corporate tax rate has been reflected in measuring the Company’s deferred taxes. Total income tax (benefit)/expense for the twelve months ended December 31, 2018, 2017 and 2016 was allocated as follows:
|  | Twelve Months Ended December 31,
|  | 2018 |  | 2017 |  | 2016
|  | ($ in millions)
Income tax (benefit)/expense allocated to net income |  | $ | (10.2 | ) |  | $ | (15.4 | ) |  | $ | 6.1 |
Income tax expense/(benefit) allocated to other comprehensive income |  | 4.1 |  |  | (17.4 | ) |  | (1.7 | )
Income tax (benefit) allocated directly to shareholders’ equity |  | — |  |  | — |  |  | (1.0 | )
Total income tax (benefit)/expense |  | $ | (6.1 | ) |  | $ | (32.8 | ) |  | $ | 3.4 |
(Loss)/income from operations before income tax and income tax expense/(benefit) attributable to that income/(loss) for the twelve months ended December 31, 2018, 2017 and 2016 is provided in the tables below:
|  | Twelve Months Ended December 31, 2018
|  | (Loss)/income before tax |  | Current income tax (benefit)/expense |  | Deferred income tax (benefit)/expense |  | Total income tax (benefit)/expense
|  | ($ in millions)
Bermuda |  | $ | (72.1 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |
U.S. (1) |  | (81.0 | ) |  | 6.1 |  |  | (8.1 | ) |  | (2.0 | )
U.K.(2) |  | (4.7 | ) |  | (12.2 | ) |  | (0.1 | ) |  | (12.3 | )
Other (3) (4) |  | 1.8 |  |  | 4.4 |  |  | (0.3 | ) |  | 4.1 |
Total |  | $ | (156.0 | ) |  | $ | (1.7 | ) |  | $ | (8.5 | ) |  | $ | (10.2 | )
|  | Twelve Months Ended December 31, 2017
|  | (Loss)/income before tax |  | Current income tax (benefit)/expense |  | Deferred income tax (benefit)/expense |  | Total income tax (benefit)/expense
|  | ($ in millions)
Bermuda |  | $ | (130.0 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |
U.S. |  | (140.3 | ) |  | — |  |  | 1.1 |  |  | 1.1 |
U.K. |  | 15.3 |  |  | 14.1 |  |  | (33.3 | ) |  | (19.2 | )
Other (3) (4) |  | (26.8 | ) |  | 3.0 |  |  | (0.3 | ) |  | 2.7 |
Total |  | $ | (281.8 | ) |  | $ | 17.1 |  |  | $ | (32.5 | ) |  | $ | (15.4 | )
|  | Twelve Months Ended December 31, 2016
|  | (Loss)/income before tax |  | Current income tax (benefit)/expense |  | Deferred income tax (benefit)/expense |  | Total income tax (benefit)/expense
|  | ($ in millions)
Bermuda |  | $ | 259.5 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
U.S. |  | (70.2 | ) |  | — |  |  | 2.5 |  |  | 2.5 |
U.K. |  | 43.7 |  |  | (3.2 | ) |  | 5.4 |  |  | 2.2 |
Other (3) |  | (23.5 | ) |  | 1.1 |  |  | 0.3 |  |  | 1.4 |
Total |  | $ | 209.5 |  |  | $ | (2.1 | ) |  | $ | 8.2 |  |  | $ | 6.1 |
______________
(1) | The $6.1 million current income tax expense relates to the base erosion and anti-abuse tax (“BEAT”) which applies to premiums ceded by U.S. subsidiaries to non-U.S. related parties.
(2) | In 2018, the current income tax benefit includes the release of a $12.8 million provision held against the potential disallowance of a prior period adjustment following the successful conclusion of a U.K. tax inquiry.
(3) | Beginning from the twelve months ended December 31, 2017, the total income tax (benefit)/expense allocation table has been re-presented to show the branches of Aspen U.K. under the “Other” category with the exception of the U.S. branch which is reported under the “U.S.” category.
(4) | Included within “Other” is $4.4 million (December 31, 2017 — $0.9 million) withholding tax payable in Australia in respect of reinsurance premiums payable to Aspen Bermuda by the Australian branch of Aspen U.K.
As noted above, the tax rate in Bermuda, the Company’s country of domicile, is zero. Application of the statutory tax rate for operations in other jurisdictions produces a differential to the expected tax (benefit)/expense as shown in the table below. The reconciliation between the income tax (benefit)/expense and the statutory rate for the Company for the twelve months ended December 31, 2018, 2017 and 2016 is provided in the table below:
|  | Twelve Months Ended December 31,
|  | 2018 |  | 2017 |  | 2016
Income Tax Reconciliation |  | ($ in millions)
Expected tax (benefit)/expense |  | $ | — |  |  | $ | — |  |  | $ | — |
Overseas statutory tax rates differential |  | (17.1 | ) |  | (41.5 | ) |  | (19.3 | )
Base erosion and anti-abuse tax expense |  | 6.0 |  |  | — |  |  | — |
Prior year adjustments (1) |  | 1.4 |  |  | 1.3 |  |  | 3.3 |
Valuation allowance |  | 7.1 |  |  | (37.9 | ) |  | 21.0 |
Impact of unrecognized tax benefits (2) |  | (12.8 | ) |  | 0.1 |  |  | (1.9 | )
Restricted foreign tax credits |  | — |  |  | 0.7 |  |  | 1.9 |
Australian non-resident withholding tax |  | 4.4 |  |  | 0.9 |  |  | — |
Share-based payments |  | 0.2 |  |  | (0.9 | ) |  | — |
Foreign exchange |  | 0.1 |  |  | (2.1 | ) |  | 0.2 |
Non-deductible expenses |  | 0.7 |  |  | 0.4 |  |  | 0.8 |
Non-taxable items |  | (0.3 | ) |  | (0.9 | ) |  | (0.9 | )
Impact of changes in statutory tax rates |  | 0.1 |  |  | 64.5 |  |  | 1.0 |
Total income tax (benefit)/expense |  | $ | (10.2 | ) |  | $ | (15.4 | ) |  | $ | 6.1 |
________________ (1) The submission dates for filing income tax returns for the Company’s U.S. and U.K. operating subsidiaries are after the submission date of this report. Accordingly, the final tax liabilities may differ from the estimated tax expense included in this report and may result in prior year adjustments being reported. The prior period adjustments for the twelve months ended December 31, 2018, 2017 and 2016 predominantly relate to the determination of results under U.K. GAAP upon which the U.K. tax returns are based. These items can only be ultimately determined on an accurate basis after this report is filed. (2) For 2018, the $12.8 million benefit relates to the successful conclusion of a U.K. tax inquiry which enabled the release of a provision we had been holding against the potential disallowance of a prior period adjustment. For 2017, the $0.1 million charge relates to a $0.3 million benefit following the conclusion of a tax examination in respect of tax deductions for certain interest payments and accrued interest of $0.4 million in respect of the adjustment to equity reserves. For 2016, there was a $1.9 million credit primarily relating to the conclusion of a tax examination in respect of tax deductions for certain interest payments. Unrecognized tax benefits. As illustrated in the table below, unrecognized tax benefits were $Nil as at December 31, 2018. An unrecognized tax benefit of $11.0 million relating to U.K. prior period tax positions for the year 2011 was released during the year ended December 31, 2018 following the successful conclusion of a U.K. tax inquiry. An unrecognized tax benefit of $0.3 million relating to tax deductions for certain expenses was released during the year ended December 31, 2017 following the completion of the U.K. tax authority review.
|  | Twelve Months Ended December 31,
|  | 2018 |  | 2017
|  | ($ in millions)
Unrecognized tax benefits balance at January 1 |  | $ | 11.2 |  |  | $ | 10.5 |
Foreign exchange re-translation |  | (0.2 | ) |  | 1.0 |
Prior year reductions |  | $ | (11.0 | ) |  | (0.3 | )
Unrecognized tax benefits balance at December 31 |  | $ | — |  |  | $ | 11.2 |
The Company accrues interest and penalties related to an underpayment of income taxes, if applicable, as income tax expenses. The Company does not believe it will be subject to any penalties in any open tax years and has not accrued any such amounts for the twelve months ended December 31, 2018 (December 31, 2017 — $Nil). During the year, interest of $1.8 million was released in respect of the tax positions for the year 2011 (December 31, 2017 — accrued $0.4 million). Cumulative interest accrued as at December 31, 2018 was $Nil (December 31, 2017 — $1.7 million) Income tax returns that have been filed by the Company’s U.S. operating subsidiaries are subject to examination for 2015 and later tax years. The Company’s U.K. operating subsidiaries’ income tax returns are subject to examination for 2017 and later tax years. The tax effects of temporary differences and carryforwards that give rise to deferred tax assets and deferred tax liabilities are presented in the following table as at December 31, 2018 and 2017:
|  | As at December 31,
|  | 2018 |  | 2017
|  | ($ in millions)
Deferred tax assets:
Share-based payments |  | $ | 2.2 |  |  | $ | 4.0 |
Operating loss carryforwards |  | 126.4 |  |  | 102.5 |
Loss reserves |  | 5.0 |  |  | 4.3 |
Unrealized losses on investments |  | 0.8 |  |  | — |
Accrued expenses |  | 7.9 |  |  | 7.9 |
Foreign tax credit carryforwards |  | 3.8 |  |  | 4.0 |
Unearned premiums |  | 15.5 |  |  | 11.8 |
Deferred policy acquisition costs |  | — |  |  | 5.9 |
Office properties and equipment |  | 11.1 |  |  | 8.0 |
Other temporary differences |  | 3.3 |  |  | 2.9 |
Total gross deferred tax assets |  | 176.0 |  |  | 151.3 |
Less valuation allowance |  | (111.9 | ) |  | (104.8 | )
Net deferred tax assets |  | $ | 64.1 |  |  | $ | 46.5 |
Deferred tax liabilities: |  |  |  |  |  |
Intangible assets (other) |  | (2.5 | ) |  | (2.0 | )
Deferred policy acquisition costs |  | (18.5 | ) |  | (14.5 | )
Quota share losses |  | (0.6 | ) |  | — |
Loss portfolio transfer costs |  | (6.1 | ) |  | — |
Other temporary differences |  | (1.0 | ) |  | (1.7 | )
Total gross deferred tax (liabilities) |  | (28.7 | ) |  | (18.2 | )
Net deferred tax assets |  | $ | 35.4 |  |  | $ | 28.3 |
Deferred tax liabilities and assets represent the tax effect of temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by U.K. and U.S. tax laws and regulations. Deferred tax assets and liabilities from the same tax jurisdiction have been netted off resulting in assets and liabilities being recorded under the deferred taxation captions on the consolidated balance sheet. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences and carryforwards become deductible or creditable. Management considers the scheduled reversal of existing taxable temporary differences, projected future taxable income, and tax-planning strategies in making this assessment. As at December 31, 2018, the Company had net operating losses carried forward for U.S. federal income tax purposes of $599.4 million (2017 — $482.7 million) and net operating losses carried forward for U.K. corporate tax purposes of $59.3 million (2017 — $84.9 million). Of the U.S. net operating losses, $547.7 million are available to offset future U.S. federal taxable income, if any, with expiry periods between 2026 and 2038 and $51.7 million are available to offset future U.S. federal taxable income over an indefinite period. The U.K. net operating losses are available to offset future U.K. corporate income over an indefinite period. For U.S. federal income tax purposes, the Company also has capital loss carryforwards of $0.3 million (2017 — $0.5 million) which will expire in 2023 and charitable contribution carryforwards of $0.8 million (2017 — $0.7 million) with expiry periods between 2019 and 2023. For U.K. corporate tax purposes, the Company has capital loss carryforwards of $3.8 million which is available to offset future U.K. capital gains over an indefinite period. A full valuation allowance of $108.2 million (2017 — $101.1 million) on U.S. deferred tax assets (which includes these loss carryforwards) has been recognized at December 31, 2018 as management believes that it is more likely than not that a tax benefit will not be realized. The increase in this portion of the valuation allowance totals $7.1 million (2017 —$38.4 million decrease) with $7.1 million (2017 — $38.4 million decrease) recorded in the consolidated income statement and $Nil (2017 —$Nil) recorded in other comprehensive income. A valuation allowance of $3.7 million (2017 — $3.7 million) has been established against U.K. deferred tax assets. The increase in this portion of the valuation allowance totals $Nil (2017 — $0.4 million increase) with $Nil (2017 — $0.4 million increase) recorded in the consolidated income statement and $Nil (2017 — $Nil) recorded in other comprehensive income. The U.K. and U.S. valuation allowance combined total is $111.9 million (2017 — $104.8 million). Included within the foreign tax credits totaling $3.8 million carried forward as at December 31, 2018, $1.2 million is due to expire in 2021. The remainder will continue to be available to carry forward indefinitely. At the effective time of the Merger, restrictions will apply to the Company’s ability to utilize net operating losses carried forward for U.S. federal income tax purposes. Aspen U.K. business includes income connected with a U.S. trade or business and therefore Aspen U.K has a branch for U.S. tax purposes (“U.S. Branch”). The U.S. Branch could become subject to an additional branch profits tax if earnings are repatriated to the Aspen U.K. head office or upon termination of the U.S. branch. However, based on the plans currently in place, the U.S. Branch profits are being, and Aspen U.K. intends they will continue to be, indefinitely reinvested in the U.S. Branch such that there is no branch profits tax liability arising in the current period or in the foreseeable future. Furthermore, based on the cumulative earnings position as at December 31, 2018, $Nil (2017 — $Nil) branch profits tax liability would be expected to arise. Accordingly, the Company has determined that no deferred tax liability for branch profits tax has been recognized as permitted by ASC 740.

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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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