Income taxes (Notes)

12 Months Ended

Dec. 31, 2019

The Company provides for income tax expense or benefit based upon pre-tax income or loss reported in the consolidated statements of income (loss) 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 an operating subsidiary incorporated in Bermuda, Third Point Re USA, which made an election to pay tax in the United States of America under Section 953(d) of the U.S. Internal Revenue Code of 1986, as amended. Our non-U.S. subsidiaries would become subject to U.S. federal income tax only to the extent that they derive income from activity that is deemed to be the conduct of a trade or business within the United States.

The Company also has subsidiaries in the United Kingdom, TPRUK and Third Point Re UK, which are subject to applicable taxes in that jurisdiction.

Prior to the change in the Company’s investment account structure described in Note 4, the Company was subject to withholding taxes on income sourced in the United States and in other countries, subject to each countries’ specific tax regulations. Income subject to withholding taxes includes, but is not limited to, dividends, capital gains and interest on certain investments. In addition, the Company had recorded uncertain tax positions related to certain investment transactions in certain foreign jurisdictions. As of December 31, 2019, the Company had accrued $1.5 million (December 31, 2018 - $1.5 million).

For the years ended December 31, 2019, 2018 and 2017, the Company recorded income tax expense (benefit), as follows:



	2019		2018			2017
Income tax expense (benefit) related to U.S. and U.K. subsidiaries	$	713	$	(10,035	)	$	9,248
Change in uncertain tax positions	—		(300		)	155
Withholding taxes on certain investment transactions	—		6,325			2,573
	$	713	$	(4,010	)	$	11,976

The following is a summary of the Company’s income (loss) before income tax expense (benefit) by jurisdiction for the years ended December 31, 2019, 2018 and 2017:



	2019		2018			2017
Bermuda	$	197,973	$	(273,697	)	$	266,497
United States	3,245		(47,771		)	27,172
United Kingdom	114		(11		)	78
	$	201,332	$	(321,479	)	$	293,747

The Company’s expected income tax provision computed on 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 statutory tax rate. Statutory tax rates of 0.0%, 21.0% and 19.0% have been used for Bermuda, the United States and the United Kingdom, respectively. As of December 31, 2019, the Company has income tax returns open for examination in the United States for the tax years 2016 through 2018.

The following table presents a reconciliation of expected income taxes to income tax expense (benefit) for the years ended December 31, 2019, 2018 and 2017:



	2019		2018			2017
Bermuda (expected tax expense at 0%)	$	—	$	—		$	—
Foreign taxes at local expected rates:
United States	681		(10,032		)	9,510
United Kingdom	22		(2		)	15
Withholding taxes related to dividend and interest income	—		6,325			2,573
Uncertain tax positions	—		(300		)	155
Non-deductible expenses and other	10		(1		)	(277		)
	$	713	$	(4,010	)	$	11,976

The following table presents the Company’s current and deferred incomes taxes for the years ended December 31, 2019, 2018 and 2017:



	2019		2018			2017
Current tax expense	$	54	$	6,025		$	2,824
Deferred tax expense (benefit)	659		(10,035		)	9,152
	$	713	$	(4,010	)	$	11,976

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, 2019, 2018 and 2017:



	2019		2018			2017
Deferred tax assets:
Discounting of loss and loss adjustment expense reserves	$	786	$	534		$	330
Unearned premiums	1,774		1,567			1,634
Temporary differences in recognition of expenses	1,208		1,247			138
Net operating loss carryforward	9,282		6,798			7,048
Total deferred tax assets	13,050		10,146			9,150


Deferred tax liabilities:
Deferred acquisition costs	1,379		1,490			7,798
Unrealized gains (losses) on investments	3,366		(405		)	2,435
Total deferred tax liabilities	4,745		1,085			10,233
Net deferred tax asset (liability)	$	8,305	$	9,061		$	(1,083	)

The deferred tax assets and liabilities as of December 31, 2019 were primarily related to U.S. income tax. To evaluate the recoverability of the deferred tax assets, the Company considers the timing of the reversal of deferred income and expense items as well as the likelihood that the Company will generate sufficient taxable income to realize future tax benefits. The Company believes that it is more likely than not that it will generate sufficient taxable income and realize the future tax benefits in order to recover the deferred assets and, accordingly, no valuation allowance was recorded as of December 31, 2019 and 2018. As of December 31, 2019, deferred tax assets included $45.1 million related to net

operating loss carryforwards. A portion of the net operating losses generated prior to January 1, 2018 can be carried forward for twenty years and will begin to expire in 2035. Losses generated after January 1, 2018 can generally be carried forward indefinitely.