v2.3.0.15
Income Taxes
9 Months Ended
Sep. 30, 2011
Income Taxes [Abstract] 
Income Taxes
8. Income Taxes

The statutory income tax rates of the countries where the Company does business are 35.0% in the United States, 0.0% in Bermuda, 0.0% in the Cayman Islands, 0.0% in Gibraltar, 28.59% in the Grand Duchy of Luxembourg, and 25.0% on non-trading income and 12.5% on trading income in the Republic of Ireland. For 2010, on an interim basis, the statutory income tax rate of each country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense. Total estimated annual income tax expense was divided by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision. The expected annual income tax rate was applied against interim pre-tax income, excluding net realized gains and losses and limited partnership distributions, and then adding that amount to actual income taxes on net realized gains and losses, discrete items and limited partnership distributions. For the quarter and nine months ended September 30, 2011, the Company recorded the actual income tax provision in lieu of using the estimated effective income tax rate due to wide variability in the expected annual effective income tax rate across several similar pre-tax income scenarios. The Company's income before income taxes from the Non-U.S. Subsidiaries and U.S. Subsidiaries, including the results of the quota share agreement between Wind River Reinsurance and the Insurance Operations, for the quarters and nine months ended September 30, 2011 and 2010 were as follows:

 

$000000000 $000000000 $000000000 $000000000

Quarter Ended September 30, 2011:

(Dollars in thousands)

    Non-U.S.
Subsidiaries		     U.S.
Subsidiaries		      Eliminations     Total  

Revenues:

          

Gross premiums written

    $ 42,603      $ 55,262       $ (24,773 )    $ 73,092   
  

 

 

    

 

 

     

 

 

    

 

 

  

Net premiums written

    $ 42,603      $ 22,331       $ —        $ 64,934   
  

 

 

    

 

 

     

 

 

    

 

 

  

Net premiums earned

    $ 51,075      $ 26,015       $ —        $ 77,090   

Net investment income

      10,602        6,926         (4,648 )      12,880   

Net realized investment gains (losses)

      (762 )      2,050         —          1,288   

Other income

      —          167         —          167   
  

 

 

    

 

 

     

 

 

    

 

 

  

Total revenues

      60,915        35,158         (4,648 )      91,425   

Losses and Expenses:

          

Net losses and loss adjustment expenses

      76,539        9,695         —          86,234   

Acquisition costs and other underwriting expenses

      21,812        12,785         —          34,597   

Corporate and other operating expenses

      1,585        1,277         —          2,862   

Interest expense

      —          6,173         (4,648 )      1,525   
  

 

 

    

 

 

     

 

 

    

 

 

  

Income (loss) before income taxes

    $ (39,021 )    $ 5,228       $ —        $ (33,793 ) 
  

 

 

    

 

 

     

 

 

    

 

 

  

 

$000000000 $000000000 $000000000 $000000000

Quarter Ended September 30, 2010:

(Dollars in thousands)

    Non-U.S.
Subsidiaries		      U.S.
Subsidiaries		      Eliminations     Total  

Revenues:

           

Gross premiums written

    $ 47,586       $ 66,213       $ (27,564 )    $ 86,235   
  

 

 

     

 

 

     

 

 

    

 

 

  

Net premiums written

    $ 47,586       $ 25,620       $ —        $ 73,206   
  

 

 

     

 

 

     

 

 

    

 

 

  

Net premiums earned

    $ 47,225       $ 22,864       $ —        $ 70,089   

Net investment income

      11,089         7,648         (4,648 )      14,089   

Net realized investment gains

      258         1,560         —          1,818   

Other income

      —           173         —          173   
  

 

 

     

 

 

     

 

 

    

 

 

  

Total revenues

      58,572         32,245         (4,648 )      86,169   

Losses and Expenses:

           

Net losses and loss adjustment expenses

      24,412         5,377         —          29,789   

Acquisition costs and other underwriting expenses

      17,243         11,298         —          28,541   

Corporate and other operating expenses

      2,802         2,304         —          5,106   

Interest expense

      —           6,473         (4,648 )      1,825   
  

 

 

     

 

 

     

 

 

    

 

 

  

Income before income taxes

    $ 14,115       $ 6,793       $ —        $ 20,908   
  

 

 

     

 

 

     

 

 

    

 

 

  

 

$000000000 $000000000 $000000000 $000000000

Nine Months Ended September 30, 2011:

(Dollars in thousands)

    Non-U.S.
Subsidiaries		     U.S.
Subsidiaries		      Eliminations       Total    

Revenues:

          

Gross premiums written

    $ 158,058      $ 182,102       $ (84,440 )    $ 255,720   
  

 

 

    

 

 

     

 

 

    

 

 

  

Net premiums written

    $ 157,556      $ 76,893       $ —        $ 234,449   
  

 

 

    

 

 

     

 

 

    

 

 

  

Net premiums earned

    $ 151,538      $ 79,576       $ —        $ 231,114   

Net investment income

      33,548        21,469         (13,793 )      41,224   

Net realized investment gains

      5,024        16,647         —          21,671   

Other income

      —          11,999         —          11,999   
  

 

 

    

 

 

     

 

 

    

 

 

  

Total revenues

      190,110        129,691         (13,793 )      306,008   

Losses and Expenses:

          

Net losses and loss adjustment expenses

      156,075        50,254         —          206,329   

Acquisition costs and other underwriting expenses

      60,562        34,084         —          94,646   

Corporate and other operating expenses

      7,035        3,294         —          10,329   

Interest expense

      —          18,813         (13,793 )      5,020   
  

 

 

    

 

 

     

 

 

    

 

 

  

Income (loss) before income taxes

    $ (33,562 )    $ 23,246       $ —        $ (10,316 ) 
  

 

 

    

 

 

     

 

 

    

 

 

  

 

$000000000 $000000000 $000000000 $000000000

Nine Months Ended September 30, 2010:

(Dollars in thousands)

    Non-U.S.
Subsidiaries		      U.S.
Subsidiaries		      Eliminations     Total  

Revenues:

           

Gross premiums written

    $ 165,372       $ 181,815       $ (76,049 )    $ 271,138   
  

 

 

     

 

 

     

 

 

    

 

 

  

Net premiums written

    $ 164,588       $ 69,622       $ —        $ 234,210   
  

 

 

     

 

 

     

 

 

    

 

 

  

Net premiums earned

    $ 145,724       $ 69,855       $ —        $ 215,579   

Net investment income

      32,760         23,641         (13,792 )      42,609   

Net realized investment gains

      5,754         15,865         —          21,619   

Other income

      —           515         —          515   
  

 

 

     

 

 

     

 

 

    

 

 

  

Total revenues

      184,238         109,876         (13,792 )      280,322   

Losses and Expenses:

           

Net losses and loss adjustment expenses

      76,485         27,768         —          104,253   

Acquisition costs and other underwriting expenses

      56,292         31,405         —          87,697   

Corporate and other operating expenses

      7,795         7,270         —          15,065   

Interest expense

      —           19,189         (13,792 )      5,397   
  

 

 

     

 

 

     

 

 

    

 

 

  

Income before income taxes

    $ 43,666       $ 24,244       $ —        $ 67,910   
  

 

 

     

 

 

     

 

 

    

 

 

  

The following tables summarize the differences between the tax provisions under accounting guidance applicable to interim financial statement periods and the expected tax provision at the weighted average tax rate:

 

     Quarters Ended September 30,  
(Dollars in thousands)    2011     2010  
     Amount     % of Pre-
Tax  Income		     Amount     % of Pre-
Tax  Income		  

Expected tax provision at weighted average rate

    $ 1,845        (5.5 %)    $ 2,379        11.4 % 

Adjustments:

         

Tax exempt interest

      (478 )      1.4        (504 )      (2.4 ) 

Dividend exclusion

      (173 )      0.5        (123 )      (0.6 ) 

Effective tax rate adjustment

      —          —          150        0.7   

Other

      (740 )      2.3        (756 )      (3.6 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Income tax expense

    $ 454        (1.3 %)    $ 1,146        5.5 % 
  

 

 

    

 

 

    

 

 

    

 

 

  

The effective income tax rate for the quarter ended September 30, 2011 was (1.3%), compared to an effective income tax rate of 5.5% for the quarter ended September 30, 2010. Due to potential volatility in the 2011 expected effective tax rate, the Company recorded its actual year-to-date tax provision during the quarter ended September 30, 2011 as compared with an estimated annual effective rate during the quarter ended September 30, 2010. The effective rate differed from the weighted average expected income tax expense rate of (5.5%) for the quarter ended September 30, 2011 due to the fact that the Company records income tax expense net of tax-exempt interest and dividends. The effective rate differed from the weighted average expected income tax expense rate of 11.4% for the quarter ended September 30, 2010 primarily due to the fact that the Company recorded income tax expense during interim periods using an expected annual effective tax rate, net of tax-exempt interest and dividends.

 

     Nine Months Ended September 30,  
(Dollars in thousands)    2011     2010  
     Amount     % of Pre-
Tax  Income		     Amount     % of Pre-
Tax  Income		  

Expected tax provision at weighted average rate

    $ 8,481        (82.2 %)    $ 8,564        12.6 % 

Adjustments:

         

Tax exempt interest

      (1,498 )      14.5        (1,488 )      (2.2 ) 

Dividend exclusion

      (540 )      5.2        (286 )      (0.4 ) 

Effective tax rate adjustment

      —          —          (1,376 )      (2.0 ) 

Other

      (685 )      6.7        (708 )      (1.1 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Income tax expense

    $ 5,758        (55.8 %)    $ 4,706        6.9 % 
  

 

 

    

 

 

    

 

 

    

 

 

  

 

The weighted average expected tax provision was $8.5 million and $8.6 million for the nine months ended September 30, 2011 and 2010, respectively. Although the Company incurred a pre-tax loss in 2011, our U.S. Insurance Operations segment recognized $23.2 million of income. U.S. Insurance Operations income includes $16.6 million of realized gains and $11.5 million related to a litigation settlement with AON. The income generated in the U.S. is the primary driver of the weighted average expected income tax expense of $8.5 million. The effective rate differed from the weighted average expected tax provision in 2011 and 2010 primarily due to the impact of tax-exempt interest and dividends.

The Company and some of its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal tax examinations by tax authorities for tax years before 2008.

The alternative minimum tax credit carryforward was $5.6 million as of September 30, 2011 and $6.5 million as of December 31, 2010, respectively.

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties whereby it only recognizes those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the taxing authorities. The Company's unrecognized tax benefits were $0.3 million as of September 30, 2011 and $0.7 million as of December 31, 2010. If recognized, the gross unrecognized tax benefits could lower the effective income tax rate in any future period.

The Company classifies all interest and penalties related to uncertain tax positions as income tax expense. As of September 30, 2011, the Company has recorded $0.03 million in liabilities for tax-related interest and penalties on its consolidated balance sheet.