Entity information:
Income Taxes

The provision for income taxes consists of the following for the years ended December 31, 2017, 2016 and 2015:

 
Year Ended December 31,

2017

2016
 
2015
Current expense (benefit):


 


 


Federal
$
(11,415
)
 
$
(13,084
)
 
$
74,967

Foreign
37,360

 
46,020

 
20,442

Total current tax expense
25,945

 
32,936

 
95,409

Deferred expense (benefit):


 


 


Federal
$
(131,890
)
 
$
67,154

 
$
(71,446
)
Foreign
6,582

 
(14,783
)
 
14,983

Total deferred tax (benefit) expense
(125,308
)
 
52,371

 
(56,463
)
Total income tax (benefit) expense
$
(99,363
)
 
$
85,307

 
$
38,946



The following table is a reconciliation of the Company’s statutory income tax expense to its effective tax rate for the years ended December 31, 2017, 2016 and 2015:

 
Year Ended December 31,

2017
 
2016
 
2015
(Loss) income before income taxes and equity in earnings of unconsolidated subsidiaries
$
(507,730
)
 
$
500,051

 
$
471,194

Tax at federal statutory rate of 35%
(177,706
)
 
175,018

 
164,918

Tax effects resulting from:


 


 


Tax reform
72,534

 
—

 
—

Permanent adjustments
1,218

 
(5,091
)
 
(121,923
)
Foreign rate differential
(27,120
)
 
(56,637
)
 
(98,059
)
Adjustments to prior year taxes
(2,723
)
 
(17,504
)
 
(68,075
)
Valuation allowance
32,954

 
(12,874
)
 
149,842

Other, net
1,480

 
2,395

 
12,243

Total income tax (benefit) expense
$
(99,363
)
 
$
85,307

 
$
38,946

Effective tax rate
19.6
%
 
17.1
%
 
8.3
%


“Adjustments to prior year taxes” include a change in a prior year estimate for the tax provision based on what management believes the result will be versus what is recorded in the tax return. The adjustments for December 31, 2016, primarily related to a $12,726 benefit associated with a statutory to GAAP accounting adjustment for investments and a $5,138 benefit for the Company making a full APB 23 permanent reinvestment assertion. The adjustments for December 31, 2015, primarily related to a $73,420 benefit for provision to return adjustments, specifically from transfer pricing, and a $5,112 expense resulting from a change in the Company’s ownership percentage of an equity investment that returned the tax rate applied to this investment to the standard statutory rate from the dividend received deduction rate.

The TCJA was enacted on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, creates new taxes on certain foreign sourced earnings, and revises the tax treatment of certain items for property and casualty insurers. As of December 31, 2017, the Company had not completed its accounting for the tax effects of enactment of the TCJA; however, as provided in SEC Staff Accounting Bulletin No. 118, in certain cases, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. For the items for which the Company was able to determine a reasonable estimate, it recognized a provisional amount of $72,534. This amount is related to the restatement of deferred taxes from 35% to the newly enacted 2018 rate of 21%, and are included as a component of income tax benefit from continuing operations. In all cases, the Company will continue to make and refine its calculations as it completes additional analysis. In addition, the Company's estimates may also be affected as it gains a more thorough understanding of the tax law. As noted above, under the TCJA, undistributed post-1986 earnings and profits (E&P) previously deferred from U.S. income taxes are subject to a one-time transition tax. Based on an initial review, it is reasonably expected that the Company will not incur the one-time transitional tax liability. This expectation may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalizes the amounts held in cash or other specified assets.

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2017 and 2016 are shown below:

 
December 31,
 
2017
 
2016
Deferred tax assets:
 
 
 
Net operating loss carryforward
$
280,271

 
$
224,918

Unearned premiums
86,215

 
150,167

Ceding commission
—

 
146,503

Loss and LAE reserves
48,575

 
73,873

Other
114,851

 
109,408

Deferred revenue
46,455

 
61,780

Bad debt
28,108

 
25,489

Deferred compensation
2,004

 
6,655

Total gross deferred tax assets
606,479

 
798,793

Valuation allowance
(195,146
)
 
(142,462
)
Total deferred tax assets
411,333

 
656,331

Deferred tax liabilities:
 
 
 
Deferred acquisition costs
(145,600
)
 
(384,656
)
Equity results which cannot be liquidated tax free
(11,838
)
 
(57,614
)
Intangible assets
(67,008
)
 
(89,133
)
Depreciation
(24,224
)
 
(49,411
)
Other
(3,118
)
 
(3,489
)
Equalization reserves
(13,307
)
 
(15,890
)
Accrual market discount
(4,853
)
 
(10,144
)
Cash surrender value on insurance
(1,563
)
 
(2,299
)
Unrealized gain on investments
(22,978
)
 
(27,663
)
Total deferred tax liabilities
(294,489
)
 
(640,299
)
Deferred tax asset, net
$
116,844

 
$
16,032



The Company's net deferred tax asset at December 31, 2017, is included in other assets in the consolidated balance sheets. The likelihood of realizing deferred tax assets is reviewed periodically. Any adjustments required to the valuation allowance are made in the period during which developments requiring an adjustment become known.

The Company has U.S. Net Operating Losses (“NOLs”) of $13,104 that expire beginning in 2019 through 2037. In addition, these NOLs are subject to certain limitations under Section 382 of the Internal Revenue Code due to changes in ownership of $9,123 per year. The Company also has foreign NOLs of $991,862, the majority of which have no expiration.

The Company's management believes that as of December 31, 2017, except for a portion of foreign and domestic NOLs, it will realize the benefits of its deferred tax assets. The Company placed a valuation allowance on a significant portion of the foreign NOLs as of December 31, 2017. The Company has a valuation allowance of $195,146 and $142,462, as of December 31, 2017 and December 31, 2016. The valuation allowance increased for the year ended December 31, 2017, as a result of establishing a valuation allowance on the Company's UK Lloyd syndicate that was acquired in November 2016. The valuation allowance was the result of an update to the income forecast for new facts that did not exist during the measurement period that resulted in a decreased amount of future income in the UK in order to fully utilize the NOL's incurred to date. Even though the NOL's do not have an expiration date, the Company determined that a valuation allowance should be placed on the portion that is unlikely to be utilized within the next three years.

The earnings of certain of the Company’s foreign subsidiaries have been indefinitely reinvested in foreign operations. Therefore, no provision has been made for any U.S. taxes or foreign withholding taxes that may be applicable upon any repatriation or disposition. The determination of any unrecognized deferred tax liability for temporary differences related to investments in certain of the Company’s foreign subsidiaries is not practicable. As of December 31, 2017 and 2016, the financial reporting basis in excess of the tax basis for which no deferred taxes have been recognized was approximately $400,698 and $315,712, respectively.

The Company's major taxing jurisdictions include the U.S. (federal and state), the United Kingdom and Ireland. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the Company’s statute of limitations is open for tax years ended December 31, 2012 and forward. The Company is currently under audit in the U.S. for tax years 2013, 2014 and 2015. The audit is ongoing as of December 31, 2017 and is expected to close during 2018.

Listed below are the tax years that remain subject to examination by major tax jurisdictions:
 
Open Tax Years
United States
2013-2016
United Kingdom
2016
Ireland
2012-2016


As permitted by ASC 740-10 Income Taxes, the Company recognizes interest and penalties, if any, related to unrecognized tax benefits in its income tax provision.  The Company does not have any unrecognized tax benefits and, therefore, has not recorded any unrecognized tax benefits, or any related interest and penalties, as of December 31, 2017 and 2016.  No interest or penalties have been recorded by the Company for the years ended December 31, 2017, 2016, and 2015. The Company does not anticipate any significant changes to its total unrecognized tax benefits in the next 12 months.