Entity information:
Taxation
The Company conducts global operations through its subsidiaries in various jurisdictions around the world, including but not limited to Bermuda, the U.S., the U.K., Switzerland, Ireland, France, Germany, Italy, and Spain. The Company is subject to tax in accordance with the relevant tax laws and regulations governing taxation in the jurisdictions in which it operates.
The Company, and its Bermuda subsidiaries, are not subject to any income or capital gains taxes under current Bermuda law. In the event that there is a change such that these taxes are imposed, the Bermuda subsidiaries would be exempted from any such tax until March 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act 1966, and the Exempted Undertakings Tax Protection Amendment Act 2011.
The Company's U.S. subsidiaries are subject to federal, state and local corporate income taxes, as well as premium, excise and other taxes applicable to U.S. corporations. The U.S. related provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the IRS Code and Regulations thereunder.
On December 22, 2017, the U.S Tax Cuts and Jobs Act was enacted. The new law, which takes effect for taxable years beginning on or after January 1, 2018, includes numerous changes in tax law, including: (1) a reduction in the federal corporate income tax rate from 35% to 21%; (2) repeal of the corporate Alternative Minimum Tax, with existing credit carryforwards refundable no later than 2021; (3) limitations on the deductibility of certain elements of executive compensation; and (4) a number of base erosion provisions designed to reduce the ability of multinational companies to reduce the U.S. tax base through payments to offshore affiliates.
On December 22, 2017, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the income tax effects of the U.S. Tax Cuts and Jobs Act. SAB 118 provides scenarios where the measurement of the income tax effects is complete, incomplete, or incomplete but for which a reasonable provisional amount can be estimated, and provides a twelve month measurement period from the enactment date to complete the accounting.
Based on its initial analysis of the provisions of the new tax law, and associated guidance issued to date, the Company recorded a net income tax expense of $100.5 million in the period ended December 31, 2017, primarily to reduce the value of its net deferred tax assets to reflect the reduction in the U.S. federal corporate income tax rate. In accordance with SAB 118, the accounting for the income tax effects of the rate change on the net deferred tax asset is complete.
The Company has recorded provisional amounts that are incomplete, but have been reasonably estimated, related to the re-computation of its insurance reserves and the transition adjustment from the existing laws. The Company may reflect adjustments to its provisional amounts upon issuance of additional guidance with respect to the operation of the new tax law provisions, or by obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts. The Company does not expect these adjustments to be material to its financial position.
With the exception of the U.S., deferred income taxes have not been accrued with respect to certain undistributed earnings of subsidiaries located outside of Bermuda. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding taxation in the jurisdiction of the paying entity. The Company does not assert that all earnings arising in the U.S. will be permanently reinvested in the U.S., and accordingly, the Company provides for withholding taxes arising in respect of current period U.S. earnings. No withholding taxes are accrued with respect to the earnings of the Company's subsidiaries arising outside the U.S. However, if there is a change in tax law, interpretation of existing law, or change in way in which the Company conducts its business, then the company would accrue the required withholding tax.
The Company's current corporate structure is such that distribution of earnings from subsidiaries located outside of the United States would not be subject to significant incremental taxation. It is not practicable to estimate the amount of additional withholding taxes that might be payable on such earnings due to a variety of factors, including the timing, extent and nature of any repatriation.
The table below details the tax years that are open to assessment and under examination by local tax authorities, by major tax jurisdictions. While the Company cannot estimate with certainty the outcome of these examinations, the Company does not believe that adjustments from open tax years will result in a significant change to the Company's financial results.
Jurisdiction
Tax Years Open to Assessment
 
Tax Years Under Examination
France
2013 - 2017
 
2013 - 2014
Germany
2014 - 2017
 
 
Ireland
2013 - 2017
 

Italy
2013 - 2017
 

Spain
2011 - 2017
 
2011 - 2012
Switzerland
2013 - 2017
 

U.K.
2013 - 2017
 
2013 - 2015
U.S.
2013 - 2017
 
2013 - 2015

The Company's income (loss) before income tax and non-controlling interests, for the years ended December 31, 2017, 2016 and 2015, was distributed between U.S. and non-U.S. jurisdictions as follows:
Income (loss) before income tax and non-controlling interests:
(U.S. dollars in thousands)
2017
 
2016
 
2015
U.S.
$
116,491

 
$
68,970

 
$
(5,931
)
Non U.S.
(547,558
)
 
543,304

 
1,300,109

Total
$
(431,067
)
 
$
612,274

 
$
1,294,178


The income tax provisions for the years ended December 31, 2017, 2016 and 2015 are as follows:
(U.S. dollars in thousands)
2017
 
2016
 
2015
Current expense (benefit):
 
 
 
 
 
U.S.
$
715

 
$
(12,201
)
 
$
(22,698
)
Non U.S.
103,339

 
59,031

 
67,784

Total current expense (benefit)
$
104,054

 
$
46,830

 
$
45,086

Deferred expense (benefit):
 
 
 
 
 
U.S.
$
100,126

 
$
8,502

 
$
(63,491
)
Non U.S.
(145,110
)
 
(13,203
)
 
(756
)
Total deferred expense (benefit)
$
(44,984
)
 
$
(4,701
)
 
$
(64,247
)
Total tax expense (benefit)
$
59,070

 
$
42,129

 
$
(19,161
)

The applicable statutory tax rates for the current year of the most significant jurisdictions contributing to the overall taxation of the Company are:
Jurisdiction
Applicable Statutory Corporate Income
Tax Rates
Bermuda
—
%
France (1)
33.33
%
Germany (2)
15.00
%
Ireland (3)
12.50
%
Switzerland (4)
21.15
%
U.K. (5)
19.25
%
U.S. (6)
35.00
%
____________
(1)
The statutory corporate income tax rate is 33.33%. However, with the mandatory social surcharge, the combined statutory rate would increase to 34.43%.
(2)
The statutory corporate income tax rate is 15.00%. However, including applicable surcharges and local trade tax, which can vary by location, would increase the combined statutory rate to approximately 33%.
(3)
The 12.50% statutory corporate income tax rate applies to active income from the conduct of a trade in Ireland. For passive income or income from other defined activities the statutory rate increases to 25%.
(4)
Represents the combined federal and cantonal rate primarily applicable to the Company's Swiss entities.
(5)
The statutory rate is 19% effective April 1, 2017. However, from January 1, through March 31, 2017 the statutory rate is 20%. Due to this change of rate, the average statutory tax rate for 2017 is 19.25%.
(6)
The statutory tax rate is 35% for the 2017 tax year. Under the Tax Cuts and Jobs Act of 2017, the federal corporate tax rate has been reduced to 21% for taxable years beginning on or after January 1, 2018.
The expected tax provision has been calculated using the pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate. A reconciliation of the difference between the provision for income taxes and the expected tax provision for the years ended December 31, 2017, 2016 and 2015 is provided below:
(U.S. dollars in thousands)
2017
 
2016
 
2015
Expected tax (benefit) provision
$
(2,527
)
 
$
(31,080
)
 
$
(50,797
)
Permanent differences:
 
 
 
 
 
Non-taxable (income) loss
(41,043
)
 
(19,937
)
 
(23,036
)
Revision to prior year estimates
9,428

 
(24,121
)
 
7,402

State, local and foreign taxes
37,455

 
23,157

 
27,499

Valuation allowance
2,510

 
1,197

 
9,517

Net allocated investment income
8,531

 
5,990

 
(405
)
Stock awards
(3,132
)
 
543

 
(433
)
Non-deductible expenses
3,305

 
48,206

 
42,839

Other investment related adjustments
(1,753
)
 
(905
)
 
2,075

Adjustments related to GreyCastle Life Retro Arrangements
(9,815
)
 
21,682

 
(35,045
)
Change in tax rates
(8,105
)
 
(6,233
)
 
(11,877
)
U.S. Tax Cuts and Jobs Act of 2017, net deferred tax asset revaluation
100,500

 
—

 
—

Uncertain tax positions
(36,284
)
 
23,630

 
13,100

Total tax expense (benefit)
$
59,070

 
$
42,129

 
$
(19,161
)

Significant components of the Company's deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows:
(U.S. dollars in thousands)
2017
 
2016
Deferred tax asset:
 
 
 
Net unpaid loss reserve discount
$
82,026

 
$
96,357

Net unearned premiums
104,168

 
95,676

Compensation liabilities
56,760

 
96,280

Net operating losses
339,130

 
323,716

Investment adjustments
18,570

 
14,030

Pension
10,770

 
6,817

Bad debt reserve
14,844

 
12,418

Amortizable goodwill
—

 
967

Net unrealized depreciation on investments
2,719

 
5,915

Stock options
624

 
7,249

Depreciation
23,497

 
26,525

Net realized capital losses
63,757

 
89,568

Deferred intercompany capital losses
9,997

 
18,221

Untaxed Lloyd's result
91,056

 
—

Deferred acquisition costs
65,432

 
17,820

Tax Credits
53,304

 
71,651

Other
29,462

 
34,708

Deferred tax asset, gross of valuation allowance
$
966,116

 
$
917,918

Valuation allowance
338,556

 
367,366

Deferred tax asset, net of valuation allowance
$
627,560

 
$
550,552

 
 
 
 
(U.S. dollars in thousands)
2017
 
2016
Deferred tax liability:
 
 
 
Net unrealized appreciation on investments
$
16,170

 
$
21,500

Deferred acquisition costs
62,871

 
10,858

Currency translation adjustments
13,170

 
12,813

Regulatory reserves
99,265

 
116,500

Net unearned premiums
9,270

 
4,380

Investment adjustments
4,232

 
5,269

Untaxed Lloyd's result
—

 
11,940

Depreciation
11,355

 
15,601

Syndicate capacity
87,714

 
82,106

Intangible asset
24,473

 
32,508

Other
24,590

 
3,806

Deferred tax liability
$
353,110

 
$
317,281

Net Deferred Tax Asset
$
274,450

 
$
233,271


The deferred tax asset and deferred tax liability balances presented above represent the gross deferred tax asset and liability balances across each tax jurisdiction. As disclosed on the Consolidated Balance Sheets, the deferred tax asset balances of $332.0 million and $310.5 million at December 31, 2017 and 2016, respectively, and deferred tax liability balances of $57.6 million and $77.3 million at December 31, 2017 and 2016, respectively, include netting of certain deferred tax assets and liabilities within a tax jurisdiction to the extent such netting is consistent with ASC 740 "Income Taxes".
At December 31, 2017 and 2016, the valuation allowance of $338.6 million and $367.4 million, respectively, related primarily to net operating loss and realized capital loss carryforwards in the following major tax jurisdictions:
Jurisdiction
(U.S. dollars in thousands)
2017
 
2016
Australia
$
18,849

 
$
15,120

Austria
919

 
10,162

Brazil
14,909

 
12,857

France
28,656

 
23,523

Germany
32,566

 
9,562

Hong Kong
5,749

 
3,780

Ireland
86,647

 
96,642

Italy
—

 
10,313

Luxembourg
8,025

 
5,648

Singapore
9,331

 
8,916

Spain
20,387

 
16,709

Switzerland
20,935

 
15,025

U.K.
28,328

 
32,528

U.S.
53,761

 
92,999

Other
9,494

 
13,582

Valuation Allowance Total
$
338,556

 
$
367,366


The decrease in the valuation allowance in 2017 of $28.8 million was primarily driven by the revaluation of U.S. capital loss related deferred tax assets, in conformity with U.S. Tax Cuts and Jobs Act, for which a valuation allowance is held. The increase in the valuation allowance in Germany is due to a reduction in deferred tax liabilities that were supporting the recognition of deferred tax assets. This effect was partially offset by valuation allowance decreases in Austria and Italy due to improved profit forecasts, and a decrease in Ireland due to receipt of tax clearance related to the pending dissolution of an entity.
Management believes it is more likely than not that the tax benefit associated with the Company's deferred tax assets, not offset by a valuation allowance, will be realized.
The following table summarizes the net operating loss carryforwards the Company had at December 31, 2017:
Jurisdiction
(U.S. dollars in thousands)
Carryforward Amount
 
Gross Deferred Tax Asset
 
Valuation Allowance
 
Net Deferred Tax Asset
 
Expiration Period
Australia
60,565

 
18,169

 
(18,166
)
 
3

 
No Expiration
Austria
33,483

 
8,371

 
(837
)
 
7,534

 
No Expiration
France
110,615

 
28,904

 
(28,657
)
 
247

 
No Expiration
Germany
177,587

 
49,764

 
(32,566
)
 
17,198

 
No Expiration
Ireland (1)
430,685

 
53,836

 
(53,836
)
 
—

 
No Expiration
Spain
103,822

 
11,479

 
(11,186
)
 
293

 
No Expiration
Switzerland (2)
181,789

 
20,620

 
(20,620
)
 
—

 
2018-2025
U.K.
228,444

 
42,612

 
(31,913
)
 
10,699

 
No Expiration
U.S. (3)
305,771

 
64,212

 
(1,179
)
 
63,033

 
2033-2037
Other
221,893

 
41,163

 
(32,977
)
 
8,186

 
Various
Total Net Operating Loss Carryforwards
1,854,654

 
339,130

 
(231,937
)
 
107,193

 
 
____________
(1)
These net operating loss carryforwards relate to a former Irish tax resident company which is in the process of withdrawing from Ireland. Any remaining unused loss carryforward, and the related valuation allowance, will be eliminated at the time of the receipt of tax clearance.
(2)
Net operating losses of $4.0 million and $31.8 million will expire in 2018 and 2019, respectively, with the remaining $146.0 million expiring through 2025.
(3)
Approximately $47.0 million of the net operating loss carryforwards is subject to restrictions on timing and utilization under §382 of the IRS Code.
The following table summarizes the capital loss carryforwards the Company had at December 31, 2017:
Jurisdiction
(U.S. dollars in thousands)
Carryforward Amount
 
Gross Deferred Tax Asset
 
Valuation Allowance
 
Net Deferred Tax Asset
 
Expiration Period
Ireland
122,142

 
30,536

 
(30,536
)
 
—

 
No Expiration
U.K.
14,927

 
2,836

 
(2,836
)
 
—

 
No Expiration
U.S. (1)
144,691

 
30,385

 
(30,385
)
 
—

 
2018 - 2021
Total Capital Loss Carryforwards
281,760

 
63,757

 
(63,757
)
 
—

 
 
____________
(1)
Capital loss carryforwards of $41.2 million will expire at the end of 2018 with another $103.5 million expiring in future years through 2021.
At December 31, 2017, the Company had total tax credits of $53.3 million, comprised of: (1) $31.7 million of U.S. Alternative Minimum Tax Credits, which are refundable no later than 2021; (2) $3.0 million of U.S. foreign tax credits that expire through 2021; (3) $3.1 million of U.S. Research and Development tax credits which expire through 2034; and (4) $15.5 million of U.K. foreign tax credits that do not expire.
For the years ended December 31, 2017, 2016 and 2015, the Company had unrecognized tax benefits of $65.0 million, $97.8 million and $80.6 million, respectively. If recognized, the full amount of these unrecognized tax benefits would generally decrease the current year annual effective tax rate. The Company does not currently anticipate any significant change in unrecognized tax benefits during 2018.
The following table presents a reconciliation of the Company's unrecognized tax benefits:
(U.S. dollars in thousands)
2017
 
2016
 
2015
Unrecognized tax benefits, beginning of the year
$
97,780

 
$
80,590

 
$
37,190

Increases for tax positions taken during the year
3,290

 
25,250

 
20,370

Increases for tax positions taken in prior years
15,940

 
11,700

 
38,650

Decreases for tax positions taken in prior years
(35,230
)
 
(6,440
)
 
(4,850
)
Decreases for settlement with taxing authorities
(16,320
)
 
—

 
—

Decreases for lapse of the applicable statute of limitations
(500
)
 
(13,320
)
 
(10,770
)
Unrecognized tax benefits, end of year
$
64,960

 
$
97,780

 
$
80,590


The Company's policy is to recognize any interest and penalties related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2017, 2016 and 2015, the Company had accrued interest and penalties of $3.8 million, $0.9 million and $0.4 million, respectively.