Entity information:
10.   INCOME TAXES

Under Bermuda law, no income or capital gains taxes are imposed on Group and its Bermuda Subsidiaries.  The Minister of Finance of Bermuda has assured Group and its Bermuda subsidiaries that, pursuant to The Exempted Undertakings Tax Protection Amendment Act of 2011, they will be exempt until 2035 from imposition of any such taxes.

All of the income of Group's non-Bermuda subsidiaries is subject to the applicable federal, foreign, state and local taxes on corporations.  Additionally, the income of the foreign branches of the Company's insurance operating companies, in particular the UK branch of Bermuda Re, is subject to various rates of income tax. Group's U.S. subsidiaries conduct business in and are subject to taxation in the U.S. Should the U.S. subsidiaries distribute current or accumulated earnings and profits in the form of dividends or otherwise, the Company would be subject to an accrual of 5% U.S. withholding tax.  Currently, however, no withholding tax has been accrued with respect to such un-remitted earnings as management has no intention of remitting them.  The cumulative amount that would be subject to withholding tax, if distributed, is not practicable to compute.  The provision for income taxes in the consolidated statement of operations and comprehensive income (loss) has been determined in accordance with the individual income of each entity and the respective applicable tax laws.  The provision reflects the permanent differences between financial and taxable income relevant to each entity. The TCJA, enacted on December 22, 2017, caused the Company to record income tax expense of $8,246 thousand in 2017.  The income tax expense reflects the lower 21% tax benefit to be realized by the Company under the TCJA upon the reversal of the temporary differences in its deferred tax inventory account versus the 35% tax benefit that had been expected to be realized before TCJA.  The significant components of the provision are as follows for the periods indicated:


   
Years Ended December 31,
  
(Dollars in thousands)
  
2017
    
2016
    
2015
  
Current tax expense (benefit):
                  
U.S.
  
$
(117,173
)
  
$
30,971
    
$
90,486
  
Non-U.S.
    
2,849
      
4,228
      
14,811
  
Total current tax expense (benefit)
    
(114,324
)
    
35,199
      
105,297
  
Deferred tax expense (benefit):
                        
U.S.
    
49,763
      
70,995
      
28,724
  
Non-U.S.
    
777
      
(2,694
)
    
-
  
Total deferred tax expense (benefit)
    
50,540
      
68,301
      
28,724
  
                         
Total income tax expense (benefit)
  
$
(63,784
)
  
$
103,500
    
$
134,021
  
                         
(Some amounts may not reconcile due to rounding.)
                        

 

The weighted average expected tax provision has been calculated using the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction's applicable statutory tax rate.  Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the periods indicated is provided below:


   
Years Ended December 31,
  
(Dollars in thousands)
  
2017
    
2016
    
2015
  
   
U.S.
    
Non-U.S.
    
U.S.
    
Non-U.S.
    
U.S.
    
Non-U.S.
  
Underwriting gain (loss)
  
$
(516,167
)
  
$
308,646
    
$
208,821
    
$
480,602
    
$
294,386
    
$
493,025
  
Net investment income
    
255,310
      
287,588
      
230,691
      
242,393
      
234,709
      
238,763
  
Net realized capital gains (losses)
    
148,099
      
5,095
      
(16,465
)
    
9,249
      
(159,268
)
    
(24,879
)
Net derivative gain (loss)
    
-
      
9,581
      
-
      
18,647
      
-
      
6,317
  
Corporate expenses
    
(7,394
)
    
(18,529
)
    
(8,276
)
    
(18,955
)
    
(7,179
)
    
(16,075
)
Interest, fee and bond issue cost amortization expense
    
(31,183
)
    
(420
)
    
(35,435
)
    
(793
)
    
(35,434
)
    
(756
)
Other income (expense)
    
30,325
      
(65,767
)
    
(5,536
)
    
(5,101
)
    
27,706
      
60,574
  
Pre-tax income (loss)
  
$
(121,010
)
  
$
526,194
    
$
373,801
    
$
726,043
    
$
354,920
    
$
756,970
  
                                                 
Expected tax provision at the applicable statutory rate(s)
    
(42,355
)
    
6,843
      
130,830
      
2,387
      
124,221
      
14,848
  
Increase (decrease) in taxes resulting from:
                                                
Tax exempt income
    
(8,488
)
    
-
      
(9,078
)
    
-
      
(10,004
)
    
-
  
Dividend received deduction
    
(4,639
)
    
-
      
(4,913
)
    
-
      
(5,364
)
    
-
  
Proration
    
1,760
      
-
      
1,931
      
-
      
2,160
      
-
  
Affiliated preferred stock dividends
    
10,861
      
-
      
10,861
      
-
      
13,608
      
-
  
Creditable foreign premium tax
    
(7,515
)
    
-
      
(6,134
)
    
-
      
(7,492
)
    
-
  
Tax audit settlement
    
(11,516
)
    
-
      
(18,644
)
    
-
      
-
      
-
  
Share based compensation tax benefits formerly in APIC
    
(6,716
)
    
(235
)
    
-
      
-
      
-
      
-
  
Impact of U.S. tax reform
    
8,246
      
-
      
-
      
-
      
-
      
-
  
Impact of prior year accounting adjustment
    
(8,986
)
    
-
      
-
      
-
      
-
      
-
  
Other
    
1,938
      
(2,982
)
    
(2,887
)
    
(853
)
    
2,081
      
(37
)
Total income tax provision
  
$
(67,410
)
  
$
3,626
    
$
101,966
    
$
1,534
    
$
119,210
    
$
14,811
  
                                                 
(Some amounts may not reconcile due to rounding.)
                                                

During 2016, the Internal Revenue Service ("IRS") completed its audit of the Company for 2009 through 2013 tax years and issued a final Revenue Agent Report ("RAR").  The RAR reflected that the IRS owed the Company a net refund for five years of $43,682 thousand plus net interest of $1,252 thousand.  The net refund due to the Company resulted primarily from the carryback of capital losses incurred in 2009 and 2010 to 2006 and 2007, from the conversion of foreign premium tax deductions into Foreign Tax Credits ("FTC") and from increased utilization of such FTCs as well as the increased utilization of Alternative Minimum Tax ("AMT") credit carryforwards.  The gross refunds, by year, which were $5,000 thousand or greater, had to be reviewed and approved by IRS Joint Committee and were approved in July, 2017.  The Company received the expected refunds from the IRS in early 2018.

The Company's 2014 and subsequent tax years are open to audit by the IRS.

In addition, the Company subsequently filed amended tax returns for 2006, 2007, 2008, the RAR years, and 2014 and plans to file amended 2015 and 2016 tax returns for $29,385 thousand in additional net refunds plus interest.  These additional net refunds also result primarily from the conversion of foreign premium tax deductions into FTCs.

The Company has no reserve for uncertain tax positions.

Deferred Income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the U.S. tax laws and regulations.  Under the TCJA, temporary differences at December 31, 2017, are now expected to reverse at a 21% tax rate, whereas, at December 31, 2016, such items were expected to reverse at a 35% tax rate.   The principal items making up the net deferred income tax assets/ (liabilities) are as follows for the periods indicated:


   
Years Ended December 31,
  
(Dollars in thousands)
  
2017
    
2016
  
Deferred tax assets:
            
     Unearned premium reserves
  
$
55,034
    
$
37,573
  
     Loss reserves
    
52,649
      
104,547
  
     Net unrealized losses on benefit plans
    
19,120
      
35,271
  
     Foreign tax credits
    
15,914
      
-
  
     Benefit plan liability
    
10,417
      
14,576
  
     Net operating loss carryforward
    
9,645
      
6,341
  
     Uncollectible reinsurance reserves
    
3,320
      
5,534
  
     Deferred expenses
    
1,759
      
2,884
  
     Unrealized foreign currency losses
    
1,550
      
27,410
  
     Investment impairments
    
1,144
      
3,093
  
     Alternative minimum tax credits
    
363
      
-
  
     Other assets
    
10,494
      
14,843
  
Total deferred tax assets
    
181,409
      
252,071
  
                 
Deferred tax liabilities:
                
     Deferred acquisition costs
    
64,997
      
26,652
  
     Net fair value income
    
58,983
      
78,740
  
     Net unrealized investment gains
    
11,576
      
20,698
  
     Gain on tender of debt
    
3,287
      
10,958
  
     Partnership investments
    
2,149
      
11,912
  
     Other liabilities
    
2,174
      
3,086
  
Total deferred tax liabilities
    
143,165
      
152,045
  
                 
Net deferred tax assets
    
38,244
      
100,026
  
     Less:  Valuation allowance
    
(9,560
)
    
(3,846
)
Total net deferred tax assets
  
$
28,684
    
$
96,181
  
                 
(Some amounts may not reconcile due to rounding.)
                


At December 31, 2017, the Company has $15,914 thousand of FTCs and $363 thousand of AMT credit carry forwards.  The FTCs expire at the end of 2027 and the AMT credit does not expire.  Management believes that it is more likely than not that the Company will realize the majority of its deferred tax assets, however, a valuation allowance  of $9,560 thousand and $3,846 thousand has been recorded in 2017 and 2016, respectively, against the net operating loss ("NOL") deferred tax assets in its Canadian and UK subsidiaries.  The Canadian NOLs begin to expire in 2035 and the UK NOLs do not expire.

The Company has adopted the provisions of SAB 118 with respect to measuring the tax effects for the modifications to the determination of tax basis loss reserves enacted by the TCJA.  Modifications include the extension of long-tail payment patterns out 24 years, and the use of an interest rate based upon the corporate bond yield curve.  The IRS is required to provide discount factors following these new parameters based upon industry loss payment data.  Because of uncertainty in how the Treasury/IRS intend to implement the modifications and the necessary transition calculation, the Company has determined that a reasonable estimate cannot be determined, and has followed the provisions of the tax laws that were in effect prior to the modifications.

The Company has made a provisional estimated tax expense of the effects of the TCJA on its deferred tax inventory at December 31, 2017 of $8,246 thousand.  Any adjustments, if necessary, during the measurement period guidance outlined in SAB 118 will be included in net earnings from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.
 
Effective January 1, 2017, the Company adopted ASU 2016-09 which provided new guidance on the treatment of the tax effects of share based compensation transactions.  ASU 2016-09 required that the income tax effects of restricted stock vestings and stock option exercises resulting from the change in value of share based compensation awards between the grant date and settlement (vesting/exercise) date be recorded as part of income tax expense (benefit) within the consolidated statements of operations and comprehensive income (loss). Per the new guidance, the Company recorded excess tax benefits of $6,951 thousand related to restricted stock vestings and stock option exercises as part of income tax expense (benefit) within the consolidated statements of operations and comprehensive income (loss) in 2017.

In years prior to 2017, the Company recorded tax benefits related to restricted stock vestings and stock option exercises as part of additional paid-in capital in the shareholders' equity section of the consolidated balance sheets. In 2016, the Company recorded excess tax benefits of $6,861 thousand related to restricted stock vestings and stock option exercises as part of additional paid-in capital.

The adoption of ASU 2016-09 did not impact the accounting treatment of tax benefits related to dividends on restricted stock.  The tax benefits related to the payment of dividends on restricted stock have been recorded as part of additional paid-in capital in the shareholders' equity section of the consolidated balance sheets in all years.  The tax benefits related to the payment of dividends on restricted stock were $626 thousand and $597 thousand in 2017 and 2016, respectively.