Entity information:
Income Taxes
The Company is a Cayman-domiciled corporation that has operations in Bermuda and the U.S. Neither the Cayman Islands nor Bermuda impose a corporate income tax. The Company’s U.S. non-life subsidiaries file a consolidated non-life U.S. Federal income tax return. For tax years prior to December 1, 2017, the non-life members were included in former parent company HRG’s consolidated U.S. Federal income tax return. The income tax liabilities of the Company as former members of the consolidated HRG return were calculated using the separate return method as prescribed in ASC 740. The Company’s US life insurance subsidiaries file a separate life subgroup consolidated U.S. Federal income tax return. The life insurance companies will be eligible to join in a consolidated filing with the U.S. non-life companies in 2022.
On November 30, 2017, FGL, a former majority owned subsidiary of HRG, was acquired pursuant to a structured merger by CF Corp.
On May 24, 2017, the Company, HRG and CF Corp executed a letter agreement (the “side letter”) which set forth the settlement provisions between the parties related to the Section 338(h)(10) transaction.
Pursuant to the side letter, FS Holdco agreed to pay the Company a $30 fixed fee for the right to make a unilateral decision with regard to election.
    The side letter agreement between the parties, also further specifies that the purchase price will be adjusted for specified amounts determined by reference to the Company’s incremental tax costs attributable to the election, if any. Alternatively, the Company will be required to pay FS Holdco additional specified amounts determined by reference to the Company’s incremental current tax savings attributable to the election (if any) in excess of $6.
On January 27, 2018, pursuant to Section 4(b) of the “side letter”, the Company delivered to FS Holdco an estimate of the additional tax benefit amount of $57 million that the Company will be required to pay HRG.
The Section 338(h)(10) election will treat the merger as an asset acquisition for U.S. tax purposes resulting in stub period tax yearends for both the life and non-life subsidiaries within the target group acquired as part of the acquisition. The target 338(h)(10) group does not include FSRC, a 953(d) election U.S. tax payer. Any tax liability of the non-life entities’ arising from the deemed asset sale will be reflected on HRG’s consolidated return, with the Companies’ non-life entities retaining successor liability. The life entities will file a separate final short-period return reflecting gain (or loss) from the deemed asset sale.
The Company’s U.S. subsidiaries are taxed at corporate rates on taxable income based on existing U.S. tax laws. Current income taxes are charged or credited to net income based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year.
Deferred income taxes are provided for the tax effect of temporary differences in the financial reporting and income tax bases of assets and liabilities, net operating loss carryforwards and tax credit carryforwards using enacted income tax rates and laws. The effect on deferred income tax assets and deferred income tax liabilities of a change in tax rates is recognized in net income in the period in which the change is enacted. A valuation allowance is required if it is more likely than not that a deferred tax asset will not be realized. In assessing the need for a valuation allowance we considered the scheduled reversal of deferred tax liabilities, projected future taxable income, and taxable income from prior years available for recovery and tax planning strategies. Based on the available positive and negative evidence regarding future sources of taxable income, we have determined that the establishment of a valuation allowance was necessary for the U.S. non-life companies and FSRC at December 31, 2017. The valuation allowance reflects a history of cumulative losses for both the US nonlife subgroup, as well as for FSRC. In addition, due to the debt structure of the US non-life entities, particularly at the holding company level, it is unlikely the US non-life subgroup will be in a net cumulative taxable income position in a near term projection window.
The Tax Cut and Jobs Act (“TCJA”) was enacted on December 22, 2017, and it amended many provisions of the Internal Revenue Code that will have effect on the Company. Because the TCJA reduced the statutory tax rate, the Company was required to remeasure its deferred tax assets and liabilities using the lower rate at the December 22, 2017, date of enactment. This remeasurement resulted in a reduction of net deferred tax assets of $131, which includes a $0 benefit related to deferred taxes previously recognized in accumulated other comprehensive income. The SEC’s Staff Accounting Bulletin No. 118 (“SAB 118”) provides guidance on accounting for the effects of U.S. tax reform in circumstances in which an exact calculation cannot be made, but for which a reasonable estimate can be determined. As internal systems are updated and additional guidance becomes available, the estimate will be updated in accordance with instruction outlined in the standard and within the measurement period, which is not to extend beyond one year from the enactment date. The only provisional amount utilized in the preparation of the Company’s financial statements was tax reserves.  As of the reporting date, the Company has not yet been able to update its reserving system for the impact of the TCJA.  A reasonable estimate, prepared by the Company's Actuarial department, was calculated for purposes of developing a reasonable estimate used in its December 31, 2017 financial statements. No other provisions of the TCJA had a significant impact on our 2017 income tax provisions.
Income tax (expense) benefit is calculated based upon the following components of income before income taxes:
 
 
 
 
 
 
 
 
 
Year ended September 30,
 
 
Period from December 1 to December 31, 2017
 
 
Period from October 1 to November 30, 2017
 
Period from October 1 to December 31, 2016 (Unaudited)
 
2017
 
2016
 
2015
 
 
Successor
 
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
Pretax income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
(58
)
 
 
44

 
163

 
$
333

 
$
153

 
$
182

Outside the United States
 
63

 
 
—

 
—

 
—

 
—

 
—

Total pretax income
 
$
5

 
 
$
44

 
$
163

 
$
333

 
$
153

 
$
182


The components of income tax (expense) benefit are as follows:
 
 
 
 
 
 
 
 
 
Year ended September 30,
 
 
Period from December 1 to December 31, 2017
 
 
Period from October 1 to November 30, 2017
 
Period from October 1 to December 31, 2016 (Unaudited)
 
2017
 
2016
 
2015
 
 
Successor
 
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
(5
)
 
 
(23
)
 
21

 
$
(114
)
 
$
(5
)
 
$
(14
)
State
 
—

 
 
—

 
—

 
—

 
—

 
—

Total current
 
$
(5
)
 
 
$
(23
)
 
$
21

 
$
(114
)
 
$
(5
)
 
$
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred:
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal
 
$
(102
)
 
 
$
7

 
$
(76
)
 
$
4

 
$
(51
)
 
$
(50
)
State
 
—

 
 
—

 
—

 
—

 
—

 
—

Total deferred
 
$
(102
)
 
 
$
7

 
$
(76
)
 
$
4

 
$
(51
)
 
$
(50
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax (expense)/benefit
 
$
(107
)
 
 
$
(16
)
 
$
(55
)
 
$
(110
)
 
$
(56
)
 
$
(64
)

The difference between income taxes expected at the U.S. Federal statutory income tax rate of 35% and reported income tax (expense) benefit is summarized as follows:
 
 
 
 
 
 
 
 
 
Year ended September 30,
 
 
Period from December 1 to December 31, 2017
 
 
Period from October 1 to November 30, 2017
 
Period from October 1 to December 31, 2016 (Unaudited)
 
2017
 
2016
 
2015
 
 
Successor
 
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
Expected income tax (expense)/benefit at Federal statutory rate
 
$
(2
)
 
 
$
(15
)
 
$
(57
)
 
$
(117
)
 
$
(54
)
 
$
(64
)
Valuation allowance for deferred tax assets
 
13

 
 
(2
)
 
—

 
1

 
69

 
(1
)
Amortization of low income housing tax credits
 
(1
)
 
 
(1
)
 
—

 
(4
)
 
(2
)
 
(1
)
Benefit on LIHTC under proportional amortization method
 
—

 
 
1

 
—

 
5

 
3

 
1

Write off of expired capital loss carryforward
 
—

 
 
—

 
—

 
—

 
(73
)
 
—

Remeasurement of deferred taxes under U.S. tax reform
 
(131
)
 
 
—

 
—

 
—

 
—

 
—

Dividends received deduction
 
—

 
 
1

 
—

 
4

 
1

 
2

Benefit on International Income taxed at 0%
 
22

 
 
—

 
—

 
—

 
—

 
—

Write off of 382 Limited NOL
 
(12
)
 
 
—

 
—

 
—

 
—

 
—

Other
 
2

 
 
—

 
2

 
1

 
—

 
(1
)
Reported income tax (expense)/benefit
 
$
(107
)
 
 
$
(16
)
 
$
(55
)
 
$
(110
)
 
$
(56
)
 
$
(64
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Effective tax rate
 
2,043
%
 
 
37
%
 
34
%
 
33
%
 
37
%
 
35
%

For the Successor period December 1, 2017 to December 31, 2017, the Company’s effective tax rate includes the effects of rate change from 35% to 21% in connection with The Tax Cuts & Jobs ACT (“TCJA”) as well as certain reinsurance effects between the Companies' onshore and offshore insurance entities. Reversing out the effects of the tax reform rate change and impacts of FAS 133/DIGB36, (i.e. Embedded Derivatives impacts under Modified Coinsurance Arrangements) in regards to US/offshore reinsurance treatment of unrealized gains on funds withheld assets, results in an adjusted effective rate for the quarter of approximately 34% and is a more useful comparative to prior period rates reflected in the schedule above. The effective tax rate was impacted by tax expense recorded related to the remeasurement of deferred tax assets and liabilities as a result of tax reform. Additionally, the tax rate was positively impacted by income earned by foreign companies that is taxed at 0%.
For the Predecessor period October 1, 2017 to November 30, 2017, the Company’s effective tax rate was 37% (for Predecessor periods, references to “the Company” are to its predecessor). The negative impact of the valuation allowance expense of the non-life companies was partially offset by the net impact of positive permanent adjustments, including low income housing tax credits and the dividends received deduction.
For the Predecessor period October 1, 2016 to December 31, 2016 (unaudited), the Company’s effective tax rate was 34%. The effective tax rate was impacted by favorable permanent adjustments, including low income housing tax credits.
For the Predecessor year ended September 30, 2017, the Company’s effective tax rate was 33%. The effective tax rate was positively impacted by a valuation allowance release within the non-life companies and favorable permanent adjustments, including low income housing tax credits and the dividends received deduction.
For the Predecessor year ended September 30, 2016, the Company’s effective tax rate was 37%. The negative impact of the valuation allowance expense of the non-life companies was partially offset by the net impact of positive permanent adjustments, including low income housing tax credits and the dividends received deduction. For the Predecessor year ended September 30, 2016, the remaining unutilized life company capital loss carryforwards deferred tax assets expired and were written off, resulting in $73 in deferred income tax expense which was entirely offset by a valuation allowance release of the same amount.
For the Predecessor year ended September 30, 2015, the Company’s effective tax rate was 35%. The impact of valuation allowance expense was offset by the net impact of positive permanent adjustments.

For the Successor period from December 1, 2017 to December 31, 2017, the Company recorded a net valuation allowance release of $13 primarily related to the DTA write off of the NOL on FSR that would not be able to be utilized as a result of the Section 382 limitation created by the merger with CF Corporation. For the Predecessor period from October 1, 2017 to November 30, 2017, the Company recorded a net valuation allowance expense of $2 related to the Company’s non-life companies. For the Predecessor period from October 1, 2016 to December 31, 2016 (unaudited), the Company recorded a net valuation allowance release of $0.
For the Predecessor year ended September 30, 2017, the Company recorded a net valuation allowance release of $1 related to Company's non-life companies. For the Predecessor year ended September 30, 2016, the Company recorded net valuation allowance release of $69 (comprised of a full year valuation allowance release of $74 related to the life insurance companies, offset by a net increase to valuation allowance of $5 related to the Company's non-life companies). During the Predecessor year ended September 30, 2016, the remaining unutilized life company capital loss carryforward deferred tax assets expired and were written off, resulting in $73 in deferred income tax expense. Most of the valuation allowance release during the year was attributable to this write-off. For the Predecessor year ended September 30, 2015, the Company recorded net valuation allowance expense of $1 (comprised of a full year valuation allowance release of $4 related to the life insurance companies, offset by a net increase to valuation allowance of $5 related to the Company's non-life companies).
The Company records tax expense (benefit) that results from a change in other comprehensive income (“OCI”) directly to OCI. Tax expense recorded directly to OCI includes deferred tax expense arising from a change in unrealized gain (loss) on available-for-sale securities and the tax-effects of other income items that are recorded to OCI. Changes in valuation allowance that are solely due to a deferred tax liability related to the unrealized gain on an available-for-sale security are allocated to other comprehensive income in accordance with ASC 740-10-45-20, "Income Taxes: Other Presentation Matters".
The Company recorded the following deferred tax expense to OCI:
 
 
 
 
 
 
 
 
 
Year ended September 30,
 
 
Period from December 1 to December 31, 2017
 
 
Period from October 1 to November 30, 2017
 
Period from October 1 to December 31, 2016 (Unaudited)
 
September 30, 2017
 
September 30, 2016
 
September 30, 2015
 
 
Successor
 
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
 
Predecessor
Deferred Tax Expense in OCI
 
$
(19
)
 
 
$
(7
)
 
$
154

 
$
(56
)
 
$
(187
)
 
$
140


An excess tax benefit is the realized tax benefit related to the amount of deductible compensation cost reported on an employer’s tax return for equity instruments in excess of the compensation cost for those instruments recognized for financial reporting purposes. The Company adopted ASU-2016-09 (Stock Compensation) effective October 1, 2015. ASU-2016-09 eliminates the requirement for excess tax benefits to be recorded as additional paid-in capital when realized. For the Successor period from December 1, 2017 to December 31, 2017, the Predecessor period from October 1, 2017 to November 30, 2017, the Predecessor period from October 1, 2016 to December 31, 2016 (unaudited), and the Predecessor years ended September 30, 2017, 2016, and 2015, the Company recorded all excess tax benefits in the Consolidated Statements of Operations as a component of current income tax expense in accordance with the newly adopted guidance.
The following table is a summary of the components of deferred income tax assets and liabilities:
 
 
December 31, 2017
 
 
September 30, 2017
 
September 30, 2016
 
 
Successor
 
 
Predecessor
 
Predecessor
Deferred tax assets:
 
 
 
 
 
 
 
Net operating loss, credit and capital loss carryforwards
 
$
7

 
 
$
91

 
$
93

Insurance reserves and claim related adjustments
 
685

 
 
601

 
511

Investments
 
—

 
 
—

 
—

Deferred acquisition costs
 
2

 
 
—

 
—

Other
 
38

 
 
75

 
44

Valuation allowance
 
(24
)
 
 
(49
)
 
(51
)
Total deferred tax assets
 
$
708

 
 
$
718

 
$
597

 
 
 
 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
 
 
 
Value of business acquired
 
$
(172
)
 
 
$
—

 
$
(7
)
Investments
 
(265
)
 
 
(456
)
 
(312
)
Deferred acquisition costs
 
—

 
 
(316
)
 
(277
)
Transition reserve on new reserve method
 
(84
)
 
 
—

 
—

Other
 
(11
)
 
 
(8
)
 
(11
)
Total deferred tax liabilities
 
$
(532
)
 
 
$
(780
)
 
$
(607
)
 
 
 
 
 
 
 
 
Net deferred tax assets and (liabilities)
 
$
176

 
 
$
(62
)
 
$
(10
)


For the Successor period from December 1, 2017 to December 31, 2017 (Successor), the Company’s valuation allowance of $24 consisted of a valuation allowance of $0 on US life company deferred tax assets, a full valuation allowance on the Company’s non-life insurance net deferred taxes, and a full valuation allowance on Front Street Re’s (Cayman) net deferred taxes.

At September 30, 2017 (Predecessor), the Company’s valuation allowance of $49 consisted of a valuation allowance of $0 on life company deferred tax assets and a full valuation allowance of $49 on the Company's non−life insurance net deferred taxes. At September 30, 2016 (Predecessor), the Company’s valuation allowance of $51 consisted of a valuation allowance of $0 on life company deferred tax assets and a full valuation allowance of $51 on the Company's non−life insurance net deferred taxes. The life company's remaining capital loss carryforwards expired on December 31, 2015, and the capital loss carryforward deferred tax assets and related valuation allowance were written off at that time.
In the Successor and Predecessor periods, the Company maintained a valuation allowance against the deferred tax assets of its non-life insurance company subsidiaries. The non-life insurance company subsidiaries had a history of losses and insufficient sources of future income necessary to recognize any portion of their deferred tax assets. All other deferred tax assets were more likely than not to be realized based on expectations regarding future taxable income and considering all other available evidence, both positive and negative.    
During the Predecessor periods the Company had net operating losses (“NOLs”), capital losses and other tax credit carryforwards, which no longer exist as of December 31, 2017 as a result of the acquisition and Section 338(h)(10) election.
The U.S. Federal income tax returns of the Company for years prior to 2014 are no longer subject to examination by the taxing authorities. With limited exception, the Company is no longer subject to state and local income tax audits for years prior to 2013. The Company does not have any unrecognized tax benefits (“UTBs”) at December 31, 2017 (Successor), September 30, 2017 (Predecessor) and 2016 (Predecessor). In the event the Company has UTBs, interest and penalties related to uncertain tax positions would be recorded as part of income tax expense in the financial statements. The Company regularly assesses the likelihood of additional tax assessments by jurisdiction and, if necessary, adjusts its tax reserves based on new information or developments.