14. Income Taxes

We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Supervisor of Insurance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 2011, which exempts us from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, at least until the year 2035.

We do not consider ourselves to be engaged in a trade or business in the United States or the United Kingdom and, accordingly, do not expect to be subject to direct United States or United Kingdom income taxation.

We have subsidiaries based in the United Kingdom that are subject to the tax laws of that country. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Six of the United Kingdom subsidiaries are deemed to be engaged in business in the United States, and therefore, are subject to United States corporate tax in respect of a proportion of their United States underwriting business only. Relief is available against the United Kingdom tax liabilities in respect of overseas taxes paid that arise from the underwriting business. Corporate income tax losses incurred in the United Kingdom can be carried forward, for application against future income, indefinitely. Our United Kingdom subsidiaries file separate United Kingdom income tax returns.

We have subsidiaries based in the United States that are subject to United States tax laws. Under current law, these subsidiaries are taxed at the applicable corporate tax rates. Our United States subsidiaries file a consolidated United States federal income tax return.

We also have operations in Belgium, Switzerland, Brazil, France, Malta, Spain and Ireland, which also are subject to income taxes imposed by the jurisdiction in which they operate. We have operations in the United Arab Emirates, which are not subject to income tax under the laws of that country.

Our income tax provision includes the following components:


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
(in millions)	2014		2013		2014			2013
Current tax provision	$	2.9	$	8.1	$	4.3		$	9.9
Deferred tax provision related to:
Future tax deductions		3.0		2.0		33.2			4.4
Valuation allowance change		0.2		1.0		(28.9	)		1.6

Income tax provision	$	6.1	$	11.1	$	8.6		$	15.9

Our expected income tax provision computed on pre-tax income (loss) at the weighted average tax rate has been calculated as the sum of the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. For the three and six months ended June 30, 2014 and 2013, pre-tax income (loss) attributable to our operations and the operations’ effective tax rates were as follows:


	For the Three Months Ended June 30,
	2014						2013
	Pre-tax			Effective Tax			Pre-tax			Effective Tax
(in millions)	Income (Loss)			Rate			Income (Loss)			Rate
Bermuda	$	25.0			0.0	%	$	3.9			0.0	%
United States		20.9			24.1	%		31.5			18.3	%
United Kingdom		(5.4	)		-19.4	%		10.7			25.5	%
Belgium		0.0	⁽¹⁾		64.2	%		0.0	⁽¹⁾		-67.0	%
Brazil		5.1			0.0	%		(2.9	)		0.0	%
Dubai		(0.1	)		0.0	%		0.0			0.0	%
Malta		(0.6	)		0.0	%		(0.4	)		0.0	%
Switzerland		(0.2	)		18.2	%		0.0	⁽¹⁾		24.5	%

Pre-tax income	$	44.7					$	42.8

⁽¹⁾	Pre-tax income for the respective period was less than $0.1 million.


	For the Six Months Ended June 30,
	2014						2013
	Pre-tax			Effective Tax			Pre-tax			Effective Tax
(in millions)	Income (Loss)			Rate			Income (Loss)			Rate
Bermuda	$	46.9			0.0	%	$	20.0			0.0	%
United States		35.7			22.7	%		49.0			23.7	%
United Kingdom		1.9			25.4	%		16.7			25.8	%
Belgium		0.0	⁽²⁾		43.3	%		0.0	⁽²⁾		-35.3	%
Brazil		5.1			0.0	%		(4.7	)		0.0	%
Dubai		(1.0	)		0.0	%		0.0			0.0	%
Malta		(1.0	)		0.0	%		(0.7	)		0.0	%
Switzerland		(0.2	)		21.0	%		0.0	⁽²⁾		19.6	%

Pre-tax income	$	87.4					$	80.3

⁽²⁾	Pre-tax income for the respective period was less than $0.1 million.

A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate is as follows:


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(in millions)	2014			2013			2014			2013
Income tax provision at expected rate	$	9.8		$	12.3		$	14.5		$	19.0
Tax effect of:
Tax-exempt interest		(1.1	)		(1.4	)		(2.3	)		(2.8	)
Dividends received deduction		(0.6	)		(0.5	)		(1.2	)		(1.1	)
Valuation allowance change		0.2			1.0			(28.9	)		1.6
Other permanent adjustments, net		(1.0	)		0.0			(0.9	)		(0.9	)
Adjustment for annualized rate—United States		(0.6	)		(0.8	)		0.2			(0.4	)
Adjustment for annualized rate—Foreign		(2.0	)		0.0			(2.0	)		0.0
Prior period adjustment to deferred		(1.0	)		0.0			(1.0	)		0.0
United States state tax benefit		(0.1	)		(0.1	)		0.0			(0.3	)
PXRE Reinsurance capital loss carryforward		0.0			0.0			29.8			0.0
Foreign exchange adjustments		2.3			0.2			0.1			0.4
Foreign withholding taxes		0.2			0.4			0.3			0.4

Income tax provision	$	6.1		$	11.1		$	8.6		$	15.9

Income tax provision—Foreign	$	1.0		$	2.7		$	0.4		$	4.3
Income tax provision—United States Federal		5.0			8.2			7.8			11.7
Income tax (benefit) provision—United States State		(0.1	)		(0.2	)		0.1			(0.5	)
Foreign withholding tax—United States		0.2			0.4			0.3			0.4

Income tax provision	$	6.1		$	11.1		$	8.6		$	15.9

We recognize accrued interest and penalties if any, within our global operations in “Interest expense” and “Underwriting, acquisition and insurance expenses,” respectively, in our Consolidated Statements of Income.

Our net deferred tax assets (liabilities) are supported by taxes paid in previous periods, reversal of the taxable temporary differences and recognition of future income. Management regularly evaluates the recoverability of the deferred tax assets and makes any necessary adjustments to them based upon any changes in management’s expectations of future taxable income. Realization of deferred tax assets is dependent upon our generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in the carryback period, which is generally two years for net operating losses and three years for capital losses for our United States operations. At June 30, 2014, we had a total net deferred tax liability of $18.9 million prior to any valuation allowance. Management has concluded that a valuation allowance is required for a portion of the tax effected net operating loss carryforward of $18.3 million from PXRE Corporation and for the tax effected net operating loss carryforward of $1.0 million from ARIS. The capital loss carryforward generated from the sale of PXRE Reinsurance Company expired on December 31, 2013. Of the PXRE Corporation loss carryforwards, $16.8 million will expire if not used by December 31, 2025 and $1.5 million will expire if not used by December 31, 2027. Of the ARIS loss carryforward, $0.2 million will expire if not used by December 31, 2027, $0.4 million will expire if not used by December 31, 2028 and $0.4 million will expire if not used by December 31, 2029. The valuation allowances have been established as Internal Revenue Code Section 382 limits the application of net operating loss and net capital loss carryforwards following an ownership change. The loss carryforwards available per year are $2.8 million as required by Internal Revenue Code Section 382. Further, due to cumulative losses since inception, management has concluded that a valuation allowance is required for the full amount of the tax effected net operating losses generated by our Brazil and Malta entities. Accordingly, a valuation allowance of $27.4 million is required as of June 30, 2014 of which $16.4 million relates to the PXRE Corporation and ARIS loss carryforwards, $9.0 million relates to Brazil operations and $2.0 million relates to Malta operations. For the six months ended June 30, 2014, the valuation allowance was reduced by $29.8 million pertaining to the expiration of the PXRE Reinsurance Company capital loss carryforward, reduced by $0.4 million pertaining to the PXRE Corporation and ARIS loss carryforwards, increased by $1.0 million pertaining to the Brazil operations and increased by $0.3 million pertaining to the Malta operations.

We had no material unrecognized tax benefits as of June 30, 2014 and 2013. Our United States subsidiaries are no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2010. Our United Kingdom subsidiaries are no longer subject to United Kingdom income tax examinations by Her Majesty’s Revenue and Customs for years before 2011.