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Income Taxes
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

5.

Income Taxes

As of September 30, 2018, the statutory income tax rates of the countries where the Company conducts business are 21% in the United States, 0% in Bermuda, 0% in the Cayman Islands, 26.01% for companies with a registered office in Luxembourg City, 0.25% to 2.5% in Barbados, and 25% on non-trading income, 33% on capital gains and 12.5% on trading income in the Republic of Ireland.  The statutory income tax rate of each country is applied against the expected annual taxable income of the Company in each country to estimate the annual income tax expense.  Generally, during interim periods, the Company will divide total estimated annual income tax expense by total estimated annual pre-tax income to determine the expected annual income tax rate used to compute the income tax provision.  The expected annual income tax rate is then applied against interim pre-tax income, excluding net realized gains and losses and limited partnership distributions, and that amount is then added to the actual income taxes on net realized gains and losses, discrete items and limited partnership distributions.  However, when there is significant volatility in the expected effective tax rate, the Company records its actual income tax provision in lieu of the estimated effective income tax rate.

The Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries for the quarters and nine months ended September 30, 2018 and 2017 were as follows:

 

Quarter Ended September 30, 2018

(Dollars in thousands)

 

Non-U.S.

Subsidiaries

 

 

U.S.

Subsidiaries

 

 

Eliminations

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

9,361

 

 

$

126,245

 

 

$

-

 

 

$

135,606

 

Net premiums written

 

$

9,356

 

 

$

106,877

 

 

$

-

 

 

$

116,233

 

Net premiums earned

 

$

30,220

 

 

$

90,308

 

 

$

-

 

 

$

120,528

 

Net investment income

 

 

12,013

 

 

 

7,204

 

 

 

(7,467

)

 

 

11,750

 

Net realized investment gains (losses)

 

 

(273

)

 

 

5,592

 

 

 

-

 

 

 

5,319

 

Other income (loss)

 

 

(82

)

 

 

493

 

 

 

-

 

 

 

411

 

Total revenues

 

 

41,878

 

 

 

103,597

 

 

 

(7,467

)

 

 

138,008

 

Losses and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses and loss adjustment expenses

 

 

14,877

 

 

 

65,616

 

 

 

-

 

 

 

80,493

 

Acquisition costs and other underwriting expenses

 

 

13,188

 

 

 

35,492

 

 

 

-

 

 

 

48,680

 

Corporate and other operating expenses

 

 

1,237

 

 

 

2,238

 

 

 

-

 

 

 

3,475

 

Interest expense

 

 

356

 

 

 

12,035

 

 

 

(7,467

)

 

 

4,924

 

Income (loss) before income taxes

 

$

12,220

 

 

$

(11,784

)

 

$

-

 

 

$

436

 

 

Quarter Ended September 30, 2017

(Dollars in thousands)

 

Non-U.S.

Subsidiaries

 

 

U.S.

Subsidiaries

 

 

Eliminations

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

50,812

 

 

$

114,076

 

 

$

(38,834

)

 

$

126,054

 

Net premiums written

 

$

50,800

 

 

$

58,245

 

 

$

-

 

 

$

109,045

 

Net premiums earned

 

$

50,392

 

 

$

58,227

 

 

$

-

 

 

$

108,619

 

Net investment income

 

 

14,631

 

 

 

6,584

 

 

 

(11,081

)

 

 

10,134

 

Net realized investment losses

 

 

(150

)

 

 

(813

)

 

 

-

 

 

 

(963

)

Other income

 

 

40

 

 

 

2,254

 

 

 

-

 

 

 

2,294

 

Total revenues

 

 

64,913

 

 

 

66,252

 

 

 

(11,081

)

 

 

120,084

 

Losses and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses and loss adjustment expenses

 

 

31,044

 

 

 

51,351

 

 

 

-

 

 

 

82,395

 

Acquisition costs and other underwriting expenses

 

 

21,922

 

 

 

23,080

 

 

 

-

 

 

 

45,002

 

Corporate and other operating expenses

 

 

1,807

 

 

 

2,823

 

 

 

-

 

 

 

4,630

 

Interest expense

 

 

4,679

 

 

 

11,238

 

 

 

(11,081

)

 

 

4,836

 

Income (loss) before income taxes

 

$

5,461

 

 

$

(22,240

)

 

$

-

 

 

$

(16,779

)

 

Nine Months Ended September 30, 2018

(Dollars in thousands)

 

Non-U.S.

Subsidiaries

 

 

U.S.

Subsidiaries

 

 

Eliminations

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

39,976

 

 

$

378,694

 

 

$

-

 

 

$

418,670

 

Net premiums written

 

$

39,970

 

 

$

320,587

 

 

$

-

 

 

$

360,557

 

Net premiums earned

 

$

115,353

 

 

$

227,094

 

 

$

-

 

 

$

342,447

 

Net investment income

 

 

39,527

 

 

 

21,428

 

 

 

(26,847

)

 

 

34,108

 

Net realized investment gains (losses)

 

 

(437

)

 

 

8,270

 

 

 

-

 

 

 

7,833

 

Other income (loss)

 

 

(179

)

 

 

1,468

 

 

 

-

 

 

 

1,289

 

Total revenues

 

 

154,264

 

 

 

258,260

 

 

 

(26,847

)

 

 

385,677

 

Losses and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses and loss adjustment expenses

 

 

48,210

 

 

 

147,216

 

 

 

-

 

 

 

195,426

 

Acquisition costs and other underwriting expenses

 

 

50,475

 

 

 

90,721

 

 

 

-

 

 

 

141,196

 

Corporate and other operating expenses

 

 

10,550

 

 

 

13,103

 

 

 

-

 

 

 

23,653

 

Interest expense

 

 

6,749

 

 

 

34,823

 

 

 

(26,847

)

 

 

14,725

 

Income (loss) before income taxes

 

$

38,280

 

 

$

(27,603

)

 

$

-

 

 

$

10,677

 

 

Nine Months Ended September 30, 2017

(Dollars in thousands)

 

Non-U.S.

Subsidiaries

 

 

U.S.

Subsidiaries

 

 

Eliminations

 

 

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

164,975

 

 

$

348,331

 

 

$

(119,607

)

 

$

393,699

 

Net premiums written

 

$

164,947

 

 

$

179,401

 

 

$

-

 

 

$

344,348

 

Net premiums earned

 

$

150,384

 

 

$

178,434

 

 

$

-

 

 

$

328,818

 

Net investment income

 

 

41,519

 

 

 

16,786

 

 

 

(30,687

)

 

 

27,618

 

Net realized investment gains (losses)

 

 

87

 

 

 

(937

)

 

 

-

 

 

 

(850

)

Other income

 

 

213

 

 

 

5,231

 

 

 

-

 

 

 

5,444

 

Total revenues

 

 

192,203

 

 

 

199,514

 

 

 

(30,687

)

 

 

361,030

 

Losses and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses and loss adjustment expenses

 

 

74,780

 

 

 

127,876

 

 

 

-

 

 

 

202,656

 

Acquisition costs and other underwriting expenses

 

 

65,544

 

 

 

69,466

 

 

 

-

 

 

 

135,010

 

Corporate and other operating expenses

 

 

4,137

 

 

 

6,908

 

 

 

-

 

 

 

11,045

 

Interest expense

 

 

11,653

 

 

 

31,099

 

 

 

(30,687

)

 

 

12,065

 

Income (loss) before income taxes

 

$

36,089

 

 

$

(35,835

)

 

$

-

 

 

$

254

 

 

For the quarter and nine months ended September 30, 2017, the Company’s income before income taxes from its non-U.S. subsidiaries and U.S. subsidiaries, as reported in the table above, includes the results of the quota share agreement between Global Indemnity Reinsurance and the Insurance Operations.  This quota share agreement was cancelled on a runoff basis effective January 1, 2018.

The following table summarizes the components of income tax benefit:

 

 

 

Quarters Ended September 30,

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Current income tax expense (benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

$

62

 

 

$

107

 

 

$

326

 

 

$

290

 

U.S. Federal

 

 

(732

)

 

 

128

 

 

 

-

 

 

 

128

 

Total current income tax expense (benefit)

 

 

(670

)

 

 

235

 

 

 

326

 

 

 

418

 

Deferred income tax benefit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Federal

 

 

(2,622

)

 

 

(8,090

)

 

 

(6,270

)

 

 

(13,611

)

Total deferred income tax benefit

 

 

(2,622

)

 

 

(8,090

)

 

 

(6,270

)

 

 

(13,611

)

Total income tax benefit

 

$

(3,292

)

 

$

(7,855

)

 

$

(5,944

)

 

$

(13,193

)

 

The weighted average expected tax provision has been calculated using income before income taxes in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate.  

The following table summarizes the differences between the tax provision for financial statement purposes and the expected tax provision at the weighted average tax rate:

 

 

 

Quarters Ended September 30,

 

 

 

2018

 

 

2017

 

(Dollars in thousands)

 

Amount

 

 

% of Pre-

Tax Income

 

 

Amount

 

 

% of Pre-

Tax Income

 

Expected tax provision at weighted average rate

 

$

(2,494

)

 

 

(571.9

%)

 

$

(7,678

)

 

 

(45.8

%)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt interest

 

 

-

 

 

 

-

 

 

 

(40

)

 

 

(0.2

)

Dividend exclusion

 

 

(68

)

 

 

(15.6

)

 

 

(144

)

 

 

(0.9

)

Base Erosion Anti-Abuse Tax

 

 

(731

)

 

 

(167.7

)

 

 

-

 

 

 

-

 

Other

 

 

1

 

 

 

0.2

 

 

 

7

 

 

 

0.1

 

Actual tax on continuing operations

 

$

(3,292

)

 

 

(755.0

%)

 

$

(7,855

)

 

 

(46.8

%)

 

The effective income tax benefit for the quarter ended September 30, 2018 was $3,292, compared with an effective income tax benefit of $7,855 for the quarter ended September 30, 2017. The decrease in the effective income tax benefit in the quarter ended September 30, 2018 compared to the quarter ended September 30, 2017 is due to less pretax losses in the U.S. and the change in the U.S. statutory tax rate from 35% to 21% effective January 1, 2018 per the passage of the Tax Cuts and Jobs Act (“TCJA”).

.  

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

(Dollars in thousands)

 

Amount

 

 

% of Pre-

Tax Income

 

 

Amount

 

 

% of Pre-

Tax Income

 

Expected tax provision at weighted average rate

 

$

(5,527

)

 

 

(51.8

%)

 

$

(12,252

)

 

 

(4,823.6

%)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt interest

 

 

(5

)

 

-

 

 

 

(191

)

 

 

(75.2

)

Dividend exclusion

 

 

(203

)

 

 

(1.9

)

 

 

(410

)

 

 

(161.4

)

Other

 

 

(209

)

 

 

(2.0

)

 

 

(340

)

 

 

(133.9

)

Actual tax on continuing operations

 

$

(5,944

)

 

 

(55.7

%)

 

$

(13,193

)

 

 

(5,194.1

%)

 

The effective income tax benefit for the nine months ended September 30, 2018 was $5,944, compared with an effective income tax benefit of $13,193 for the nine months ended September 30, 2017. The decrease in the effective income tax benefit in the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 is due to the change in the U.S. statutory tax rate from 35% to 21% effective January 1, 2018 upon the passage of the TCJA.  Taxes were computed using a discrete period computation because a reliable estimate of an effective tax rate could not be made.  

Financial results for the quarter and nine months ended September 30, 2018 reflect provisional tax estimates related to the TCJA. These provisional estimates are based on the Company’s initial analysis and current interpretation of the legislation. Given the complexity of the legislation, anticipated guidance from the U.S. Treasury, and the potential for additional guidance from the Securities and Exchange Commission (“SEC”) or the Financial Accounting Standards Board (“FASB”), these estimates may be adjusted during 2018. During the quarter and nine months ended September 30, 2018, there were no adjustments to provisional tax estimates recorded in prior periods.

The Company had an alternative minimum tax (“AMT”) credit carryforward of $11.0 million as of December 31, 2017.  The TCJA repealed the corporate AMT.  The AMT credit carryforward of $11.0 million was reclassed to federal income taxes receivable at December 31, 2017 and will be fully refunded by the end of 2021.  The Company has a net operating loss (“NOL”) carryforward of $21.9 million as of September 30, 2018, which begins to expire in 2035 based on when the original NOL was generated.  The Company’s NOL carryforward as of December 31, 2017 was $16.3 million. The Company has a Section 163(j) (“163(j)”) carryforward of $10.8 million and $7.9 million as of September 30, 2018 and December 31, 2017, respectively, which can be carried forward indefinitely. The 163(j) carryforward is for disqualified interest paid or accrued.