Income taxes

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

Income taxes

14. Income taxes

The Company is subject to income tax expense or benefit based upon pre-tax income or loss reported in the consolidated statements of income (loss) and the provisions of currently enacted tax laws. The Company and its Bermuda-domiciled subsidiaries are incorporated under the laws of Bermuda and are subject to Bermuda law with respect to taxation. Under current Bermuda law, the Company and its Bermuda-domiciled subsidiaries are not subject to any income or capital gains taxes in Bermuda. In recent months, the Government of Bermuda announced that it is expected to enact, before year end 2023, a 15% corporate income tax that will be effective for tax years beginning on or after January 1, 2025 (the “Proposed Bermudian CIT”). The Government of Bermuda opened a second public comment period through October 30, 2023, and is expected to release full draft legislation on November 11, 2023 with a third public comment period ending on November 24, 2023, with a view to enactment on or before December 31, 2023. The Company will be required to record the financial statement impact, if any, of the new legislation for the period of enactment. The Company is closely analyzing the Proposed Bermudian CIT and the related potential tax and financial statement consequences. It is possible that the net impact on deferred taxes and the effective tax rate may be material in light of specific technical provisions proposed in the October 2023 announcement. The Proposed Bermudian CIT, if implemented, may subject us to additional income taxes, which may adversely affect our results of operations.

The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The jurisdictions in which the Company's subsidiaries and branches are subject to tax are Belgium, Canada, Germany, Gibraltar, Hong Kong (China), Luxembourg, Singapore, Sweden, Switzerland, the United Kingdom, and the United States.

For the three and nine months ended September 30, 2023, the Company recorded income tax (expense) benefit of $(15.3) million and $(56.6) million, respectively (2022 - $0.9 million and $17.1 million, respectively) on pre-tax income (loss) of $79.1 million and $320.6 million, respectively (2022 - $(92.7) million and $(380.1) million, respectively). The effective tax rates for the three and nine months ended September 30, 2023 were 18.6% and 17.7%, respectively. The difference between the effective tax rate on income (losses) from continuing operations and the Bermuda statutory tax rate of 0.0% is primarily because of income recognized in jurisdictions with higher tax rates than Bermuda, and adjustments pursuant to applicable U.S. GAAP guidance on interim period financial reporting of taxes, which are based on the annual estimated effective tax rate.

In arriving at the estimated annual effective tax rate for the nine months ended September 30, 2023 and 2022, the Company took into consideration all year-to-date income and expense items including the change in unrealized investment gains (losses) and realized investment gains (losses) and such items on a forecasted basis for the remainder of each year. Based on applicable U.S. GAAP guidance, jurisdictions with a projected loss for the full year where no tax benefit can be recognized are excluded from the estimation of the annual effective tax rate.

Uncertain tax positions

Recognition of the benefit of a given tax position is based upon whether a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more likely than not recognition threshold, the Company must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement.

The total reserve for unrecognized tax benefits is $2.3 million as of September 30, 2023, which did not materially change compared to December 31, 2022. If the Company determines in the future that its reserves for unrecognized tax benefits on permanent differences and interest and penalties are not needed, the reversal of $1.6 million of such reserves as of September 30, 2023 would be recorded as an income tax benefit and would impact the effective tax rate. The remaining balance is accrued interest and penalties.