TAXATION

12 Months Ended

Dec. 31, 2011

Income Tax Disclosure [Text Block]

22. Taxation

          Following completion of the redomestication of the Company, with effect from July 1, 2010, the Company is subject to income and capital gains tax in Ireland under applicable Irish law. Prior to July 1, 2010, the Company was resident for tax purposes in the Cayman Islands and in accordance with Cayman law, was not subject to any taxes in the Cayman Islands on either income or capital gains.

          The Company’s Bermuda subsidiaries are not subject to any income, withholding or capital gains taxes under current Bermuda law. In the event that there is a change such that these taxes are imposed, the Bermuda subsidiaries would be exempted from any such tax until March 2035 pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966, and the Exempted Undertakings Tax Protection Amendment Act of 2011.

          The Company’s U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the IRS Code and Regulations thereunder.

          The Company has operations in subsidiary and branch form in various other jurisdictions around the world, including but not limited to the U.K., Switzerland, Ireland, Germany, France, Canada, Brazil and various other countries in Latin America and Asia that are subject to relevant taxes in those jurisdictions.

          Deferred income taxes have not been accrued with respect to certain undistributed earnings of foreign subsidiaries. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding taxation in the state of the paying entity. During 2010, the Company revised its capital strategy such that it is no longer able to positively assert that all earnings arising in the U.S. will be permanently reinvested in that jurisdiction and accordingly, a provision for withholding taxes arising in respect of U.S. earnings has been made. No withholding taxes are accrued with respect to the earnings of the Company’s subsidiaries arising outside the U.S., as it is the intention that all such earnings will remain reinvested indefinitely.

          The Company adopted the provisions of the final authoritative guidance on accounting for uncertainty in income taxes, on January 1, 2007. The Company did not recognize any liabilities for unrecognized tax benefits as a result of its implementation and has not recognized any liabilities in subsequent accounting periods. The Company’s policy is to recognize any interest accrued related to unrecognized tax benefits as a component of interest expense and penalties in the tax charge. At December 31, 2011 and 2010, the Company has no accrued liabilities relating to interest and penalties.

          The Company has open examinations by tax authorities in Ireland (2006 to 2009), the U.K. (2007 to 2010), the U.S. (2006 to 2009), France (2008 and 2009), Germany (2006 to 2009), India (2008 to 2010), Canada (2007 to 2010) and Singapore (2008 and 2009). The Company believes that these examinations will be concluded within the next 24 months; however, it is not currently possible to estimate the outcome of these examinations.

          The Company has open tax years that are potentially subject to examinations by local tax authorities, in the following major tax jurisdictions: the U.S., 2010 and 2011; the U.K., 2009 to 2011; Switzerland, 2007 to 2011; Ireland, 2005 to 2011; Germany, 2010 and 2011; and France, 2007 to 2011.

          The income tax provisions for the years ended December 31, 2011, 2010 and 2009 are as follows:

Year Ended December 31
(U.S. dollars in thousands)	2011			2010		2009
Current expense:
U.S	$	9,138		$	40,413	$	29,112
Non U.S		87,220			35,113		90,079
Total current expense	$	96,358		$	75,526	$	119,191
Deferred expense (benefit):
U.S	$	(5,550	)	$	18,225	$	(4,604	)
Non U.S		(31,101	)		68,986		5,720
Total deferred expense (benefit)	$	(36,651	)	$	87,211	$	1,116
Total Tax Expense	$	59,707		$	162,737	$	120,307

          The weighted average expected tax provision has been calculated using the pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. The applicable statutory tax rates of the most significant jurisdictions contributing to the overall taxation of the Company are: Ireland 12.5% and 25%, Bermuda 0%, the U.S. 35%, the U.K. 26.5%, Switzerland 7.83% and 21.2%, Germany 15%, and France 34.43%. Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the years ended December 31, 2011, 2010 and 2009 is provided below:

(U.S. dollars in thousands)	2011			2010			2009
Expected tax provision at weighted average rate	$	(66,493	)	$	80,225		$	129,136
Permanent differences:
Non-taxable investment income (loss)		(14,246	)		(10,176	)		(5,715	)
Non-taxable income (loss)		(3,265	)		3,838			(91,968	)
Prior year adjustments		(9,206	)		16,594			(15,360	)
State, local and foreign taxes		42,581			44,122			59,835
Valuation allowance		24,990			1,346			11,439
Allocated investment income		21,483			12,386			20,045
Stock options		5,840			3,323			6,222
Non-deductible expenses		12,901			11,079			6,673
Non-deductible goodwill impairment		57,069			—			—
Non-taxable reserve release		(11,947	)		—			—
Total tax expense	$	59,707		$	162,737		$	120,307

          Taxes during 2011 varied significantly relative to the weighted average effective tax rate due to a combination of three key items; i) the impairment of goodwill which represented a loss to the company but was not deductible in certain relevant jurisdictions, ii) the distribution of fourth quarter 2011 catastrophe losses between jurisdictions with the majority ultimately impacting low tax jurisdictions, and iii) the valuation allowances recorded against the tax impact of certain realized investment losses.

          Significant components of the Company’s deferred tax assets and liabilities at December 31, 2011 and 2010 were as follows:

(U.S. dollars in thousands)	2011		2010
Deferred Tax Asset:
Net unpaid loss reserve discount	$	108,981	$	105,313
Net unearned premiums		62,162		57,289
Compensation liabilities		35,830		42,347
Net operating losses		263,600		282,202
Investment adjustments		12,861		8,941
Pension		9,753		6,290
Bad debt reserve		10,829		10,502
Amortizable goodwill		10,732		—
Net unrealized depreciation on investments		320		6,004
Stock options		13,842		15,052
Depreciation		4,072		7,131
Net realized capital losses		119,307		117,358
Deferred intercompany capital losses		117,892		142,300
Other		7,573		9,527
Deferred tax asset, gross of valuation allowance	$	777,754	$	810,256
Valuation allowance		497,236		514,467
Deferred tax asset, net of valuation allowance	$	280,518	$	295,789
Deferred Tax Liability:
Net unrealized appreciation on investments	$	96,797	$	52,972
Deferred acquisition costs		20,103		19,601
Currency translation adjustments		8,062		11,115
Regulatory reserves		125,249		149,650
Untaxed Lloyd’s result		8,340		16,028
Other		4,786		8,565
Deferred tax liability	$	263,337	$	257,931
Net Deferred Tax Asset	$	17,181	$	37,858

          The deferred tax asset and liability balances presented above represent the gross deferred tax asset and liability balances across each tax jurisdiction. The deferred tax asset balances of $115.6 million and $143.5 million at December 31, 2011 and 2010, respectively, and deferred tax liability balances of $98.4 million and $105.7 million at December 31, 2011 and 2010, respectively, as disclosed on the consolidated balance sheets include netting of certain deferred tax assets and liabilities within a tax jurisdiction to the extent such netting is consistent with the regulations of the tax authorities in those jurisdictions.

          The valuation allowance at December 31, 2011 and December 31, 2010 of $497.2 million and $514.5 million, respectively, related primarily to net operating loss carry forwards in Switzerland, net operating loss and capital loss carry forwards in Ireland, and net unrealized capital losses and realized capital loss carry forwards in the U.S. that may not be realized within a reasonable period. At December 31, 2011, the Company had realized capital loss carry forwards of approximately $340.8 million in the U.S. ($119.3 million tax effected). The 5 year limitation for the utilization of realized capital losses applies to this balance. Losses of $35.2 million will expire at the end of 2012 with another $305.6 million of realized capital losses expiring in future years through 2016. A valuation allowance ($119.3 million) has been established in respect of all of these realized capital losses. At December 31, 2011, the Company also had $336.8 million of losses arising from the sale of investments to a group company ($117.9 million tax effected), against which a valuation allowance of $117.9 million has been established. These losses cannot be utilized to offset any future U.S. realized capital gains, and will not begin to expire, until the underlying assets have been sold to unrelated parties.

          At December 31, 2011, net operating loss carry forwards in the U.K. were approximately $96.5 million and have no expiration. A valuation allowance ($2.1 million) has been established in respect of $8.1 million of these U.K. losses given management’s expectation that losses in specific U.K. entities will not be utilized in the future. At December 31, 2011, net operating loss carry forwards in Switzerland were approximately $881.2 million, of which $803.3 million will expire at the end of 2012 with the balance expiring in future years through 2018. A valuation allowance ($183.8 million) has been established in respect of all of the net operating losses which will expire in 2012 and in respect of a further $74.3 million of other Swiss losses. At December 31, 2011, net operating loss carry forwards in Ireland were approximately $189.5 million, with a further $158.0 million of capital losses carried forward. Although these Irish losses may be carried forward indefinitely, a valuation allowance ($53.1 million) has been established in respect of these Irish losses due to the uncertainty surrounding any future loss utilization.

          Management has reviewed historical taxable income and future taxable income projections for its U.K. group and has determined that in its judgment substantially all of the U.K. net operating losses ($88.4 million) will more likely than not be realized as reductions of future taxable income within a reasonable period. Management will continue to evaluate income generated in future periods by the U.K. group in determining the reasonableness of its position. If management determines that future income generated by the U.K. group is insufficient to cause the realization of the net operating losses within a reasonable period, a valuation allowance would be required for the U.K. portion of the net deferred tax asset balance related to net operating losses in the amount of $22.2 million.

          Management believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized.

          Shareholders’ equity at December 31, 2011 and 2010 reflected tax benefits of nil and nil, respectively, related to compensation expense deductions for stock options exercised by the Company’s U.S. subsidiaries.