Kestrel Group LtdKG
Kestrel Group Ltd Income Taxes Disclosure
Income Taxes
Bermuda enacted the Corporate Income Tax Act 2023 on December 27, 2023 (the “CIT Act”). Entities subject to tax under the CIT Act are the Bermuda constituent entities of multi-national groups. A multi-national group is defined under the CIT Act as a group with entities in more than one jurisdiction with consolidated revenues of at least €750 million for two of the four previous fiscal years. If Bermuda constituent entities of a multi-national group are subject to tax under the CIT Act, such tax is charged at a rate of 15% of the net income of such constituent entities (as determined in accordance with the CIT Act, including after adjusting for any relevant foreign tax credits applicable to the Bermuda constituent entities). No tax is chargeable under the CIT Act until tax years starting on or after January 1, 2025. The Company's consolidated revenues do not presently meet the minimum amounts for taxation under the CIT Act. Should the Company become eligible to be taxed under the CIT Act, there would be an adverse effect on the Company's results of operation.
Pillar Two addresses the Base Erosion and Profit Shifting ("BEPS") risk of profit shifting to entities in low tax jurisdictions by introducing a global minimum tax and a proposed tax on base eroding payments, which would operate through a denial of a deduction or imposition of source-based taxation (including withholding tax) on certain payments. In December 2021, the OECD issued Pillar Two model rules for domestic implementation of the global minimum tax and shortly thereafter the European Commission proposed a Directive to implement the Pillar Two rules into EU law, which required EU member states to transpose the rules into their national laws by December 31, 2023 with certain measures initially being effective from January 1, 2024. In 2023, a number of jurisdictions (including Sweden and the UK) passed legislation to implement the OECD/G20's model rules into domestic law with effect from January 1, 2024. The proposals, in particular in relation to Pillar Two, are broad in scope and include a number of exemptions which are available to the Company therefore no impact on our results of operation are expected at this time.
The Company has Net Operating Loss carry-forwards ("NOL"), other Deferred Tax Assets (“DTA”) and Deferred Tax Liabilities (“DTL”) that are not presently recognized as a net DTA because a full valuation allowance is currently carried against them. Our U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. Should our U.S. subsidiaries pay a dividend outside the U.S. group, withholding taxes will apply. Tax years 2022 to 2024 are subject to examination in the U.S by the Internal Revenue Service.
The Company has subsidiary operations in various other locations around the world, including Canada, Ireland, Sweden and the United Kingdom, that are subject to relevant taxes in those jurisdictions. These subsidiaries are not under examination but generally remain subject to examination in all applicable jurisdictions for tax years from 2021 through 2025. Deferred income taxes have not been accrued with respect to certain undistributed earnings of foreign subsidiaries as it is the intention that such earnings will remain reinvested or will not be taxable. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding tax in the country of the paying entity. Currently, however, no withholding taxes have been accrued.
There were no unrecognized tax benefits at December 31, 2025 and 2024. Total income (loss) before income taxes and total income tax expense for the years ended December 31, 2025 and 2024 are as follows:
| For the Year Ended December 31, | 2025 | 2024 | ||||||||||||
| Income before income taxes – Domestic (Bermuda) | $ | 46,181 | $ | — | ||||||||||
Income (loss) before income taxes – Foreign (U.S. and others) | 3,425 | (1,261) | ||||||||||||
Total income (loss) before income taxes | $ | 49,606 | $ | (1,261) | ||||||||||
Current tax expense – Domestic (Bermuda) | $ | — | $ | — | ||||||||||
Current tax (benefit) expense – Foreign (U.S. and others) | (152) | 30 | ||||||||||||
Total current tax (benefit) expense | (152) | 30 | ||||||||||||
Deferred tax expense – Domestic (Bermuda) | — | — | ||||||||||||
Deferred tax expense – Foreign (U.S. and others) | 220 | — | ||||||||||||
Total deferred tax expense | 220 | — | ||||||||||||
Total income tax expense | $ | 68 | $ | 30 | ||||||||||
The Company recognized an income tax expense of $68 for the year ended December 31, 2025 compared to an income tax expense of $30 recognized for 2024. The income tax expense for 2025 was incurred on the operating results of our international subsidiaries from continuing operations. These international operations were acquired under the Combination on May 27, 2025.
13. Income Taxes (continued)
The following table is a reconciliation of the actual income tax rate for the years ended December 31, 2025 and 2024 to the amount computed by applying the effective tax rate of 0.0% under Bermuda law to the Company's income (loss) before income taxes. Effective tax rate of 0.0% is used as the Company is out of scope for the CIT Act which imposes a statutory tax rate of 15%.
| For the Year Ended December 31, | 2025 | 2024 | ||||||||||||||||||||||||
Income (loss) before income taxes | $ | 49,606 | $ | (1,261) | ||||||||||||||||||||||
Less: income tax expense | 68 | 30 | ||||||||||||||||||||||||
Net income (loss) | $ | 49,538 | $ | (1,291) | ||||||||||||||||||||||
| Reconciliation of effective tax rate (% of income before income taxes) | Amount | Percentage | Amount | Percentage | ||||||||||||||||||||||
| Bermuda federal statutory tax rate | $ | — | — | % | $ | — | — | % | ||||||||||||||||||
| U.S. taxes at statutory rates - Federal | 695 | 1.4 | % | (265) | 21.0 | % | ||||||||||||||||||||
Valuation allowance in respect of U.S. taxes | (695) | (1.4) | % | 265 | (21.0) | % | ||||||||||||||||||||
Other jurisdictions | 68 | 0.1 | % | 30 | (2.4) | % | ||||||||||||||||||||
Actual tax expense/rate | $ | 68 | 0.1 | % | $ | 30 | (2.4) | % | ||||||||||||||||||
The following table provides an analysis of income taxes paid disaggregated by jurisdiction, following the adoption of ASU 2023-09, at December 31, 2025 and 2024:
| December 31, | 2025 | 2024 | ||||||||||||
| Jurisdiction: | ||||||||||||||
| Federal (Bermuda) | $ | — | $ | — | ||||||||||
| Foreign | ||||||||||||||
| United States | 44 | — | ||||||||||||
| Sweden | 4 | — | ||||||||||||
| Total income taxes paid | $ | 48 | $ | — | ||||||||||
Deferred income taxes reflect the tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of the Company's deferred tax assets and liabilities at December 31, 2025 and 2024 were as follows:
| December 31, | 2025 | 2024 | ||||||||||||
Deferred tax assets: | ||||||||||||||
Net operating losses | $ | 99,350 | $ | 75 | ||||||||||
Unearned premiums | 724 | — | ||||||||||||
Net unrealized gains on investments | 40,631 | — | ||||||||||||
| Discounting of net loss and LAE reserves | 6,480 | — | ||||||||||||
| Intangible Assets & Capitalized Start-Up Costs | 8,965 | — | ||||||||||||
Others | 1,408 | 85 | ||||||||||||
Deferred tax assets before valuation allowance | 157,558 | 160 | ||||||||||||
Valuation allowance | 150,389 | 109 | ||||||||||||
Deferred tax assets, net | 7,169 | 51 | ||||||||||||
Deferred tax liabilities: | ||||||||||||||
| Fair value adjustment for Senior Notes | 6,779 | — | ||||||||||||
Others | 390 | 51 | ||||||||||||
Deferred tax liabilities | 7,169 | 51 | ||||||||||||
Net deferred tax asset | $ | — | $ | — | ||||||||||
13. Income Taxes (continued)
The net deferred tax asset at December 31, 2025 was $0 (2024 - $0). A valuation allowance has been established against the net U.S. and International deferred tax assets which is primarily attributable to net operating losses and capital losses in the respective regions. At this time, the Company believes it is necessary to establish a valuation allowance against the U.S. and International net deferred tax assets as more evidence is needed for the utilization of these losses. During 2025, the Company recorded an increase in the valuation allowance of $150,280 (2024 - decrease of $61). The change in valuation allowance for the year ended December 31, 2025 is primarily from acquired operations under the Combination on May 27, 2025 as further described in Note 17. Business Combination.
At December 31, 2025, the Company has available net operating loss carry-forwards of $473,094 (2024: $358) for income tax purposes. Approximately $388,724 (2024: $0) of the net operating loss carryforwards expire in various years beginning in 2029. As of December 31, 2025, approximately $84,370 or 17.8% of the Company's NOL carryforwards have no expiry date under the relevant U.S. tax law (December 31, 2024 - $358 or 100.0%).
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.