OCTAVE SPECIALTY GROUP INCOSG
OCTAVE SPECIALTY GROUP INC Income Taxes Disclosure
16. INCOME TAXES
AFG files a consolidated Federal income tax return with its subsidiaries. AFG and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions. The following are the major jurisdictions in which Ambac and its subsidiaries operate and the earliest tax years subject to examination:
| Jurisdiction | Tax Year | ||||
| United States | 2010 | ||||
| New York State | 2013 | ||||
| New York City | 2018 | ||||
| United Kingdom | 2020 | ||||
| Italy | 2019 | ||||
Consolidated Pretax Income (Loss)
U.S. and foreign components of pre-tax income (loss) were as follows:
| Year Ended December 31, | 2023 | 2022 | 2021 | ||||||||||||||
| U.S. | $ | (29) | $ | 511 | $ | (32) | |||||||||||
| Foreign | 41 | 13 | 34 | ||||||||||||||
| Total | $ | 12 | $ | 525 | $ | 2 | |||||||||||
Provision (Benefit) for Income Taxes
The components of the provision (benefit) for income taxes were as follows:
| Year Ended December 31, | 2023 | 2022 | 2021 | ||||||||||||||
| Current taxes | |||||||||||||||||
| U.S. state and local | $ | 1 | $ | — | $ | 2 | |||||||||||
| Foreign | 8 | 7 | 10 | ||||||||||||||
| Total current taxes | 8 | 6 | 12 | ||||||||||||||
| Deferred taxes | |||||||||||||||||
| Domestic | (2) | — | — | ||||||||||||||
| Foreign | 1 | (4) | 6 | ||||||||||||||
| Total deferred taxes | $ | (1) | $ | (4) | $ | 6 | |||||||||||
| Provision for income taxes | $ | 7 | $ | 2 | $ | 18 | |||||||||||
The total effect of income taxes on net income and stockholders’ equity for the years ended December 31, 2023, 2022 and 2021 is as follows:
| Year Ended December 31, | 2023 | 2022 | 2021 | ||||||||||||||
| Total income taxes charged to net income | $ | 7 | $ | 2 | $ | 18 | |||||||||||
| Income taxes charged (credited) to stockholders’ equity: | |||||||||||||||||
| Unrealized gains (losses) on investment securities, including foreign exchange | 12 | (47) | (3) | ||||||||||||||
| Change in retirement benefits | (1) | — | — | ||||||||||||||
| Credit Risk Changes to Fair Value Options | — | — | — | ||||||||||||||
| Valuation allowance to equity | (9) | 41 | 1 | ||||||||||||||
| Total charged to stockholders’ equity: | 2 | (6) | (2) | ||||||||||||||
| Total effect of income taxes | $ | 9 | $ | (4) | $ | 16 | |||||||||||
Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate
The tax provisions in the accompanying Consolidated Statements of Total Comprehensive Loss reflect effective tax rates differing from prevailing Federal corporate income tax rates. The following is a reconciliation of these differences:
| Year Ended December 31, | 2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||
| Tax on income (loss) at statutory rate | $ | 3 | 21 | % | $ | 110 | 21 | % | $ | — | 21 | % | |||||||||||||||||||||||
| Changes in expected tax resulting from: | |||||||||||||||||||||||||||||||||||
| Tax-exempt interest | — | — | % | (1) | — | % | (2) | (114) | % | ||||||||||||||||||||||||||
| Foreign taxes | 9 | 70 | % | 4 | 1 | % | 8 | 448 | % | ||||||||||||||||||||||||||
| State Income Taxes | — | (1) | % | (1) | — | % | 14 | 794 | % | ||||||||||||||||||||||||||
| Return to Provision | 15 | 118 | % | — | — | % | — | — | % | ||||||||||||||||||||||||||
| Variable Interest Entities | (24) | (197) | % | 25 | 5 | % | — | — | % | ||||||||||||||||||||||||||
| Valuation allowance | 2 | 13 | % | (131) | (25) | % | (4) | (230) | % | ||||||||||||||||||||||||||
| Other, net | 4 | 35 | % | (4) | (1) | % | 1 | 72 | % | ||||||||||||||||||||||||||
| Tax expense on income (loss) | $ | 7 | 60 | % | $ | 2 | 1 | % | $ | 18 | 991 | % | |||||||||||||||||||||||
Unrecognized Tax Positions
The Company had no material unrecognized tax benefits at December 31, 2023 and 2022.
Deferred Income Taxes
The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2023 and 2022, are presented below:
| December 31, | 2023 | 2022 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Insurance intangible | $ | 51 | $ | 56 | |||||||
| Unearned premiums and credit fees | 23 | 24 | |||||||||
| Variable interest entities | — | 4 | |||||||||
| Other | 3 | 1 | |||||||||
| Total deferred tax liabilities | 77 | 85 | |||||||||
| Deferred tax assets: | |||||||||||
| Net operating loss carryforward | 714 | 725 | |||||||||
| Interest expense carryforward | 58 | 66 | |||||||||
| Loss reserves | 42 | 38 | |||||||||
| Debentures | 22 | 15 | |||||||||
| State capital loss carryforward | 8 | 8 | |||||||||
| Compensation | 5 | 6 | |||||||||
| Investments | — | 6 | |||||||||
| Other | 4 | 4 | |||||||||
| Subtotal deferred tax assets | 853 | 867 | |||||||||
| Valuation allowance | 795 | 796 | |||||||||
| Total deferred tax assets | 58 | 70 | |||||||||
| Net deferred tax liability | $ | 19 | $ | 15 | |||||||
In accordance with the Income Tax Topic of the ASC, a valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some, or all, of the deferred tax asset will not be realized. As a result of the risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient U.S. federal, state and/or local taxable income to recover the deferred tax operating assets and therefore maintains a full valuation allowance. The remaining net deferred tax liability of $19 is attributable to Ambac U.K. and is classified in other liabilities on the Consolidated Balance Sheet.
NOL & Investment Interest Carryforward
As of December 31, 2023, the Company has (i) $3,400 of NOLs, which if not utilized will begin expiring in 2030, and will fully expire in 2042, and (ii) $274 of interest expense tax deduction carryover, which has an indefinite carryforward period but is limited in any particular year based on certain provisions.Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2023 | Feb 27, 2024 | Showing above |
| 2022 | Mar 1, 2023 | |
| 2021 | Feb 24, 2022 | |
| 2020 | Mar 1, 2021 | |
| 2019 | Mar 2, 2020 | |
| 2018 | Feb 28, 2019 | |
| 2017 | Feb 28, 2018 | |
| 2016 | Feb 28, 2017 | |
| 2015 | Feb 29, 2016 | |
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.