11. Income Taxes

9 Months Ended

Sep. 30, 2012

Notes to Financial Statements

Income Taxes

It is our policy to estimate taxes for interim periods based on estimated annual effective tax rates which are derived, in part, from expected annual pre-tax income. However, the change in the deferred income taxes and related valuation allowance for the three and nine months ended September 30, 2012 has been computed based on the first nine months of 2012 as a discrete period. Similarly, the tax benefit and expense for the three and nine months ended September 30, 2012, respectively, is determined based upon the first nine months of 2012 as a discrete period.

The tax expense of $4.3 million for the three months ended September 30, 2012 includes $5.0 million of current taxes offset by a benefit of $0.7 million related to the exception to intraperiod allocation rules in accordance with ASC 740-20, Accounting for Income Taxes – Intraperiod Tax Allocation. The tax expense of $23.6 million for the nine months ended September 30, 2012 includes $30.1 million of estimated current taxes offset by a benefit of $6.5 million related to the exception to intraperiod allocation rules in accordance with ASC 740-20, Accounting for Income Taxes – Intraperiod Tax Allocation.

We recorded a deferred tax asset, net of deferred tax liabilities and valuation allowances, of $18.7 million as of September 30, 2012. Consistent with the prior period, the deferred tax asset not offset by a valuation allowance relates to gross unrealized losses on available-for-sale debt securities. For the three months ended September 30, 2012, we recognized a net increase in the valuation allowance of $31.6 million. For the nine months ended September 30, 2012, we recognized a net increase in the valuation allowance of $75.4 million. Accounting guidance requires that changes in the valuation allowance be allocated to various financial statement components of income or loss.

During the first quarter of 2012, the Company generated taxable income sufficient to fully utilize its life group related net operating loss carryforwards; however, due to the limited ability to offset non-life group losses with life group taxable income, significant net operating losses attributable to the non-life group remain. However, as a result of the pre-tax loss in the third quarter of 2012, it is unlikely that a reduction in the existing valuation allowance will occur during the fourth quarter of 2012.

We have concluded that a valuation allowance on the deferred tax assets attributable to available-for-sale debt securities with gross unrealized losses was not required due to our ability and intent to hold these securities until recovery of fair value or contractual maturity, thereby avoiding realization of taxable capital losses. This conclusion is consistent with prior periods.

The Company and its subsidiaries file consolidated, combined, unitary or separate income tax returns in the U.S. federal, various state and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2010.

Based upon the timing and status of our current examinations by taxing authorities, we do not believe that it is reasonably possible that any changes to the balance of unrecognized tax benefits occurring within the next 12 months will result in a significant change to the results of operations, financial condition or liquidity. In addition, we do not anticipate that there will be additional payments made or refunds received within the next 12 months with respect to the years under audit. We do not anticipate any increases to the existing unrecognized tax benefits that would have a significant impact on the financial position of the Company.