Income Taxes

We file consolidated federal income tax returns that include all of our wholly-owned subsidiaries except Eagle Life which must file a separate federal income tax return for 2009–2013 under applicable federal income tax guidelines. Our income tax expense as presented in the consolidated financial statements is summarized as follows:



	Year Ended December 31,
	2011			2010			2009
	(Dollars in thousands)
Consolidated statements of operations:
Current income taxes	$	127,535		$	140,381		$	73,784
Deferred income taxes (benefits)	(80,869		)	(118,048		)	(56,150		)
Total income tax expense included in consolidated statements of operations	46,666			22,333			17,634
Stockholders' equity:
Expense (benefit) relating to:
Change in net unrealized investment losses	202,143			60,456			39,680
Share-based compensation	(1,061		)	(480		)	277
Cumulative effect of noncredit OTTI	—			—			2,462
Issuance of convertible debt	—			—			10,756
Total income tax expense included in consolidated financial statements	$	247,748		$	82,309		$	70,809

Income tax expense (benefit) in the consolidated statements of operations differed from the amount computed at the applicable statutory federal income tax rate of 35% as follows:



	Year Ended December 31,
	2011			2010			2009
	(Dollars in thousands)
Income before income taxes	$	132,914		$	65,266		$	86,164
Income tax expense on income before income taxes	$	46,520		$	22,843		$	30,157
Tax effect of:
Deferred tax asset valuation allowance	—			—			(11,949		)
Other	146			(510		)	(574		)
Income tax expense	$	46,666		$	22,333		$	17,634
Effective tax rate	35.1		%	34.2		%	20.5		%

Deferred income tax assets or liabilities are established for temporary differences between the financial reporting amounts and tax bases of assets and liabilities that will result in deductible or taxable amounts, respectively, in future years. The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2011 and 2010, are as follows:



	December 31,
	2011			2010
	(Dollars in thousands)
Deferred income tax assets:
Policy benefit reserves	$	1,472,653		$	1,265,860
Other than temporary impairments	9,072			12,920
Derivative instruments	21,429			—
Amounts due reinsurer	—			5,045
Other policyholder funds	9,946			5,448
Litigation settlement accrual	—			16,800
Deferred compensation	15,576			14,453
Net operating loss carryforwards	14,818			13,298
Other	6,351			5,364
Gross deferred tax assets	1,549,845			1,339,188
Deferred income tax liabilities:
Deferred policy acquisition costs and deferred sales inducements	(1,266,042		)	(1,043,016		)
Net unrealized gains on available for sale fixed maturity and equity securities	(234,066		)	(31,923		)
Convertible senior notes	(10,917		)	(17,567		)
Derivative instruments	—			(89,898		)
Investment income items	(4,315		)	(8,902		)
Other	(12,524		)	(4,629		)
Gross deferred tax liabilities	(1,527,864		)	(1,195,935		)
Net deferred income tax asset	$	21,981		$	143,253

The total deferred income tax asset includes other than temporary impairments on investments. The other than temporary impairments will not be available for utilization for tax purposes until the securities are either sold at a loss or deemed completely worthless. The other than temporary impairments totaled $26.0 million and $36.9 million as of December 31, 2011 and 2010, respectively. In 2008, we recorded a valuation allowance of $34.5 million on the deferred income tax assets related to capital loss carryforwards and other than temporary impairments on investment securities. The valuation allowance was eliminated in 2009 due to taxable income from capital gain sources and an increase in anticipated future taxable income from capital gain sources, which resulted in $11.9 million being recognized as a component of 2009 income tax expense. The remaining $22.5 million of the valuation allowance was reversed through an adjustment to accumulated other comprehensive income.

Included in the deferred income taxes is the expected income tax benefit attributable to unrealized losses on available for sale fixed maturity securities. There is no valuation allowance provided for the deferred income tax asset attributable to unrealized losses on available for sale fixed maturity securities. Management expects that the passage of time will result in the reversal of these unrealized losses due to the fair value increasing as these securities near maturity. Management has the intent and ability to hold these securities to maturity because we generate adequate cash flow from new business to fund all foreseeable cash flow needs and do not believe it would ever be necessary to liquidate these securities at a loss to meet cash flow needs. For deferred income taxes related to unrealized losses on equity securities, we had sufficient future taxable income from capital gain sources to support the realizability of the deferred income tax asset.

Realization of our deferred income tax assets is more likely than not based on expectations as to our future taxable income and considering all other available evidence, both positive and negative. Therefore, no valuation allowance against deferred income tax assets has been established as of December 31, 2011 and 2010.

There were no material income tax contingencies requiring recognition in our consolidated financial statements as of December 31, 2011. We are no longer subject to income tax examinations by tax authorities for years prior to 2008.

At December 31, 2011, we had non-life net operating loss carryforwards for federal income tax purposes totaling $22.1 million which expire beginning in 2018 through 2031.