INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES

INCOME TAXES

15.INCOME TAXES

The Company’s effective income tax rate related to continuing operations varied from the maximum federal income tax rate as follows:

	For The Year Ended December 31,
	2011		2010		2009
Statutory federal income tax rate applied to pre-tax income	35.0	%	35.0	%	35.0	%
Investment income not subject to tax	(2.0	)	(1.4	)	(1.2	)
State income taxes	0.4		0.5		0.4
Uncertain tax positions	(0.1	)	(0.9	)	0.2
Other	(1.2	)	0.1		0.3
	32.1	%	33.3	%	34.7	%

The annual provision for federal income tax in these financial statements differs from the annual amounts of income tax expense reported in the respective income tax returns. Certain significant revenues and expenses are appropriately reported in different years with respect to the financial statements and the tax returns.

The components of the Company’s income tax expense related to income before the cumulative effect of a change in accounting principle are as follows:

	For The Year Ended December 31,
	2011			2010			2009
	(Dollars In Thousands)
Income tax expense per the income tax returns:
Federal	$	(4,609	)	$	3,600		$	(60,018	)
State	33			2,944			4,133
Total current	$	(4,576	)	$	6,544		$	(55,885	)
Deferred income tax expense:
Federal	$	166,163		$	123,415		$	204,709
State	2,930			(930		)	(1,261		)
Total deferred	$	169,093		$	122,485		$	203,448

The components of the Company’s net deferred income tax liability are as follows:

	As of December 31,
	2011			2010
	(Dollars In Thousands)
Deferred income tax assets:
Policy and policyholders liability reserves	$	35,267		$	158,549
Intercompany losses	42,685			44,854
Invested assets (other than unrealized gains)	68,530			90,032
Deferred compensation	3,059			2,356
State tax valuation allowance	(2,440		)	(2,414		)
	147,101			293,377
Deferred income tax liabilities:
Deferred policy acquisition costs and value of business acquired	1,160,381			1,114,892
Unrealized gain on investments	557,221			184,624
Other	3,263			29,034
	1,720,865			1,328,550
Net deferred income tax asset (liability)	$	(1,573,764	)	$	(1,035,173	)

The Company’s income tax returns, except for Protective Life Insurance Company of New York and United Investors Life Insurance Company which file separately, are included in PLC’s consolidated U.S. income tax returns.

In management’s judgment, the gross deferred income tax asset as of December 31, 2011, will more likely than not be fully realized. As of December 31, 2011, there were no U.S. tax ordinary or capital loss carryforwards available for use in subsequent years. With regard to state tax loss carryforwards, the Company has recognized a valuation allowance of $2.4 million and $2.4 million as of December 31, 2011 and 2010, respectively, related to operating loss carryforwards that it has determined are more likely than not to expire unutilized. As of December 31, 2011 and 2010, no valuation allowances were established with regard to deferred tax assets relating to impairments on fixed maturities, capital loss carryforwards, and unrealized losses on investments. As of December 31, 2011 and 2010, the Company relied upon certain prudent and feasible tax-planning strategies and its ability and intent to hold to recovery its fixed maturities that were reported at an unrealized loss. The Company has the ability and the intent to either hold any unrealized loss bond to maturity, thereby avoiding a realized loss, or to generate a realized gain from unrealized gain bonds if such unrealized loss bond is sold at a loss prior to maturity. As of December 31, 2011, the Company recorded a net unrealized gain on its fixed maturities.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	As of December 31,
	2011			2010
	(Dollars In Thousands)
Balance, beginning of period	$	12,659		$	23,172
Additions for tax positions of the current year	—			—
Additions for tax positions of prior years	106			10,906
Reductions of tax positions of prior years:
Changes in judgment	(8,447		)	(11,625		)
Lapses of applicable statute of limitations	—			(9,794		)
Balance, end of period	$	4,318		$	12,659

Included in the balance above, as of December 31, 2011 and 2010, are approximately $2.0 million and $10.4 million of unrecognized tax benefits, respectively, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductions. Other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective income tax rate but would accelerate to an earlier period the payment of cash to the taxing authority. The total amount of unrecognized tax benefits, if recognized, that would affect the effective income tax rate is approximately $2.3 million and $2.2 million as of December 31, 2011 and as of December 31, 2010, respectively.

Any accrued interest and penalties related to the unrecognized tax benefits have been included in income tax expense. These amounts were a $1.4 million benefit, a $2.9 million benefit, and a $1.2 million expense in 2011, 2010, and 2009, respectively. The Company has approximately $1.4 million and $2.8 million of accrued interest associated with unrecognized tax benefits as of December 31, 2011 and 2010, respectively (before taking into consideration the related income tax benefit that is associated with such an expense).

Using the information available as of December 31, 2011, the Company believes that in the next 12 months, there are no positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease. With regard to the reconciliation above, the reduction in the amount of unrecognized tax benefits due to lapses of applicable statute of limitations was attributable almost entirely to tax issues that were timing in nature. Therefore, aside from the effect of interest cost, such reduction did not result in a decrease in the overall effective income tax rate. During the 12 months ended December 31, 2011 and 2010, the Company’s uncertain tax position liability decreased in the amount of $8.4 million and $11.6 million, respectively, as a result of new technical guidance and other developments which led the Company to conclude that the full amount of the associated tax benefit was more than 50% likely to be realized. In general, the Company is no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for tax years that began before 2003.