Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Note 8—Income Taxes

Torchmark and its subsidiaries file a life-nonlife consolidated Federal income tax return.

The components of income taxes were as follows:

	Year Ended December 31,
	2012			2011			2010
Income tax expense from continuing operations	$	236,669		$	226,166		$	246,475
Income tax expense (benefit) from discontinued operations		0			(467	)		11,830
Shareholders’ equity:
Other comprehensive income (loss)		201,950			284,355			184,305
Tax basis compensation expense (from the exercise of stock options and vesting of restricted stock awards) in excess of amounts recognized for financial reporting purposes		(22,602	)		(13,121	)		(3,455	)
	$	416,017		$	496,933		$	439,155

Income tax expense from continuing operations consists of:

	Year Ended December 31,
	2012		2011		2010
Current income tax expense	$	161,332	$	169,500	$	147,346
Deferred income tax expense		75,337		56,666		99,129
	$	236,669	$	226,166	$	246,475

In each of the years 2010 through 2012, deferred income tax expense was incurred because of certain differences between net income before income taxes as reported on the Consolidated Statements of Operations and taxable income as reported on Torchmark’s income tax returns. As explained in Note 1—Significant Accounting Policies, these differences caused the financial statement book values of some assets and liabilities to be different from their respective tax bases.

The effective income tax rate differed from the expected 35% rate as shown below:

	Year Ended December 31,
	2012			%			2011			%			2010			%
Expected income taxes	$	268,098			35.0	%	$	253,324			35.0	%	$	262,700			35.0	%
Increase (reduction) in income taxes resulting from:
Tax-exempt investment income		(3,506	)		(.4	)		(3,468	)		(.5	)		(3,371	)		(.5	)
Low income housing investments		(28,877	)		(3.8	)		(24,258	)		(3.4	)		(12,900	)		(1.7	)
Other		954			.1			568			.1			46			0
Income tax expense	$	236,669			30.9	%	$	226,166			31.2	%	$	246,475			32.8	%

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

	December 31,
	2012		2011
Deferred tax assets:
Fixed maturity investments	$	22,387	$	35,670
Carryover of tax losses		14,177		7,429
Other assets		4,084		5,509
Total gross deferred tax assets		40,648		48,608
Deferred tax liabilities:
Unrealized gains		481,804		276,591
Employee and agent compensation		65,877		57,136
Deferred acquisition costs		791,254		712,974
Future policy benefits, unearned and advance premiums, and policy claims		311,366		355,825
Total gross deferred tax liabilities		1,650,301		1,402,526
Net deferred tax liability	$	1,609,653	$	1,353,918

Torchmark’s Federal income tax returns are routinely audited by the Internal Revenue Service (IRS). The IRS is currently examining Torchmark’s 2009 tax year. The statutes of limitation for the assessments of additional tax are closed for all tax years prior to 2008. Management believes that adequate provision has been made in the financial statements for any potential assessments that may result from current or future tax examinations and other tax-related matters for all open tax years.

Torchmark has net operating loss carryforwards of approximately $41 million at December 31, 2012 which will begin to expire in 2021 if not otherwise used to offset future taxable income. A valuation allowance is to be provided when it is more likely than not that deferred tax assets will not be realized by the Company. No valuation allowance has been recorded relating to Torchmark’s deferred tax assets since, in management’s judgment, Torchmark will more likely than not have sufficient taxable income in future periods to fully realize its existing deferred tax assets.

Torchmark’s tax liability is adjusted to include the provision for uncertain tax positions taken or expected to be taken in a tax return. A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding effects of accrued interest, net of Federal tax benefits) for the years 2010 through 2012 is as follows:

	2012		2011			2010
Balance at January 1,	$	0	$	875		$	3,960
Increase based on tax positions taken in current period		0		0			245
Increase related to tax positions taken in prior periods		0		0			280
Decrease related to tax positions taken in prior periods		0		(875	)		(3,610	)
Decrease due to settlements		0		0			0
Balance at December 31,	$	0	$	0		$	875

Torchmark’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company recognized interest income of $56 thousand, $0, and $124 thousand, net of Federal income tax benefits, in its Consolidated Statements of Operations for 2012, 2011, and 2010, respectively. The Company had an accrued interest receivable of $0 and $2.7 million, net of Federal income tax expense, as of 2012 and 2011, respectively. The Company had no accrued penalties at December 31, 2012 or 2011.