Federal Income Taxes

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements [Abstract]

Federal Income Taxes

7. Federal Income Taxes

The federal income tax expense (benefit) on continuing operations (in millions) was as follows:

		For the Years Ended December 31,
		2012		2011		2010
Current		$	23	$	13	$	(138)
Deferred			259		261		400
	Federal income tax expense (benefit)	$	282	$	274	$	262

A reconciliation of the effective tax rate differences (in millions) was as follows:

			For the Years Ended December 31,
			2012			2011			2010
Tax rate times pre-tax income			$	549		$	176		$	398
Effect of:
	Tax-preferred investment income			(141)			(144)			(120)
	Tax credits			(34)			(34)			(28)
	Goodwill			(2)			260			-
	Change in uncertain tax positions			(94)			8			2
	Other items			4			8			10
		Federal income tax expense (benefit)	$	282		$	274		$	262
Effective tax rate				18	%		55	%		23	%

The effective tax rate is the ratio of tax expense over pre-tax income (loss). The tax-preferred investment income relates primarily to separate account dividends-received deductions. The separate account dividends-received deduction benefit was $128 million, $135 million and $109 million for the years ended December 31, 2012, 2011 and 2010. The change in uncertain tax positions relates primarily to the lapse of statute of limitations for prior year tax returns and excludes amounts included in other items. Additional amounts related to uncertain tax positions are included in discontinued operations. See Note 3 for information on amounts reflected in discontinued operations.

The federal income tax asset (liability) (in millions) was as follows:

		As of December 31,
		2012		2011
Current		$	(27)	$	(159)
Deferred			(2,982)		(2,153)
	Total federal income tax asset (liability)	$	(3,009)	$	(2,312)

Significant components of our deferred tax assets and liabilities (in millions) were as follows:

			As of December 31,
			2012		2011
Deferred Tax Assets
Future contract benefits and other contract holder funds			$	1,189	$	837
Deferred gain on business sold through reinsurance				96		125
Reinsurance related embedded derivative asset				75		59
Investments				311		396
Compensation and benefit plans				293		306
Net operating loss				26		23
Net capital loss				32		59
Tax credits				222		208
VIE				35		97
Other				41		144
	Total deferred tax assets			2,320		2,254
Deferred Tax Liabilities
DAC				1,332		1,322
VOBA				246		370
Net unrealized gain on AFS securities				3,283		2,259
Net unrealized gain on trading securities				150		131
Intangibles				157		160
Other				134		165
	Total deferred tax liabilities			5,302		4,407
		Net deferred tax asset (liability)	$	(2,982)	$	(2,153)

As of December 31, 2012, the Company had $73 million of net operating loss carryforwards that begin to expire in 2031 and $90 million of capital loss carryforwards that begin to expire in 2014. In addition, the Company had $156 million of alternative minimum tax creditsthat are not subject to expiration and $66 million of general business credits that begin to expire in 2030.

Although realization is not assured, management believes that it is more likely than not that the Company will realize the benefits of its deferred tax assets, and, accordingly, no valuation allowance has been recorded.

As of December 31, 2012 and 2011, $69 million and $205 million, respectively, of our unrecognized tax benefits presented below, if recognized, would have affected our income tax expense and our effective tax rate. The Company is not aware of any events for which it is likely that unrecognized tax benefits will significantly increase or decrease within the next year. A reconciliation of the unrecognized tax benefits (in millions) was as follows:

			For the
			Years Ended
			December 31,
			2012		2011
Balance as of beginning-of-year			$	211	$	218
	Increases for prior year tax positions			-		1
	Decreases for prior year tax positions			(49)		(10)
	Increases for current year tax positions			5		8
	Decreases for current year tax positions			-		(6)
	Decreases for settlements with taxing authorities			(2)		-
	Decreases for lapse of statute of limitations			(88)		-
		Balance as of end-of-year	$	77	$	211

We recognize interest and penalties accrued, if any, related to unrecognized tax benefits as a component of tax expense. For the years ended December 31, 2012, 2011 and 2010, we recognized interest and penalty expense (benefit) related to uncertain tax positions of $(61) million, $6 million and $7 million, respectively. We had accrued interest and penalty expense related to the unrecognized tax benefits of $11 million and $72 million as of December 31, 2012 and 2011, respectively.

The Company is subject to examination by U.S. federal, state, local and non-U.S. income authorities. The Company is currently under examination by the Internal Revenue Service (“IRS”) for tax years 2009 through 2011. The IRS concluded its examination of tax years 2007 and 2008 on January 18, 2013. The Company has protested the final assessment, which is being combined with tax years 2005 and 2006 in IRS Appeals. The IRS also completed its examination of tax years 2005 and 2006, and 2006 of the former Jefferson-Pilot Corporation (“JP”) and its subsidiaries during 2010. The Company believes a portion of the 2005 through 2008 assessments is inconsistent with current laws and is using the established IRS Appeals process to attempt to settle the remaining issues. The IRS also concluded its examination of non-consolidated returns for JP Life Insurance Company and JP Financial Insurance Company for the tax years ended April 1, 2007, and July 1, 2007, respectively, with agreement on all adjustments on January 18, 2013. The Company does not expect any adjustments that might result from those audits would be material to its consolidated results of operations or its financial condition.