Principles Of Consolidation And Other Matters

6 Months Ended

Jun. 30, 2011

Principles Of Consolidation And Other Matters

Principles Of Consolidation And Other Matters

2.     Principles of Consolidation and Other Matters

The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant to such rules and regulations for interim filings, although the Company believes that the information and disclosures presented are adequate to make such information and disclosure not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010 (the "2010 10-K").

The financial information contained herein reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company's results of operations for the three and six-month periods ended June 30, 2011 and 2010.

Investment Income (Loss)

The caption "investment income (loss)" in the consolidated statements of income comprises realized and unrealized gains and losses from investments recognized in current earnings. It includes, when applicable, other than temporary declines in the value of available for sale securities and the change in value of the Company's holdings in certain private equity funds. The Company's investments may include direct investments in insurance or consulting companies and investments in private equity funds. This line includes equity method gains/(losses) of $(4) million and $18 million for the three months ended June 30, 2011 and 2010, respectively, and $14 million and $17 million for the six months ended June 30, 2011 and 2010, respectively.

The Company has an investment in Trident II limited partnership, a private equity investment fund. At June 30, 2011, the Company's investment in Trident II was approximately $117 million, reflected in other assets in the consolidated balance sheet. The Company's maximum exposure to loss is equal to its investment plus any calls on its remaining capital commitment of $67 million. Since this fund is closed to new investments, none of the remaining capital commitment is expected to be called.

Income Taxes

The Company's effective tax rate in the second quarter of 2011 was 31.1%. The 29.8% effective tax rate for the first six months of 2011 includes a benefit recorded in the first quarter from the effective settlement of the IRS audit for the years 2006 through 2008. Excluding this benefit, the effective tax rate for the first six months of 2011 was 31.4%.

The Company reported a net income tax benefit of $60 million in continuing operations in the second quarter of 2010 on a pretax loss of $89 million, an effective tax rate of 67.4%. The high tax benefit rate primarily reflects the combination of the tax benefit related to the Alaska settlement, determined at U.S. tax rates, with other pretax income that is subject to lower average effective tax rates applicable worldwide. Excluding the impact of the Alaska settlement, the effective tax rate for the quarter was 32.3%. The 14.9% effective tax rate for the first six months of 2010 also primarily reflects the tax benefit associated with the Alaska settlement as discussed below. Excluding the effect of the settlement, the effective tax rate for the first six months was 29.5%.

The Company is routinely examined by tax authorities in the jurisdictions in which it has significant operations. The Company regularly considers the likelihood of assessments in each of the taxing jurisdictions resulting from examinations. When appropriate, the Company establishes liabilities for uncertain tax positions in relation to the potential assessments, including the possible assessment of penalties. When establishing this liability, the Company considers a number of relevant factors under penalty statutes, including appropriate disclosure of the tax return position, the existence of legal authority supporting the Company's position, and reliance on the opinion of professional tax advisors.

The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in the tax return. The Company's gross unrecognized tax benefits decreased from $199 million at December 31, 2010 to $152 million at June 30, 2011, primarily reflecting the effective settlement of issues on audit. It is reasonably possible that the total amount of unrecognized tax benefits will decrease between zero and approximately $20 million within the next twelve months due to settlement of audits and expiration of statutes of limitation.

Other Matters Impacting Results in Prior Periods

In June 2010, the Company settled a lawsuit brought by the Alaska Retirement Management Board ("ARMB") against Mercer. Under the terms of the settlement agreement, Mercer paid $500 million, of which $100 million was covered by insurance, and recognized a charge of $400 million in the second quarter of 2010.