8. Income Taxes

Income tax expense (benefit) consists of the following (in millions):


	Federal			State and Foreign			Total
2011
Current	$	45.8		$	1.6		$	47.4
Deferred		0.3			(0.2	)		0.1

	$	46.1		$	1.4		$	47.5

2010
Current	$	63.9		$	2.6		$	66.5
Deferred		11.3			1.1			12.4

	$	75.2		$	3.7		$	78.9

2009
Current	$	123.3		$	2.4		$	125.7
Deferred		(1.1	)		(0.2	)		(1.3	)

	$	122.2		$	2.2		$	124.4

The difference between the federal income tax rate and the effective income tax rate is as follows:


	2011			2010			2009
Federal income tax rate		35.0	%		35.0	%		35.0	%
Foreign tax credit and other adjustments		(0.9	)		(1.7	)		—
Income subject to dividends-received deduction		(4.0	)		(1.8	)		(0.8	)
Tax-exempt interest		(5.7	)		(4.3	)		(3.5	)
State taxes, net of federal tax benefit		0.4			1.0			0.4
Other, net		0.1			0.2			0.4

Effective income tax rate		24.9	%		28.4	%		31.5	%

The lower effective tax rate in 2011 primarily reflects the impact of higher dividends received deductions and lower pre-tax earnings in 2011, partially offset by the absence of a foreign tax benefit which was significant in 2010. The lower effective income tax rate in 2010 compared with 2009 primarily reflects the recognition of a permanent tax benefit in the 2010 first quarter. This permanent tax benefit related to a finalization of Alleghany’s unused foreign tax credits arising from Alleghany’s prior ownership of World Minerals, Inc. which was sold on July 14, 2005. The lower effective income tax rate in 2010 compared with 2009 also reflects increased tax benefits associated with dividends and tax-exempt income.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2011 and 2010 are as follows (in millions):


	2011			2010
*Deferred tax assets*
State net operating loss carry forward	$	15.2		$	15.2
Reserves for capitalized real estate		4.0			3.7
Expenses deducted for tax purposes when paid		1.8			1.9
Other than temporary impairment		10.5			21.7
Property and casualty loss reserves		58.9			62.6
Unearned premium reserves		28.8			26.8
Compensation accruals		71.7			70.4
Other		30.4			14.2

Gross deferred tax assets before valuation allowance	$	221.3		$	216.5

Valuation allowance		(15.2	)		(15.0	)

Gross deferred tax assets	$	206.1		$	201.5

*Deferred tax liabilities*
Unrealized gain on investments	$	81.9		$	84.8
Tax over book depreciation		4.1			1.1
Deferred gains		2.4			2.5
Deferred acquisition costs		25.1			24.0
Purchase accounting adjustments		3.8			4.1
Other		7.8			7.9

Gross deferred tax liabilities	$	125.1		$	124.4

Net deferred tax assets	$	81.0		$	77.1

A valuation allowance is provided against deferred tax assets when, in the opinion of Alleghany management, it is more likely than not that some portion of the deferred tax asset will not be realized. Accordingly, a valuation allowance is maintained for certain state tax items. Alleghany has recognized $15.2 million of deferred tax assets for state net operating and capital loss carryovers. A valuation allowance of $15.2 million has been established against these deferred tax assets since Alleghany does not currently anticipate generating sufficient income in the various states to absorb these loss carryovers.

Alleghany’s income tax returns are not currently under examination by the Internal Revenue Service. Alleghany’s 2010, 2009 and 2008 income tax returns remain open to examination.

Alleghany believes that, as of December 31, 2011, there were no material uncertain tax positions that would require disclosure under GAAP.