9.	Income Taxes

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


	Federal			State			Foreign			Total
Nine months ended September 30, 2012
Current	$	154.3		$	1.1		$	(0.3	)	$	155.1
Deferred		(43.6	)		0.2			—			(43.4	)

	$	110.7		$	1.3		$	(0.3	)	$	111.7


Nine months ended September 30, 2011
Current	$	21.8		$	1.2		$	0.2		$	23.2
Deferred		8.4			(0.3	)		—			8.1

	$	30.2		$	0.9		$	0.2		$	31.3

The effective tax rate for the first nine months of 2012 was 12.3 percent, compared with 22.9 percent for the first nine months of 2011. The lower effective tax rate in the first nine months of 2012 primarily reflects the impact of the non-taxable gain on bargain purchase and, to a lesser extent, the impact of higher tax-exempt interest income generated by Transatlantic from the Acquisition Date through September 30, 2012, partially offset by the impact of higher taxable earnings in the first nine months of 2012 and the impact of certain non-deductible Transaction Costs. The gain on bargain purchase resulted in a significant increase in earnings before income taxes without a corresponding increase in income taxes, whereas certain non-deductible Transaction Costs resulted in losses before income taxes without a corresponding decrease in income taxes. As a result of these non-recurring, merger-related items, the effective tax rate for the first nine months of 2012 was reduced by a net 10.2 percentage points.

The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of September 30, 2012 and December 31, 2011 are as follows (in millions):


	As of September 30, 2012			As of December 31, 2011
Deferred tax assets:
Loss and LAE reserves	$	367.6		$	58.9
Minimum tax credit carry forward		179.5			—
Compensation accruals		106.2			71.7
Unearned premiums		115.1			28.8
OTTI losses		8.5			10.5
Foreign tax credit carry forward		41.8			—
State net operating loss carry forward		15.2			15.2
Other		63.2			36.2

Gross deferred tax assets before valuation allowance		897.1			221.3
Valuation allowance		(15.2	)		(15.2	)

Gross deferred tax assets		881.9			206.1


Deferred tax liabilities:
Net unrealized gains on investments		166.0			81.9
Deferred acquisition costs		100.0			25.1
Purchase accounting adjustments		144.0			3.8
Other		22.6			14.3

Gross deferred tax liabilities		432.6			125.1


Net deferred tax assets	$	449.3		$	81.0

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

The Internal Revenue Code provides for limits on the utilization of certain tax benefits following a corporate ownership change. Upon the closing of the merger, Transatlantic was subject to an annual limitation on its ability to use its foreign tax credit carryforwards and its minimum tax credit carryforwards. The total amount of foreign tax credit carryforwards and minimum tax credit carryforwards that were available prior to the merger are not diminished by this provision. The limitation provides for an annual limit on the amount of the carryforwards that can be utilized each year. The unused carryovers are available to be utilized in subsequent years, subject to the annual limitation. The annual limitation is estimated at approximately $42.7 million.

Alleghany’s income tax returns are not currently under examination by the Internal Revenue Service. Transatlantic’s income tax returns, which all relate to periods prior to the merger with Alleghany, are not currently under examination by the Internal Revenue Service. The following table lists the tax years of Alleghany and Transatlantic tax returns that remain subject to examination by major tax jurisdiction as of September 30, 2012:


Major Tax Jurisdiction		Open Tax Years
Australia		2008-2011
Canada		2008-2011
France		2009-2011
Japan		2010-2011
Switzerland		2011
United Kingdom		2009-2011
United States		2009-2011

Alleghany believes that, as of September 30, 2012, it had no material uncertain tax positions. Interest and penalties relating to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable. There was no liability for interest or penalties accrued as of September 30, 2012.