Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes

Income Taxes

20. Income Taxes

The Company retrospectively adopted a new accounting standard for DAC in the first quarter of 2012. See Note 1 for the effect of the change on affected financial statement line items for prior periods retrospectively adjusted. Prior period disclosures presented below have been retrospectively adjusted for the new accounting standard.

In 2012, the Company made two corrections to tax expense primarily attributable to prior periods. Management has determined that the effect of these corrections is not material to the Consolidated Financial Statements for all current and prior periods presented. See Note 1 for additional information on these corrections.

The components of income tax provision attributable to continuing operations were as follows:

	Years Ended December 31,
	2012			2011			2010
	(in millions)
Current income tax
Federal	$	229		$	250		$	(224	)
State and local		25			21			13
Foreign		31			23			32
Total current income tax		285			294			(179	)
Deferred income tax
Federal		37			90			483
State and local		15			1			(5	)
Foreign		(2	)		(8	)		(6	)
Total deferred income tax		50			83			472
Total income tax provision	$	335		$	377		$	293

The geographic sources of pretax income from continuing operations were as follows:

	Years Ended December 31,
	2012		2011		2010
	(in millions)
United States	$	1,161	$	1,350	$	1,305
Foreign		77		97		164
Total	$	1,238	$	1,447	$	1,469

The principal reasons that the aggregate income tax provision attributable to continuing operations is different from that computed by using the U.S. statutory rate of 35% were as follows:

	Years Ended December 31,
	2012			2011			2010
Tax at U.S. statutory rate		35.0	%		35.0	%		35.0	%
Changes in taxes resulting from:
Dividend exclusion		(5.9	)		(8.5	)		(4.6	)
Tax-exempt interest income		(1.7	)		(1.3	)		(1.1	)
Foreign tax credits, net of addback		(3.2	)		(2.2	)		(1.7	)
Low income housing credits		(3.0	)		(1.1	)		(1.6	)
Taxes applicable to prior years		(2.5	)		0.2			(3.2	)
State taxes, net of federal benefit		2.5			1.0			0.2
Net income (loss) attributable to noncontrolling interests		3.6			2.6			(3.9	)
Other, net		2.3			0.4			0.8
Income tax provision		27.1	%		26.1	%		19.9	%

The increase in the Company's effective tax rate in 2012 compared to 2011 primarily reflects higher state taxes and the impact of the out-of-period correction of tax related to securities lending activities, partially offset by increased tax credits and the impact of the out-of-period correction related to the Company's deferred tax balance review. The increase in the Company's effective tax rate in 2011 compared to 2010 primarily reflects the change in the noncontrolling interests which is included in pretax income, partially offset by a favorable audit settlement related to the dividends received deduction.

Accumulated earnings of certain foreign subsidiaries, which totaled $85 million at December 31, 2012, are intended to be permanently reinvested outside the United States. Accordingly, U.S. federal taxes, which would have aggregated $1 million, have not been provided on those earnings.

Deferred income tax assets and liabilities result from temporary differences between the assets and liabilities measured for GAAP reporting versus income tax return purposes. The significant components of the Company's deferred income tax assets and liabilities, which are included net within other assets or other liabilities on the Consolidated Balance Sheets, were as follows:

	December 31,
	2012			2011
	(in millions)
Deferred income tax assets
Liabilities for future policy benefits and claims	$	1,320		$	1,615
Investment impairments and write-downs		105			118
Investment related		104			—
Deferred compensation		310			274
Loss carryovers and tax credit carryforwards		43			134
Other		50			92
Gross deferred income tax assets		1,932			2,233
Less: valuation allowance		(16	)		(5	)
Total deferred income tax assets		1,916			2,228
Deferred income tax liabilities
Deferred acquisition costs		701			674
Investment related		—			260
Deferred sales inducement costs		142			180
Net unrealized gains on Available-for-Sale securities		708			457
Depreciation expense		164			182
Intangible assets		74			60
Other		82			71
Gross deferred income tax liabilities		1,871			1,884
Net deferred income tax assets	$	45		$	344

Included in the Company's deferred income tax assets are tax benefits related to state net operating losses of $39 million which will expire beginning December 31, 2014.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (expense) were as follows:

	2012			2011			2010
	(in millions)
Balance at January 1	$	184		$	75		$	(33	)
Additions based on tax positions related to the current year		2			1			2
Additions for tax positions of prior years		25			95			57
Reductions for tax positions of prior years		(83	)		(8	)		(42	)
Settlements		(12	)		21			91
Balance at December 31	$	116		$	184		$	75

If recognized, approximately $38 million, $38 million and $54 million, net of federal tax benefits, of unrecognized tax benefits as of December 31, 2012, 2011, and 2010, respectively, would affect the effective tax rate.

It is reasonably possible that the total amounts of unrecognized tax benefits will change in the next 12 months. Based on the current audit position of the Company, it is estimated that the total amount of gross unrecognized tax benefits may decrease by $76 million in the next 12 months.

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the income tax provision. The Company recognized a net reduction of $1 million in interest and penalties for the year ended December 31, 2012. The Company recognized $66 million of interest and penalties for the year ended December 31, 2011 and a net reduction of $17 million in interest and penalties for the year ended December 31, 2010. At December 31, 2012 and 2011, the Company had a payable of $36 million and $37 million, respectively, related to accrued interest and penalties.

The Company or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The IRS has completed its field examination of the 1997 through 2007 tax returns. However, for federal income tax purposes, these years, except for 2007, continue to remain open as a consequence of certain unagreed-upon issues. The IRS is in the process of completing the audit of the Company's U.S. income tax returns for 2008 and 2009 and began auditing the Company's U.S. income tax returns for 2010 and 2011 in the fourth quarter of 2012. The Company's or certain of its subsidiaries' state income tax returns are currently under examination by various jurisdictions for years ranging from 1997 through 2008 and remain open for all years after 2008.

The items comprising other comprehensive income are presented net of the following income tax provision (benefit) amounts:

	Years Ended December 31,
	2012			2011			2010
	(in millions)
Net unrealized securities gains	$	238		$	90		$	191
Net unrealized derivatives gains (losses)		4			(15	)		8
Defined benefit plans		(9	)		(28	)		(2	)
Foreign currency translation		7			(1	)		(6	)
Net income tax provision	$	240		$	46		$	191