Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes disclosure

Income Taxes disclosure [Text Block]

11. INCOME TAXES

(for the year ended December 31, in millions)	2011			2010			2009
Composition of income tax expense (benefit) included in consolidated statement of income
Current expense (benefit):
Federal	$	(176	)	$	846		$	822
Foreign		34			78			75
State		3			10			(8	)
Total current tax expense (benefit)		(139	)		934			889
Deferred expense (benefit):
Federal		63			178			213
Foreign		2			(22	)		(13	)
Total deferred tax expense		65			156			200
Total income tax expense (benefit) included in consolidated statement of income		(74	)		1,090			1,089
Composition of income tax included in common shareholders' equity
Expense (benefit) relating to stock-based compensation, the change in unrealized appreciation on investments, unrealized loss on foreign exchange and unrealized loss on derivatives, and other comprehensive income		399			(2	)		1,099
Total income tax expense included in consolidated financial statements	$	325		$	1,088		$	2,188

(for the year ended December 31, in millions)	2011			2010			2009
Effective tax rate
Income before federal, foreign and state income taxes	$	1,352		$	4,306		$	4,711
Statutory tax rate		35	%		35	%		35	%
Expected federal income tax expense		473			1,507			1,649
Tax effect of:
Nontaxable investment income		(449	)		(476	)		(480	)
Favorable resolution of prior year tax matters		(104	)		—			(89	)
Other, net		6			59			9
Total income tax expense (benefit)	$	(74	)	$	1,090		$	1,089
Effective tax rate		(5	)%		25	%		23	%

        The current income tax receivable was $119 million at December 31, 2011 and is included in other assets in the consolidated balance sheet. The current income tax payable was $265 million at December 31, 2010 and is included in other liabilities in the consolidated balance sheet.

        Income, before income taxes, from domestic operations for the years ended December 31, 2011, 2010 and 2009 was $1.23 billion, $4.20 billion and $4.54 billion, respectively. Income, before income taxes, from foreign opererations for the years ended December 31, 2011, 2010 and 2009 was $122 million, $106 million and $171 million, respectively.

        The net deferred tax asset comprises the tax effects of temporary differences related to the following assets and liabilities:

(at December 31, in millions)	2011		2010
Deferred tax assets
Claims and claim adjustment expense reserves	$	936	$	996
Unearned premium reserves		680		662
Other		844		713
Total gross deferred tax assets		2,460		2,371
Deferred tax liabilities
Deferred acquisition costs		585		575
Investments		1,650		1,128
Internally developed software		128		122
Other		90		53
Total gross deferred tax liabilities		2,453		1,878
Total deferred taxes	$	7	$	493

        If the Company determines that any of its deferred tax assets will not result in future tax benefits, a valuation allowance must be established for the portion of these assets that are not expected to be realized. Based upon a review of the Company's anticipated future taxable income, and also including all other available evidence, both positive and negative, the Company's management concluded that it is more likely than not that the gross deferred tax assets will be realized.

        For tax return purposes, as of December 31, 2011, the Company had net operating loss (NOL) carryforwards on a regular tax basis and an alternative minimum tax (AMT) basis of approximately $59 million and $14 million, respectively. These NOL carryforwards expire, if unused, in 2018. In addition, the Company has AMT credit carryforwards of $95 million which are available to reduce future federal regular income taxes over an indefinite period. The amount and timing of realizing the benefits of NOL and AMT credit carryforwards depend on future taxable income and limitations imposed by tax laws. The benefits of the NOL and AMT credit carryforwards have been recognized in the consolidated financial statements and are included in net deferred tax assets.

        U.S. income taxes have not been recognized on $649 million of the Company's foreign operations' undistributed earnings as of December 31, 2011, as such earnings are intended to be permanently reinvested in those operations. Furthermore, any taxes paid to foreign governments on these earnings may be used as credits against the U.S. tax on any dividend distributions from such earnings.

        The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2011 and 2010:

(in millions)	2011			2010
Balance at January 1	$	103		$	100
Additions for tax positions of prior years		1			9
Reductions for tax positions of prior years		(68	)		(7	)
Additions based on tax positions related to current year		1			1
Balance at December 31	$	37		$	103

        Included in the balances at December 31, 2011 and 2010 were $2 million and $3 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balances at those dates were $35 million and $100 million, respectively, of tax positions for which the ultimate deductibility is certain, but for which there is uncertainty about the timing of deductibility. The timing of such deductibility would not affect the annual effective tax rate.

        The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2011 and 2010, the Company recognized approximately $(122) million and $79 million in interest, respectively. The Company had approximately $48 million and $170 million accrued for the payment of interest at December 31, 2011 and 2010, respectively.

        The IRS is conducting an examination of the Company's U.S. income tax returns for 2009 and 2010. The Company does not expect any significant changes to its liability for unrecognized tax benefits during the next twelve months.