Income Taxes

12 Months Ended

Dec. 31, 2012

Income Taxes disclosure

Income Taxes disclosure [Text Block]

12. INCOME TAXES

(for the year ended December 31, in millions)	2012			2011			2010
Composition of income tax expense (benefit) included in the consolidated statement of income
Current expense (benefit):
Federal	$	406		$	(176	)	$	846
Foreign		45			34			78
State		3			3			10
Total current tax expense (benefit)		454			(139	)		934
Deferred expense (benefit):
Federal		223			63			178
Foreign		16			2			(22	)
Total deferred tax expense		239			65			156
Total income tax expense (benefit) included in the consolidated statement of income		693			(74	)		1,090
Composition of income tax included in common shareholders' equity
Expense (benefit) relating to stock-based compensation, and the expense (benefit) related to the changes in unrealized appreciation on investments, unrealized loss on foreign exchange, unrealized loss on derivatives and other comprehensive income		57			399			(2	)
Total income tax expense included in the consolidated financial statements	$	750		$	325		$	1,088
(for the year ended December 31, in millions)	2012			2011			2010
Effective tax rate
Income before federal, foreign and state income taxes	$	3,166		$	1,352		$	4,306
Statutory tax rate		35	%		35	%		35	%
Expected federal income tax expense		1,108			473			1,507
Tax effect of:
Nontaxable investment income		(427	)		(449	)		(476	)
Favorable resolution of prior year tax matters		—			(104	)		—
Other, net		12			6			59
Total income tax expense (benefit)	$	693		$	(74	)	$	1,090
Effective tax rate		22	%		(5	)%		25	%

        The current income tax payable was $102 million at December 31, 2012 and was included in other liabilities in the consolidated balance sheet. The current income tax receivable was $119 million at December 31, 2011 and was included in other assets in the consolidated balance sheet.

        Income, before income taxes, from domestic operations for the years ended December 31, 2012, 2011 and 2010 was $3.00 billion, $1.23 billion and $4.20 billion, respectively. Income, before income taxes, from foreign operations for the years ended December 31, 2012, 2011 and 2010 was $166 million, $122 million and $106 million, respectively.

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

(at December 31, in millions)	2012			2011
Deferred tax assets
Claims and claim adjustment expense reserves	$	888		$	936
Unearned premium reserves		689			680
Other		741			844
Total gross deferred tax assets		2,318			2,460
Deferred tax liabilities
Deferred acquisition costs		590			585
Investments		1,800			1,650
Internally developed software		134			128
Other		132			90
Total gross deferred tax liabilities		2,656			2,453
Total deferred tax asset (liability)	$	(338	)	$	7

        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, 2012, the Company had net operating loss (NOL) carryforwards on a regular tax basis and an alternative minimum tax (AMT) basis of approximately $37 million and $3 million, respectively. These NOL carryforwards expire, if unused, in 2018. In addition, the Company has AMT credit carryforwards of $17 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 $755 million of the Company's foreign operations' undistributed earnings as of December 31, 2012, 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, 2012 and 2011:

(in millions)	2012			2011
Balance at January 1	$	37		$	103
Additions for tax positions of prior years		2			1
Reductions for tax positions of prior years		(15	)		(68	)
Additions based on tax positions related to current year		—			1
Balance at December 31	$	24		$	37

        Included in the balances at December 31, 2012 and 2011 were $3 million and $2 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 $21 million and $35 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, 2012 and 2011, the Company recognized approximately $46 million and $(122) million in interest, respectively. The Company had approximately $94 million and $48 million accrued for the payment of interest at December 31, 2012 and 2011, 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.