16. Income Taxes
The Company and its domestic subsidiaries file a consolidated federal income tax return. Tax liabilities and benefits realized by the consolidated group are allocated as generated by the respective entities.
The Internal Revenue Service ("IRS") is currently examining the Company's 2011 and 2012 federal income tax returns. The IRS has completed its examination of the Company's 2009 and 2010 federal income tax returns and issued a Revenue Agent's Report on April 15, 2013. The Company protested certain of the adjustments contained in the report and the case was forwarded to Appeals on June 13, 2013. The IRS has also completed its examinations of the Company's federal income tax returns for the years 2005-2008 and a final settlement for those years has been approved by the Joint Committee on Taxation. The Company's tax years prior to 2005 have been examined by the IRS and the statute of limitations has expired on those years. Any adjustments that may result from IRS examinations of tax returns are not expected to have a material effect on the results of operations, cash flows or financial position of the Company.
The reconciliation of the change in the amount of unrecognized tax benefits for the years ended December 31 is as follows:
| ($ in millions) |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Balance — beginning of year |
$ | 25 | $ | 25 | $ | 25 | ||||
|
Increase for tax positions taken in a prior year |
1 | — | — | |||||||
|
Decrease for tax positions taken in a prior year |
— | — | — | |||||||
|
Increase for tax positions taken in the current year |
— | — | — | |||||||
|
Decrease for tax positions taken in the current year |
— | — | — | |||||||
|
(Decrease) increase for settlements |
(26 | ) | — | — | ||||||
|
Reductions due to lapse of statute of limitations |
— | — | — | |||||||
| | | | | | | | | | | |
|
Balance — end of year |
$ | — | $ | 25 | $ | 25 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company believes it is reasonably possible that the liability balance will not significantly increase within the next twelve months. Because of the impact of deferred tax accounting, recognition of previously unrecognized tax benefits is not expected to impact the Company's effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. The Company did not record interest income or expense relating to unrecognized tax benefits in income tax expense in 2013, 2012 or 2011. As of December 31, 2013 and 2012, there was no interest accrued with respect to unrecognized tax benefits. No amounts have been accrued for penalties.
The components of the deferred income tax assets and liabilities as of December 31 are as follows:
| ($ in millions) |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Deferred assets |
|||||||
|
Unearned premium reserves |
$ | 722 | $ | 666 | |||
|
Discount on loss reserves |
238 | 280 | |||||
|
Accrued compensation |
226 | 212 | |||||
|
Difference in tax bases of invested assets |
223 | 353 | |||||
|
Sale of subsidiary |
196 | 27 | |||||
|
Other postretirement benefits |
105 | 218 | |||||
|
Pension |
— | 278 | |||||
|
Alternative minimum tax credit carryforward |
— | 165 | |||||
|
Other assets |
96 | 92 | |||||
| | | | | | | | |
|
Total deferred assets |
1,806 | 2,291 | |||||
|
Deferred liabilities |
|||||||
|
DAC |
(1,077 | ) | (917 | ) | |||
|
Unrealized net capital gains |
(849 | ) | (1,527 | ) | |||
|
Life and annuity reserves |
(206 | ) | (130 | ) | |||
|
Pension |
(136 | ) | — | ||||
|
Other liabilities |
(324 | ) | (314 | ) | |||
| | | | | | | | |
|
Total deferred liabilities |
(2,592 | ) | (2,888 | ) | |||
|
Net deferred liability before classification as held for sale |
(786 | ) | (597 | ) | |||
|
Deferred taxes classified as held for sale |
(151 | ) | — | ||||
| | | | | | | | |
|
Net deferred liability |
$ | (635 | ) | $ | (597 | ) | |
| | | | | | | | |
| | | | | | | | |
Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized based on the Company's assessment that the deductions ultimately recognized for tax purposes will be fully utilized.
As of December 31, 2013, the Company has net operating loss carryforwards of $110 million which will expire at the end of 2014 through 2029.
The components of income tax expense for the years ended December 31 are as follows:
| ($ in millions) |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Current |
$ | 869 | $ | 295 | $ | 14 | ||||
|
Deferred |
247 | 705 | 158 | |||||||
| | | | | | | | | | | |
|
Total income tax expense |
$ | 1,116 | $ | 1,000 | $ | 172 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company paid income taxes of $500 million, $280 million and $32 million in 2013, 2012 and 2011, respectively. The Company had current income tax payable of $203 million as of December 31, 2013 and current income tax receivable of $157 million as of December 31, 2012.
A reconciliation of the statutory federal income tax rate to the effective income tax rate on income from operations for the years ended December 31 is as follows:
| |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||
|
Tax-exempt income |
(1.8 | ) | (3.0 | ) | (13.6 | ) | ||||
|
Tax credits |
(2.2 | ) | (1.4 | ) | (2.1 | ) | ||||
|
Dividends received deduction |
(0.6 | ) | (0.5 | ) | (1.8 | ) | ||||
|
Sale of subsidiary |
2.0 | — | — | |||||||
|
Other |
0.5 | 0.2 | 0.4 | |||||||
| | | | | | | | | | | |
|
Effective income tax rate |
32.9 | % | 30.3 | % | 17.9 | % | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |