12. INCOME TAXES
|
(for the year ended December 31, in millions) |
2013 | 2012 | 2011 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Composition of income tax expense (benefit) included in the consolidated statement of income |
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|
Current expense (benefit): |
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|
Federal |
$ | 1,059 | $ | 406 | $ | (176 | ) | |||
|
Foreign |
30 | 45 | 34 | |||||||
|
State |
6 | 3 | 3 | |||||||
|
Total current tax expense (benefit) |
1,095 | 454 | (139 | ) | ||||||
|
Deferred expense: |
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|
Federal |
167 | 223 | 63 | |||||||
|
Foreign |
10 | 16 | 2 | |||||||
|
Total deferred tax expense |
177 | 239 | 65 | |||||||
|
Total income tax expense (benefit) included in the consolidated statement of income |
1,272 | 693 | (74 | ) | ||||||
|
Composition of income tax included in shareholders' equity |
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|
Expense (benefit) relating to stock-based compensation, and the expense (benefit) related to the changes in unrealized gain on investments, unrealized loss on foreign exchange and other comprehensive income |
(822 | ) | 57 | 399 | ||||||
|
Total income tax expense included in the consolidated financial statements |
$ | 450 | $ | 750 | $ | 325 | ||||
|
(for the year ended December 31, in millions) |
2013 | 2012 | 2011 | |||||||
|
Income before income taxes |
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|
U.S |
$ | 4,804 | $ | 2,955 | $ | 1,175 | ||||
|
Foreign |
141 | 211 | 177 | |||||||
|
Total income before income taxes |
4,945 | 3,166 | 1,352 | |||||||
|
Effective tax rate |
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|
Statutory tax rate |
35 | % | 35 | % | 35 | % | ||||
|
Expected federal income tax expense |
1,731 | 1,108 | 473 | |||||||
|
Tax effect of: |
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|
Nontaxable investment income |
(409 | ) | (427 | ) | (449 | ) | ||||
|
Resolution of prior year tax matters |
(63 | ) | — | (104 | ) | |||||
|
Other, net |
13 | 12 | 6 | |||||||
|
Total income tax expense (benefit) |
$ | 1,272 | $ | 693 | $ | (74 | ) | |||
|
Effective tax rate |
26 | % | 22 | % | (5 | )% | ||||
The Company paid income taxes of $1.06 billion, $188 million and $218 million during the years ended December 31, 2013, 2012 and 2011, respectively. The current income tax payable was $85 million and $102 million at December 31, 2013 and 2012, respectively, and was included in other liabilities in the consolidated balance sheet.
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) |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Deferred tax assets |
|||||||
|
Claims and claim adjustment expense reserves |
$ | 825 | $ | 888 | |||
|
Unearned premium reserves |
693 | 689 | |||||
|
Other |
621 | 741 | |||||
|
Total gross deferred tax assets |
2,139 | 2,318 | |||||
|
Deferred tax liabilities |
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|
Deferred acquisition costs |
554 | 590 | |||||
|
Investments |
931 | 1,800 | |||||
|
Internally developed software |
138 | 134 | |||||
|
Other |
213 | 132 | |||||
|
Total gross deferred tax liabilities |
1,836 | 2,656 | |||||
|
Total deferred tax asset (liability) |
$ | 303 | $ | (338 | ) | ||
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, 2013, the Company had net operating loss (NOL) carryforwards in the United States, Canada and United Kingdom. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitations imposed by tax laws. The benefits of the NOL carryforwards have been recognized in the consolidated financial statements and are included in net deferred tax assets. The NOL amounts by jurisdiction and year of expiration are as follows:
|
(in millions) |
Amount | Year of expiration | |||||
|---|---|---|---|---|---|---|---|
|
United States |
$ | 26 | 2018 | ||||
|
Canada |
100 | 2028 - 2033 | |||||
|
United Kingdom |
123 | None | |||||
U.S. income taxes have not been recognized on $714 million of the Company's foreign operations' undistributed earnings as of December 31, 2013, 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, 2013 and 2012:
|
(in millions) |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
|
Balance at January 1 |
$ | 24 | $ | 37 | |||
|
Additions for tax positions of prior years |
— | 2 | |||||
|
Reductions for tax positions of prior years |
(3 | ) | (15 | ) | |||
|
Additions based on tax positions related to current year |
— | — | |||||
|
Balance at December 31 |
$ | 21 | $ | 24 | |||
Included in the balances at December 31, 2013 and 2012 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 $19 million and $21 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, 2013 and 2012, the Company recognized approximately $(67) million and $46 million in interest, respectively. The Company had approximately $27 million and $94 million accrued for the payment of interest at December 31, 2013 and 2012, respectively.
The IRS is conducting an examination of the Company's U.S. income tax returns for 2011 and 2012. The Company does not expect any significant changes to its liability for unrecognized tax benefits during the next twelve months.