16. INCOME TAXES

The Company's effective income tax rate related to continuing operations varied from the maximum federal income tax rate as follows:

	For The Year Ended December 31,

	2012			2011			2010
Statutory federal income tax rate applied to pre-tax income		35.0	%		35.0	%		35.0	%
State income taxes		0.3			0.4			0.5
Investment income not subject to tax		(3.1	)		(2.2	)		(1.6	)
Uncertain tax positions		0.4			—			(1.3	)
Other		0.6			(0.3	)		0.2

		33.2	%		32.9	%		32.8	%

The annual provision for federal income tax in these financial statements differs from the annual amounts of income tax expense reported in the respective income tax returns. Certain significant revenues and expenses are appropriately reported in different years with respect to the financial statements and the tax returns.

The components of the Company's income tax expense are as follows:

	For The Year Ended December 31,

	2012		2011		2010
	(Dollars In Thousands)
Income tax expense per the income tax returns:
Federal	$	72,743	$	9,510	$	(6,723	)
State		3,443		264		3,509

Total current	$	76,186	$	9,774	$	(3,214	)

Deferred income tax expense:
Federal	$	71,659	$	142,761	$	115,172
State		2,674		2,304		(2,055	)

Total deferred	$	74,333	$	145,065	$	113,117

The components of the Company's net deferred income tax liability are as follows:

	As of December 31,

	2012			2011
	(Dollars In Thousands)
Deferred income tax assets:
Premium receivables and policy liabilities	$	56,918		$	35,432
Invested assets (other than unrealized gains)		—			60,524
Deferred compensation		78,465			72,944
U.S. capital loss carryforwards		—			4,763
Other		52,158			7,049
Valuation allowance		(4,653	)		(2,593	)

		182,888			178,119

Deferred income tax liabilities:
Deferred policy acquisition costs and value of business acquired		916,406			872,297
Invested assets (other than unrealized gains)		28,396			—
Unrealized gain on investments		974,475			566,451

		1,919,277			1,438,748

Net deferred income tax liability	$	(1,736,389	)	$	(1,260,629	)

In management's judgment, the gross deferred income tax asset as of December 31, 2012, will more likely than not be fully realized. With regard to state tax loss carryforwards, the Company has recognized a valuation allowance of $4.6 million and $2.6 million as of December 31, 2012 and 2011, respectively, related to operating loss carryforwards that it has determined are more likely than not to expire unutilized. This resulting unfavorable change of $1.3 million, net of federal income taxes, increased state income tax expense in 2012 by the same amount. As of December 31, 2012 and 2011, no valuation allowances were established with regard to deferred tax assets relating to impairments on fixed maturities, capital loss carryforwards, and unrealized losses on investments. As of December 31, 2012 and 2011, the Company relied upon certain prudent and feasible tax-planning strategies and its ability and intent to hold to recovery its fixed maturities that were reported at an unrealized loss. The Company has the ability and the intent to either hold any unrealized loss bond to maturity, thereby avoiding a realized loss, or to generate a realized gain from unrealized gain bonds if such unrealized loss bond is sold at a loss prior to maturity. As of December 31, 2012, the Company recorded a net unrealized gain on its fixed maturities.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	As of December 31,

	2012			2011
	(Dollars In Thousands)
Balance, beginning of period	$	4,840		$	13,181
Additions for tax positions of the current year		9,465			—
Additions for tax positions of prior years		64,485			106
Reductions of tax positions of prior years:
Changes in judgment		(3,498	)		(8,447	)
Settlements during the period		—			—
Lapses of applicable statute of limitations		—			—

Balance, end of period	$	75,292		$	4,840

Included in the balance above, as of December 31, 2012 and 2011, are approximately $67.7 million and $2.0 million of unrecognized tax benefits, respectively, for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductions. Other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective income tax rate but would accelerate to an earlier period the payment of cash to the taxing authority. The total amount of unrecognized tax benefits, if recognized, that would affect the effective income tax rate is approximately $7.6 million and $2.9 million as of December 31, 2012 and as of December 31, 2011, respectively.

Any accrued interest and penalties related to the unrecognized tax benefits have been included in income tax expense. These amounts were a $2.5 million detriment, a $1.4 million benefit, and a $3.6 million benefit in 2012, 2011, and 2010, respectively. The Company has approximately $4.0 million and $1.6 million of accrued interest associated with unrecognized tax benefits as of December 31, 2012 and 2011, respectively (before taking into consideration the related income tax benefit that is associated with such an expense).

During 2012, an IRS audit concluded in which the IRS proposed favorable and unfavorable adjustments to the Company's 2003 through 2007 reported taxable incomes. The Company protested certain unfavorable adjustments and is seeking resolution at the IRS' Appeals Divisions. Although it cannot be certain, the Company believes the Appeals process may conclude within the next 12 months. If this is the case, approximately $16.5 million of the unrecognized tax benefits on the above chart will be reduced. This reduction could occur because of the Company's successful negotiation of certain issues at Appeals coupled with its unsuccessful negotiations on other issues. This possible scenario includes an assumption that the Company would pay the IRS-asserted deficiencies on issues that it loses at Appeals rather than litigating such issues. If the IRS prevails at Appeals and the Company does not litigate these issues, the tax payments that would occur as a result would not materially impact the Company or its effective tax rate.

During the 12 months ended December 31, 2012 and 2011, the Company's uncertain tax position liability decreased in the amount of $3.5 million and $8.4 million, respectively, as a result of new technical guidance and other developments which led the Company to conclude that the full amount of the associated tax benefit was more than 50% likely to be realized.

In general, the Company is no longer subject to U.S. federal, state, and local income tax examinations by taxing authorities for tax years that began before 2003.