Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes [Abstract]

Income Taxes

Note 16― Income Taxes

A. Income Tax Expense

The Company continues to accrue income taxes on undistributed earnings of certain foreign operations using the foreign jurisdictions' tax rates, as compared to the higher U.S. statutory tax rate. Beginning in the first quarter of 2012, the Company began computing income taxesattributable to its China and Indonesia operations using the same method, based upon a determination that the earnings of these operations wouldbe permanently invested overseas. The Company continues to evaluate the permanent investment of foreign earnings for additional jurisdictions.

Shareholders' net income for the nine months ended September 30, 2012 increased by $29 million, that included $13millionattributable to the first quarter implementation of this method for the Company'sChina and Indonesia operations. Shareholders' net income for the nine months ended September 30, 2011 increased by $22 million related to this method.Permanent investment of foreign operation earnings has resulted in cumulative unrecognized deferred tax liabilities of $98 million throughSeptember 30, 2012. The year-to-date change in the cumulative unrecognized deferred tax liability includes a $9 million reduction due to the transition in the accounting for deferred acquisition costs, that was adopted through retrospective adjustment on January 1, 2012. See Note 2 for additional information.

B. Unrecognized Tax Benefits

Gross unrecognized tax benefits increased for the nine months ended September 30, 2012 by $15 million, resulting in a decrease to shareholders' net income of $10 million.

During the first quarter of 2011, the IRS completed its examination of the Company's 2007 and 2008 consolidated federal income tax returns, resulting in an increase to shareholders' net income of $24million($33 million reported in income tax expense, partially offset by a $9 million pre-tax charge). The increase in shareholders' net income included a reduction in net unrecognized tax benefits of $11 million and a reduction of interest expense of $11 million (reported in income tax expense).

The Company has determined it is at least reasonably possible that within the next twelve months there could be a significant change in the level of unrecognized tax benefits should there be developments relative to certainIRS specific matters. Any changes are not expected to have a material impact on shareholders' net income.

C. Other Tax Matters

The Company has had a continuing dispute with the IRS for tax years 2004 through 2006 regarding the appropriate reserve methodology for certain reinsurance contracts. Trial was held before the United States Tax Court for the 2004 tax year in September 2011. Prior to trial, the IRS conceded the adjustments, but continued to disagree with the Company's reserve methodology. Though the IRS concession represented a favorable development that significantly limited exposure, the Company continued to pursue the litigation in order to establish that its methodology was appropriate and could be applied prospectively. The IRS raised the same issue in its audit of the Company's 2005 and 2006 tax returns. As a result, the Company filed a petition with the United States Tax Court for these years on September 19, 2011.On September 13, 2012, the United States Tax Court issued its opinion for the 2004 year. While declining to rule on the underlying legal issue, the Tax Court opinion referenced an IRS representation that it would not challenge the Company's reserving methodology in future tax years, thereby providing certainty that the Company may use its current reserve methodology prospectively. Relative to tax years 2005 and 2006, the Tax Court has demonstrated an intention to apply its decision in the 2004 proceedings to these years. The parties are finalizing the necessary documentation to permit the Tax Court to enter its final decision for the 2004, 2005 and 2006 tax years.

The IRS has commenced examination of the Company's 2009 and 2010 consolidated federal income tax returns; this examinationis not expected to be completed prior to 2013.