TRAVELERS COMPANIES, INC. | 2013 | FY | 3


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

                   

Current expense (benefit):

                   

Federal

  $ 1,059   $ 406   $ (176 )

Foreign

    30     45     34  

State

    6     3     3  
               

Total current tax expense (benefit)

    1,095     454     (139 )
               

Deferred expense:

                   

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

   
 
   
 
   
 
 

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

                   

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

                   

Statutory tax rate

    35 %   35 %   35 %
               

Expected federal income tax expense

    1,731     1,108     473  

Tax effect of:

                   

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

             

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.


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