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Income Taxes | 12 Months Ended
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Dec. 31, 2011
Income Taxes |
Income Taxes |
NOTE 7. Income Taxes The Company and its Bermuda domiciled subsidiaries are not subject to Bermuda income tax under current Bermuda law. In the event there is a change in the current law such that taxes are imposed, the Company and its Bermuda domiciled subsidiaries would be exempt from such tax until March 31, 2035, pursuant to the Bermuda Exempted Undertakings Tax Protection Act of 1966. The Company has subsidiaries and branches that operate in various other jurisdictions around the world that are subject to tax in the jurisdictions in which they operate. The jurisdictions in which the Company’s subsidiaries and branches are subject to tax are Australia, Belgium, Canada, Germany, Gibraltar, Luxembourg, the Netherlands, Singapore, Sweden, Switzerland, the United Kingdom and the United States. The total income tax benefit (expense) for the years ended December 31, 2011, 2010 and 2009 consisted of the following:
|  | Year Ended December 31, |
Millions |  | 2011 |  | 2010 |  | 2009 |
Current tax benefit (expense): |  |  |  |  |  |  |
U.S. federal |  | $ | 39.5 |  | $ | 52.4 |  | $ | (40.0 | )
State |  | (2.5 | ) | (2.2 | ) | (1.5 | )
Non-U.S. |  | 5.1 |  | (9.1 | ) | (2.7 | )
Total current tax benefit (expense) |  | 42.1 |  | 41.1 |  | (44.2 | )
Deferred tax benefit (expense): |  |  |  |  |  |  |
U.S. federal |  | (34.1 | ) | (61.6 | ) | (139.0 | )
State |  | — |  | — |  | — |
Non-U.S. |  | 114.7 |  | 3.6 |  | (31.0 | )
Total deferred tax benefit (expense) |  | 80.6 |  | (58.0 | ) | (170.0 | )
Total income tax benefit (expense) |  | $ | 122.7 |  | $ | (16.9 | ) | $ | (214.2 | )
Effective Rate Reconciliation A reconciliation of taxes calculated using the 35% U.S. statutory rate (the tax rate at which the majority of White Mountains’ worldwide operations are taxed) to the income tax (expense) benefit on pre-tax income follows:
|  | Year Ended December 31, |
Millions |  | 2011 |  | 2010 |  | 2009 |
Tax (expense) benefit at the U.S. statutory rate |  | $ | (21.5 | ) | $ | (53.6 | ) | $ | (279.1 | )
Differences in taxes resulting from: |  |  |  |  |  |  |
Change in valuation allowance |  | 128.2 |  | 2.6 |  | 53.7 |
Non-U.S. earnings, net of foreign taxes |  | 6.2 |  | 22.8 |  | (1.2 | )
Tax reserve adjustments |  | 4.3 |  | (2.8 | ) | 8.8 |
Tax exempt interest and dividends |  | 2.9 |  | 2.3 |  | 1.7 |
Tax rate change enacted in Luxembourg |  | 1.2 |  | 2.8 |  | — |
Withholding tax |  | .2 |  | (.2 | ) | (.7 | )
Purchase of subsidiaries |  | — |  | 4.5 |  | — |
Sale of subsidiaries |  | — |  | 4.3 |  | — |
Other, net |  | 1.2 |  | .4 |  | 2.6 |
Total income tax benefit (expense) on pre-tax income |  | $ | 122.7 |  | $ | (16.9 | ) | $ | (214.2 | )
The non-U.S. component of pre-tax income was $65.4 million, $74.4 million and $221.0 million for the years ended December 31, 2011, 2010 and 2009. Tax Payments and Receipts Net income tax payments to (receipts from) national governments (primarily the United States) totaled $12.5 million, $(47.0) million and $(17.5) million for the years ended December 31, 2011, 2010 and 2009. Deferred Tax Inventory Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for tax purposes. An outline of the significant components of White Mountains’ deferred tax assets and liabilities follows:
|  | December 31, |
Millions |  | 2011 |  | 2010 |
Deferred income tax assets related to: |  |  |  |  |
Non-U.S. net operating loss carryforwards |  | $ | 504.0 |  | $ | 545.4 |
Loss reserve discount |  | 114.2 |  | 142.4 |
U.S. federal and state net operating loss carryforwards |  | 102.7 |  | 103.6 |
Incentive compensation |  | 43.4 |  | 36.9 |
Unearned premiums |  | 41.2 |  | 37.3 |
U.S. tax credit carryforwards |  | 13.5 |  | 12.0 |
Deferred compensation |  | 11.4 |  | 13.1 |
Loss on sale of AutoOne |  | 10.4 |  | — |
Pension and benefit accruals |  | 8.0 |  | 4.3 |
Accrued interest |  | 3.5 |  | .5 |
Investment basis differences |  | 1.6 |  | 7.3 |
Fixed assets |  | (.1 | ) | 4.8 |
Other items |  | 9.5 |  | 14.1 |
Total gross deferred income tax assets |  | 863.3 |  | 921.7 |
Less: valuation allowances |  | (232.7 | ) | (385.8 | )
Total net deferred income tax assets |  | 630.6 |  | 535.9 |
Deferred income tax liabilities related to: |  |  |  |  |
Safety reserve |  | 369.6 |  | 378.5 |
Deferred acquisition costs |  | 48.8 |  | 41.5 |
Net unrealized investment gains |  | 34.8 |  | 55.8 |
Purchase accounting |  | .7 |  | 2.1 |
Intangible assets |  | (.1 | ) | .1 |
Other items |  | 5.4 |  | (.8 | )
Total deferred income tax liabilities |  | 459.2 |  | 477.2 |
Net deferred tax asset (liability) |  | $ | 171.4 |  | $ | 58.7 |
White Mountains’ deferred tax assets are net of U.S. federal, state, and non-U.S. valuation allowances and, to the extent they relate to non-U.S. jurisdictions, they are shown at year-end exchange rates. Valuation Allowance White Mountains records a valuation allowance against deferred tax assets if it becomes more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in income tax expense in the period of change. In determining whether or not a valuation allowance, or change therein, is warranted, White Mountains considers factors such as prior earnings history, expected future earnings, carryback and carryforward periods and strategies that if executed would result in the realization of a deferred tax asset. During the next twelve months, it is possible that certain planning strategies will no longer be sufficient to utilize the entire deferred tax asset, which could result in material changes to White Mountains’ deferred tax assets and tax expense. Of the $232.7 million valuation allowance at December 31, 2011, $225.5 million relates to deferred tax assets on net operating losses in Luxembourg subsidiaries (discussed below under “Net Operating Loss Carryforwards”) that are not expected to have significant income in the future, $6.9 million relates to deferred tax assets on U.S. losses and other federal deferred tax benefits. Of the $385.8 million valuation allowance at December 31, 2010, $379.6 million relates to deferred tax assets on net operating losses in Luxembourg subsidiaries (discussed below under “Net Operating Loss Carryforwards”) that are not expected to have significant income in the future, $6.2 million relates to deferred tax assets on U.S. losses and other federal deferred tax benefits. Release of Valuation Allowance in Luxembourg During the fourth quarter of 2011, White Mountains recorded a $129.5 million tax benefit from the release of valuation allowances against deferred tax assets in two Luxembourg domiciled subsidiaries, White Sands Holdings (Luxembourg) S.à r.l. (“Sands”) and OneBeacon Holdings (Luxembourg) S.à r.l. (“Holdings”). These companies had built up substantial deferred tax assets due to net operating loss carryforwards (“NOLs”). There were full valuation allowances on these deferred tax assets in periods prior to the fourth quarter of 2011 because neither company expected future taxable income to utilize them. During the fourth quarter, Sirius Group reorganized its corporate structure to optimize operational and capital efficiency. As part of the Reorganization, additional internal debt instruments were added to Sirius International Holdings Sweden AB. These additional internal debt instruments were initially contributed to Sands and later some were contributed to Holdings after Sirius Group acquired Holdings from OneBeacon on January 24, 2012. As the plan for the Sirius Group to acquire Holdings and contribute the notes was in place on December 31, 2011, and this was a transaction between entities under common control, White Mountains accounted for the tax effects of the transaction as if it had occurred in 2011. The valuation allowance released at Sands and Holdings is equal to the expected future tax-effected income from the notes. The notes have staggered maturity dates with the longest dated note being 30 years. The remaining deferred tax asset for the unutilized NOLs at both companies still carries a full valuation allowance as no additional taxable income is expected. Net Operating Loss and Capital Loss Carryforwards Net operating loss and capital loss carryforwards as of December 31, 2011, the expiration dates and the deferred tax assets thereon are as follows:
|  | December 31, 2011 |
Millions |  | United States |  | Luxembourg |  | Sweden |  | Total |
2012 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
2013-2017 |  | 2.4 |  | — |  | — |  | 2.4 |
2018-2022 |  | 18.7 |  | — |  | — |  | 18.7 |
2023-2032 |  | 305.7 |  | — |  | — |  | 305.7 |
No expiration date |  | — |  | 1,740.3 |  | 10.7 |  | 1,751.0 |
Total |  | $ | 326.8 |  | $ | 1,740.3 |  | $ | 10.7 |  | $ | 2,077.8 |
Gross deferred tax asset |  | $ | 102.7 |  | $ | 501.2 |  | $ | 2.8 |  | $ | 606.7 |
Valuation allowance |  | (1.8 | ) | (225.5 | ) | (.3 | ) | (227.6 | )
Net deferred tax asset |  | $ | 100.9 |  | $ | 275.7 |  | $ | 2.5 |  | $ | 379.1 |
White Mountains expects to utilize net operating loss carryforwards in Luxembourg of $999.7 million but does not expect to utilize the remainder as they belong to companies that are not expected to have significant income in the future. These losses primarily relate to tax deductible write-downs in 2007 and 2008 of investments in U.S. subsidiaries held by Luxembourg subsidiaries. Included in the U.S. net operating loss carryforwards are losses of $29.1 million subject to an annual limitation on utilization under Internal Revenue Code Section 382. At December 31, 2011, there were U.S. foreign tax credit carryforwards available of $8.8 million, which begin to expire in 2016. At December 31, 2011, there were U.S. low-income housing tax credit carryforwards available of $2.0 million, which begin to expire in 2031. Also, at December 31, 2011, there were U.S. alternative minimum tax credit carryforwards of $2.7 million which do not expire. During 2010, White Mountains International S.à r.l. (“WMI”) received a tax ruling in Luxembourg which allowed it to change its tax functional currency in Luxembourg to the Swedish krona from the euro. Pursuant to the ruling, WMI revalued its NOL carryforwards in Luxembourg using the December 31, 2008 euro/krona exchange rate. This resulted in WMI recording an $11.9 million deferred tax benefit in 2010 for the increase in its NOLs in Luxembourg. ASC 740-10 Under ASC 740-10, recognition of the benefit of a given tax position is based upon whether or not a company determines that it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. In evaluating the more-likely-than-not recognition threshold, White Mountains must presume that the tax position will be subject to examination by a taxing authority with full knowledge of all relevant information. If the recognition threshold is met, then the tax position is measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Millions |  | Permanent Differences(1) |  | Temporary Differences(2) |  | Interest and Penalties(3) |  | Total |
Balance at January 1, 2009 |  | $ | 61.4 |  | $ | 17.1 |  | $ | 8.3 |  | $ | 86.8 |
Changes in prior year tax positions |  | 7.2 |  | 46.1 |  | 3.1 |  | 56.4 |
Tax positions taken during the current year |  | — |  | 16.4 |  | — |  | 16.4 |
Lapse in statute of limitations |  | (1.0 | ) | — |  | (.2 | ) | (1.2 | )
Settlements with tax authorities |  | (53.7 | ) | (.9 | ) | (6.9 | ) | (61.5 | )
Balance at December 31, 2009 |  | 13.9 |  | 78.7 |  | 4.3 |  | 96.9 |
Changes in prior year tax positions |  | .5 |  | (8.5 | ) | 1.9 |  | (6.1 | )
Tax positions taken during the current year |  | .4 |  | 5.0 |  | — |  | 5.4 |
Lapse in statute of limitations |  | — |  | — |  | — |  | — |
Settlements with tax authorities |  | (.3 | ) | (.1 | ) | — |  | (.4 | )
Balance at December 31, 2010 |  | 14.5 |  | 75.1 |  | 6.2 |  | 95.8 |
Changes in prior year tax positions |  | (.9 | ) | .1 |  | 2.0 |  | 1.2 |
Tax positions taken during the current year |  | — |  | (20.4 | ) | — |  | (20.4 | )
Lapse in statute of limitations |  | (3.4 | ) | (5.7 | ) | (1.4 | ) | (10.5 | )
Settlements with tax authorities |  | (.6 | ) | — |  | — |  | (.6 | )
Balance at December 31, 2011 |  | $ | 9.6 |  | $ | 49.1 |  | $ | 6.8 |  | $ | 65.5 |
(1) Represents the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate. (2) Represents the amount of unrecognized tax benefits that, if recognized would create a temporary difference between the reported amount of an item in the Company’s Consolidated Balance Sheet and its tax basis. (3) Net of tax benefit. If recognized, $16.4 million (tax plus interest and penalties) would be recorded as a reduction to income tax expense. Also included in the balance at December 31, 2011, are $49.1 million of tax positions for which ultimate deductibility is highly certain but the timing of deductibility is uncertain. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. On November 18, 2009, the Internal Revenue Service (“IRS”) released a coordinated issue paper outlining their position with respect to loss reserves. The vast majority of the increase during 2009 and decrease during 2011 relates to deductions for loss reserves in which the timing of the deductions is uncertain. White Mountains classifies all interest and penalties on unrecognized tax benefits as part of income tax expense. During the years ended December 31, 2011, 2010 and 2009 White Mountains recognized $0.6 million, $1.9 million, $(4.0) million in interest (benefit) expense, net of any tax benefit. The balance of accrued interest at December 31, 2011 and 2010 is $6.8 million and $6.2 million, net of any tax benefit. Tax Examinations With few exceptions, White Mountains is no longer subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years before 2005. On October 14, 2009, a settlement was reached with the IRS on the 2003 through 2004 federal tax examination for certain U.S. subsidiaries of OneBeacon, Sirius Group and Esurance. The settlement resulted in an assessment of $24.9 million of additional tax or a total assessment of $51.9 million including interest, withholding tax and utilization of credits. White Mountains recorded a tax benefit of $17.8 million in the fourth quarter of 2009 from the settlement of the 2003 through 2004 tax examination. The IRS is conducting an examination of income tax returns for 2005 and 2006 for certain U.S. subsidiaries of OneBeacon. On January 5, 2011, White Mountains received Form 4549-A (Income Tax Discrepancy Adjustments) from the IRS relating to the examination of tax years 2005 and 2006. The estimated total assessment, including interest and utilization of alternative minimum and foreign tax credit carryovers, is $19.6 million. White Mountains disagrees with the adjustments proposed by the IRS and intends to defend its position. The timing of the resolution of these issues is uncertain, however, it is reasonably possible that the resolution could occur within the next twelve months. An estimate of the range of potential outcomes cannot be made at this time. When ultimately settled, White Mountains does not expect the resolution of this examination to result in a material change to its financial position. On July 28, 2011, the IRS commenced an examination of the income tax returns for 2007, 2008 and 2009 for certain U.S. subsidiaries of OneBeacon. White Mountains does not expect the resolution of this examination to result in a material change to its financial position. On December 15, 2011, the IRS commenced an examination of the income tax returns for 2010 for certain U.S. subsidiaries of AFI. Pursuant to a Stock Purchase Agreement dated as of May 17, 2011 between White Mountains and Allstate, White Mountains is required to indemnify Allstate for any changes in pre-closing taxes. White Mountains does not expect the resolution of this examination to result in a material change to its financial position. The IRS conducted an examination of income tax returns for 2006 and 2007 for certain U.S. subsidiaries of Sirius Group. On October 26, 2011, the Sirius Group received and signed the IRS Revenue Agent’s Report, which contained no proposed adjustments. The IRS also examined the U.S. income tax return filed by WM Belvaux S.à r.l., a Luxembourg subsidiary, for tax year 2007. On May 3, 2011, the exam was completed with no proposed adjustments.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32537-109319 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 136, 172 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 109 -Paragraph 43, 44, 45, 46, 47, 48, 49 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 08 -Paragraph h -Article 4 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32559-109319 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32639-109319 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 15 -URI http://asc.fasb.org/extlink&oid=6907707&loc=d3e32718-109319 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(h)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 + Details
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