16. Income Taxes

The provision for income taxes consists of the following for the years ended December 31, 2011, 2010 and 2009:


(Amounts in Thousands) Income Tax Provision (Benefit)	2011			2010			2009
Current expense (benefit)
Federal	$	11,147		$	20,693		$	11,856
Foreign		21,345			9,165			3,321
Total current tax expense		32,492			29,858			15,177
Deferred expense (benefit)
Federal	$	40,462		$	35,623		$	19,683
Foreign		(30,582	)		(18,428	)		(7,401	)
Total deferred tax expense		9,880			17,195			12,282
Total income tax expense	$	42,372		$	47,053		$	27,459

The following table is a reconciliation of the Company’s statutory income tax expense to its effective tax rate for the years ended December 31, 2011, 2010 and 2009:


(Amounts in Thousands)	2011			2010			2009
Effective tax rate
Income before equity in earnings (loss) of unconsolidated subsidiaries	$	228,654		$	171,401		$	131,504
Tax at federal statutory rate of 35%	$	80,029		$	59,990		$	46,026
Tax effects resulting from:
Net income of non-includible foreign subsidiaries		(29,063	)		(19,483	)		(12,905	)
Foreign currency gain		861			(247	)		(864	)
Other, net		(9,455	)		6,793			(4,798	)
	$	42,372		$	47,053		$	27,459
Effective tax rate		18.5	%		27.5	%		20.9	%

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities as of December 31, 2011 and 2010 are shown below:


(Amounts in Thousands)	2011			2010
Deferred tax assets:
Unearned premiums	$	55,140		$	37,930
Ceding commission		49,882			31,749
Other		15,164			12,195
Carryforward loss		14,579			20,990
Bad debt		4,904			4,628
Deferred compensation		4,837			4,132
Losses and LAE reserves		—			6,718
	$	144,506		$	118,342
Deferred tax liabilities:
Deferred acquisition costs	$	(147,819	)	$	(110,384	)
Losses and LAE reserves		(56,869	)		—
Intangible assets		(17,175	)		—
Depreciation		(12,379	)		(5,501	)
Equity results which cannot be liquidated tax free		(8,796	)		(4,179	)
Other		(6,299	)		(4,610	)
Accrual market discount		(2,062	)		(1,674	)
Cash surrender value on insurance		(1,882	)		(1,877	)
		(253,281	)		(128,225	)
Deferred tax liability, net	$	(108,775	)	$	(9,883	)

The Company’s management believes that it will realize the benefits of its deferred tax asset and, accordingly, no valuation allowance has been recorded for the periods presented. A provision has not been made for the U.S. or additional foreign taxes on undistributed earnings of foreign subsidiaries, which have been, and will continue to be reinvested. These earnings could become subject to additional tax if they were remitted as dividends, if foreign earnings were loaned to the parent entity or a U.S. affiliate, or if the Company should sell its stock in its foreign subsidiaries. It is not practicable to determine the amount of additional tax, if any, that might be payable on foreign earnings. The deferred tax liability related to loss and LAE reserves of $56,869 includes a deferred tax liability of $88,576 for equalization reserves that were acquired as part of the AmTrust Re 2007, AmTrust Re Alpha, AmTrust Re Kappa, and AmTrust Re Zeta acquisitions.

The Company’s major taxing jurisdictions include the U.S. (federal and state), the United Kingdom and Ireland. The years subject to potential audit vary depending on the tax jurisdiction. Generally, the Company’s statute of limitation is open for tax years ended December 31, 2007 and forward. As permitted by FASB ASC 740-10, the Company adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in its income tax provision. Previously, the Company’s policy was to classify interest and penalties as an operating expense in arriving at pre-tax income. At December 31, 2011, the Company does not have any accrued interest and penalties related to unrecognized tax benefits in accordance with FASB ASC 740-10.

The earnings of certain of the Company’s foreign subsidiaries have been indefinitely reinvested in foreign operations. Therefore, no provision has been made for any U.S. taxes or foreign withholding taxes that may be applicable upon any repatriation or sale. The determination of any unrecognized deferred tax liability for temporary differences related to investments in certain of the Company’s foreign subsidiaries is not practicable. At December 31, 2011 and 2010, the financial reporting basis in excess of the tax basis for which no deferred taxes have been recognized was approximately $223,000 and $163,400, respectively.

A reconciliation of the total amounts of gross unrecognized tax benefits is as follows:


(Amounts in Thousands)	2011			2010
Gross unrecognized tax benefit as of January 1	$	1,017		$	5,293
Decreases in tax positions for prior years		(1,017	)		(4,325	)
Increases in tax positions for prior years		—			49
Decreases in tax positions for current year		—			—
Increases in tax positions for current year		—			—
Lapse in statute of limitations		—			—
Settlements		—			—
Gross unrecognized tax benefits as of December 31	$	—		$	1,017

Listed below are the tax years that remain subject to examination by major tax jurisdictions:


	Open Tax Years
Major tax jurisdictions:
United States		2008 – 2011
United Kingdom		2009 – 2011
Ireland		2007 – 2011