Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 35% to the provision for income taxes as shown in the Statement of Earnings (dollars in millions):



	2014					2013					2012
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	626				$	689				$	537

Income taxes at statutory rate	$	219		35	%	$	241		35	%	$	188		35	%
Effect of:
Tax exempt interest	(25		)	(4	%)	(21		)	(3	%)	(23		)	(4	%)
Losses of managed investment entities	18			3	%	9			1	%	34			6	%
Change in valuation allowance	7			1	%	1			—	%	3			1	%
Subsidiaries not in AFG’s tax return	1			—	%	2			—	%	(1		)	—	%
Tax case and settlement of open tax years	—			—	%	—			—	%	(67		)	(13	%)
Other	—			—	%	4			1	%	1			—	%
Provision for income taxes as shown in the Statement of Earnings	$	220		35	%	$	236		34	%	$	135		25	%

A decision in favor of AFG from litigation with the IRS regarding the calculation of tax reserves for certain annuity liabilities became final in August 2012. As a result, during the third quarter of 2012, AFG recorded net earnings of approximately $28 million, which included the expected refund of $17 million of tax and interest paid to the IRS in 2005 and 2006 as well as a decrease in the liability for uncertain tax positions. In December 2012, AFG reached an agreement with the IRS to close subsequent years held open by the tax case. As a result, AFG decreased its tax liabilities by approximately $39 million in the fourth quarter of 2012.

AFG’s 2012 — 2014 tax years remain subject to examination by the IRS.

Total earnings before income taxes include losses subject to tax in foreign jurisdictions of less than $1 million in 2014 compared to income of $12 million in 2013 and losses of $3 million in 2012.

The total income tax provision (credit) consists of (in millions):



	2014			2013			2012
Current taxes:
Federal	$	265		$	308		$	146
State	8			5			6
Deferred taxes:
Federal	(53		)	(77		)	(17		)
Provision for income taxes	$	220		$	236		$	135

For income tax purposes, AFG and its subsidiaries had the following carryforwards available at December 31, 2014 (in millions):


(*)	£85 million

Deferred income tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The significant components of deferred tax assets and liabilities included in the Balance Sheet at December 31 were as follows (in millions):



	2014			2013
Deferred tax assets:
Federal net operating loss carryforwards	$	51		$	51
Foreign underwriting losses	56			50
Insurance claims and reserves	746			558
Employee benefits	107			98
Other, net	26			51
Total deferred tax assets before valuation allowance	986			808
Valuation allowance against deferred tax assets	(109		)	(103		)
Total deferred tax assets	877			705
Deferred tax liabilities:
Subsidiaries not in AFG’s tax return (*)	(61		)	(60		)
Investment securities	(663		)	(443		)
Deferred policy acquisition costs	(178		)	(234		)
Total deferred tax liabilities	(902		)	(737		)
Net deferred tax liability	$	(25	)	$	(32	)

(*) Related to National Interstate Corporation, a 51%-owned subsidiary.

AFG’s net deferred tax liability at December 31, 2014 and 2013 is included in other liabilities in AFG’s Balance Sheet.

The likelihood of realizing deferred tax assets is reviewed periodically; any adjustments required to the valuation allowance are made in the period during which developments requiring an adjustment become known.

“Foreign underwriting losses” in the table above include the net operating loss carryforward and other deferred tax assets related to the Marketform Lloyd’s insurance business, which resulted primarily from underwriting losses in its run-off Italian public hospital medical malpractice business that has not been written since 2008. Due to uncertainty concerning the realization of the deferred tax benefits associated with these losses, AFG maintains a full valuation allowance of $56 million against these deferred tax assets at December 31, 2014. In addition to the valuation allowance related to the Marketform Lloyd’s insurance business, the gross deferred tax asset has also been reduced by a $50 million valuation allowance related to a portion of AFG’s net operating loss carryforwards (“NOL”) subject to the separate return limitation year (“SRLY”) tax rules. A SRLY NOL can be used only by the entity that created it and only in years that both it and the consolidated group have taxable income.

The increase in the deferred tax assets related to insurance claims and reserves reflects growth in the annuity business, the April 2014 acquisition of Summit and the impact of the increase in unrealized gains on fixed maturity securities.

The changes in the deferred tax liabilities related to investment securities and deferred policy acquisition costs at year end 2014 compared to 2013 are due primarily to the increase in unrealized gains on fixed maturity securities.

In July 2014, AFG finalized a settlement with the IRS related to tax years 2008 and 2009. As a result, AFG’s uncertain tax positions are now effectively settled, allowing AFG to reduce its liability for previously uncertain tax positions by $19 million in the third quarter of 2014. Although AFG agreed to pay $11 million to the IRS, the majority of the reduction in this liability resulted in offsetting adjustments to AFG’s deferred tax liability and did not impact AFG’s effective tax rate. The portion of the reduction in this liability that favorably impacted the effective tax rate was approximately $4 million including interest. The reduction of the liability for previously uncertain tax positions includes $17 million related to the timing of recognition of investment income on certain debt securities and $2 million related to the deductibility of certain financing expenses.

AFG increased its liability for uncertain tax positions by $1 million in 2013 and $3 million in 2012, exclusive of interest, for the uncertainty as to the timing of tax return inclusion of income related to certain securities. During 2012, AFG also increased its liability for uncertain tax positions by $2 million related to the deductibility of certain financing expenses.

The resolution of the tax case and closure of subsequent tax years during 2012 (discussed above) also reduced AFG’s liability for uncertain tax positions by $36 million and the related liability for interest by $14 million. Additionally, the IRS issued new guidance during the third quarter of 2012 that brought certainty to the timing of investment deductions, which caused AFG to reduce its liability for uncertain tax positions by $10 million. Because this was solely a timing issue, the reduction in AFG’s liability for uncertain tax positions for this item was offset by an increase in AFG’s deferred tax liability with no overall impact on income tax expense.

A progression of the liability for uncertain tax positions, excluding interest and penalties, follows (in millions):



	2014			2013		2012
Balance at January 1	$	19		$	18	$	59
Reductions for tax positions of prior years	(8		)	—		(46		)
Additions for tax positions of current year	—			1		5
Settlements	(11		)	—		—
Balance at December 31	$	—		$	19	$	18

AFG’s provision for income taxes included a benefit of $1 million in 2014, an expense of $1 million in 2013 and a benefit of $14 million in 2012 of interest (net of federal benefit or expense). AFG’s liability for interest related to unrecognized tax benefits was $1 million at December 31, 2013 (net of federal benefit); no penalties were accrued at that date.

Cash payments for income taxes, net of refunds, were $347 million, $204 million and $277 million for 2014, 2013 and 2012, respectively.

Operating Loss – U.S.

Operating Loss – United Kingdom

indefinite