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):



	2015					2014					2013
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	565				$	626				$	689

Income taxes at statutory rate	$	198		35	%	$	219		35	%	$	241		35	%
Effect of:
Tax exempt interest	(27		)	(5	%)	(25		)	(4	%)	(21		)	(3	%)
Losses of managed investment entities	—			—	%	18			3	%	9			1	%
Change in valuation allowance	23			4	%	7			1	%	1			—	%
Subsidiaries not in AFG’s tax return	2			1	%	1			—	%	2			—	%
Other	(1		)	—	%	—			—	%	4			1	%
Provision for income taxes as shown in the Statement of Earnings	$	195		35	%	$	220		35	%	$	236		34	%

AFG’s 2012 — 2015 tax years remain subject to examination by the IRS.

Total earnings before income taxes include losses subject to tax in foreign jurisdictions of $66 million in 2015 compared to losses of $4 million in 2014 and income of $4 million in 2013.

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



	2015			2014			2013
Current taxes:
Federal	$	216		$	265		$	308
State	8			8			5
Deferred taxes:
Federal	(29		)	(53		)	(77		)
Provision for income taxes	$	195		$	220		$	236

For income tax purposes, AFG and its subsidiaries had the following carryforwards available at December 31, 2015 (in millions):


(*)	£90 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 AFG’s Balance Sheet at December 31 were as follows (in millions):



	2015									2014
	Excluding Unrealized Gains			Impact of Unrealized Gains			Total			Excluding Unrealized Gains			Impact of Unrealized Gains			Total
Deferred tax assets:
Federal net operating loss carryforwards	$	50		$	—		$	50		$	51		$	—		$	51
Foreign underwriting losses	77			—			77			56			—			56
Capital loss carryforwards	32			—			32			—			—			—
Insurance claims and reserves	691			22			713			682			75			757
Employee benefits	115			—			115			107			—			107
Other, net	33			(4		)	29			26			(11		)	15
Total deferred tax assets before valuation allowance	998			18			1,016			922			64			986
Valuation allowance against deferred tax assets	(130		)	—			(130		)	(109		)	—			(109		)
Total deferred tax assets	868			18			886			813			64			877
Deferred tax liabilities:
Subsidiaries not in AFG’s tax return (*)	(63		)	—			(63		)	(61		)	—			(61		)
Investment securities	23			(281		)	(258		)	(6		)	(657		)	(663		)
Deferred policy acquisition costs	(418		)	82			(336		)	(364		)	186			(178		)
Total deferred tax liabilities	(458		)	(199		)	(657		)	(431		)	(471		)	(902		)
Net deferred tax asset (liability)	$	410		$	(181	)	$	229		$	382		$	(407	)	$	(25	)

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

AFG’s net deferred tax asset at December 31, 2015, is included in other assets in AFG’s Balance Sheet; its net deferred tax liability at December 31, 2014, is included in other liabilities.

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. Due to uncertainty concerning the realization of the deferred tax benefits associated with these losses, AFG maintains a full valuation allowance of $77 million against these deferred tax assets at December 31, 2015. 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.

AFG increased its liability for uncertain tax positions by $1 million in 2015 due to uncertainty in state taxation of its surplus lines insurance subsidiaries.

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 were 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, exclusive of interest, for the uncertainty as to the timing of tax return inclusion of income related to certain securities.

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



	2015		2014			2013
Balance at January 1	$	—	$	19		$	18
Additions for tax positions of prior years	1		—			—
Reductions for tax positions of prior years	—		(8		)	—
Additions for tax positions of current year	—		—			1
Settlements	—		(11		)	—
Balance at December 31	$	1	$	—		$	19

AFG’s provision for income taxes included an expense of less than $1 million in 2015, a benefit of $1 million in 2014 and an expense of $1 million in 2013 of interest (net of federal benefit or expense). AFG’s liability for interest related to unrecognized tax benefits was less than $1 million at December 31, 2015 and $1 million at December 31, 2013 (net of federal benefit); no penalties were accrued at those dates.

Cash payments for income taxes, net of refunds, were $234 million, $347 million and $204 million for 2015, 2014 and 2013, respectively.

Operating Loss – U.S.

Operating Loss – United Kingdom

indefinite

Capital Loss – U.S.