Income Taxes

9 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 21% to the provision for income taxes as shown in AFG’s Statement of Earnings (dollars in millions):

	Three months ended September 30,								Nine months ended September 30,
	2020				2019				2020				2019
	Amount		% of EBT		Amount		% of EBT		Amount		% of EBT		Amount		% of EBT
Earnings (loss) before income taxes (“EBT”)	$	134			$	177			$	(36)			$	849
Income taxes at statutory rate	$	28	21	%	$	37	21	%	$	(8)	21	%	$	178	21	%
Effect of:
Pending sale of Neon	(73)		(54	%)	—		—	%	(73)		203	%	—		—	%
Tax exempt interest	(3)		(2	%)	(4)		(2	%)	(9)		25	%	(11)		(1	%)
Stock-based compensation	—		—	%	(2)		(1	%)	(4)		11	%	(6)		(1	%)
Dividends received deduction	(1)		(1	%)	(1)		(1	%)	(2)		6	%	(3)		—	%
Adjustment to prior year taxes	(1)		(1	%)	(3)		(2	%)	(1)		3	%	(3)		—	%
Employee Stock Ownership Plan dividends paid deduction	(1)		(1	%)	—		—	%	(1)		3	%	(1)		—	%
Change in valuation allowance	20		15	%	4		2	%	31		(86	%)	7		1	%
Nondeductible expenses	2		1	%	2		1	%	4		(11	%)	6		1	%
Foreign operations	(4)		(3	%)	—		—	%	(3)		8	%	—		—	%
Other	3		3	%	1		1	%	3		(8	%)	4		(1	%)
Provision (credit) for income taxes as shown in the statement of earnings	$	(30)	(22	%)	$	34	19	%	$	(63)	175	%	$	171	20	%

In September 2020, AFG reached a definitive agreement to sell the legal entities that own Neon (see Note B — “Acquisitions and Sale of Businesses”, which will result in a loss on sale for U.S. tax purposes. In accordance with accounting guidance for transactions that meet the GAAP “held for sale” criteria, AFG recorded a $73 million tax benefit associated with this loss in the third quarter of 2020. The changes in valuation allowance in the table above are primarily increases in the valuation allowance on tax benefits related to losses in the Neon Lloyd’s insurance business.

Approximately $23 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, 2020. Since AFG maintains a full valuation allowance against its SRLY NOLs, the expiration of these loss carryforwards will be offset by a corresponding reduction in the valuation allowance and will have no overall impact on AFG’s income tax expense or results of operations.