(10) Income Taxes

The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:


	Three months ended September 30,										Nine months ended September 30,
(Amounts in millions)	2016					2015					2016					2015
Pre-tax income (loss)	$	(125	)			$	(351	)			$	376				$	188

Statutory U.S. federal income tax rate	$	(44	)	35.0	%	$	(123	)	35.0	%	$	132		35.0	%	$	66		35.0	%
Increase (reduction) in rate resulting from:
State income tax, net of federal income tax effect		—		—			(1	)	0.4			1		0.2			3		1.4
Benefit on tax favored investments		1		(0.7	)		(9	)	2.5			(2	)	(0.5	)		(14	)	(7.2	)
Effect of foreign operations		5		(3.9	)		(3	)	0.8			(12	)	(3.3	)		(33	)	(17.5	)
Non-deductible expenses		(1	)	0.5			—		—			(1	)	(0.1	)		1		0.6
Interest on uncertain tax positions		—		—			1		(0.2	)		—		—			1		0.4
Valuation allowance		265		(212.9	)		—		—			240		63.8			—		—
Stock-based compensation		2		(1.8	)		2		(0.5	)		5		1.4			4		2.0
Loss on sale of business		—		—			—		—			(1	)	(0.2	)		—		—
Other, net		(6	)	4.8			(1	)	0.1			(7	)	(1.8	)		(1	)	(0.4	)

Effective rate	$	222		(179.0	)%	$	(134	)	38.1	%	$	355		94.5	%	$	27		14.3	%

The effective tax rate for the three and nine months ended September 30, 2016 was impacted by a valuation allowance of $265 million recorded on deferred tax assets. In light of our latest financial projections, including the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership. The effective tax rate for the nine months ended September 30, 2016 was also impacted by the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe due to taxable gains supporting the recognition of these deferred tax assets in the current year.