Income Taxes

The significant components of deferred tax assets and liabilities included in the consolidated balance sheets at December 31 were as follows:



(In millions)	At December 31,
	2013		2012
Deferred tax assets:
Loss and loss expense reserves	$	206	$	202
Unearned premiums	137		124
Investments	19		31
Other	46		39
Total	408		396
Deferred tax liabilities:
Unrealized investment gains, net and other	807		605
Deferred acquisition costs	178		163
Life policy reserves	86		65
Other	10		16
Total	1,081		849
Net deferred tax liability	$	673	$	453

Deferred tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for tax purposes.

The differences between the 35 percent statutory income tax rate and our effective income tax rate were as follows:



(Dollars in millions)	Years ended December 31,
	2013					2012					2011
Tax at statutory rate:	$	250		35.0	%	$	198		35.0	%	$	61		35.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds	(32		)	(4.5	)	(33		)	(5.9	)	(35		)	(20.0	)
Dividend received exclusion	(26		)	(3.6	)	(24		)	(4.2	)	(20		)	(11.7	)
Other	5			0.7		4			0.7		3			1.9
Provision for income taxes	$	197		27.6	%	$	145		25.6	%	$	9		5.2	%

The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries. As of December 31, 2013, we had no operating or capital loss carry forwards. The change in our effective tax rate was primarily due to changes in pretax income from underwriting results and realized investment gains and losses, with unchanged levels of permanent book-tax differences.

Unrecognized Tax Benefits

As a result of positions either taken in our 2011 and 2012 federal tax return filed with the IRS or expected to be taken in the 2013 filing, we believe it is more likely than not that our tax liability will be sustained upon examination by the IRS. We therefore carry no amount for unrecognized tax benefits for the years ended 2013, 2012 and 2011.

The statute of limitations for federal and state income tax purposes have closed for tax years 2008 and earlier. In November, 2011, the IRS began its audit of tax years 2009 and 2010. In December 2012, the IRS Exam Team completed its phase of the audit with no material changes to the returns as filed. As is standard practice whenever large refunds are received, the Joint Committee on Taxation in Washington DC reviewed the 2009 and 2010 IRS audit and completed its review in September of 2013. Although the Joint Committee had no changes to the audit, our exam for tax year 2009 will remain open until the IRS completes its review of a limited partnership we hold as an investment. We expect no material changes as a result of this limited partnership audit. Federal statutes for tax year 2009 will expire in August 2014.

On September 13, 2013, the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986 (Code), regarding the deduction and capitalization of expenditures related to tangible property. The final regulations replace temporary regulations that were issued in December 2011. Also released were proposed regulations under Section 168 of the Code regarding dispositions of tangible property. These regulations generally apply to taxable years beginning on or after January 1, 2014. Although the final regulations will affect all taxpayers that acquire, produce, or improve tangible property, we do not expect them to have a material impact on our consolidated financial statements.

Income taxes paid in our Consolidated Statements of Cash Flows are shown net of refunds received of less than $1 million, $11 million and $2 million for 2013, 2012 and 2011, respectively.

In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions.