Income Taxes

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



(Dollars in millions)	At December 31,
	2017		2016
Deferred tax assets:
Loss and loss expense reserves	$	123	$	199
Unearned premiums	100		158
Investments	—		5
Other	27		52
Total gross deferred tax assets	250		414
Deferred tax liabilities:
Unrealized investment gains and other, net	740		907
Deferred acquisition costs	123		195
Life policy reserves	111		162
Investments	10		—
Other	11		15
Total gross deferred tax liabilities	995		1,279
Net deferred income tax liability	$	745	$	865

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.

Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. After considering all positive and negative evidence of taxable income in the carryback and carryforward periods as permitted by law, we believe it is more likely than not that all of the deferred tax asset will be realized. As a result, we have no valuation allowance as of December 31, 2017 and 2016.

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



(Dollars in millions)	Years ended December 31,
	2017					2016					2015
Tax at statutory rate:	$	256		35.0	%	$	284		35.0	%	$	308		35.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds	(36		)	(4.9	)	(34		)	(4.2	)	(33		)	(3.7	)
Dividend received exclusion	(34		)	(4.7	)	(33		)	(4.1	)	(32		)	(3.6	)
Deferred tax benefit due to tax rate change	(495		)	(67.8	)	—			—		—			—
Other	(6		)	(0.8	)	4			0.5		4			0.3
Provision for income taxes	$	(315	)	(43.2	)%	$	221		27.2	%	$	247		28.0	%

The Tax Act was enacted on December 22, 2017, and represented one of the most comprehensive changes in U.S. corporate income taxation since 1986. The Tax Act revises the U.S. corporate income tax by lowering the corporate income tax rate from a top marginal rate of 35 percent to a flat rate of 21 percent. In addition to lowering tax rates, changes were made to the amount of the dividends received deduction and the required proration addback for qualified dividend income and tax exempt municipal interest. The Tax Act is effective January 1, 2018. The reduction in corporate income tax rate decreased our net deferred tax liability as of December 22, 2017, by $495 million. The effect of the rate change was recorded as a one-time noncash benefit to income tax expense in our consolidated statements of income for the year ended December 31, 2017, with an effective tax rate benefit of 67.8 percent. This benefit results from re-measuring our net deferred tax liability at the newly enacted corporate income tax rate of 21 percent (the rate at which the deferred items are expected to be reversed) versus the 35 percent rate at which the net deferred tax benefits were previously carried. Of this $495 million benefit, $492 million relates to net unrealized gains on investments and other AOCI amounts. The remainder relates to differences in the recognition of deferred acquisition costs, unearned premiums, insurance reserves and basis differences in the carrying value of investments held. We expect to complete determination of the effects of the Tax Act on our deferred tax assets and liabilities as part of the annual income tax return filing process which is expected to be completed in the fourth quarter of 2018.

The provision for federal income taxes is based upon filing a consolidated income tax return for the company and its subsidiaries. Included in Other above is the current year tax benefit under ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which decreased both the provision for income taxes and the effective income tax rate by $7 million and 1 percent, respectively. As of December 31, 2017, 2016 and 2015, we had no operating or capital loss carryforwards.

Unrecognized Tax Benefits

As a result of positions either taken in our 2014 through 2016 federal tax returns filed with the IRS or expected to be taken in the 2017 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 2014 through 2017.

The statute of limitations for federal tax purposes has closed for tax years 2013 and earlier. There are no federal returns under examination and we have not been notified of any upcoming IRS examinations.

Income taxes paid in our consolidated statements of cash flows are shown net of refunds received of $18 million in 2017, $2 million in 2016 and an immaterial amount in 2015.

In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions. The statute of limitations for state income tax purposes has closed for tax years 2013 and earlier. There are no state income returns under examination and we have not been notified of any upcoming state examinations.