
(Dollars in millions)	At December 31,
	2020		2019
Deferred tax assets:
Unearned premiums	$	119	$	113
Loss and loss expense reserves	81		66
Deferred international earnings	45		51
Net operating loss on international earnings	26		4
Other	41		39
Deferred tax assets before valuation allowance	312		273
Valuation allowance for international operations	56		41
Deferred tax assets net of valuation allowance	256		232
Deferred tax liabilities:
Investment gains and other, net	1,240		995
Deferred acquisition costs	143		139
Life policy reserves	121		120
Investments	13		23
Other	38		34
Total gross deferred tax liabilities	1,555		1,311
Net deferred income tax liability	$	1,299	$	1,079

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 assets on our U.S. domestic operations will be realized. As a result, we have no valuation allowance as of December 31, 2020 and 2019 for our U.S. domestic operations. As more fully discussed below, we do carry a valuation allowance on the deferred tax assets related to Cincinnati Global.


(Dollars in millions)	For the years ended December 31,
	2020		2019		2018
United States	$	1,521	$	2,440	$	251
International	(22)		32		—
Total income before income taxes	$	1,499	$	2,472	$	251


(Dollars in millions)	For the years ended December 31,
	2020		2019		2018
Provision (benefit) for income taxes:
Current – United States federal	$	147	$	137	$	11
International	—		(5)		—
Total current	147		132		11
Deferred – United States federal	136		338		(47)
International	—		5		—
Total deferred	136		343		(47)
Total provision (benefit) for income taxes	$	283	$	475	$	(36)


(Dollars in millions)	Years ended December 31,
	2020				2019				2018
Tax at statutory rate:	$	315	21.0	%	$	519	21.0	%	$	53	21.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds	(20)		(1.3)		(19)		(0.8)		(20)		(8.0)
Dividend received exclusion	(17)		(1.1)		(16)		(0.6)		(15)		(6.0)
Tax accounting method changes	—		—		—		—		(50)		(19.9)

Other	5		0.3		(9)		(0.4)		(4)		(1.4)
Provision (benefit) for income taxes	$	283	18.9	%	$	475	19.2	%	$	(36)	(14.3)	%

In 2018, we received approval from the IRS to change our method of tax accounting for certain items applicable for the 2017 tax year and tax return, primarily related to the valuation of our tax basis unpaid losses. Accounting guidance does not allow recognition of the impact of certain tax accounting method changes until approved by the IRS. As a result, we recognized a $50 million income tax benefit in 2018 for the difference between the current 21% tax rate and the 2017 tax rate of 35% for the related items. This reduced our effective tax rate by 19.9% for the year ended December 31, 2018.

The provision for federal income taxes is based upon the filing of a consolidated income tax return for the company and its domestic subsidiaries within the United States. As of December 31, 2020, 2019 and 2018, we have no operating loss carryforwards in the United States. For the years ended December 31, 2020, 2019 and 2018, we have no capital loss carryforwards in the United States. As more fully discussed below, Cincinnati Global, has operating loss carryforwards in the United Kingdom.

As more fully discussed in Note 1, Summary of Significant Accounting Policies, COVID-19 was declared a pandemic on March 11, 2020. In response to the pandemic, various stimulus legislation was enacted in 2020 including the Coronavirus Aid, Relief and Economic Security Act (CARES Act), signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (CAA Act), signed into law on December 27, 2020. We have evaluated both Acts as well as other pandemic-related legislation enacted in 2020 and believe any impact to our financial statements, as a result of such legislation, will be immaterial.

As of December 31, 2020, 2019 and 2018, we had a gross unrecognized tax benefit of $34 million. The following is a tabular reconciliation of the total amounts of unrecognized tax benefits.


(Dollars in millions)	Years ended December 31,
	2020		2019		2018
Gross unrecognized tax benefits, January 1	$	34	$	34	$	—
Gross increase in prior year positions	—		—		—
Gross decrease in prior year positions	—		—		—
Gross increase in current year positions	—		—		34
Settlements with tax authorities	—		—		—
Lapse of statute of limitations	—		—		—
Gross unrecognized tax benefits, December 31	$	34	$	34	$	34

The unrecognized tax benefit liability is carried in other liabilities in the consolidated balance sheets. Included in the unrecognized tax benefit liability as of December 31, 2020 is $34 million that, if recognized, would affect the effective tax rate in the period of the release. Although no interest and penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense. We do not expect any changes to our unrecognized tax benefit liability in the next twelve months.

The statute of limitations for federal tax purposes has generally closed for tax years ended December 31, 2016 and earlier, however, as a result of certain net operating loss carryback claims we have filed, the IRS maintains a limited ability to assess tax for the 2015 tax year. In 2019, the IRS began its examination of the tax year ended December 31, 2017 and they have expanded their scope to include tax year ended December 31, 2018. At this time, no adjustments have been proposed. In addition to our IRS filings, we file income tax returns with immaterial amounts in various state jurisdictions and record these amounts in our provision for income taxes for both current and deferred taxes. The statute of limitations for state income tax purposes has closed for tax years ended December 31, 2016 and earlier.

Cincinnati Global operates in the United Kingdom and as such, is subject to tax in that jurisdiction. The statute of limitation for tax return review by Her Majesty’s Revenue and Customs (HMRC) has closed for tax years ended December 31, 2018 and earlier. There are currently no tax returns under review by HMRC.

Income taxes paid in our consolidated statements of cash flows are shown net of refunds received. We received no refunds in 2020, $94 million in 2019 and none in 2018.

Cincinnati Global's operating results for the year ended December 31, 2020, increased their net deferred assets by $15 million with an offsetting increase of $15 million to their valuation allowance. As of December 31, 2020, Cincinnati Global had a net deferred tax asset of $56 million and an offsetting valuation allowance of $56 million.

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, including cumulative losses related to the operations of Cincinnati Global, we believe it was appropriate to set up a valuation allowance for purposes of our opening Cincinnati Global balance sheet and is appropriate to carry a valuation allowance as of December 31, 2020 and 2019.


(Dollars in millions)	Years ended December 31,
	2020		2019
Valuation allowance, January 1	$	41	$	—
Acquisition accounting amount	—		55
Current year operations	15		(14)
Valuation allowance, December 31	$	56	$	41

As of December 31, 2020, and 2019, Cincinnati Global had operating loss carryforwards in the United States of $26 million and $20 million and in the United Kingdom of $108 million and $127 million, respectively. These Cincinnati Global losses can only be utilized within the Cincinnati Global group in both the United States and in the United Kingdom and cannot offset the income of our CFC group domestic operations in the United States.