11.

Income Taxes

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

	At December 31,
(In millions)	2011		2010
Deferred tax assets:
Loss and loss expense reserves	$	201	$	182
Unearned premiums		113		107
Investments		36		31
Other		46		34
Total		396		354
Deferred tax liabilities:
Unrealized investment gains and losses		481		411
Deferred acquisition costs		167		157
Life policy reserves		42		26
Other		20		20
Total		710		614
Net deferred tax liability	$	314	$	260

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:

	Years ended December 31,
(Dollars in millions)	2011					2010					2009
Tax at statutory rate	$	62		35.0	%	$	175		35.0	%	$	204		35.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds		(35	)	(19.6	)		(36	)	(7.2	)		(38	)	(6.5	)
Dividend received exclusion		(20	)	(11.5	)		(19	)	(3.8	)		(19	)	(3.4	)
Other		3		1.8			4		0.8			3		0.6
Effective tax	$	10		5.7	%	$	124		24.8	%	$	150		25.7	%

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, 2011, 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, changes in investment income and the amount of realized investment gains and losses.

Unrecognized Tax Benefits

Below is the unrecognized tax benefit for the years ended December 31:

	Years ended December 31,
(In millions)	2011		2010		2009
Gross unrecognized tax benefits at January 1	$	0	$	0	$	2
Gross increase in prior year positions		0		0		0
Gross decrease in prior year positions		0		0		(2	)
Gross increase in current year positions		0		0		0
Gross decrease in current year positions		0		0		0
Settlements with tax authorities		0		0		0
Decrease for lapse in applicable statute of limitations		0		0		0
Gross unrecognized tax benefits at December 31	$	0	$	0	$	0

As a result of positions either taken in our federal tax returns filed with the IRS or expected to be taken in the 2011 filing, we believe it is more likely than not that tax positions for which we previously carried a liability for unrecognized tax benefits will be sustained upon examination by the IRS.

In December 2010, we reached agreement with the IRS settling all issues related to the 2007 and 2008 tax years. In November, 2011, the IRS began its audit of tax years 2009 and 2010.

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