11. 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,
		2012		2011
Deferred tax assets:
Loss and loss expense reserves	$	202	$	201
Unearned premiums		124		113

Investments		31		36
Other		39		46
Total		396		396
Deferred tax liabilities:
Unrealized investment gains and other		605		481
Deferred acquisition costs		163		156
Life policy reserves		65		42
Other		16		20
Total		849		699
Net deferred tax liability	$	453	$	303

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,
		2012				2011				2010
Tax at statutory rate	$	198	35.0	%	$	61	35.0	%	$	174	35.0	%
Increase (decrease) resulting from:
Tax-exempt income from municipal bonds		(33)	(5.9)			(35)	(20.0)			(36)	(7.2)
Dividend received exclusion		(24)	(4.2)			(20)	(11.7)			(19)	(3.8)
Other		4	0.7			3	1.9			4	0.7
Effective tax	$	145	25.6	%	$	9	5.2	%	$	123	24.7	%

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, 2012, 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. Changes to tax-exempt interest and the dividend received deduction in the current year compared with prior years also contributed to the change.

Unrecognized Tax Benefits

As a result of positions either taken in our 2011 federal tax return filed with the IRS or expected to be taken in the 2012 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 2012, 2011 and 2010.

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 is currently reviewing the 2009 and 2010 IRS audit and is expected to complete its review by mid-2013. Income taxes paid in our Consolidated Statements of Cash Flows are shown net of refunds received of $11 million, $2 million and $10 million for 2012, 2011 and 2010, respectively.

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