
(for the year ended December 31, in millions)	2020		2019		2018
Composition of income tax expense included in the consolidated statement of income
Current expense:
Federal	$	532	$	546	$	424
Foreign	35		7		41
State	4		6		8
Total current tax expense	571		559		473
Deferred benefit:
Federal	(29)		(33)		(13)
Foreign	(2)		(10)		(22)
Total deferred tax benefit	(31)		(43)		(35)
Total income tax expense included in the consolidated statement of income	540		516		438
Composition of income tax expense (benefit) included in shareholders’ equity
Expense (benefit) relating to changes in the unrealized gain (loss) on investments, unrealized loss on foreign exchange and other items in other comprehensive income (loss)	490		641		(349)
Total income tax expense included in the consolidated financial statements	$	1,030	$	1,157	$	89

The following is a reconciliation of income tax expense at the U.S. federal statutory income tax rate to the income tax expense reported in the Company’s consolidated statement of income:


(for the year ended December 31, in millions)	2020			2019			2018
Income (loss) before income taxes
U.S.	$	3,095		$	3,211		$	3,039
Foreign	142			(73)			(78)
Total income before income taxes	3,237			3,138			2,961
Effective tax rate
Statutory tax rate	21		%	21		%	21		%
Expected federal income tax expense	680			659			622
Tax effect of:
Nontaxable investment income	(147)			(149)			(150)
Other, net	7			6			(34)
Total income tax expense	$	540		$	516		$	438
Effective tax rate	17		%	16		%	15		%

The Company paid income taxes of $578 million, $428 million and $408 million during the years ended December 31, 2020, 2019 and 2018, respectively. The current income tax payable was $131 million and $126 million at December 31, 2020 and 2019, respectively, and was included in other liabilities in the consolidated balance sheet.


(at December 31, in millions)	2020		2019
Deferred tax assets
Claims and claim adjustment expense reserves	$	575	$	551
Unearned premium reserves	560		539
Compensation-related liabilities	110		97
Net operating losses	87		62
Other	180		181
Total gross deferred tax assets	1,512		1,430
Less: valuation allowance	21		27
Adjusted gross deferred tax assets	1,491		1,403
Deferred tax liabilities
Claims and claim adjustment expense reserve discounting (transition rule)	96		115
Deferred acquisition costs	445		427
Investments	1,225		781
Internally developed software	93		94
Depreciation	130		70
Other	60		53
Total gross deferred tax liabilities	2,049		1,540
Net deferred tax liability	$	558	$	137

If the Company determines that any of its deferred tax assets will not result in future tax benefits, a valuation allowance must be established for the portion of these assets that are not expected to be realized. The net change in the valuation allowance for deferred tax assets was a decrease of $6 million in 2020, primarily driven by a $10 million decrease resulting from the sale of the Company's consolidated Brazilian subsidiary, partially offset by increases of $2 million in each of the Company's Canadian subsidiary and Republic of Ireland subsidiary. Based upon a review of the Company’s anticipated future taxable income, and also including all other available evidence, both positive and negative, the Company’s management concluded that it is more likely than not that the net deferred tax assets will be realized.

U.S. income taxes have not been recognized on any undistributed earnings that are intended to be permanently reinvested. Any potential U.S. income tax on these amounts is immaterial.

For tax return purposes, as of December 31, 2020, the Company had net operating loss (NOL) carryforwards in the United States, Canada, the Republic of Ireland and the United Kingdom. The amount and timing of realizing the benefits of NOL carryforwards depend on future taxable income and limitations imposed by tax laws. Only the benefits of the United Kingdom NOL carryforwards have been recognized in the consolidated financial statements and are included in net deferred tax assets. The NOL amounts by jurisdiction and year of expiration are as follows:


(in millions)	2020		2019
Balance at January 1	$	37	$	31
Additions for tax positions of prior years	16		8
Reductions for tax positions of prior years	—		—
Reductions based on tax positions related to current year	—		—
Expiration of statute of limitations	(4)		(2)
Balance at December 31	$	49	$	37

Included in the balances at December 31, 2020 and 2019 were $48 million and $34 million, respectively, of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balances at those dates were $1 million and $3 million, respectively, of tax positions for which the ultimate deductibility is certain, but for which there is uncertainty about the timing of deductibility. The timing of such deductibility could affect the annual effective tax rate depending on the year of deduction and tax rate at the time.

The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2020, 2019 and 2018, the Company recognized approximately $0 million, $(1) million and $(10) million in interest, respectively. The Company had approximately $13 million accrued for the payment of interest at both December 31, 2020 and 2019.

The IRS is conducting an examination of the Company’s U.S. income tax returns for 2017 and 2018. The Company does not expect any significant changes to its liability for unrecognized tax benefits during the next twelve months.