12. INCOME TAXES

(for the year ended December 31, in millions)	2014		2013			2012

Composition of income tax expense included in the consolidated statement of income
Current expense:
Federal	$	1,216	$	1,059		$	406
Foreign		28		30			45
State		10		6			3

Total current tax expense		1,254		1,095			454

Deferred expense:
Federal		121		167			223
Foreign		22		10			16

Total deferred tax expense		143		177			239

Total income tax expense included in the consolidated statement of income		1,397		1,272			693
Composition of income tax included in shareholders' equity
Expense (benefit) relating to share-based compensation, the changes in unrealized gain on investments, unrealized loss on foreign exchange and other items in other comprehensive income		68		(822	)		57

Total income tax expense included in the consolidated financial statements	$	1,465	$	450		$	750

(for the year ended December 31, in millions)	2014			2013			2012

Income before income taxes
U.S	$	4,899		$	4,804		$	2,955
Foreign		190			141			211

Total income before income taxes		5,089			4,945			3,166
Effective tax rate
Statutory tax rate		35	%		35	%		35	%

Expected federal income tax expense		1,781			1,731			1,108
Tax effect of:
Nontaxable investment income		(379	)		(409	)		(427	)
Other, net		(5	)		(50	)		12

Total income tax expense	$	1,397		$	1,272		$	693



Effective tax rate		27	%		26	%		22	%

The Company paid income taxes of $1.15 billion, $1.06 billion and $188 million during the years ended December 31, 2014, 2013 and 2012, respectively. The current income tax payable was $139 million and $85 million at December 31, 2014 and 2013, respectively, and was included in other liabilities in the consolidated balance sheet.

The net deferred tax asset comprises the tax effects of temporary differences related to the following assets and liabilities:

(at December 31, in millions)	2014		2013

Deferred tax assets
Claims and claim adjustment expense reserves	$	768	$	825
Unearned premium reserves		709		693
Compensation-related liabilities		345		207
Other		346		356

Total gross deferred tax assets		2,168		2,081

Deferred tax liabilities
Deferred acquisition costs		565		554
Investments		1,267		931
Internally developed software		130		138
Other		173		155

Total gross deferred tax liabilities		2,135		1,778

Net deferred tax asset	$	33	$	303

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. 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 gross deferred tax assets will be realized.

For tax return purposes, as of December 31, 2014, the Company had net operating loss (NOL) carryforwards in the United States, Canada 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. The benefits of the 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)	Amount

United States	$	15	2018
Canada		6	2033
United Kingdom		133	None

U.S. income taxes have not been recognized on $647 million of the Company's foreign operations' undistributed earnings as of December 31, 2014, as such earnings are intended to be permanently reinvested in those operations. Furthermore, any taxes paid to foreign governments on these earnings may be used as credits against the U.S. tax on any dividend distributions from such earnings.

The following is a reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2014 and 2013:

(in millions)	2014		2013

Balance at January 1	$	21	$	24
Additions for tax positions of prior years		2		—
Reductions for tax positions of prior years		—		(3	)
Additions based on tax positions related to current year		—		—

Balance at December 31	$	23	$	21

Included in the balances at both December 31, 2014 and 2013 were $2 million of unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. Also included in the balances at those dates were $21 million and $19 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 would not affect the annual effective tax rate.

The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income taxes. During the years ended December 31, 2014 and 2013, the Company recognized approximately $31 million and $(67) million in interest, respectively. The Company had approximately $58 million and $27 million accrued for the payment of interest at December 31, 2014 and 2013, respectively.

The IRS is conducting an examination of the Company's U.S. income tax returns for 2011 and 2012. The Company does not expect any significant changes to its liability for unrecognized tax benefits during the next twelve months.