Note F. Income Taxes

The CNA Tax Group is included in the consolidated federal income tax return of Loews and its eligible subsidiaries. Loews and the Company have agreed that for each taxable year, the Company will 1) be paid by Loews the amount, if any, by which the Loews consolidated federal income tax liability is reduced by virtue of the inclusion of the CNA Tax Group in the Loews consolidated federal income tax return, or 2) pay to Loews an amount, if any, equal to the federal income tax that would have been payable by the CNA Tax Group filing a separate consolidated tax return. In the event that Loews should have a net operating loss in the future computed on the basis of filing a separate consolidated tax return without the CNA Tax Group, the Company may be required to repay tax recoveries previously received from Loews. This agreement may be canceled by either party upon 30 days written notice.

For the years ended December 31, 2012, 2011, and 2010 the Company received from Loews $75 million, $10 million, and $298 million related to federal income taxes.

For 2010 through 2012, the IRS has accepted Loews and the Company into the Compliance Assurance Process (CAP), which is a voluntary program for large corporations. Under CAP, the IRS conducts a real-time audit and works contemporaneously with the Company to resolve any issues prior to the filing of the tax return. The Company believes that this approach should reduce tax-related uncertainties, if any.

At December 31, 2012 and 2011, there were no unrecognized tax benefits.

The Company recognizes interest accrued related to: 1) unrecognized tax benefits in Interest expense and 2) tax refund claims in Other revenues on the Consolidated Statements of Operations. The Company recognizes penalties (if any) in Income tax (expense) benefit on the Consolidated Statements of Operations. During 2012, the Company recognized $2 million of interest income and no penalties. During 2011 and 2010, the Company did not recognize any interest or penalties. There were no amounts accrued for interest or penalties at December 31, 2012 or 2011.

The following table provides a reconciliation between the Company's federal income tax (expense) benefit at statutory rates and the recorded income tax (expense) benefit, excluding discontinued operations.

Tax Reconciliation



Years ended December 31
(In millions)	2012			2011			2010
Income tax expense at statutory rates	$	(305	)	$	(305	)	$	(389	)
Tax benefit from tax exempt income	84			74			84
Foreign taxes and credits	(13		)	(3		)	(25		)
Taxes related to domestic affiliate	—			(21		)	(1		)
Prior year tax adjustment	—			20			—
Other tax expense	(10		)	(7		)	(1		)
Income tax expense	$	(244	)	$	(242	)	$	(332	)

Provision has not been made for the investment in certain subsidiaries for which the Company intends to invest the undistributed earnings indefinitely. At December 31, 2012, the company has not provided deferred taxes of $4 million on $12 million of undistributed earnings related to a foreign subsidiary.

The following table provides the current and deferred components of the Company's income tax (expense) benefit, excluding taxes on discontinued operations.

Current and Deferred Taxes



Years ended December 31
(In millions)	2012			2011			2010
Current tax expense	$	(97	)	$	(54	)	$	(6	)
Deferred tax expense	(147		)	(188		)	(326		)
Total income tax expense	$	(244	)	$	(242	)	$	(332	)

Total income tax presented above includes foreign tax expense of approximately $34 million, $27 million and $50 million related to income from continuing foreign operations of approximately $88 million, $75 million and $91 million for the years ended December 31, 2012, 2011 and 2010.

The deferred tax effects of the significant components of the Company's deferred tax assets and liabilities are set forth in the table below.

Components of Net Deferred Tax Asset



December 31
(In millions)	2012		2011
Deferred Tax Assets:
Insurance reserves:
Property and casualty claim and claim adjustment expense reserves	$	352	$	419
Unearned premium reserves	162		142
Receivables	60		74
Employee benefits	384		323
Life settlement contracts	45		61
Investment valuation differences	—		3
Net loss and tax credits carried forward	8		25
Other assets	152		159
Gross deferred tax assets	1,163		1,206
Deferred Tax Liabilities:
Investment valuation differences	38		—
Deferred acquisition costs	238		241
Net unrealized gains	737		513
Other liabilities	57		37
Gross deferred tax liabilities	1,070		791
Net deferred tax asset	$	93	$	415

At December 31, 2012, the CNA Tax Group had loss carryforwards of approximately $9 million which expire in 2014, and tax credit carryforwards of $4 million.

Although realization of deferred tax assets is not assured, management believes it is more likely than not that the recognized net deferred tax asset will be realized through recoupment of ordinary and capital taxes paid in prior carryback years and through future earnings, reversal of existing temporary differences and available tax planning strategies. As a result, no valuation allowance was recorded at December 31, 2012 or 2011.