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Income Taxes | 12 Months Ended
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Dec. 31, 2018
Income Tax Disclosure [Abstract] |
Income Taxes | Income Taxes The following is a reconciliation of income taxes at the statutory rate (21% in 2018 and 35% in both 2017 and 2016) to the provision for income taxes as shown in AFG’s Statement of Earnings (dollars in millions):
| 2018 |  | 2017 |  | 2016
| Amount |  | % of EBT |  | Amount |  | % of EBT |  | Amount |  | % of EBT
Earnings before income taxes (“EBT”) | $ | 639 |  |  |  |  | $ | 724 |  |  |  |  | $ | 787 |  |  |
Income taxes at statutory rate | $ | 134 |  |  | 21 | % |  | $ | 253 |  |  | 35 | % |  | $ | 275 |  |  | 35 | %
Effect of: |  |  |  |  |  |  |  |  |  |  |
Tax exempt interest | (13 | ) |  | (2 | %) |  | (23 | ) |  | (3 | %) |  | (24 | ) |  | (3 | %)
Adjustment to prior year taxes | (8 | ) |  | (1 | %) |  | (4 | ) |  | (1 | %) |  | (2 | ) |  | — | %
Stock-based compensation | (8 | ) |  | (1 | %) |  | (16 | ) |  | (2 | %) |  | (9 | ) |  | (1 | %)
Dividend received deduction | (4 | ) |  | (1 | %) |  | (8 | ) |  | (1 | %) |  | (7 | ) |  | (1 | %)
Employee stock ownership plan dividend paid deduction | (3 | ) |  | (1 | %) |  | (5 | ) |  | (1 | %) |  | (2 | ) |  | — | %
Foreign operations | (2 | ) |  | — | % |  | 21 |  |  | 3 | % |  | 5 |  |  | — | %
Change in valuation allowance (excluding change in tax rate) | 11 |  |  | 2 | % |  | (7 | ) |  | (1 | %) |  | 52 |  |  | 7 | %
Nondeductible expenses | 7 |  |  | 1 | % |  | 6 |  |  | 1 | % |  | 7 |  |  | 1 | %
Neon restructuring | — |  |  | — | % |  | (56 | ) |  | (8 | %) |  | (111 | ) |  | (14 | %)
Change in U.S corporate tax rate | — |  |  | — | % |  | 83 |  |  | 11 | % |  | — |  |  | — | %
Acquisition of noncontrolling interest in NATL | — |  |  | — | % |  | — |  |  | — | % |  | (66 | ) |  | (8 | %)
Subsidiaries not in AFG’s tax return | — |  |  | — | % |  | — |  |  | — | % |  | 3 |  |  | — | %
Other | 8 |  |  | 1 | % |  | 3 |  |  | 1 | % |  | (2 | ) |  | (1 | %)
Provision for income taxes as shown in the statement of earnings | $ | 122 |  |  | 19 | % |  | $ | 247 |  |  | 34 | % |  | $ | 119 |  |  | 15 | %
The favorable impact of stock-based compensation on AFG’s effective tax rate in the year ended December 31, 2017 reflects the high volume of employee stock option exercises during that period and the increase in the market price of AFG Common Stock. In January 2008, AFG paid $75 million in cash to acquire approximately 67% of Neon Underwriting Limited (“Neon”, formerly known as Marketform Group Limited), a United Kingdom-based Lloyd’s insurer. During 2012, AFG acquired the then-remaining shares of Neon that it did not already own for $17 million. AFG’s investment in Neon includes the cost of acquiring the company as well as additional capital provided to Neon since the date of acquisition. In 2011, cumulative losses at Neon across multiple lines of business resulted in uncertainty concerning the realization of the deferred tax benefits associated with the losses. Consequently, AFG began maintaining a full valuation allowance against the deferred tax assets related to the Lloyd’s insurance business in 2011. Approximately $14 million of the $21 million impact of “foreign operations” for 2017 in the table above relates to a reduction in the “foreign underwriting losses” deferred tax asset as a result of the sale of the noncontrolling interest in Neon. Since AFG maintains a full valuation allowance against the deferred tax assets related to Neon, this reduction in deferred tax assets was offset by a corresponding reduction in the valuation allowance and had no overall impact on AFG’s income tax expense or results of operations. The changes in valuation allowance in the table above are primarily increases in the valuation allowance on tax benefits related to losses in the Neon Lloyd’s insurance business. The $61 million decrease in the valuation allowance in 2017 related to the change in the U.S. corporate tax rate is included in “Change in U.S. corporate tax rate” in table above. In connection with the reorganization of the Neon Lloyd’s business, in December 2016, AFG undertook a restructuring that included the liquidation for tax purposes of the foreign subsidiary that is the parent of the Neon Lloyd’s operations, resulting in a taxable loss for U.S. tax purposes. AFG reported a $111 million tax benefit associated with this loss in the fourth quarter of 2016. Approximately $29 million of the $111 million tax benefit recorded in 2016 reduced current taxes payable for 2016, while the remaining tax benefit was received in 2017 from the carry-back of the tax-basis capital loss to offset capital gains in prior years. An additional loss associated with the 2016 restructuring was deferred under U.S. tax laws, resulting in an unrecognized potential tax benefit of $48 million at December 31, 2016. The sale of the noncontrolling interest in Neon resulted in the recognition of an additional tax benefit of $56 million in the fourth quarter of 2017, including the recognition of the deferred loss from the 2016 restructuring. Approximately $20 million of the $56 million tax benefit recorded in 2017 reduced current taxes payable for 2017. The majority of the remaining 2017 tax benefit is expected to be received in 2019 as a result of the filing of a refund claim in 2018 to carry back tax basis capital losses to offset prior year tax basis capital gains. The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was enacted on December 22, 2017, lowered the U.S corporate tax rate to 21% and made other widespread changes to the U.S. tax code effective in 2018. Because the TCJA was enacted in December 2017, AFG recorded the $83 million decrease in its net deferred tax asset resulting from the changes in the tax code (primarily the lower corporate tax rate applicable to 2018 and future years) in the fourth quarter of 2017. In addition to the lower U.S. corporate tax rate, the TCJA implemented a new global minimum tax on income earned by foreign subsidiaries of U.S.-based entities known as the Global Intangible Low-taxed Income (“GILTI”) provision. Since almost all of AFG’s earnings are taxable based on U.S. tax rates, the GILTI is not expected to be material to AFG’s results of operations and will be recorded in the period that any tax arises. At the time it was enacted, the TCJA was subject to further clarification and interpretation by the U.S. Treasury Department and the Internal Revenue Service. For example, the TCJA changed the way that companies calculate their insurance claims and reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that had not been published. The resulting transitional deferred tax liability (taxes payable over eight years under the TCJA) and offsetting increase in AFG’s insurance claims and reserves deferred tax assets, were recorded at December 31, 2017 using reasonable estimates based on available information and were considered provisional in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”). Because the established transition liability was completely offset by an increase in related deferred tax assets, the adjustment to the final amount when the factors were published in 2018 did not impact AFG’s effective tax rate. In accordance with SAB 118, the insurance claims and reserves transitional deferred tax liability (and offsetting adjustment to the related deferred tax assets) and all other changes in deferred taxes resulting from clarification and interpretation of the TCJA were recorded in 2018 in the period in which the guidance was published and did not have a material impact on AFG’s effective tax rate. As a result, AFG’s implementation of the TCJA is complete as of December 31, 2018. As discussed in Note B — “Acquisitions and Sale of Businesses,” AFG acquired the noncontrolling interest in NATL in November 2016. This transaction allowed NATL and its subsidiaries to become members of the AFG consolidated tax group, which resulted in a tax benefit of $66 million to AFG during the fourth quarter of 2016. Excluding the tax benefit related to the Neon restructuring and the impact of the change in the U.S. corporate tax rate, AFG’s effective tax rate for the year ended December 31, 2017 was 31%. Excluding a $65 million charge related to the exit of certain lines of business within Neon and the tax benefits related to the acquisition of the noncontrolling interest in NATL and the Neon restructuring, AFG’s effective tax rate for the year ended December 31, 2016 was 35%. AFG’s 2012 — 2018 tax years remain subject to examination by the IRS. Total earnings before income taxes include losses subject to tax in foreign jurisdictions of $69 million in 2018, $58 million in 2017 and $160 million in 2016, primarily related to the Neon Lloyd’s operations. The total income tax provision (credit) consists of (in millions):
| 2018 |  | 2017 |  | 2016
Current taxes: |  |  |  |  |
Federal | $ | 196 |  |  | $ | 153 |  |  | $ | 299 |
State | 8 |  |  | 6 |  |  | 12 |
Deferred taxes: |  |  |  |  |
Federal | (82 | ) |  | 5 |  |  | (192 | )
Impact of change in U.S. corporate tax rate | — |  |  | 83 |  |  | — |
Total Federal deferred taxes | (82 | ) |  | 88 |  |  | (192 | )
Provision for income taxes | $ | 122 |  |  | $ | 247 |  |  | $ | 119 |
For income tax purposes, AFG and its subsidiaries had the following carryforwards available at December 31, 2018 (in millions):
| Expiring |  | Amount |
Operating Loss – U.S. | 2019 - 2022 |  | $ | 112 |  |
Operating Loss – United Kingdom | indefinite |  | 215 |  | (*)
(*) | £168 million
Deferred income tax assets and liabilities reflect temporary differences between the carrying amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. The significant components of deferred tax assets and liabilities included in AFG’s Balance Sheet at December 31 were as follows (in millions):
| 2018 |  | 2017
| Excluding Unrealized Gains |  | Impact of Unrealized Gains |  | Total |  | Excluding Unrealized Gains |  | Impact of Unrealized Gains |  | Total
Deferred tax assets: |  |  |  |  |  |  |  |  |  |  |
Federal net operating loss carryforwards | $ | 23 |  |  | $ | — |  |  | $ | 23 |  |  | $ | 27 |  |  | $ | — |  |  | $ | 27 |
Foreign underwriting losses | 93 |  |  | — |  |  | 93 |  |  | 80 |  |  | — |  |  | 80 |
Capital loss carryforwards | — |  |  | — |  |  | — |  |  | 32 |  |  | — |  |  | 32 |
Insurance claims and reserves | 740 |  |  | 3 |  |  | 743 |  |  | 665 |  |  | 29 |  |  | 694 |
Employee benefits | 88 |  |  | — |  |  | 88 |  |  | 84 |  |  | — |  |  | 84 |
Other, net | 44 |  |  | — |  |  | 44 |  |  | 48 |  |  | (3 | ) |  | 45 |
Total deferred tax assets before valuation allowance | 988 |  |  | 3 |  |  | 991 |  |  | 936 |  |  | 26 |  |  | 962 |
Valuation allowance against deferred tax assets | (119 | ) |  | — |  |  | (119 | ) |  | (109 | ) |  | — |  |  | (109 | )
Total deferred tax assets | 869 |  |  | 3 |  |  | 872 |  |  | 827 |  |  | 26 |  |  | 853 |
Deferred tax liabilities: |  |  |  |  |  |  |  |  |  |  |
Investment securities | (36 | ) |  | (34 | ) |  | (70 | ) |  | (1 | ) |  | (340 | ) |  | (341 | )
Deferred policy acquisition costs | (300 | ) |  | 9 |  |  | (291 | ) |  | (293 | ) |  | 91 |  |  | (202 | )
Insurance claims and reserves transition liability | (110 | ) |  | — |  |  | (110 | ) |  | (128 | ) |  | — |  |  | (128 | )
Real estate, property and equipment | (36 | ) |  | — |  |  | (36 | ) |  | (35 | ) |  | — |  |  | (35 | )
Total deferred tax liabilities | (482 | ) |  | (25 | ) |  | (507 | ) |  | (457 | ) |  | (249 | ) |  | (706 | )
Net deferred tax asset (liability) | $ | 387 |  |  | $ | (22 | ) |  | $ | 365 |  |  | $ | 370 |  |  | $ | (223 | ) |  | $ | 147 |
AFG’s net deferred tax asset at December 31, 2018 and 2017 is included in other assets in AFG’s Balance Sheet. The increase in AFG’s net deferred tax asset at December 31, 2018 compared to December 31, 2017 reflects significantly lower pretax unrealized gains on securities. The likelihood of realizing deferred tax assets is reviewed periodically; any adjustments required to the valuation allowance are made in the period during which developments requiring an adjustment become known. “Foreign underwriting losses” in the table above include the net operating loss carryforward and other deferred tax assets related to the Neon Lloyd’s insurance business. Due to uncertainty concerning the realization of the deferred tax benefits associated with these losses, AFG maintains a full valuation allowance of $93 million against these deferred tax assets at December 31, 2018. In addition to the valuation allowance related to the Neon Lloyd’s insurance business, the gross deferred tax asset has also been reduced by a $23 million valuation allowance related to AFG’s net operating loss carryforwards (“NOL”) subject to the separate return limitation year (“SRLY”) tax rules. A SRLY NOL can be used only by the entity that created it and only in years that both it and the consolidated group have taxable income. Approximately $19 million of AFG’s SRLY NOLs expired unutilized at December 31, 2018. Since AFG maintains a full valuation allowance against its SRLY NOLs, the expiration of these loss carryforwards was offset by corresponding reduction in the valuation allowance and had no overall impact on AFG’s income tax expense or results of operations. AFG increased its liability for uncertain tax positions by $1 million in 2015 due to uncertainty in state taxation of its surplus lines insurance subsidiaries. In 2017, this uncertainty was resolved, resulting in total tax payments of less than $1 million. A progression of the liability for uncertain tax positions, excluding interest and penalties, follows (in millions):
| 2018 |  | 2017 |  | 2016
Balance at January 1 | $ | — |  |  | $ | 1 |  |  | $ | 1 |
Additions for tax positions of prior years | — |  |  | — |  |  | — |
Reductions for tax positions of prior years | — |  |  | — |  |  | — |
Additions for tax positions of current year | — |  |  | — |  |  | — |
Settlements | — |  |  | (1 | ) |  | — |
Balance at December 31 | $ | — |  |  | $ | — |  |  | $ | 1 |
The total unrecognized tax benefits and related interest and penalties that, if recognized, would impact the effective tax rate is less than $1 million at December 31, 2018 and December 31, 2017. AFG’s provision for income taxes in 2018, 2017 and 2016 included interest expense related to unrecognized tax benefits of less than $1 million in each year (net of federal benefit or expense). There was no liability for interest related to unrecognized tax benefits at December 31, 2018. AFG’s liability for interest related to unrecognized tax benefits was less than $1 million at December 31, 2017 (net of federal benefit). AFG’s provision for income taxes in 2018, 2017 and 2016 included penalties of less than $1 million in each year. AFG’s liability for penalties related to unrecognized tax benefits was less than $1 million at December 31, 2018 and December 31, 2017. Cash payments for income taxes, net of refunds, were $156 million, $194 million and $308 million for 2018, 2017 and 2016, respectively.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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