Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 35% to the provision for income taxes as shown in AFG’s Statement of Earnings (dollars in millions):



	Three months ended September 30,										Nine months ended September 30,
	2017					2016					2017					2016
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	29				$	178				$	457				$	470

Income taxes at statutory rate	$	10		35	%	$	63		35	%	$	160		35	%	$	165		35	%
Effect of:
Stock-based compensation	(1		)	(3	%)	—			—	%	(14		)	(3	%)	—			—	%
Tax exempt interest	(5		)	(17	%)	(5		)	(3	%)	(17		)	(4	%)	(18		)	(4	%)
Dividends received deduction	(2		)	(7	%)	(1		)	(1	%)	(6		)	(1	%)	(5		)	(1	%)
Employee Stock Ownership Plan dividends paid deduction	—			—	%	—			—	%	(2		)	—	%	(1		)	—	%
Change in valuation allowance	16			55	%	7			4	%	16			4	%	40			9	%
Subsidiaries not in AFG’s tax return	—			—	%	2			1	%	—			—	%	4			1	%
Other	—			(1	%)	(1		)	1	%	9			1	%	5			—	%
Provision for income taxes as shown in the statement of earnings	$	18		62	%	$	65		37	%	$	146		32	%	$	190		40	%

AFG’s effective tax rate for the three months ended September 30, 2017 reflects the impact of catastrophe losses in the Neon Lloyd’s insurance business for which no tax benefit is recognized. AFG maintains a full valuation allowance against the deferred tax benefits associated with losses related to Neon. Excluding the $53 million in catastrophe losses at Neon, AFG’s effective tax rate for the three months ended September 30, 2017 was 22%, which reflects the impact of a typical level of tax-favored investment income on lower earnings before income taxes. Excluding the $65 million charge in the second quarter of 2016 related to the exit of certain lines of business within Neon, AFG’s effective tax rate for the nine months ended September 30, 2016, was 36%. The favorable impact of stock-based compensation on AFG’s effective tax rate in the first nine months of 2017 reflects the high volume of employee stock option exercises during that period and the increase in the market price of AFG Common Stock.

Approximately $13 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, 2017. Since AFG maintains a full valuation allowance against its SRLY NOLs, the expiration of these loss carryforwards will be offset by a corresponding reduction in the valuation allowance and will have no overall impact on AFG’s income tax expense or results of operations.

During the first nine months of 2017, there were no material changes to AFG’s liability for uncertain tax positions.