Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 21% to the provision for income taxes as shown in AFG’s Statement of Earnings (dollars in millions):

	2020				2019				2018
	Amount		% of EBT		Amount		% of EBT		Amount		% of EBT
Earnings before income taxes (“EBT”)	$	848			$	1,108			$	639
Income taxes at statutory rate	$	178	21	%	$	233	21	%	$	134	21	%
Effect of:
Tax exempt interest	(12)		(1	%)	(14)		(1	%)	(13)		(2	%)
Stock-based compensation	(4)		—	%	(8)		(1	%)	(8)		(1	%)
Dividend received deduction	(3)		—	%	(4)		—	%	(4)		(1	%)
Adjustment to prior year taxes	(1)		—	%	(3)		—	%	(8)		(1	%)
Employee stock ownership plan dividend paid deduction	(2)		—	%	(2)		—	%	(3)		(1	%)
Tax benefit related to sale of Neon	(72)		(8	%)	—		—	%	—		—	%
Change in valuation allowance	(117)		(14	%)	17		2	%	11		2	%
Foreign operations	149		18	%	4		—	%	(2)		—	%
Nondeductible expenses	5		1	%	8		1	%	7		1	%
Other	6		(2	%)	8		—	%	8		1	%
Provision for income taxes as shown in the statement of earnings	$	127	15	%	$	239	22	%	$	122	19	%

On December 31, 2020, AFG completed the sale of the legal entities that own Neon Underwriting Limited (“Neon”, formerly known as Marketform Group Limited), a United Kingdom-based Lloyd’s insurer (see Note B — “Acquisitions and Sale of Businesses”), which resulted in a taxable loss for U.S. tax purposes. AFG recorded a $72 million tax benefit associated with this loss in 2020. Approximately $65 million of the $72 million tax benefit reduced current taxes payable while the remaining tax benefit will be received from the carry-back of the tax-basis capital loss to offset capital gains in prior tax years.

Due to uncertainty concerning the realization of the deferred tax benefits associated with losses incurred at Neon and its predecessor, Marketform, AFG maintained a full valuation allowance against the deferred tax assets related to the Lloyd’s insurance business. The effect of foreign operations and change in valuation allowance in 2020 in the table above reflect the transfer of the deferred tax assets related to Neon, to the buyer at closing, and the corresponding reduction in the valuation allowance. The changes in valuation allowance in 2019 and 2018 are primarily increases in the valuation allowance on tax benefits related to losses in the Neon Lloyd’s insurance business.

Excluding the impact of the $72 million tax benefit on the sale and other impacts of Neon in 2020, AFG’s effective tax rate for the year ended December 31, 2020, was 21%.

Since almost all of AFG’s earnings are taxable based on U.S. tax rates, the Global Intangible Low-taxed Income (“GILTI”) provision is not expected to be material to AFG’s results of operations and will be recorded in the period that any tax arises.

AFG’s 2013 — 2020 tax years remain subject to examination by the IRS.

Total earnings before income taxes include losses subject to tax in foreign jurisdictions of $131 million in 2020, $109 million in 2019 and $69 million in 2018, primarily related to the Neon Lloyd’s operations.

The total income tax provision consists of (in millions):

	2020		2019		2018
Current taxes:
Federal	$	101	$	250	$	196
State	6		10		8
Foreign	3		2		—
Deferred taxes:
Federal	17		(23)		(82)
Provision for income taxes	$	127	$	239	$	122

For income tax purposes, AFG and its subsidiaries had the following carryforwards available at December 31, 2020 (in millions):

	Expiring	Amount
Operating Loss – U.S.	2021 - 2022	$	69
Operating Loss – United Kingdom	indefinite	34		(*)

(*)£25 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):

	2020						2019
	Excluding Unrealized Gains		Impact of Unrealized Gains		Total		Excluding Unrealized Gains		Impact of Unrealized Gains		Total
Deferred tax assets:
Federal net operating loss carryforwards	$	15	$	—	$	15	$	19	$	—	$	19
Foreign underwriting losses	6		—		6		118		—		118
Capital loss carryforwards	7		—		7		—		—		—
Insurance claims and reserves	772		68		840		829		46		875
Employee benefits	104		—		104		93		—		93
Other, net	50		(2)		48		45		(2)		43
Total deferred tax assets before valuation allowance	954		66		1,020		1,104		44		1,148
Valuation allowance against deferred tax assets	(29)		—		(29)		(140)		—		(140)
Total deferred tax assets	925		66		991		964		44		1,008
Deferred tax liabilities:
Investment securities	(167)		(596)		(763)		(140)		(416)		(556)
Deferred policy acquisition costs	(267)		196		(71)		(293)		143		(150)
Insurance claims and reserves transition liability	(77)		—		(77)		(93)		—		(93)
Real estate, property and equipment	(37)		—		(37)		(35)		—		(35)
Total deferred tax liabilities	(548)		(400)		(948)		(561)		(273)		(834)
Net deferred tax asset (liability)	$	377	$	(334)	$	43	$	403	$	(229)	$	174

AFG’s net deferred tax asset at December 31, 2020 and 2019 is included in other assets in AFG’s Balance Sheet. The decrease in AFG’s net deferred tax asset at December 31, 2020 compared to December 31, 2019 reflects higher 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.

The gross deferred tax asset has been reduced by a $15 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 $23 million of AFG’s SRLY NOLs expired unutilized at December 31, 2020. 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. “Foreign underwriting losses” in 2019 in the table above is primarily the net operating loss carryforward and other deferred tax assets related to the Neon Lloyd’s insurance business, which was sold in December 2020. Due to uncertainty concerning the realization of the deferred tax benefits associated with these losses, AFG maintained a full valuation allowance of $118 million against these deferred tax assets at December 31, 2019.

At December 31, 2020 and December 31, 2019, there are no unrecognized tax benefits and related interest and penalties that, if recognized, would impact the effective tax rate. There is no interest expense related to unrecognized tax benefits included in AFG’s provision for income taxes in 2020 or 2019; AFG’s provision for income taxes in 2018 included interest expense related to unrecognized tax benefits of less than $1 million (net of federal benefit or expense). There is no liability for interest related to unrecognized tax benefits at December 31, 2020 or December 31, 2019. There were no penalties related to unrecognized tax benefits included in AFG’s provision for income taxes in 2020. AFG’s provision for income taxes in 2019 and 2018 included penalties of less than $1 million in each year. There is no liability for penalties related to unrecognized tax benefits at December 31, 2020 or December 31, 2019.

Cash payments for income taxes, net of refunds, were $179 million, $278 million and $156 million for 2020, 2019 and 2018, respectively.