Managed Investment Entities

6 Months Ended

Jun. 30, 2011

Managed Investment Entities [Abstract]

Managed Investment Entities

AFG is the investment manager and has investments ranging from 7.5% to 24.4% of the most subordinate debt tranche of six collateralized loan obligation entities or “CLOs,” which are considered variable interest entities. Upon formation between 2004 and 2007, these entities issued securities in various senior and subordinate classes and invested the proceeds primarily in secured bank loans, which serve as collateral for the debt securities issued by each particular CLO. None of the collateral was purchased from AFG. AFG’s investments in these entities receive residual income from the CLOs only after the CLOs pay operating expenses (including management fees to AFG), interest on and returns of capital to senior levels of debt securities. There are no contractual requirements for AFG to provide additional funding for these entities. AFG has not provided and does not intend to provide any financial support to these entities. One of the CLOs is expected to be liquidated in August 2011, resulting in a reduction in assets and liabilities of managed investment entities of approximately $498 million and $480 million, respectively, and an $18 million reduction in appropriated retained earnings. The impact on net income attributable to shareholders is not expected to be material.

AFG’s maximum ultimate exposure to economic loss on its CLOs is limited to its investment in the CLOs, which had an aggregate fair value of $19 million at June 30, 2011.

The revenues and expenses of the CLOs are separately identified in AFG’s Statement of Earnings after the elimination of management fees and earnings attributable to shareholders of AFG as measured by the change in the fair value of AFG’s investments in the CLOs. Selected financial information related to the CLOs is shown below (in millions):


	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	$	(12	)	$	(31	)	$	17		$	50
Liabilities		(10	)		16			(72	)		(90	)
Management fees paid to AFG		5			4			8			8
CLO earnings (losses) attributable to:
AFG shareholders (b)		1			3			7			7
Noncontrolling interests (b)		(20	)		(13	)		(55	)		(33	)


(a)		Included in AFG’s “Revenues.”

(b)		Included in AFG’s “Operating earnings before income taxes.”

The aggregate unpaid principal balance of the CLOs’ fixed maturity investments exceeded the fair value of the investments by $60 million and $69 million at June 30, 2011 and December 31, 2010. The aggregate unpaid principal balance of the CLOs’ debt exceeded its fair value by $229 million and $301 million at those dates. The CLO assets include $6 million in loans at both June 30, 2011 and December 31, 2010, (aggregate unpaid principal balance of $18 million and $12 million, respectively) for which the CLOs are not accruing interest because the loans are in default.