Managed Investment Entities

9 Months Ended

Sep. 30, 2011

Managed Investment Entities [Abstract]

Managed Investment Entities

H. 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. In addition, AFG purchased $49 million face amount of the most senior debt tranche of one of the CLOs for $46 million in August 2011. 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 the subordinate debt tranches of 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. As permitted by the CLO indentures, the holder of the majority of the most subordinate debt tranche of one of AFG’s CLOs notified AFG in July 2011 of its decision to liquidate the CLO in August 2011. Prior to liquidation, this notice was rescinded and liquidation did not occur. In October 2011, AFG began marketing a new CLO with a similar structure to the existing CLOs, which is expected to initially have both assets and liabilities of approximately $400 million.

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 $60 million at September 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						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	$	(88	)	$	47		$	(71	)	$	97
Liabilities		89			(51	)		17			(141	)
Management fees paid to AFG		5			5			13			13
CLO earnings (losses) attributable to:
AFG shareholders (b)		(2	)		3			5			10
Noncontrolling interests (b)		8			(4	)		(47	)		(37	)

(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 $143 million and $69 million at September 30, 2011 and December 31, 2010. The aggregate unpaid principal balance of the CLOs’ debt exceeded its fair value by $316 million and $301 million at those dates. The CLO assets include $2 million and $6 million in loans at September 30, 2011 and December 31, 2010, (aggregate unpaid principal balance of $7 million and $12 million, respectively) for which the CLOs are not accruing interest because the loans are in default.