Investments

12 Months Ended

Dec. 31, 2011

Investments [Abstract]

Investments

E. Investments

Available for sale fixed maturities and equity securities at December 31 consisted of the following (in millions):

	2011									2010
	Amortized		Fair		Gross Unrealized					Amortized		Fair		Gross Unrealized
	Cost		Value		Gains		Losses			Cost		Value		Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	363	$	382	$	19	$	—		$	453	$	467	$	15	$	(1	)
States, municipalities and political subdivisions		3,613		3,877		267		(3	)		2,927		2,939		53		(41	)
Foreign government		236		254		18		—			269		278		9		—
Residential MBS		3,858		3,848		170		(180	)		3,781		3,875		222		(128	)
Commercial MBS		2,628		2,840		218		(6	)		1,972		2,123		153		(2	)
All other corporate		9,864		10,606		802		(60	)		9,088		9,646		602		(44	)
Total fixed maturities	$	20,562	$	21,807	$	1,494	$	(249	)	$	18,490	$	19,328	$	1,054	$	(216	)
Common stocks	$	610	$	797	$	207	$	(20	)	$	312	$	543	$	232	$	(1	)
Perpetual preferred stocks	$	134	$	131	$	5	$	(8	)	$	146	$	147	$	6	$	(5	)

The non-credit related portion of other-than-temporary impairment charges are included in other comprehensive income (loss). Such charges taken for residential MBS still owned at December 31, 2011 and 2010, respectively, were $227 million and $258 million.

The following tables show gross unrealized losses (in millions) on fixed maturities and equity securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010.

	Less Than Twelve Months								Twelve Months or More
	Unrealized			Fair		Fair Value as			Unrealized			Fair		Fair Value as
	Loss			Value		% of Cost			Loss			Value		% of Cost
2011
Fixed maturities:
U.S. Government and government agencies	$	—		$	2		100	%	$	—		$	—		—	%
States, municipalities and political subdivisions		(2	)		120		98	%		(1	)		59		98	%
Foreign government		—			1		100	%		—			—		—	%
Residential MBS		(59	)		1,141		95	%		(121	)		473		80	%
Commercial MBS		(6	)		183		97	%		—			18		100	%
All other corporate		(43	)		940		96	%		(17	)		114		87	%
Total fixed maturities	$	(110	)	$	2,387		96	%	$	(139	)	$	664		83	%
Common stocks	$	(19	)	$	169		90	%	$	(1	)	$	4		80	%
Perpetual preferred stocks	$	(1	)	$	23		96	%	$	(7	)	$	31		82	%
2010
Fixed maturities:
U.S. Government and government agencies	$	(1	)	$	86		99	%	$	—		$	—		—	%
States, municipalities and political subdivisions		(38	)		1,180		97	%		(3	)		40		93	%
Foreign government		—			37		99	%		—			—		—	%
Residential MBS		(11	)		412		97	%		(117	)		551		82	%
Commercial MBS		(2	)		83		98	%		—			15		97	%
All other corporate		(24	)		1,020		98	%		(20	)		275		93	%
Total fixed maturities	$	(76	)	$	2,818		97	%	$	(140	)	$	881		86	%
Common stocks	$	—		$	21		99	%	$	(1	)	$	4		88	%
Perpetual preferred stocks	$	—		$	22		98	%	$	(5	)	$	37		88	%

At December 31, 2011, the gross unrealized losses on fixed maturities of $249 million relate to approximately 850 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 38% of the gross unrealized loss and 62% of the fair value.

Gross Unrealized Losses on MBS At December 31, 2011, gross unrealized losses on AFG’s residential MBS represented 72% of the total gross unrealized loss on fixed maturity securities and 87% of the “twelve months or more”. Of the residential MBS that have been in an unrealized loss position (“impaired”) for 12 months or more (239 securities), approximately 27% of the unrealized losses and 49% of the fair value relate to investment grade rated securities. AFG analyzes its MBS for other-than-temporary impairment each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan to collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data. For 2011, AFG recorded in earnings $52 million in other-than-temporary impairment charges related to its residential MBS.

Gross Unrealized Losses on All Other Corporates AFG recorded in earnings approximately $6 million in other-than-temporary impairment charges on “all other corporate” securities during 2011. Management concluded that no additional charges for other-than-temporary impairments were required based on many factors, including AFG’s ability and intent to hold the investments for a period of time sufficient to allow for anticipated recovery of its amortized cost, the length of time and the extent to which fair value has been below cost, analysis of historical and projected company-specific financial data, the outlook for industry sectors, and credit ratings.

The following table is a progression of the credit portion of other-than-temporary impairments on fixed maturity securities for which the non-credit portion of an impairment has been recognized in other comprehensive income (loss)(in millions).

	2011			2010			2009
Balance at January 1	$	143		$	99		$	14
Additional credit impairments on:
Previously impaired securities		44			44			26
Securities without prior impairments		8			9			72
Reductions — disposals		(8	)		(9	)		(13	)
Balance at December 31	$	187		$	143		$	99

The table below sets forth the scheduled maturities of available for sale fixed maturities as of December 31, 2011 (in millions). Asset-backed securities and other securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers. MBS had an average life of approximately 4 years at December 31, 2011.

	Amortized		Fair Value
	Cost		Amount		%
Maturity
One year or less	$	603	$	615		3	%
After one year through five years		5,196		5,478		25
After five years through ten years		6,437		6,998		32
After ten years		1,840		2,028		9
		14,076		15,119		69
MBS		6,486		6,688		31
Total	$	20,562	$	21,807		100	%

Certain risks are inherent in connection with fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.

There were no investments in individual issuers that exceeded 10% of Shareholders’ Equity at December 31, 2011 or 2010.

Net Unrealized Gain on Marketable Securities In addition to adjusting equity securities and fixed maturity securities classified as “available for sale” to fair value, GAAP requires that deferred policy acquisition costs related to annuities and certain other balance sheet amounts be adjusted to the extent that unrealized gains and losses from securities would result in adjustments to those balances had the unrealized gains or losses actually been realized. The following table shows (in millions) the components of the net unrealized gain on securities that is included in Accumulated Other Comprehensive Income in AFG’s Balance Sheet.

				Deferred Tax and
				Amounts Attributable
				to Noncontrolling
	Pre-tax			Interests			Net
December 31, 2011
Unrealized gain on:
Fixed maturity securities	$	1,245		$	(444	)	$	801
Equity securities		184			(65	)		119
Deferred policy acquisition costs		(572	)		200			(372	)
Annuity benefits and other liabilities		10			(3	)		7
	$	867		$	(312	)	$	555
December 31, 2010
Unrealized gain on:
Fixed maturity securities	$	838		$	(295	)	$	543
Equity securities		232			(82	)		150
Deferred policy acquisition costs		(340	)		118			(222	)
Annuity benefits and other liabilities		6			(2	)		4
	$	736		$	(261	)	$	475

Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments are summarized as follows (in millions):

							Mortgage
							Loans									Noncon-
	Fixed			Equity			and Other						Tax			trolling
	Maturities			Securities			Investments			Other(a)			Effects			Interests			Total
2011
Realized before impairments	$	68		$	88		$	(24	)	$	(4	)	$	(45	)	$	(2	)	$	81
Realized — impairments		(57	)		(6	)		(5	)		16			18			1			(33	)
Change in unrealized		407			(48	)		—			(228	)		(46	)		(5	)		80
2010
Realized before impairments		146			36			(5	)		(14	)		(57	)		(2	)		104
Realized — impairments		(79	)		(1	)		(6	)		24			22			—			(40	)
Change in unrealized		751			49			—			(316	)		(169	)		(2	)		313
2009
Realized before impairments		207			61			1			(23	)		(82	)		(5	)		159
Realized — impairments		(221	)		(22	)		(28	)		68			72			1			(130	)
Change in unrealized		2,005			126			—			(788	)		(471	)		(6	)		866

(a) Primarily adjustments to deferred policy acquisition costs related to annuities.

Realized gains (losses) on securities include net losses of less than $1 million in 2011 and net gains of $50 million in 2010 and $157 million in 2009 from the mark-to-market of certain MBS, primarily interest-only securities with interest rates that float inversely with short-term rates. Gross realized gains and losses (excluding impairment writedowns and mark-to-market of derivatives) on available for sale fixed maturity and equity security investment transactions included in the Statement of Cash Flows consisted of the following (in millions):

	2011			2010			2009
Fixed maturities:
Gross gains	$	77		$	108		$	92
Gross losses		(9	)		(11	)		(43	)
Equity securities:
Gross gains		90			35			82
Gross losses		(1	)		—			(21	)