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Investments
 6 Months Ended
Jun. 30, 2014
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

Available for sale fixed maturities and equity securities at June 30, 2014 and December 31, 2013, consisted of the following (in millions): 
 
June 30, 2014
 
December 31, 2013
Amortized
Cost
 
Fair
Value
 
Gross Unrealized
 
Amortized
Cost
 
Fair
Value
 
Gross Unrealized
Gains
 
Losses
 
Gains
 
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
343

 
$
349

 
$
8

 
$
(2
)
 
$
310

 
$
314

 
$
7

 
$
(3
)
States, municipalities and political subdivisions
5,979

 
6,228

 
281

 
(32
)
 
5,360

 
5,372

 
156

 
(144
)
Foreign government
128

 
138

 
10

 
—

 
198

 
208

 
10

 
—

Residential MBS
4,274

 
4,684

 
428

 
(18
)
 
3,947

 
4,310

 
391

 
(28
)
Commercial MBS
2,390

 
2,583

 
194

 
(1
)
 
2,535

 
2,724

 
192

 
(3
)
Asset-backed securities
3,185

 
3,219

 
45

 
(11
)
 
2,477

 
2,493

 
35

 
(19
)
Corporate and other
10,988

 
11,787

 
820

 
(21
)
 
10,539

 
11,035

 
604

 
(108
)
Total fixed maturities
$
27,287

 
$
28,988

 
$
1,786

 
$
(85
)
 
$
25,366

 
$
26,456

 
$
1,395

 
$
(305
)
Common stocks
$
897

 
$
1,115

 
$
233

 
$
(15
)
 
$
721

 
$
914

 
$
209

 
$
(16
)
Perpetual preferred stocks
$
341

 
$
358

 
$
21

 
$
(4
)
 
$
266

 
$
265

 
$
9

 
$
(10
)

The non-credit related portion of other-than-temporary impairment charges is included in other comprehensive income. Cumulative non-credit charges taken for securities still owned at June 30, 2014 and December 31, 2013, respectively, were $223 million and $229 million. Gross unrealized gains on such securities at June 30, 2014 and December 31, 2013 were $154 million and $150 million, respectively. Gross unrealized losses on such securities at June 30, 2014 and December 31, 2013 were $10 million and $13 million, respectively. These amounts represent the non-credit other-than-temporary impairment charges recorded in AOCI adjusted for subsequent changes in fair values and nearly all relate to residential MBS.
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 June 30, 2014 and December 31, 2013. 
  
Less Than Twelve Months
 
Twelve Months or More
Unrealized
Loss
 
Fair
Value
 
Fair Value as
% of Cost
 
Unrealized
Loss
 
Fair
Value
 
Fair Value as
% of Cost
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
(2
)
 
$
18

 
90
%
 
$
—

 
$
1

 
100
%
States, municipalities and political subdivisions
(3
)
 
289

 
99
%
 
(29
)
 
933

 
97
%
Residential MBS
(4
)
 
304

 
99
%
 
(14
)
 
260

 
95
%
Commercial MBS
(1
)
 
24

 
96
%
 
—

 
17

 
100
%
Asset-backed securities
(5
)
 
990

 
99
%
 
(6
)
 
332

 
98
%
Corporate and other
(4
)
 
238

 
98
%
 
(17
)
 
772

 
98
%
Total fixed maturities
$
(19
)
 
$
1,863

 
99
%
 
$
(66
)
 
$
2,315

 
97
%
Common stocks
$
(15
)
 
$
98

 
87
%
 
$
—

 
$
—

 
—
%
Perpetual preferred stocks
$
(1
)
 
$
16

 
94
%
 
$
(3
)
 
$
52

 
95
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
(3
)
 
$
60

 
95
%
 
$
—

 
$
—

 
—
%
States, municipalities and political subdivisions
(135
)
 
2,219

 
94
%
 
(9
)
 
73

 
89
%
Residential MBS
(9
)
 
553

 
98
%
 
(19
)
 
212

 
92
%
Commercial MBS
(3
)
 
106

 
97
%
 
—

 
2

 
100
%
Asset-backed securities
(18
)
 
1,310

 
99
%
 
(1
)
 
28

 
97
%
Corporate and other
(101
)
 
2,634

 
96
%
 
(7
)
 
85

 
92
%
Total fixed maturities
$
(269
)
 
$
6,882

 
96
%
 
$
(36
)
 
$
400

 
92
%
Common stocks
$
(16
)
 
$
158

 
91
%
 
$
—

 
$
—

 
—
%
Perpetual preferred stocks
$
(6
)
 
$
91

 
94
%
 
$
(4
)
 
$
20

 
83
%


At June 30, 2014, the gross unrealized losses on fixed maturities of $85 million relate to 665 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 74% of the gross unrealized loss and 86% of the fair value.

AFG analyzes its MBS securities 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. In the first six months of 2014, AFG recorded less than $1 million in other-than-temporary impairment charges related to its residential MBS.

Management believes AFG will recover its cost basis in the securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at June 30, 2014.
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 is shown below (in millions).

 
2014
 
2013
Balance at March 31
$
177

 
$
191

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
—

Securities without prior impairments
—

 
—

Reductions due to sales or redemptions
(2
)
 
—

Balance at June 30
$
175

 
$
191

 
 
 
 
Balance at January 1
$
194

 
$
192

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
—

Securities without prior impairments
—

 
—

Reductions due to sales or redemptions
(19
)
 
(1
)
Balance at June 30
$
175

 
$
191



The table below sets forth the scheduled maturities of available for sale fixed maturities as of June 30, 2014 (in millions). 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.
  
Amortized
 
Fair Value
Cost
 
Amount
 
%
Maturity
 
 
 
 
 
One year or less
$
774

 
$
792

 
3
%
After one year through five years
4,727

 
5,120

 
17
%
After five years through ten years
7,856

 
8,304

 
29
%
After ten years
4,081

 
4,286

 
15
%
 
17,438

 
18,502

 
64
%
ABS (average life of approximately 5 years)
3,185

 
3,219

 
11
%
MBS (average life of approximately 4-1/2 years)
6,664

 
7,267

 
25
%
Total
$
27,287

 
$
28,988

 
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 June 30, 2014 or December 31, 2013.
 
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 and certain other balance sheet amounts related to annuity, long-term care and life businesses 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 AOCI in AFG’s Balance Sheet. 
 
Pretax
 
Deferred Tax and
Amounts 
Attributable
to Noncontrolling
Interests
 
Net
June 30, 2014
 
 
 
 
 
Unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (*)
$
1,188

 
$
(416
)
 
$
772

Fixed maturities — all other
513

 
(190
)
 
323

Equity securities
235

 
(86
)
 
149

Deferred policy acquisition costs — annuity segment
(551
)
 
193

 
(358
)
Annuity benefits accumulated
(117
)
 
41

 
(76
)
Life, accident and health reserves
(41
)
 
14

 
(27
)
Unearned revenue
34

 
(12
)
 
22

 
$
1,261

 
$
(456
)
 
$
805

 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
Unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (*)
$
729

 
$
(255
)
 
$
474

Fixed maturities — all other
361

 
(133
)
 
228

Equity securities
192

 
(70
)
 
122

Deferred policy acquisition costs — annuity segment
(345
)
 
121

 
(224
)
Annuity benefits accumulated
(71
)
 
25

 
(46
)
Life, accident and health reserves
(8
)
 
3

 
(5
)
Unearned revenue
22

 
(8
)
 
14

 
$
880

 
$
(317
)
 
$
563



(*)
Unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.

Net Investment Income   The following table shows (in millions) investment income earned and investment expenses incurred.
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Investment income:
 
 
 
 
 
 
 
Fixed maturities
$
338

 
$
308

 
$
665

 
$
610

Equity securities
16

 
9

 
32

 
21

Equity in earnings of partnerships and similar investments
7

 
—

 
13

 
—

Other
19

 
19

 
36

 
35

Gross investment income
380

 
336

 
746

 
666

Investment expenses
(1
)
 
(4
)
 
(6
)
 
(8
)
Net investment income
$
379

 
$
332

 
$
740

 
$
658



Equity in the earnings of partnerships has not been material and was included in realized gains (losses) on securities prior to 2014.
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments are summarized as follows (in millions): 
 
Fixed
Maturities
 
Equity
Securities
 
Mortgage
Loans
and Other
Investments
 
Other (a)
 
Tax
Effects
 
Noncon-
trolling
Interests
 
Total
Quarter ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized before impairments
$
9

 
$
4

 
$
—

 
$
—

 
$
(4
)
 
$
(1
)
 
$
8

Realized — impairments
—

 
(1
)
 
—

 
—

 
—

 
—

 
(1
)
Change in unrealized
295

 
30

 
—

 
(137
)
 
(66
)
 
(2
)
 
120

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quarter ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized before impairments
$
8

 
$
33

 
$
1

 
$
—

 
$
(15
)
 
$
—

 
$
27

Realized — impairments
—

 
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Change in unrealized
(725
)
 
(13
)
 
—

 
319

 
147

 
7

 
(265
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized before impairments
$
22

 
$
10

 
$
1

 
$
—

 
$
(11
)
 
$
(1
)
 
$
21

Realized — impairments
(1
)
 
(1
)
 
—

 
—

 
—

 
—

 
(2
)
Change in unrealized
611

 
43

 
—

 
(273
)
 
(134
)
 
(5
)
 
242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized before impairments
$
27

 
$
71

 
$
2

 
$
(1
)
 
$
(35
)
 
$
(1
)
 
$
63

Realized — impairments
—

 
—

 
(1
)
 
—

 
—

 
—

 
(1
)
Change in unrealized
(740
)
 
54

 
—

 
333

 
124

 
6

 
(223
)
 
(a)
Primarily adjustments to deferred policy acquisition costs and reserves related to annuities and long-term care business.

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): 
  
Six months ended June 30,
2014
 
2013
Fixed maturities:
 
 
 
Gross gains
$
18

 
$
28

Gross losses
(2
)
 
(1
)
Equity securities:
 
 
 
Gross gains
12

 
71

Gross losses
—

 
—