Managed Investment Entities

AFG is the investment manager and its subsidiaries have investments ranging from 15.0% to 51.2% of the most subordinate debt tranche of twelve collateralized loan obligation entities or “CLOs,” which are considered variable interest entities. AFG’s subsidiaries also own portions of the senior debt tranches of certain of these CLOs. Upon formation between 2004 and 2014, 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 expenses (including management fees to AFG), and 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.

AFG’s maximum exposure to economic loss on its CLOs is limited to its investment in the CLOs, which had an aggregate fair value of $289 million (including $92 million invested in the most subordinate debt tranches) at December 31, 2014, and $271 million at December 31, 2013.

In 2014, AFG formed two new CLOs, which issued an aggregate of $917 million face amount of liabilities (including $94 million face amount purchased by subsidiaries of AFG). During 2014, AFG subsidiaries also purchased $13 million face amount of senior debt tranches of existing CLOs for $13 million and received $81 million in redemption proceeds from its CLO investments. In 2013, AFG formed two new CLOs, which issued an aggregate of $829 million face amount of liabilities (including $85 million face amount purchased by subsidiaries of AFG). During 2013, AFG subsidiaries also purchased $94 million face amount of senior debt tranches of existing CLOs for $89 million and received $142 million in redemption proceeds from its CLO investments. In 2012, AFG formed two new CLOs, which issued an aggregate of $860 million face amount of liabilities (including $74 million face amount purchased by subsidiaries of AFG). During 2012, AFG subsidiaries also purchased $74 million face amount of senior debt tranches of existing CLOs for $69 million and received $12 million in redemption proceeds from its CLO investments. In 2014 and 2013, four and two AFG CLOs were substantially liquidated as permitted by the CLO indentures, respectively.

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):



	Year ended December 31,
	2014			2013			2012
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	$	(66	)	$	11		$	95
Liabilities	22			(25		)	(189		)
Management fees paid to AFG	25			16			18
CLO earnings (losses) attributable to (b):
AFG shareholders	16			35			31
Noncontrolling interests	(51		)	(26		)	(98		)


(a)	Included in Revenues in AFG’s Statement of Earnings.


(b)	Included in Earnings before income taxes in AFG’s Statement of Earnings.

The aggregate unpaid principal balance of the CLOs’ fixed maturity investments exceeded the fair value of the investments by $83 million and $15 million at December 31, 2014 and 2013. The aggregate unpaid principal balance of the CLOs’ debt exceeded its fair value by $131 million and $109 million at those dates. The CLO assets include $2 million and $1 million in loans at December 31, 2014 and 2013, respectively, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of $6 million at both of those dates).