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Investments
 12 Months Ended
Dec. 31, 2015
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

Available for sale fixed maturities and equity securities at December 31 consisted of the following (in millions): 
 
2015
 
2014
Amortized
Cost
 
Fair
Value
 
Gross Unrealized
 
Amortized
Cost
 
Fair
Value
 
Gross Unrealized
Gains
 
Losses
 
Gains
 
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
305

 
$
307

 
$
5

 
$
(3
)
 
$
347

 
$
353

 
$
8

 
$
(2
)
States, municipalities and political subdivisions
6,642

 
6,856

 
249

 
(35
)
 
6,393

 
6,747

 
364

 
(10
)
Foreign government
147

 
154

 
7

 
—

 
184

 
194

 
10

 
—

Residential MBS
3,236

 
3,529

 
308

 
(15
)
 
4,046

 
4,442

 
411

 
(15
)
Commercial MBS
2,111

 
2,187

 
77

 
(1
)
 
2,294

 
2,451

 
158

 
(1
)
Asset-backed securities
4,961

 
4,934

 
25

 
(52
)
 
3,872

 
3,887

 
37

 
(22
)
Corporate and other
14,163

 
14,317

 
422

 
(268
)
 
11,938

 
12,660

 
751

 
(29
)
Total fixed maturities
$
31,565

 
$
32,284

 
$
1,093

 
$
(374
)
 
$
29,074

 
$
30,734

 
$
1,739

 
$
(79
)
Common stocks
$
1,051

 
$
1,118

 
$
146

 
$
(79
)
 
$
885

 
$
1,087

 
$
227

 
$
(25
)
Perpetual preferred stocks
$
418

 
$
435

 
$
23

 
$
(6
)
 
$
398

 
$
414

 
$
21

 
$
(5
)


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 December 31, 2015 and December 31, 2014, respectively, were $205 million and $220 million. Gross unrealized gains on such securities at December 31, 2015 and December 31, 2014 were $134 million and $151 million, respectively. Gross unrealized losses on such securities at December 31, 2015 and December 31, 2014 were $6 million and $8 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 (dollars 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, 2015 and 2014.
 
  
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
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
(1
)
 
$
112

 
99
%
 
$
(2
)
 
$
15

 
88
%
 
States, municipalities and political subdivisions
(33
)
 
1,419

 
98
%
 
(2
)
 
50

 
96
%
 
Residential MBS
(7
)
 
438

 
98
%
 
(8
)
 
201

 
96
%
 
Commercial MBS
—

 
95

 
100
%
 
(1
)
 
28

 
97
%
 
Asset-backed securities
(42
)
 
2,706

 
98
%
 
(10
)
 
455

 
98
%
 
Corporate and other
(229
)
 
4,661

 
95
%
 
(39
)
 
165

 
81
%
 
Total fixed maturities
$
(312
)
 
$
9,431

 
97
%
 
$
(62
)
 
$
914

 
94
%
 
Common stocks
$
(79
)
 
$
509

 
87
%
 
$
—

 
$
—

 
—
%
 
Perpetual preferred stocks
$
(3
)
 
$
91

 
97
%
 
$
(3
)
 
$
22

 
88
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
—

 
$
39

 
100
%
 
$
(2
)
 
$
15

 
88
%
 
States, municipalities and political subdivisions
(2
)
 
222

 
99
%
 
(8
)
 
408

 
98
%
 
Residential MBS
(4
)
 
298

 
99
%
 
(11
)
 
209

 
95
%
 
Commercial MBS
(1
)
 
38

 
97
%
 
—

 
11

 
100
%
 
Asset-backed securities
(11
)
 
1,389

 
99
%
 
(11
)
 
622

 
98
%
 
Corporate and other
(16
)
 
588

 
97
%
 
(13
)
 
433

 
97
%
 
Total fixed maturities
$
(34
)
 
$
2,574

 
99
%
 
$
(45
)
 
$
1,698

 
97
%
 
Common stocks
$
(25
)
 
$
260

 
91
%
 
$
—

 
$
—

 
—
%
 
Perpetual preferred stocks
$
(1
)
 
$
45

 
98
%
 
$
(4
)
 
$
55

 
93
%


At December 31, 2015, the gross unrealized losses on fixed maturities of $374 million relate to approximately 1,285 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 77% of the gross unrealized loss and 91% of the fair value.

The determination of whether unrealized losses are “other-than-temporary” requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:

a)
whether the unrealized loss is credit-driven or a result of changes in market interest rates,
b)
the extent to which fair value is less than cost basis,
c)
cash flow projections received from independent sources,
d)
historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases,
e)
near-term prospects for improvement in the issuer and/or its industry,
f)
third party research and communications with industry specialists,
g)
financial models and forecasts,
h)
the continuity of dividend payments, maintenance of investment grade ratings and hybrid nature of certain investments,
i)
discussions with issuer management, and
j)
ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in 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. During 2015, AFG recorded $7 million in other-than-temporary impairment charges related to its residential MBS.
In 2015, AFG recorded approximately $31 million and $4 million in other-than-temporary impairment charges related to corporate bonds and municipal bonds, respectively.

AFG recorded $94 million in other-than-temporary impairment charges on common stocks in 2015. At December 31, 2015, the gross unrealized losses on common stocks of $79 million relate to 63 securities, none of which has been in an unrealized loss position for more than 12 months.

At December 31, 2015, the gross unrealized losses on preferred stocks of $6 million relate to 19 securities. All of the preferred stocks that have been in an unrealized loss position for 12 months or more (3 securities) have investment grade ratings.

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 December 31, 2015.

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):
 
2015
 
2014
 
2013
Balance at January 1
$
170

 
$
194

 
$
192

Additional credit impairments on:
 
 
 
 
 
Previously impaired securities
1

 
—

 
—

Securities without prior impairments
2

 
—

 
3

Reductions due to:
 
 
 
 
 
Sales or redemptions
(9
)
 
(24
)
 
(1
)
Sale of subsidiaries
(4
)
 
—

 
—

Balance at December 31
$
160

 
$
170

 
$
194



The table below sets forth the scheduled maturities of available for sale fixed maturities as of December 31, 2015 (dollars 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
$
922

 
$
935

 
3
%
After one year through five years
5,208

 
5,417

 
17
%
After five years through ten years
11,007

 
11,054

 
34
%
After ten years
4,120

 
4,228

 
13
%
 
21,257

 
21,634

 
67
%
ABS (average life of approximately 5 years)
4,961

 
4,934

 
15
%
MBS (average life of approximately 4 years)
5,347

 
5,716

 
18
%
Total
$
31,565

 
$
32,284

 
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, 2015 or 2014.

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
December 31, 2015
 
 
 
 
 
Unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (*)
$
523

 
$
(183
)
 
$
340

Fixed maturities — all other
196

 
(72
)
 
124

Equity securities
84

 
(30
)
 
54

Deferred policy acquisition costs — annuity segment
(233
)
 
82

 
(151
)
Annuity benefits accumulated
(64
)
 
22

 
(42
)
Unearned revenue
11

 
(4
)
 
7

 
$
517

 
$
(185
)
 
$
332

December 31, 2014
 
 
 
 
 
Unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (*)
$
1,157

 
$
(405
)
 
$
752

Fixed maturities — all other
503

 
(185
)
 
318

Equity securities
218

 
(79
)
 
139

Deferred policy acquisition costs — annuity segment
(531
)
 
186

 
(345
)
Annuity benefits accumulated
(112
)
 
39

 
(73
)
Life, accident and health reserves
(104
)
 
36

 
(68
)
Unearned revenue
31

 
(11
)
 
20

 
$
1,162

 
$
(419
)
 
$
743



(*)    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.
 
2015
 
2014
 
2013
Investment income:
 
 
 
 
 
Fixed maturities
$
1,461

 
$
1,352

 
$
1,241

Equity securities
76

 
66

 
50

Equity in earnings of partnerships and similar investments (*)
27

 
18

 
—

Other
87

 
77

 
72

Gross investment income
1,651

 
1,513

 
1,363

Investment expenses
(18
)
 
(12
)
 
(17
)
Net investment income
$
1,633

 
$
1,501

 
$
1,346



(*)
Prior to 2014, equity in the earnings of partnerships was not material and was included in realized gains (losses) on securities.

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 (*)
 
Total
Pretax
 
Tax
Effects
 
Noncon-
trolling
Interests
 
Total
Year ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized before impairments
$
19

 
$
94

 
$
(2
)
 
$
(5
)
 
$
106

 
$
(38
)
 
$
(2
)
 
$
66

Realized — impairments
(43
)
 
(94
)
 
(3
)
 
15

 
(125
)
 
45

 
2

 
(78
)
Change in unrealized
(941
)
 
(134
)
 
—

 
430

 
(645
)
 
226

 
8

 
(411
)
Year ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized before impairments
$
36

 
$
53

 
$
1

 
$
(2
)
 
$
88

 
$
(32
)
 
$
(2
)
 
$
54

Realized — impairments
(15
)
 
(26
)
 
—

 
5

 
(36
)
 
13

 
1

 
(22
)
Change in unrealized
570

 
26

 
—

 
(314
)
 
282

 
(99
)
 
(3
)
 
180

Year ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized before impairments
$
36

 
$
196

 
$
2

 
$
(1
)
 
$
233

 
$
(82
)
 
$
(2
)
 
$
149

Realized — impairments
(5
)
 
(5
)
 
(5
)
 
3

 
(12
)
 
4

 
—

 
(8
)
Change in unrealized
(945
)
 
31

 
—

 
504

 
(410
)
 
144

 
6

 
(260
)

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

Gross realized gains and losses (excluding impairment write-downs 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):
 
2015
 
2014
 
2013
Fixed maturities:
 
 
 
 
 
Gross gains
$
38

 
$
36

 
$
44

Gross losses
(7
)
 
(2
)
 
(5
)
Equity securities:
 
 
 
 
 
Gross gains
99

 
53

 
193

Gross losses
(5
)
 
—

 
—