XML 25 R12.htm IDEA: XBRL DOCUMENT v3.5.0.2
Investments
 9 Months Ended
Sep. 30, 2016
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

Available for sale fixed maturities and equity securities at September 30, 2016 and December 31, 2015, consisted of the following (in millions): 
 
September 30, 2016
 
December 31, 2015
Amortized
Cost
 
Gross Unrealized
 
Net
Unrealized
 
Fair
Value
 
Amortized
Cost
 
Gross Unrealized
 
Net
Unrealized
 
Fair
Value
Gains
 
Losses
 
Gains
 
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
328

 
$
6

 
$
(2
)
 
$
4

 
$
332

 
$
305

 
$
5

 
$
(3
)
 
$
2

 
$
307

States, municipalities and political subdivisions
6,597

 
455

 
(5
)
 
450

 
7,047

 
6,642

 
249

 
(35
)
 
214

 
6,856

Foreign government
134

 
7

 
—

 
7

 
141

 
147

 
7

 
—

 
7

 
154

Residential MBS
3,530

 
300

 
(14
)
 
286

 
3,816

 
3,236

 
308

 
(15
)
 
293

 
3,529

Commercial MBS
1,764

 
85

 
—

 
85

 
1,849

 
2,111

 
77

 
(1
)
 
76

 
2,187

Asset-backed securities
5,844

 
70

 
(25
)
 
45

 
5,889

 
4,961

 
25

 
(52
)
 
(27
)
 
4,934

Corporate and other
15,389

 
962

 
(31
)
 
931

 
16,320

 
14,163

 
422

 
(268
)
 
154

 
14,317

Total fixed maturities
$
33,586

 
$
1,885

 
$
(77
)
 
$
1,808

 
$
35,394

 
$
31,565

 
$
1,093

 
$
(374
)
 
$
719

 
$
32,284

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
939

 
$
157

 
$
(27
)
 
$
130

 
$
1,069

 
$
1,051

 
$
146

 
$
(79
)
 
$
67

 
$
1,118

Perpetual preferred stocks
453

 
34

 
(3
)
 
31

 
484

 
418

 
23

 
(6
)
 
17

 
435

Total equity securities
$
1,392

 
$
191

 
$
(30
)
 
$
161

 
$
1,553

 
$
1,469

 
$
169

 
$
(85
)
 
$
84

 
$
1,553



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 September 30, 2016 and December 31, 2015, respectively, were $192 million and $205 million. Gross unrealized gains on such securities at September 30, 2016 and December 31, 2015 were $131 million and $134 million, respectively. Gross unrealized losses on such securities at September 30, 2016 and December 31, 2015 were $5 million and $6 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 September 30, 2016 and December 31, 2015. 
  
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
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
—

 
$
51

 
100
%
 
$
(2
)
 
$
8

 
80
%
States, municipalities and political subdivisions
(2
)
 
191

 
99
%
 
(3
)
 
50

 
94
%
Residential MBS
(7
)
 
490

 
99
%
 
(7
)
 
158

 
96
%
Commercial MBS
—

 
23

 
100
%
 
—

 
4

 
100
%
Asset-backed securities
(13
)
 
924

 
99
%
 
(12
)
 
535

 
98
%
Corporate and other
(8
)
 
470

 
98
%
 
(23
)
 
336

 
94
%
Total fixed maturities
$
(30
)
 
$
2,149

 
99
%
 
$
(47
)
 
$
1,091

 
96
%
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
(27
)
 
$
233

 
90
%
 
$
—

 
$
—

 
—
%
Perpetual preferred stocks
(2
)
 
89

 
98
%
 
(1
)
 
6

 
86
%
Total equity securities
$
(29
)
 
$
322

 
92
%
 
$
(1
)
 
$
6

 
86
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
%
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
(79
)
 
$
509

 
87
%
 
$
—

 
$
—

 
—
%
Perpetual preferred stocks
(3
)
 
91

 
97
%
 
(3
)
 
22

 
88
%
Total equity securities
$
(82
)
 
$
600

 
88
%
 
$
(3
)
 
$
22

 
88
%


At September 30, 2016, the gross unrealized losses on fixed maturities of $77 million relate to approximately 475 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 49% of the gross unrealized loss and 74% 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 nine months of 2016, AFG recorded $2 million in other-than-temporary impairment charges related to its residential MBS.

In the first nine months of 2016, AFG recorded approximately $34 million in other-than-temporary impairment charges related to corporate bonds and other fixed maturities.

AFG recorded $79 million in other-than-temporary impairment charges on common stocks in the first nine months of 2016. At September 30, 2016, the gross unrealized losses on common stocks of $27 million relate to 32 securities, none of which has been in an unrealized loss position for more than 12 months.

AFG recorded $4 million in other-than-temporary impairment charges on preferred stocks in the first nine months of 2016. At September 30, 2016, the gross unrealized losses on preferred stocks of $3 million relate to 14 securities. All of the preferred stocks that have been in an unrealized loss position for 12 months or more (1 security), 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 September 30, 2016.

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):

 
2016
 
2015
Balance at June 30
$
157

 
$
166

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
—

Securities without prior impairments
—

 
2

Reductions due to sales or redemptions
(2
)
 
(2
)
Balance at September 30
$
155

 
$
166

 
 
 
 
Balance at January 1
$
160

 
$
170

Additional credit impairments on:
 
 
 
Previously impaired securities
2

 
1

Securities without prior impairments
—

 
2

Reductions due to sales or redemptions
(7
)
 
(7
)
Balance at September 30
$
155

 
$
166



The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 30, 2016 (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
$
1,036

 
$
1,053

 
3
%
After one year through five years
5,686

 
6,047

 
17
%
After five years through ten years
11,767

 
12,467

 
35
%
After ten years
3,959

 
4,273

 
12
%
 
22,448

 
23,840

 
67
%
ABS (average life of approximately 5 years)
5,844

 
5,889

 
17
%
MBS (average life of approximately 4 years)
5,294

 
5,665

 
16
%
Total
$
33,586

 
$
35,394

 
100
%


Certain risks are inherent in 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 September 30, 2016 or December 31, 2015.

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
September 30, 2016
 
 
 
 
 
Unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (*)
$
1,420

 
$
(497
)
 
$
923

Fixed maturities — all other
388

 
(145
)
 
243

Total fixed maturities
1,808

 
(642
)
 
1,166

Equity securities
161

 
(58
)
 
103

Total investments
1,969

 
(700
)
 
1,269

Deferred policy acquisition costs — annuity segment
(614
)
 
215

 
(399
)
Annuity benefits accumulated
(179
)
 
63

 
(116
)
Life, accident and health reserves
(1
)
 
—

 
(1
)
Unearned revenue
30

 
(11
)
 
19

Total net unrealized gain on marketable securities
$
1,205

 
$
(433
)
 
$
772

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

 
$
(183
)
 
$
340

Fixed maturities — all other
196

 
(72
)
 
124

Total fixed maturities
719

 
(255
)
 
464

Equity securities
84

 
(30
)
 
54

Total investments
803

 
(285
)
 
518

Deferred policy acquisition costs — annuity segment
(233
)
 
82

 
(151
)
Annuity benefits accumulated
(64
)
 
22

 
(42
)
Unearned revenue
11

 
(4
)
 
7

Total net unrealized gain on marketable securities
$
517

 
$
(185
)
 
$
332



(*)
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 September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Investment income:
 
 
 
 
 
 
 
Fixed maturities
$
378

 
$
370

 
$
1,126

 
$
1,082

Equity securities
20

 
20

 
59

 
54

Equity in earnings of partnerships and similar investments
16

 
18

 
31

 
26

Other
23

 
22

 
64

 
69

Gross investment income
437

 
430

 
1,280

 
1,231

Investment expenses
(4
)
 
(5
)
 
(13
)
 
(14
)
Net investment income
$
433

 
$
425

 
$
1,267

 
$
1,217



Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments are summarized as follows (in millions): 
 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
5

 
$
(2
)
 
$
3

 
$
52

 
$
7

 
$
(17
)
 
$
(10
)
 
$
(9
)
Equity securities
14

 
(16
)
 
(2
)
 
89

 
13

 
(23
)
 
(10
)
 
(135
)
Mortgage loans and other investments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other (*)
(1
)
 
2

 
1

 
(5
)
 
(1
)
 
5

 
4

 
(11
)
Total pretax
18


(16
)

2


136


19


(35
)

(16
)

(155
)
Tax effects
(7
)
 
5

 
(2
)
 
(48
)
 
(7
)
 
13

 
6

 
55

Noncontrolling interests
—

 
1

 
1

 
(1
)
 
(1
)
 
1

 
—

 
2

Net of tax and noncontrolling interests
$
11


$
(10
)

$
1


$
87


$
11


$
(21
)

$
(10
)

$
(98
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
36

 
$
(37
)
 
$
(1
)
 
$
1,089

 
$
17

 
$
(32
)
 
$
(15
)
 
$
(414
)
Equity securities
46

 
(83
)
 
(37
)
 
77

 
59

 
(48
)
 
11

 
(150
)
Mortgage loans and other investments
—

 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
 
—

Other (*)
(7
)
 
13

 
6

 
(478
)
 
(3
)
 
11

 
8

 
166

Total pretax
75

 
(107
)
 
(32
)
 
688

 
71

 
(69
)
 
2

 
(398
)
Tax effects
(27
)
 
38

 
11

 
(241
)
 
(25
)
 
25

 
—

 
140

Noncontrolling interests
(1
)
 
3

 
2

 
(7
)
 
(1
)
 
1

 
—

 
4

Net of tax and noncontrolling interests
$
47

 
$
(66
)
 
$
(19
)
 
$
440

 
$
45

 
$
(43
)
 
$
2

 
$
(254
)


(*)
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): 
  
Nine months ended September 30,
2016
 
2015
Fixed maturities:
 
 
 
Gross gains
$
44

 
$
24

Gross losses
(8
)
 
—

Equity securities:
 
 
 
Gross gains
49

 
59

Gross losses
(3
)
 
—