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Investments
 3 Months Ended
Mar. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

Available for sale fixed maturities at March 31, 2018 and December 31, 2017, consisted of the following (in millions):
 
March 31, 2018
 
December 31, 2017
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
$
253

 
$
1

 
$
(4
)
 
$
(3
)
 
$
250

 
$
244

 
$
1

 
$
(3
)
 
$
(2
)
 
$
242

States, municipalities and political subdivisions
6,855

 
187

 
(39
)
 
148

 
7,003

 
6,887

 
254

 
(18
)
 
236

 
7,123

Foreign government
130

 
2

 
—

 
2

 
132

 
124

 
3

 
—

 
3

 
127

Residential MBS
2,732

 
338

 
(7
)
 
331

 
3,063

 
2,884

 
349

 
(6
)
 
343

 
3,227

Commercial MBS
922

 
21

 
(3
)
 
18

 
940

 
927

 
36

 
(1
)
 
35

 
962

Asset-backed securities
8,546

 
148

 
(31
)
 
117

 
8,663

 
7,836

 
142

 
(16
)
 
126

 
7,962

Corporate and other
18,945

 
308

 
(179
)
 
129

 
19,074

 
18,136

 
638

 
(38
)
 
600

 
18,736

Total fixed maturities
$
38,383

 
$
1,005

 
$
(263
)
 
$
742

 
$
39,125

 
$
37,038

 
$
1,423

 
$
(82
)
 
$
1,341

 
$
38,379

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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 March 31, 2018 and December 31, 2017 were $155 million and $158 million, respectively. Gross unrealized gains on such securities at March 31, 2018 and December 31, 2017 were $136 million and $137 million, respectively. Gross unrealized losses on such securities at March 31, 2018 and December 31, 2017 were $4 million. These amounts represent the non-credit other-than-temporary impairment charges recorded in AOCI adjusted for subsequent changes in fair values and relate primarily to residential MBS.

As discussed in Note A — “Accounting Policies — Investments,” beginning on January 1, 2018, AFG implemented new accounting guidance, which required all equity securities previously classified as “available for sale” to be reported at fair value, with holding gains and losses recognized in net earnings. Equity securities reported at fair value consisted of the following at March 31, 2018 (in millions):
 
 
 
 
 
Fair Value in
 
Actual Cost
 
Fair Value
 
excess of Cost
Common stocks
$
1,099

 
$
1,154

 
$
55

Perpetual preferred stocks
632

 
632

 
—

Total equity securities carried at fair value
$
1,731

 
$
1,786

 
$
55



The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities and equity securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at the following balance sheet dates. 
  
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
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
(1
)
 
$
57

 
98
%
 
$
(3
)
 
$
119

 
98
%
States, municipalities and political subdivisions
(26
)
 
1,745

 
99
%
 
(13
)
 
411

 
97
%
Foreign government
—

 
22

 
100
%
 
—

 
—

 
—
%
Residential MBS
(3
)
 
155

 
98
%
 
(4
)
 
114

 
97
%
Commercial MBS
(3
)
 
148

 
98
%
 
—

 
—

 
—
%
Asset-backed securities
(21
)
 
2,586

 
99
%
 
(10
)
 
306

 
97
%
Corporate and other
(149
)
 
7,352

 
98
%
 
(30
)
 
601

 
95
%
Total fixed maturities
$
(203
)
 
$
12,065

 
98
%
 
$
(60
)
 
$
1,551

 
96
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
—

 
$
55

 
100
%
 
$
(3
)
 
$
123

 
98
%
States, municipalities and political subdivisions
(8
)
 
825

 
99
%
 
(10
)
 
431

 
98
%
Foreign government
—

 
4

 
100
%
 
—

 
—

 
—
%
Residential MBS
(1
)
 
118

 
99
%
 
(5
)
 
118

 
96
%
Commercial MBS
(1
)
 
67

 
99
%
 
—

 
—

 
—
%
Asset-backed securities
(7
)
 
1,195

 
99
%
 
(9
)
 
299

 
97
%
Corporate and other
(20
)
 
2,031

 
99
%
 
(18
)
 
603

 
97
%
Total fixed maturities
$
(37
)
 
$
4,295

 
99
%
 
$
(45
)
 
$
1,574

 
97
%
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
(22
)
 
$
117

 
84
%
 
$
—

 
$
—

 
—
%
Perpetual preferred stocks
—

 
41

 
100
%
 
(1
)
 
13

 
93
%
Total equity securities
$
(22
)
 
$
158

 
88
%
 
$
(1
)
 
$
13

 
93
%


At March 31, 2018, the gross unrealized losses on fixed maturities of $263 million relate to 1,621 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 90% of the gross unrealized loss and 94% 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 three months of 2018, AFG recorded less than $1 million in other-than-temporary impairment charges related to its residential MBS.

In the first three months of 2018, AFG recorded $1 million in other-than-temporary impairment charges related to corporate bonds and other fixed maturities.

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 March 31, 2018. As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities previously classified as “available for sale” are required to be carried at fair value through net earnings instead of accumulated other comprehensive income and therefore are no longer evaluated for other-than-temporary impairment.

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):

 
2018
 
2017
Balance at January 1
$
145

 
$
153

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
—

Securities without prior impairments
—

 
—

Reductions due to sales or redemptions
(1
)
 
(7
)
Balance at March 31
$
144

 
$
146



The table below sets forth the scheduled maturities of available for sale fixed maturities as of March 31, 2018 (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
$
793

 
$
804

 
2
%
After one year through five years
7,314

 
7,431

 
19
%
After five years through ten years
13,345

 
13,425

 
35
%
After ten years
4,731

 
4,799

 
12
%
 
26,183

 
26,459

 
68
%
ABS (average life of approximately 4-1/2 years)
8,546

 
8,663

 
22
%
MBS (average life of approximately 4-1/2 years)
3,654

 
4,003

 
10
%
Total
$
38,383

 
$
39,125

 
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 March 31, 2018 or December 31, 2017.

Net Unrealized Gain on Marketable Securities   In addition to adjusting fixed maturity securities and equity 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
 
Net
March 31, 2018
 
 
 
 
 
Net unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (a)
$
594

 
$
(125
)
 
$
469

Fixed maturities — all other
148

 
(31
)
 
117

Total fixed maturities
742

 
(156
)
 
586

Deferred policy acquisition costs — annuity segment
(236
)
 
49

 
(187
)
Annuity benefits accumulated
(79
)
 
17

 
(62
)
Unearned revenue
6

 
(1
)
 
5

Total net unrealized gain on marketable securities
$
433

 
$
(91
)
 
$
342

 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
Net unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (a)
$
1,082

 
$
(227
)
 
$
855

Fixed maturities — all other
259

 
(55
)
 
204

Total fixed maturities
1,341

 
(282
)
 
1,059

Equity securities (b)
279

 
(58
)
 
221

Total investments
1,620

 
(340
)
 
1,280

Deferred policy acquisition costs — annuity segment
(433
)
 
91

 
(342
)
Annuity benefits accumulated
(137
)
 
29

 
(108
)
Unearned revenue
13

 
(3
)
 
10

Total net unrealized gain on marketable securities
$
1,063

 
$
(223
)
 
$
840



(a)
Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.
(b)
As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings.

Net Investment Income   The following table shows (in millions) investment income earned and investment expenses incurred.
 
Three months ended March 31,
 
2018
 
2017
Investment income:
 
 
 
Fixed maturities
$
412

 
$
389

Equity securities
19

 
21

Equity in earnings of partnerships and similar investments
46

 
10

Other
23

 
20

Gross investment income
500

 
440

Investment expenses
(5
)
 
(5
)
Net investment income
$
495

 
$
435



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 March 31, 2018
 
Three months ended March 31, 2017
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
(1
)
 
$
(1
)
 
$
(2
)
 
$
(599
)
 
$
5

 
$
—

 
$
5

 
$
202

Equity securities (a)
(95
)
 
—

 
(95
)
 
—

 
2

 
(9
)
 
(7
)
 
72

Mortgage loans and other investments
—

 
—

 
—

 
—

 
3

 
—

 
3

 
—

Other (b)
4

 
—

 
4

 
248

 
(1
)
 
3

 
2

 
(83
)
Total pretax
(92
)
 
(1
)
 
(93
)
 
(351
)
 
9

 
(6
)
 
3

 
191

Tax effects
20

 
—

 
20

 
74

 
(3
)
 
2

 
(1
)
 
(66
)
Net of tax
$
(72
)
 
$
(1
)
 
$
(73
)
 
$
(277
)
 
$
6

 
$
(4
)
 
$
2

 
$
125



(a)
As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings. AFG recorded a net realized loss of $94 million on equity securities during the first three months of 2018 on securities that were still owned at March 31, 2018.
(b)
Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.

Gross realized gains and losses (excluding impairment write-downs and mark-to-market of derivatives) on available for sale fixed maturity investment transactions consisted of the following (in millions): 
  
Three months ended March 31,
2018
 
2017
Fixed maturities:
 
 
 
Gross gains
$
6

 
$
5

Gross losses
(3
)
 
—



In the first three months of 2017, AFG recorded gross gains of $4 million and gross losses of $2 million on available for sale equity securities.