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Investments
 6 Months Ended
Jun. 30, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

Available for sale fixed maturities at June 30, 2018 and December 31, 2017, consisted of the following (in millions):
 
June 30, 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
$
243

 
$
1

 
$
(4
)
 
$
(3
)
 
$
240

 
$
244

 
$
1

 
$
(3
)
 
$
(2
)
 
$
242

States, municipalities and political subdivisions
6,804

 
162

 
(53
)
 
109

 
6,913

 
6,887

 
254

 
(18
)
 
236

 
7,123

Foreign government
127

 
2

 
—

 
2

 
129

 
124

 
3

 
—

 
3

 
127

Residential MBS
2,564

 
329

 
(7
)
 
322

 
2,886

 
2,884

 
349

 
(6
)
 
343

 
3,227

Commercial MBS
920

 
18

 
(4
)
 
14

 
934

 
927

 
36

 
(1
)
 
35

 
962

Asset-backed securities
8,849

 
132

 
(46
)
 
86

 
8,935

 
7,836

 
142

 
(16
)
 
126

 
7,962

Corporate and other
19,737

 
198

 
(324
)
 
(126
)
 
19,611

 
18,136

 
638

 
(38
)
 
600

 
18,736

Total fixed maturities
$
39,244

 
$
842

 
$
(438
)
 
$
404

 
$
39,648

 
$
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 June 30, 2018 and December 31, 2017 were $149 million and $158 million, respectively. Gross unrealized gains on such securities at June 30, 2018 and December 31, 2017 were $135 million and $137 million, respectively. Gross unrealized losses on such securities at both June 30, 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 June 30, 2018 (in millions):
 
 
 
 
 
Fair Value in
 
Actual Cost
 
Fair Value
 
excess of Cost
Common stocks
$
1,066

 
$
1,180

 
$
114

Perpetual preferred stocks
603

 
597

 
(6
)
Total equity securities carried at fair value
$
1,669

 
$
1,777

 
$
108



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
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
(1
)
 
$
102

 
99
%
 
$
(3
)
 
$
99

 
97
%
States, municipalities and political subdivisions
(36
)
 
1,957

 
98
%
 
(17
)
 
451

 
96
%
Foreign government
—

 
26

 
100
%
 
—

 
—

 
—
%
Residential MBS
(2
)
 
157

 
99
%
 
(5
)
 
110

 
96
%
Commercial MBS
(4
)
 
215

 
98
%
 
—

 
—

 
—
%
Asset-backed securities
(36
)
 
3,738

 
99
%
 
(10
)
 
256

 
96
%
Corporate and other
(281
)
 
10,673

 
97
%
 
(43
)
 
651

 
94
%
Total fixed maturities
$
(360
)
 
$
16,868

 
98
%
 
$
(78
)
 
$
1,567

 
95
%
 
 
 
 
 
 
 
 
 
 
 
 
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 June 30, 2018, the gross unrealized losses on fixed maturities of $438 million relate to 2,043 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 93% of the gross unrealized loss and 96% 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 2018, AFG recorded less than $1 million in other-than-temporary impairment charges related to its residential MBS.

In the first six months of 2018, AFG recorded less than $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 June 30, 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 March 31
$
144

 
$
146

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
1

Securities without prior impairments
1

 
—

Reductions due to sales or redemptions
(1
)
 
(2
)
Balance at June 30
$
144

 
$
145

 
 
 
 
Balance at January 1
$
145

 
$
153

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
1

Securities without prior impairments
1

 
—

Reductions due to sales or redemptions
(2
)
 
(9
)
Balance at June 30
$
144

 
$
145



The table below sets forth the scheduled maturities of available for sale fixed maturities as of June 30, 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
$
994

 
$
1,003

 
3
%
After one year through five years
7,703

 
7,764

 
20
%
After five years through ten years
13,386

 
13,285

 
33
%
After ten years
4,828

 
4,841

 
12
%
 
26,911

 
26,893

 
68
%
ABS (average life of approximately 4-1/2 years)
8,849

 
8,935

 
22
%
MBS (average life of approximately 4-1/2 years)
3,484

 
3,820

 
10
%
Total
$
39,244

 
$
39,648

 
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 June 30, 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
June 30, 2018
 
 
 
 
 
Net unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (a)
$
310

 
$
(65
)
 
$
245

Fixed maturities — all other
94

 
(20
)
 
74

Total fixed maturities
404

 
(85
)
 
319

Deferred policy acquisition costs — annuity segment
(124
)
 
26

 
(98
)
Annuity benefits accumulated
(41
)
 
9

 
(32
)
Unearned revenue
3

 
(1
)
 
2

Total net unrealized gain on marketable securities
$
242

 
$
(51
)
 
$
191

 
 
 
 
 
 
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 June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Investment income:
 
 
 
 
 
 
 
Fixed maturities
$
431

 
$
397

 
$
843

 
$
786

Equity securities:
 
 
 
 
 
 
 
Dividends
20

 
17

 
40

 
36

Change in fair value (*)
15

 
2

 
14

 
4

Equity in earnings of partnerships and similar investments
41

 
21

 
87

 
31

Other
28

 
27

 
51

 
47

Gross investment income
535

 
464

 
1,035

 
904

Investment expenses
(5
)
 
(4
)
 
(10
)
 
(9
)
Net investment income
$
530

 
$
460

 
$
1,025

 
$
895


(*)
As discussed in Note A — “Accounting Policies — Investments,” AFG adopted guidance in January 2018 that requires all equity securities other than those accounted for under the equity method to be reported at fair value with holding gains and losses recognized in net earnings. Although the change in the fair value of the majority of AFG’s equity securities is recorded in realized gains (losses) on securities, AFG records holding gains and losses in net investment income on equity securities classified as “trading” under the previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.
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 June 30, 2018
 
Three months ended June 30, 2017
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
4

 
$
—

 
$
4

 
$
(338
)
 
$
11

 
$
(1
)
 
$
10

 
$
262

Equity securities
23

 
—

 
23

 
—

 
8

 
(11
)
 
(3
)
 
20

Mortgage loans and other investments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other (*)
4

 
—

 
4

 
147

 
(2
)
 
3

 
1

 
(112
)
Total pretax
31


—


31


(191
)

17


(9
)

8


170

Tax effects
(6
)
 
—

 
(6
)
 
40

 
(6
)
 
3

 
(3
)
 
(60
)
Net of tax
$
25


$
—


$
25


$
(151
)

$
11


$
(6
)

$
5


$
110

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
Six months ended June 30, 2017
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
3

 
$
(1
)
 
$
2

 
$
(937
)
 
$
16

 
$
(1
)
 
$
15

 
$
464

Equity securities
(72
)
 
—

 
(72
)
 
—

 
10

 
(20
)
 
(10
)
 
92

Mortgage loans and other investments
—

 
—

 
—

 
—

 
3

 
—

 
3

 
—

Other (*)
8

 
—

 
8

 
395

 
(3
)
 
6

 
3

 
(195
)
Total pretax
(61
)
 
(1
)
 
(62
)
 
(542
)
 
26

 
(15
)
 
11

 
361

Tax effects
13

 
—

 
13

 
114

 
(9
)
 
5

 
(4
)
 
(126
)
Net of tax
$
(48
)
 
$
(1
)
 
$
(49
)
 
$
(428
)
 
$
17

 
$
(10
)
 
$
7

 
$
235


(*)
Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.

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 net holding gains (losses) on equity securities during the second quarter and first six months of 2018 on securities that were still owned at June 30, 2018 as follows (in millions):
 
Three months ended
 
Six months ended
 
June 30, 2018
 
June 30, 2018
Included in realized gains (losses)
$
16

 
$
(71
)
Included in net investment income
15

 
14

 
$
31

 
$
(57
)


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): 
  
Six months ended June 30,
2018
 
2017
Fixed maturities:
 
 
 
Gross gains
$
16

 
$
21

Gross losses
(8
)
 
(2
)


In the first six months of 2017, AFG recorded gross gains of $15 million and gross losses of $5 million on available for sale equity securities.