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Investments
 9 Months Ended
Sep. 30, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

Available for sale fixed maturities at September 30, 2018 and December 31, 2017, consisted of the following (in millions):
 
September 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
$
238

 
$
—

 
$
(4
)
 
$
(4
)
 
$
234

 
$
244

 
$
1

 
$
(3
)
 
$
(2
)
 
$
242

States, municipalities and political subdivisions
6,756

 
117

 
(98
)
 
19

 
6,775

 
6,887

 
254

 
(18
)
 
236

 
7,123

Foreign government
137

 
2

 
—

 
2

 
139

 
124

 
3

 
—

 
3

 
127

Residential MBS
2,408

 
310

 
(9
)
 
301

 
2,709

 
2,884

 
349

 
(6
)
 
343

 
3,227

Commercial MBS
913

 
14

 
(4
)
 
10

 
923

 
927

 
36

 
(1
)
 
35

 
962

Asset-backed securities
9,249

 
122

 
(64
)
 
58

 
9,307

 
7,836

 
142

 
(16
)
 
126

 
7,962

Corporate and other
20,352

 
169

 
(364
)
 
(195
)
 
20,157

 
18,136

 
638

 
(38
)
 
600

 
18,736

Total fixed maturities
$
40,053

 
$
734

 
$
(543
)
 
$
191

 
$
40,244

 
$
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 September 30, 2018 and December 31, 2017 were $144 million and $158 million, respectively. Gross unrealized gains on such securities at September 30, 2018 and December 31, 2017 were $130 million and $137 million, respectively. Gross unrealized losses on such securities at both September 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 September 30, 2018 (in millions):
 
 
 
 
 
Fair Value in
 
Actual Cost
 
Fair Value
 
excess of Cost
Common stocks
$
1,040

 
$
1,151

 
$
111

Perpetual preferred stocks
683

 
676

 
(7
)
Total equity securities carried at fair value
$
1,723

 
$
1,827

 
$
104



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
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
(1
)
 
$
113

 
99
%
 
$
(3
)
 
$
100

 
97
%
States, municipalities and political subdivisions
(63
)
 
2,729

 
98
%
 
(35
)
 
721

 
95
%
Foreign government
—

 
105

 
100
%
 
—

 
—

 
—
%
Residential MBS
(3
)
 
200

 
99
%
 
(6
)
 
132

 
96
%
Commercial MBS
(3
)
 
178

 
98
%
 
(1
)
 
51

 
98
%
Asset-backed securities
(47
)
 
4,775

 
99
%
 
(17
)
 
353

 
95
%
Corporate and other
(283
)
 
10,984

 
97
%
 
(81
)
 
1,346

 
94
%
Total fixed maturities
$
(400
)
 
$
19,084

 
98
%
 
$
(143
)
 
$
2,703

 
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 September 30, 2018, the gross unrealized losses on fixed maturities of $543 million relate to 2,392 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 95% 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 nine months of 2018, AFG recorded $1 million in other-than-temporary impairment charges related to its residential MBS.

In the first nine months of 2018, AFG recorded $2 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 September 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 June 30
$
144

 
$
145

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
—

Securities without prior impairments
—

 
3

Reductions due to sales or redemptions
(1
)
 
(1
)
Balance at September 30
$
143

 
$
147

 
 
 
 
Balance at January 1
$
145

 
$
153

Additional credit impairments on:
 
 
 
Previously impaired securities
—

 
1

Securities without prior impairments
1

 
3

Reductions due to sales or redemptions
(3
)
 
(10
)
Balance at September 30
$
143

 
$
147



The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 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
$
1,212

 
$
1,223

 
3
%
After one year through five years
8,150

 
8,184

 
20
%
After five years through ten years
13,372

 
13,211

 
33
%
After ten years
4,749

 
4,687

 
12
%
 
27,483

 
27,305

 
68
%
ABS (average life of approximately 4-1/2 years)
9,249

 
9,307

 
23
%
MBS (average life of approximately 4-1/2 years)
3,321

 
3,632

 
9
%
Total
$
40,053

 
$
40,244

 
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, 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
September 30, 2018
 
 
 
 
 
Net unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (a)
$
143

 
$
(30
)
 
$
113

Fixed maturities — all other
48

 
(10
)
 
38

Total fixed maturities
191

 
(40
)
 
151

Deferred policy acquisition costs — annuity segment
(56
)
 
12

 
(44
)
Annuity benefits accumulated
(18
)
 
3

 
(15
)
Unearned revenue
1

 
—

 
1

Total net unrealized gain on marketable securities
$
118

 
$
(25
)
 
$
93

 
 
 
 
 
 
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 September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Investment income:
 
 
 
 
 
 
 
Fixed maturities
$
440

 
$
405

 
$
1,283

 
$
1,191

Equity securities:
 
 
 
 
 
 
 
Dividends
19

 
17

 
59

 
53

Change in fair value (*)
2

 
—

 
16

 
4

Equity in earnings of partnerships and similar investments
41

 
20

 
128

 
51

Other
31

 
33

 
82

 
80

Gross investment income
533

 
475

 
1,568

 
1,379

Investment expenses
(6
)
 
(4
)
 
(16
)
 
(13
)
Net investment income
$
527

 
$
471

 
$
1,552

 
$
1,366


(*)
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 September 30, 2018
 
Three months ended September 30, 2017
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
—

 
$
(2
)
 
$
(2
)
 
$
(213
)
 
$
9

 
$
(15
)
 
$
(6
)
 
$
133

Equity securities
33

 
—

 
33

 
—

 
19

 
(29
)
 
(10
)
 
24

Mortgage loans and other investments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other (*)
3

 
—

 
3

 
89

 
(2
)
 
6

 
4

 
(53
)
Total pretax
36


(2
)

34


(124
)

26


(38
)

(12
)

104

Tax effects
(8
)
 
1

 
(7
)
 
26

 
(9
)
 
13

 
4

 
(37
)
Net of tax
$
28


$
(1
)

$
27


$
(98
)

$
17


$
(25
)

$
(8
)

$
67

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
Nine months ended September 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

 
$
(3
)
 
$
—

 
$
(1,150
)
 
$
25

 
$
(16
)
 
$
9

 
$
597

Equity securities
(39
)
 
—

 
(39
)
 
—

 
29

 
(49
)
 
(20
)
 
116

Mortgage loans and other investments
—

 
—

 
—

 
—

 
3

 
—

 
3

 
—

Other (*)
11

 
—

 
11

 
484

 
(5
)
 
12

 
7

 
(248
)
Total pretax
(25
)
 
(3
)
 
(28
)
 
(666
)
 
52

 
(53
)
 
(1
)
 
465

Tax effects
5

 
1

 
6

 
140

 
(18
)
 
18

 
—

 
(163
)
Net of tax
$
(20
)
 
$
(2
)
 
$
(22
)
 
$
(526
)
 
$
34

 
$
(35
)
 
$
(1
)
 
$
302


(*)
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 third quarter and first nine months of 2018 on securities that were still owned at September 30, 2018 as follows (in millions):
 
Three months ended
 
Nine months ended
 
September 30, 2018
 
September 30, 2018
Included in realized gains (losses)
$
25

 
$
(51
)
Included in net investment income
2

 
16

 
$
27

 
$
(35
)


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): 
  
Nine months ended September 30,
2018
 
2017
Fixed maturities:
 
 
 
Gross gains
$
19

 
$
32

Gross losses
(8
)
 
(4
)


In the first nine months of 2017, AFG recorded gross gains of $36 million and gross losses of $6 million on available for sale equity securities.