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Investments
 12 Months Ended
Dec. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments
Investments

Available for sale fixed maturities at December 31 consisted of the following (in millions): 
 
2018
 
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
$
235

 
$
1

 
$
(3
)
 
$
(2
)
 
$
233

 
$
244

 
$
1

 
$
(3
)
 
$
(2
)
 
$
242

States, municipalities and political subdivisions
6,825

 
169

 
(55
)
 
114

 
6,939

 
6,887

 
254

 
(18
)
 
236

 
7,123

Foreign government
140

 
2

 
—

 
2

 
142

 
124

 
3

 
—

 
3

 
127

Residential MBS
2,476

 
277

 
(9
)
 
268

 
2,744

 
2,884

 
349

 
(6
)
 
343

 
3,227

Commercial MBS
905

 
17

 
(2
)
 
15

 
920

 
927

 
36

 
(1
)
 
35

 
962

Asset-backed securities
9,781

 
130

 
(100
)
 
30

 
9,811

 
7,836

 
142

 
(16
)
 
126

 
7,962

Corporate and other
21,475

 
167

 
(434
)
 
(267
)
 
21,208

 
18,136

 
638

 
(38
)
 
600

 
18,736

Total fixed maturities
$
41,837

 
$
763

 
$
(603
)
 
$
160

 
$
41,997

 
$
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 December 31, 2018 and December 31, 2017, respectively, were $140 million and $158 million. Gross unrealized gains on such securities at December 31, 2018 and December 31, 2017 were $119 million and $137 million, respectively. Gross unrealized losses on such securities at both December 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,” AFG implemented new accounting guidance effective on January 1, 2018, which requires 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 December 31, 2018 (in millions):
 
 
 
 
 
Fair Value
 
 
 
 
 
over (under)
 
Actual Cost
 
Fair Value
 
Cost
Common stocks
$
1,241

 
$
1,148

 
$
(93
)
Perpetual preferred stocks
705

 
666

 
(39
)
Total equity securities carried at fair value
$
1,946

 
$
1,814

 
$
(132
)


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
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
—

 
$
41

 
100
%
 
$
(3
)
 
$
120

 
98
%
 
States, municipalities and political subdivisions
(23
)
 
1,497

 
98
%
 
(32
)
 
902

 
97
%
 
Foreign government
—

 
18

 
100
%
 
—

 
4

 
100
%
 
Residential MBS
(4
)
 
279

 
99
%
 
(5
)
 
139

 
97
%
 
Commercial MBS
(1
)
 
147

 
99
%
 
(1
)
 
30

 
97
%
 
Asset-backed securities
(77
)
 
5,406

 
99
%
 
(23
)
 
629

 
96
%
 
Corporate and other
(306
)
 
10,378

 
97
%
 
(128
)
 
2,078

 
94
%
 
Total fixed maturities
$
(411
)
 
$
17,766

 
98
%
 
$
(192
)
 
$
3,902

 
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 December 31, 2018, the gross unrealized losses on fixed maturities of $603 million relate to 2,324 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 92% of the gross unrealized loss and 96% 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 interest 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 2018, 2017 and 2016, AFG recorded other-than-temporary impairment charges related to its residential MBS of $6 million, $1 million and $3 million, respectively.

In 2018, AFG recorded approximately $20 million in other-than-temporary impairment charges related to fixed maturities other than residential MBS, including $14 million related to aircraft financing. Other-than-temporary impairment charges on fixed maturities other than residential MBS were $19 million in 2017 and $35 million in 2016. In addition, AFG recorded $4 million in other-than-temporary impairment charges in 2017 on investments that are included in other investments on the balance sheet.

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, 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. In 2017 and 2016, AFG recorded other-than-temporary impairment charges on equity securities classified as available for sale of $64 million and $93 million, respectively.

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
 
2016
Balance at January 1
$
145

 
$
153

 
$
160

Additional credit impairments on:
 
 
 
 
 
Previously impaired securities
1

 
1

 
2

Securities without prior impairments
1

 
3

 
1

Reductions due to sales or redemptions
(5
)
 
(12
)
 
(10
)
Balance at December 31
$
142

 
$
145

 
$
153



The table below sets forth the scheduled maturities of available for sale fixed maturities as of December 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
$
1,310

 
$
1,318

 
3
%
After one year through five years
8,521

 
8,554

 
20
%
After five years through ten years
14,235

 
14,044

 
34
%
After ten years
4,609

 
4,606

 
11
%
 
28,675

 
28,522

 
68
%
ABS (average life of approximately 4.5 years)
9,781

 
9,811

 
23
%
MBS (average life of approximately 4.5 years)
3,381

 
3,664

 
9
%
Total
$
41,837

 
$
41,997

 
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 December 31, 2018 or 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
December 31, 2018
 
 
 
 
 
Net unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (a)
$
101

 
$
(21
)
 
$
80

Fixed maturities — all other
59

 
(13
)
 
46

Total fixed maturities
160

 
(34
)
 
126

Deferred policy acquisition costs — annuity segment
(42
)
 
9

 
(33
)
Annuity benefits accumulated
(14
)
 
3

 
(11
)
Unearned revenue
1

 
—

 
1

Total net unrealized gain on marketable securities
$
105

 
$
(22
)
 
$
83

 
 
 
 
 
 
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.
 
2018
 
2017
 
2016
Investment income:
 
 
 
 
 
Fixed maturities
$
1,742

 
$
1,607

 
$
1,510

Equity securities:
 
 
 
 
 
Dividends
79

 
73

 
77

Change in fair value (*)
22

 
6

 
4

Equity in earnings of partnerships and similar investments
161

 
64

 
44

Other
112

 
102

 
81

Gross investment income
2,116

 
1,852

 
1,716

Investment expenses
(22
)
 
(21
)
 
(20
)
Net investment income
$
2,094

 
$
1,831

 
$
1,696


(*)
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) included in AOCI related to fixed maturity and equity security investments are summarized as follows (in millions):

 
2018
 
2017
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
6

 
$
(26
)
 
$
(20
)
 
$
(1,181
)
 
$
17

 
$
(20
)
 
$
(3
)
 
$
532

Equity securities
(265
)
 
—

 
(265
)
 
—

 
70

 
(64
)
 
6

 
128

Mortgage loans and other investments
1

 
—

 
1

 
—

 
(6
)
 
(4
)
 
(10
)
 
—

Other (*)
11

 
7

 
18

 
502

 
(3
)
 
15

 
12

 
(219
)
Total pretax
(247
)
 
(19
)
 
(266
)
 
(679
)
 
78

 
(73
)
 
5

 
441

Tax effects:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reclassify impact of U.S. corporate tax rate change
—

 
—

 
—

 
—

 
—

 
—

 
—

 
149

Other
52

 
4

 
56

 
143

 
(27
)
 
25

 
(2
)
 
(154
)
Total tax effects
52

 
4

 
56

 
143

 
(27
)
 
25

 
(2
)
 
(5
)
Net of tax
$
(195
)
 
$
(15
)
 
$
(210
)
 
$
(536
)
 
$
51

 
$
(48
)
 
$
3

 
$
436


 
 
 
2016
 
 
 
 
 
Realized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
 
 
 
 
 
 
 
 
$
36

 
$
(38
)
 
$
(2
)
 
$
90

Equity securities
 
 
 
 
 
 
 
 
106

 
(93
)
 
13

 
67

Other (*)
 
 
 
 
 
 
 
 
(7
)
 
15

 
8

 
(52
)
Total pretax
 
 
 
 
 
 
 
 
135

 
(116
)
 
19

 
105

Tax effects
 
 
 
 
 
 
 
 
(48
)
 
41

 
(7
)
 
(37
)
Noncontrolling interests
 
 
 
 
 
 
 
 
(2
)
 
3

 
1

 
4

Net of tax and noncontrolling interests
 
 
 
 
 
 
 
 
$
85

 
$
(72
)
 
$
13

 
$
72

(*)
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 2018 on securities that were still owned at December 31, 2018 as follows (in millions):
 
2018
Included in realized gains (losses)
$
(279
)
Included in net investment income
22

 
$
(257
)



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):
 
2018
 
2017
 
2016
Fixed maturities:
 
 
 
 
 
Gross gains
$
22

 
$
43

 
$
55

Gross losses
(14
)
 
(20
)
 
(10
)


During 2017 and 2016, AFG recorded gross gains of $87 million and $110 million and gross losses of $17 million and $4 million, respectively, on available for sale equity securities.