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Investments
 3 Months Ended
Mar. 31, 2020
Investments, Debt and Equity Securities [Abstract]  
Investments Investments

Available for sale fixed maturities at March 31, 2020 and December 31, 2019, consisted of the following (in millions):
 
Amortized
Cost
 
Allowance for Expected Credit Losses
 
Gross Unrealized
 
Net
Unrealized
 
Fair
Value
Gains
 
Losses
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
190

 
$
—

 
$
15

 
$
—

 
$
15

 
$
205

States, municipalities and political subdivisions
6,526

 
—

 
388

 
(8
)
 
380

 
6,906

Foreign government
164

 
—

 
6

 
—

 
6

 
170

Residential MBS
3,078

 
6

 
133

 
(74
)
 
59

 
3,131

Commercial MBS
892

 
—

 
20

 
(5
)
 
15

 
907

Collateralized loan obligations
4,456

 
17

 
5

 
(306
)
 
(301
)
 
4,138

Other asset-backed securities
7,069

 
14

 
65

 
(362
)
 
(297
)
 
6,758

Corporate and other
23,726

 
24

 
786

 
(569
)
 
217

 
23,919

Total fixed maturities
$
46,101

 
$
61

 
$
1,418

 
$
(1,324
)
 
$
94

 
$
46,134

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
199

 
$
—

 
$
10

 
$
—

 
$
10

 
$
209

States, municipalities and political subdivisions
6,604

 
—

 
363

 
(4
)
 
359

 
6,963

Foreign government
170

 
—

 
3

 
(1
)
 
2

 
172

Residential MBS
2,900

 
—

 
265

 
(5
)
 
260

 
3,160

Commercial MBS
896

 
—

 
31

 
—

 
31

 
927

Collateralized loan obligations
4,307

 
—

 
10

 
(37
)
 
(27
)
 
4,280

Other asset-backed securities
6,992

 
—

 
156

 
(20
)
 
136

 
7,128

Corporate and other
22,456

 
—

 
1,231

 
(21
)
 
1,210

 
23,666

Total fixed maturities
$
44,524

 
$
—

 
$
2,069

 
$
(88
)
 
$
1,981

 
$
46,505



Equity securities, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at March 31, 2020 and December 31, 2019 (in millions):
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
Fair Value
 
 
 
 
 
Fair Value
 
Actual Cost
 
 
 
over (under)
 
Actual Cost
 
 
 
over (under)
 
 
Fair Value
 
Cost
 
 
Fair Value
 
Cost
Common stocks
$
1,315

 
$
919

 
$
(396
)
 
$
1,164

 
$
1,283

 
$
119

Perpetual preferred stocks
685

 
640

 
(45
)
 
640

 
654

 
14

Total equity securities carried at fair value
$
2,000

 
$
1,559

 
$
(441
)
 
$
1,804

 
$
1,937

 
$
133



The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities 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, 2020
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
—

 
$
—

 
—
%
 
$
—

 
$
1

 
100
%
States, municipalities and political subdivisions
(8
)
 
235

 
97
%
 
—

 
26

 
100
%
Foreign government
—

 
3

 
100
%
 
—

 
—

 
—
%
Residential MBS
(70
)
 
1,562

 
96
%
 
(4
)
 
31

 
89
%
Commercial MBS
(5
)
 
117

 
96
%
 
—

 
—

 
—
%
Collateralized loan obligations
(141
)
 
2,234

 
94
%
 
(165
)
 
1,691

 
91
%
Other asset-backed securities
(352
)
 
4,597

 
93
%
 
(10
)
 
94

 
90
%
Corporate and other
(554
)
 
7,738

 
93
%
 
(15
)
 
98

 
87
%
Total fixed maturities
$
(1,130
)
 
$
16,486

 
94
%
 
$
(194
)
 
$
1,941

 
91
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
$
—

 
$
16

 
100
%
 
$
—

 
$
11

 
100
%
States, municipalities and political subdivisions
(3
)
 
254

 
99
%
 
(1
)
 
82

 
99
%
Foreign government
(1
)
 
70

 
99
%
 
—

 
—

 
—
%
Residential MBS
(4
)
 
509

 
99
%
 
(1
)
 
69

 
99
%
Commercial MBS
—

 
17

 
100
%
 
—

 
—

 
—
%
Collateralized loan obligations
(11
)
 
1,284

 
99
%
 
(26
)
 
1,728

 
99
%
Other asset-backed securities
(12
)
 
1,211

 
99
%
 
(8
)
 
123

 
94
%
Corporate and other
(13
)
 
1,100

 
99
%
 
(8
)
 
211

 
96
%
Total fixed maturities
$
(44
)
 
$
4,461

 
99
%
 
$
(44
)
 
$
2,224

 
98
%


At March 31, 2020, the gross unrealized losses on fixed maturities of $1.32 billion relate to 1,871 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 83% of the gross unrealized loss and 89% of the fair value.

To evaluate fixed maturities for expected credit losses (impairment), management considers whether the unrealized loss is credit-driven or a result of changes in market interest rates, the extent to which fair value is less than cost basis, historical operating, balance sheet and cash flow data from the issuer, third party research and communications with industry specialists and discussions with issuer management.

AFG analyzes its MBS securities for expected credit losses (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 2020, AFG recorded an allowance for credit losses of $6 million related to its residential MBS.

In the first three months of 2020, AFG recorded an allowance for credit losses of $24 million related to corporate bonds and other fixed maturities, $17 million on third-party collateralized loan obligations and $14 million on other asset-backed securities.

Management believes AFG will recover its cost basis (net of any allowance) 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, 2020.

See Note A — “Accounting Policies — Credit Losses on Financial Instruments,” for a discussion of new guidance effective January 1, 2020, which impacts the accounting for expected credit losses (impairments) of fixed maturity securities. Under the new guidance, credit losses on available for sale fixed maturities continue to be measured based on the present value of expected future cash flows compared to amortized cost; however, impairment losses are now recognized through an allowance instead of a direct writedown of amortized cost. Under the new guidance, recoveries of previously impaired amounts are recorded as an immediate reversal of all or a portion of the allowance instead of accredited as investment income through a yield adjustment. In addition, the allowance on available for sale fixed maturities cannot cause the amortized cost net of the allowance to be below fair value. Accordingly, future changes in the fair value of an impaired security (when the allowance was limited by the fair value) due to reasons other than issuer credit (e.g. changes in market interest rates) could result in increases or decreases in the allowance, which will be recorded through realized gains (losses) on securities. A progression of the allowance for expected credit losses on fixed maturity securities is shown below (in millions):
 
2020
Balance at January 1
$
—

Impact of adoption of new accounting policy
—

Provision for expected credit losses
61

Reductions due to sales or redemptions
—

Balance at March 31
$
61



The table below sets forth the scheduled maturities of available for sale fixed maturities as of March 31, 2020 (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, net (*)
 
Amount
 
%
Maturity
 
 
 
 
 
One year or less
$
2,018

 
$
2,027

 
4
%
After one year through five years
10,563

 
10,710

 
23
%
After five years through ten years
14,450

 
14,722

 
32
%
After ten years
3,551

 
3,741

 
8
%
 
30,582

 
31,200

 
67
%
Collateralized loan obligations and other ABS (average life of approximately 4-1/2 years)
11,494

 
10,896

 
24
%
MBS (average life of approximately 3-1/2 years)
3,964

 
4,038

 
9
%
Total
$
46,040

 
$
46,134

 
100
%


(*)
Amortized cost, net of allowance for expected credit losses.

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, 2020 or December 31, 2019.

Net Unrealized Gain on Marketable Securities   In addition to adjusting 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
 
Net
March 31, 2020
 
 
 
 
 
Net unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (*)
$
124

 
$
(26
)
 
$
98

Fixed maturities — all other
(30
)
 
7

 
(23
)
Total fixed maturities
94

 
(19
)
 
75

Deferred policy acquisition costs — annuity segment
(57
)
 
12

 
(45
)
Annuity benefits accumulated
(18
)
 
3

 
(15
)
Unearned revenue
1

 
—

 
1

Total net unrealized gain on marketable securities
$
20

 
$
(4
)
 
$
16

 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
Net unrealized gain on:
 
 
 
 
 
Fixed maturities — annuity segment (*)
$
1,611

 
$
(338
)
 
$
1,273

Fixed maturities — all other
370

 
(78
)
 
292

Total fixed maturities
1,981

 
(416
)
 
1,565

Deferred policy acquisition costs — annuity segment
(681
)
 
143

 
(538
)
Annuity benefits accumulated
(219
)
 
46

 
(173
)
Life, accident and health reserves
(1
)
 
—

 
(1
)
Unearned revenue
11

 
(2
)
 
9

Total net unrealized gain on marketable securities
$
1,091

 
$
(229
)
 
$
862


(*)
Net 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 March 31,
 
2020
 
2019
Investment income:
 
 
 
Fixed maturities
$
491

 
$
469

Equity securities:
 
 
 
Dividends
17

 
22

Change in fair value (a) (b)
(12
)
 
11

Equity in earnings of partnerships and similar investments
25

 
21

Other
28

 
25

Gross investment income
549

 
548

Investment expenses
(5
)
 
(6
)
Net investment income (b)
$
544

 
$
542


(a)
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 previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.
(b)
Net investment income in the first three months of 2020 includes a loss of $6 million on investments held by the companies that comprise the Neon exited lines due primarily to the $7 million loss recorded on equity securities that are carried at fair value through net investment income.
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): 
 
Three months ended March 31, 2020
 
Three months ended March 31, 2019
 
Realized gains (losses)
 
 
 
Realized gains (losses)
 
 
 
Before Impairments
 
Impairment Allowance
 
Total
 
Change in Unrealized
 
Before Impairments
 
Impairments
 
Total
 
Change in Unrealized
Fixed maturities
$
29

 
$
(61
)
 
$
(32
)
 
$
(1,887
)
 
$
3

 
$
(3
)
 
$
—

 
$
853

Equity securities
(535
)
 
—

 
(535
)
 
—

 
182

 
—

 
182

 
—

Mortgage loans and other investments
4

 
—

 
4

 
—

 
—

 
—

 
—

 
—

Other (*)
(3
)
 
15

 
12

 
816

 
1

 
1

 
2

 
(370
)
Total pretax
(505
)
 
(46
)
 
(551
)
 
(1,071
)
 
186

 
(2
)
 
184

 
483

Tax effects
106

 
10

 
116

 
225

 
(39
)
 
—

 
(39
)
 
(102
)
Net of tax
$
(399
)
 
$
(36
)
 
$
(435
)
 
$
(846
)
 
$
147

 
$
(2
)
 
$
145

 
$
381


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

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 first three months of 2020 and 2019 on securities that were still owned at March 31, 2020 and March 31, 2019 as follows (in millions):
 
Three months ended March 31,
 
2020
 
2019
Included in realized gains (losses)
$
(540
)
 
$
163

Included in net investment income
(5
)
 
11

 
$
(545
)
 
$
174



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,
2020
 
2019
Gross gains
$
29

 
$
6

Gross losses
(4
)
 
(9
)