Investments

3 Months Ended

Mar. 31, 2012

Investments [Abstract]

Investments

D. Investments

Available for sale fixed maturities and equity securities at March 31, 2012, and December 31, 2011, consisted of the following (in millions):

	March 31, 2012									December 31, 2011
	Amortized Cost		Fair Value		Gross Unrealized					Amortized Cost		Fair Value		Gross Unrealized
					Gains		Losses							Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	374	$	390	$	16	$	—		$	363	$	382	$	19	$	—
States, municipalities and political subdivisions		3,683		3,916		239		(6	)		3,613		3,877		267		(3	)
Foreign government		243		260		17		—			236		254		18		—
Residential MBS		4,069		4,118		192		(143	)		3,858		3,848		170		(180	)
Commercial MBS		2,651		2,900		250		(1	)		2,628		2,840		218		(6	)
All other corporate		9,974		10,787		836		(23	)		9,864		10,606		802		(60	)
Total fixed maturities	$	20,994	$	22,371	$	1,550	($	173	)	$	20,562	$	21,807	$	1,494	($	249	)
Common stocks	$	643	$	892	$	258	($	9	)	$	610	$	797	$	207	($	20	)
Perpetual preferred stocks	$	157	$	162	$	8	($	3	)	$	134	$	131	$	5	($	8	)

The non-credit related portion of other-than-temporary impairment charges are included in other comprehensive income. Cumulative charges taken for residential MBS still owned at March 31, 2012 and December 31, 2011, respectively were $229 million and $227 million.

The following tables show gross unrealized losses (in millions) on fixed maturities and equity securities by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011.

	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, 2012
Fixed maturities:
U.S. Government and government agencies	$	—		$	27		100	%	$	—		$	—		—	%
States, municipalities and political subdivisions		(5	)		250		98	%		(1	)		22		96	%
Foreign government		—			—		—	%		—			—		—	%
Residential MBS		(36	)		846		96	%		(107	)		502		82	%
Commercial MBS		(1	)		38		97	%		—			2		100	%
All other corporate		(12	)		602		98	%		(11	)		112		91	%
Total fixed maturities	($	54	)	$	1,763		97	%	($	119	)	$	638		84	%
Common stocks	($	8	)	$	70		90	%	($	1	)	$	4		80	%
Perpetual preferred stocks	$	—		$	2		100	%	($	3	)	$	22		88	%
December 31, 2011
Fixed maturities:
U.S. Government and government agencies	$	—		$	2		100	%	$	—		$	—		—	%
States, municipalities and political subdivisions		(2	)		120		98	%		(1	)		59		98	%
Foreign government		—			1		100	%		—			—		—	%
Residential MBS		(59	)		1,141		95	%		(121	)		473		80	%
Commercial MBS		(6	)		183		97	%		—			18		100	%
All other corporate		(43	)		940		96	%		(17	)		114		87	%
Total fixed maturities	($	110	)	$	2,387		96	%	($	139	)	$	664		83	%
Common stocks	($	19	)	$	169		90	%	($	1	)	$	4		80	%
Perpetual preferred stocks	($	1	)	$	23		96	%	($	7	)	$	31		82	%

At March 31, 2012, the gross unrealized losses on fixed maturities of $173 million relate to approximately 725 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 28% of the gross unrealized loss and 55% 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. For the first three months of 2012, AFG recorded in earnings $4 million in other-than-temporary impairment charges related to its residential MBS.

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).

	2012		2011
Balance at January 1	$	187	$	143
Additional credit impairments on:
Previously impaired securities		3		7
Securities without prior impairments		—		1
Balance at March 31	$	190	$	151

The table below sets forth the scheduled maturities of available for sale fixed maturities as of March 31, 2012 (in millions). Asset-backed securities and other 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. MBS had an average life of approximately 4 years at March 31, 2012.

	Amortized Cost		Fair Value
			Amount		%
Maturity
One year or less	$	634	$	648		3	%
After one year through five years		5,265		5,599		25
After five years through ten years		6,425		7,001		31
After ten years		1,950		2,105		10
		14,274		15,353		69
MBS		6,720		7,018		31
Total	$	20,994	$	22,371		100	%

Certain risks are inherent in connection with 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, 2012 or December 31, 2011.

Net Unrealized Gain on Marketable Securities In addition to adjusting equity securities and fixed maturity securities classified as “available for sale” to fair value, GAAP requires that deferred policy acquisition costs related to annuities and certain other balance sheet amounts 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 Accumulated Other Comprehensive Income in AFG’s Balance Sheet.

	Pre-tax			Deferred Tax and Amounts  Attributable to Noncontrolling Interests			Net
March 31, 2012
Unrealized gain on:
Fixed maturity securities	$	1,377		($	492	)	$	885
Equity securities		254			(90	)		164
Deferred policy acquisition costs		(539	)		189			(350	)
Annuity benefits and other liabilities		10			(4	)		6
	$	1,102		($	397	)	$	705
December 31, 2011
Unrealized gain on:
Fixed maturity securities	$	1,245		($	444	)	$	801
Equity securities		184			(65	)		119
Deferred policy acquisition costs		(537	)		188			(349	)
Annuity benefits and other liabilities		10			(3	)		7
	$	902		($	324	)	$	578

Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments are summarized as follows (in millions):

	Fixed Maturities			Equity Securities			Mortgage Loans and Other Investments			Other (a)			Tax Effects			Noncon- trolling Interests			Total
Quarter ended March 31, 2012
Realized before impairments	$	14		$	35		$	1		($	2	)	($	17	)	$	—		$	31
Realized – impairments		(4	)		(2	)		—			2			1			—			(3	)
Change in unrealized		132			70			—			(2	)		(70	)		(3	)		127
Quarter ended March 31, 2011
Realized before impairments	$	13		$	1		($	2	)	($	2	)	($	3	)	$	—		$	7
Realized – impairments		(11	)		—			(3	)		4			3			—			(7	)
Change in unrealized		37			13			—			(22	)		(10	)		—			18

(a) Primarily adjustments to deferred policy acquisition costs related to annuities.

Realized gains (losses) on securities includes net gains of $4 million in the first quarter of 2012 compared to net losses of $3 million in the first quarter of 2011 from the mark-to-market of certain MBS, primarily interest-only securities with interest rates that float inversely with short-term rates. Gross realized gains and losses (excluding impairment writedowns and mark-to-market of derivatives) on available for sale fixed maturity and equity security investment transactions included in the Statement of Cash Flows consisted of the following (in millions):

	Three months ended March  31,
	2012		2011
Fixed maturities:
Gross gains	$	10	$	17
Gross losses		—		(1	)
Equity securities:
Gross gains		35		1
Gross losses		—		—