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Fair Value Measurements | 3 Months Ended
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Mar. 31, 2014
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Fair Value Measurements Accounting standards for measuring fair value are based on inputs used in estimating fair value. The three levels of the hierarchy are as follows: Level 1 — Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis). AFG’s Level 1 financial instruments consist primarily of publicly traded equity securities and highly liquid government bonds for which quoted market prices in active markets are available and short-term investments of managed investment entities. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. AFG’s Level 2 financial instruments include separate account assets, corporate and municipal fixed maturity securities, mortgage-backed securities (“MBS”) and investments of managed investment entities priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2. Level 3 — Valuations derived from market valuation techniques generally consistent with those used to estimate the fair values of Level 2 financial instruments in which one or more significant inputs are unobservable or when the market for a security exhibits significantly less liquidity relative to markets supporting Level 2 fair value measurements. The unobservable inputs may include management’s own assumptions about the assumptions market participants would use based on the best information available in the circumstances. AFG’s Level 3 is comprised of financial instruments, including liabilities of managed investment entities, whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information. AFG’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. AFG’s internal investment professionals are a group of approximately 20 analysts whose primary responsibility is to manage AFG’s investment portfolio. These professionals monitor individual investments as well as overall industries and are active in the financial markets on a daily basis. The group is led by AFG’s chief investment officer, who reports directly to one of AFG’s Co-CEOs. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG’s internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, the Company communicates directly with the pricing service regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the service to value specific securities. Assets and liabilities measured and carried at fair value in the financial statements are summarized below (in millions):
| Level 1 |  | Level 2 |  | Level 3 |  | Total
March 31, 2014 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
Available for sale (“AFS”) fixed maturities: |  |  |  |  |  |  |
U.S. Government and government agencies | $ | 152 |  |  | $ | 154 |  |  | $ | 15 |  |  | $ | 321 |
States, municipalities and political subdivisions | — |  |  | 5,662 |  |  | 61 |  |  | 5,723 |
Foreign government | — |  |  | 193 |  |  | — |  |  | 193 |
Residential MBS | — |  |  | 4,309 |  |  | 272 |  |  | 4,581 |
Commercial MBS | — |  |  | 2,591 |  |  | 28 |  |  | 2,619 |
Asset-backed securities (“ABS”) | — |  |  | 2,554 |  |  | 206 |  |  | 2,760 |
Corporate and other | 30 |  |  | 10,841 |  |  | 322 |  |  | 11,193 |
Total AFS fixed maturities | 182 |  |  | 26,304 |  |  | 904 |  |  | 27,390 |
Trading fixed maturities | — |  |  | 297 |  |  | — |  |  | 297 |
Equity securities | 1,059 |  |  | 197 |  |  | 41 |  |  | 1,297 |
Assets of managed investment entities (“MIE”) | 267 |  |  | 2,427 |  |  | 29 |  |  | 2,723 |
Variable annuity assets (separate accounts) (a) | — |  |  | 666 |  |  | — |  |  | 666 |
Other investments — derivatives | — |  |  | 288 |  |  | — |  |  | 288 |
Total assets accounted for at fair value | $ | 1,508 |  |  | $ | 30,179 |  |  | $ | 974 |  |  | $ | 32,661 |
Liabilities: |  |  |  |  |  |  |
Liabilities of managed investment entities | $ | 91 |  |  | $ | — |  |  | $ | 2,322 |  |  | $ | 2,413 |
Derivatives in annuity benefits accumulated | — |  |  | — |  |  | 904 |  |  | 904 |
Other liabilities — derivatives | — |  |  | 12 |  |  | — |  |  | 12 |
Total liabilities accounted for at fair value | $ | 91 |  |  | $ | 12 |  |  | $ | 3,226 |  |  | $ | 3,329 |
December 31, 2013 |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |
Available for sale fixed maturities: |  |  |  |  |  |  |
U.S. Government and government agencies | $ | 147 |  |  | $ | 152 |  |  | $ | 15 |  |  | $ | 314 |
States, municipalities and political subdivisions | — |  |  | 5,311 |  |  | 61 |  |  | 5,372 |
Foreign government | — |  |  | 208 |  |  | — |  |  | 208 |
Residential MBS | — |  |  | 3,994 |  |  | 316 |  |  | 4,310 |
Commercial MBS | — |  |  | 2,696 |  |  | 28 |  |  | 2,724 |
Asset-backed securities | — |  |  | 2,418 |  |  | 75 |  |  | 2,493 |
Corporate and other | 28 |  |  | 10,672 |  |  | 335 |  |  | 11,035 |
Total AFS fixed maturities | 175 |  |  | 25,451 |  |  | 830 |  |  | 26,456 |
Trading fixed maturities | — |  |  | 305 |  |  | — |  |  | 305 |
Equity securities | 1,023 |  |  | 125 |  |  | 31 |  |  | 1,179 |
Assets of managed investment entities | 266 |  |  | 2,592 |  |  | 30 |  |  | 2,888 |
Variable annuity assets (separate accounts) (a) | — |  |  | 665 |  |  | — |  |  | 665 |
Other investments — derivatives | — |  |  | 274 |  |  | — |  |  | 274 |
Total assets accounted for at fair value | $ | 1,464 |  |  | $ | 29,412 |  |  | $ | 891 |  |  | $ | 31,767 |
Liabilities: |  |  |  |  |  |  |
Liabilities of managed investment entities | $ | 156 |  |  | $ | — |  |  | $ | 2,411 |  |  | $ | 2,567 |
Derivatives in annuity benefits accumulated | — |  |  | — |  |  | 804 |  |  | 804 |
Other liabilities — derivatives | — |  |  | 10 |  |  | — |  |  | 10 |
Total liabilities accounted for at fair value | $ | 156 |  |  | $ | 10 |  |  | $ | 3,215 |  |  | $ | 3,381 |
(a) Variable annuity liabilities equal the fair value of variable annuity assets. During the first three months of 2014, eight perpetual preferred stocks with an aggregate fair value of $55 million were transferred from Level 1 to Level 2 due to insufficient trade data to warrant classification in Level 1. During the first three months of 2014 and 2013, there were no transfers from Level 2 to Level 1. Approximately 3% of the total assets carried at fair value on March 31, 2014, were Level 3 assets. Approximately 85% ($833 million) of the Level 3 assets were priced using non-binding broker quotes, for which there is a lack of transparency as to the inputs used to determine fair value. Details as to the quantitative inputs are neither provided by the brokers nor otherwise reasonably obtainable by AFG. Since internally developed Level 3 asset fair values represent less than one-half of 1% of the total assets measured at fair value and less than 3% of AFG’s shareholders’ equity, changes in unobservable inputs used to determine internally developed fair values would not have a material impact on AFG’s financial position. The fair values of the liabilities of managed investment entities were determined using primarily non-binding broker quotes, which were reviewed by AFG’s investment professionals. AFG’s investment professionals are familiar with the cash flow models used by the brokers to determine the fair value of these liabilities and review the broker quotes based on their knowledge of the CLO market and the market for the underlying assets. Their review includes consideration of expected reinvestment, default and recovery rates on the assets supporting the CLO liabilities, as well as surveying general CLO liability fair values and analysis provided by third parties. The only significant Level 3 assets or liabilities carried at fair value in the financial statements that were not measured using broker quotes are the derivatives embedded in AFG’s fixed-indexed annuity liabilities, which are measured using a discounted cash flow approach and had a fair value of $904 million at March 31, 2014. The following table presents information about the unobservable inputs used by management in determining fair value of these embedded derivatives. See Note F — “Derivatives.”
Unobservable Input |  | Range
Adjustment for insurance subsidiary’s credit risk |  | 0.40% – 1.60% over the risk free rate
Risk margin for uncertainty in cash flows |  | 0.3% reduction in the discount rate
Surrenders |  | 4% – 16% of indexed account value
Partial surrenders |  | 2% – 6% of indexed account value
Annuitizations |  | 1% – 2% of indexed account value
Deaths |  | 1.5% – 2.5% of indexed account value
Budgeted option costs |  | 2.5% – 4.0% of indexed account value
The range of adjustments for insurance subsidiary’s credit risk reflects credit spread variations across the yield curve. The range of projected surrender rates reflects the specific surrender charges and other features of AFG’s individual fixed-indexed annuity products with an expected range of 6% to 12% in the majority of future calendar years (4% to 16% over all periods). Increasing the budgeted option cost or risk margin for uncertainty in cash flows assumptions in the table above would increase the fair value of the fixed-indexed annuity embedded derivatives, while increasing any of the other unobservable inputs in the table above would decrease the fair value of the embedded derivatives. Changes in balances of Level 3 financial assets and liabilities carried at fair value during the first three months of 2014 and 2013 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period.
|  |  | Total realized/unrealized gains (losses) included in |  |  |  |  |  |  |  |  |  |
Balance at December 31, 2013 |  | Net income |  | Other comprehensive income (loss) |  | Purchases and issuances |  | Sales and settlements |  | Transfer into Level 3 |  | Transfer out of Level 3 |  | Balance at March 31, 2014
AFS fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agency | $ | 15 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 15 |
State and municipal | 61 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 61 |
Residential MBS | 316 |  |  | 1 |  |  | 4 |  |  | — |  |  | (8 | ) |  | 32 |  |  | (73 | ) |  | 272 |
Commercial MBS | 28 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 28 |
Asset-backed securities | 75 |  |  | — |  |  | 1 |  |  | 50 |  |  | (1 | ) |  | 81 |  |  | — |  |  | 206 |
Corporate and other | 335 |  |  | 1 |  |  | 3 |  |  | 1 |  |  | (16 | ) |  | — |  |  | (2 | ) |  | 322 |
Equity securities | 31 |  |  | 1 |  |  | 2 |  |  | 30 |  |  | (9 | ) |  | — |  |  | (14 | ) |  | 41 |
Assets of MIE | 30 |  |  | (1 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 29 |
Liabilities of MIE (*) | (2,411 | ) |  | 1 |  |  | — |  |  | (45 | ) |  | 133 |  |  | — |  |  | — |  |  | (2,322 | )
Embedded derivatives | (804 | ) |  | (54 | ) |  | — |  |  | (55 | ) |  | 9 |  |  | — |  |  | — |  |  | (904 | )
(*) | Total realized/unrealized loss included in net income includes gains of $4 million related to liabilities outstanding as of March 31, 2014. See Note H — “Managed Investment Entities.”
|  |  | Total realized/unrealized gains (losses) included in |  |  |  |  |  |  |  |  |  |
Balance at December 31, 2012 |  | Net income |  | Other comprehensive income (loss) |  | Purchases and issuances |  | Sales and settlements |  | Transfer into Level 3 |  | Transfer out of Level 3 |  | Balance at March 31, 2013
AFS fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agency | $ | 20 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 20 |
State and municipal | 58 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (4 | ) |  | 54 |
Residential MBS | 371 |  |  | 2 |  |  | 6 |  |  | 6 |  |  | (12 | ) |  | 16 |  |  | (35 | ) |  | 354 |
Commercial MBS | 22 |  |  | 1 |  |  | — |  |  | — |  |  | — |  |  | 7 |  |  | — |  |  | 30 |
Asset-backed securities | 253 |  |  | 1 |  |  | — |  |  | 12 |  |  | (6 | ) |  | — |  |  | (15 | ) |  | 245 |
Corporate and other | 236 |  |  | — |  |  | — |  |  | 10 |  |  | (2 | ) |  | — |  |  | — |  |  | 244 |
Equity securities | 37 |  |  | — |  |  | 3 |  |  | 9 |  |  | — |  |  | — |  |  | — |  |  | 49 |
Assets of MIE | 40 |  |  | (4 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (6 | ) |  | 30 |
Liabilities of MIE (*) | (2,745 | ) |  | (25 | ) |  | — |  |  | — |  |  | 250 |  |  | — |  |  | 19 |  |  | (2,501 | )
Embedded derivatives | (465 | ) |  | (80 | ) |  | — |  |  | (17 | ) |  | 7 |  |  | — |  |  | — |  |  | (555 | )
(*) | Total realized/unrealized loss included in net income includes losses of $18 million related to liabilities outstanding as of March 31, 2013. See Note H — “Managed Investment Entities.”
Fair Value of Financial Instruments The carrying value and fair value of financial instruments that are not carried at fair value in the financial statements are summarized below (in millions):
| Carrying Value |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
March 31, 2014 |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 1,876 |  |  | $ | 1,876 |  |  | $ | 1,876 |  |  | $ | — |  |  | $ | — |
Mortgage loans | 888 |  |  | 886 |  |  | — |  |  | — |  |  | 886 |
Policy loans | 235 |  |  | 235 |  |  | — |  |  | — |  |  | 235 |
Total financial assets not accounted for at fair value | $ | 2,999 |  |  | $ | 2,997 |  |  | $ | 1,876 |  |  | $ | — |  |  | $ | 1,121 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Annuity benefits accumulated (*) | $ | 21,542 |  |  | $ | 20,860 |  |  | $ | — |  |  | $ | — |  |  | $ | 20,860 |
Long-term debt | 913 |  |  | 1,018 |  |  | — |  |  | 942 |  |  | 76 |
Total financial liabilities not accounted for at fair value | $ | 22,455 |  |  | $ | 21,878 |  |  | $ | — |  |  | $ | 942 |  |  | $ | 20,936 |
December 31, 2013 |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 1,639 |  |  | $ | 1,639 |  |  | $ | 1,639 |  |  | $ | — |  |  | $ | — |
Mortgage loans | 781 |  |  | 779 |  |  | — |  |  | — |  |  | 779 |
Policy loans | 238 |  |  | 238 |  |  | — |  |  | — |  |  | 238 |
Total financial assets not accounted for at fair value | $ | 2,658 |  |  | $ | 2,656 |  |  | $ | 1,639 |  |  | $ | — |  |  | $ | 1,017 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Annuity benefits accumulated (*) | $ | 20,741 |  |  | $ | 19,959 |  |  | $ | — |  |  | $ | — |  |  | $ | 19,959 |
Long-term debt | 913 |  |  | 985 |  |  | — |  |  | 909 |  |  | 76 |
Total financial liabilities not accounted for at fair value | $ | 21,654 |  |  | $ | 20,944 |  |  | $ | — |  |  | $ | 909 |  |  | $ | 20,035 |
(*) Excludes life contingent annuities in the payout phase. The carrying amount of cash and cash equivalents approximates fair value. Fair values for mortgage loans are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The fair value of policy loans is estimated to approximate carrying value; policy loans have no defined maturity dates and are inseparable from insurance contracts. The fair value of annuity benefits was estimated based on expected cash flows discounted using forward interest rates adjusted for the Company’s credit risk and includes the impact of maintenance expenses and capital costs. Fair values of long-term debt are based primarily on quoted market prices.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13433-108611 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=25499696&loc=d3e19207-110258 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13504-108611 + Details
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