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Investments | 9 Months Ended
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Sep. 30, 2014
Investments, Debt and Equity Securities [Abstract] |
Investments | Investments Available for sale fixed maturities and equity securities at September 30, 2014 and December 31, 2013, consisted of the following (in millions):
| September 30, 2014 |  | December 31, 2013
Amortized Cost |  | Fair Value |  | Gross Unrealized |  | Amortized Cost |  | Fair Value |  | Gross Unrealized
Gains |  | Losses |  | Gains |  | Losses
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government and government agencies | $ | 360 |  |  | $ | 365 |  |  | $ | 7 |  |  | $ | (2 | ) |  | $ | 310 |  |  | $ | 314 |  |  | $ | 7 |  |  | $ | (3 | )
States, municipalities and political subdivisions | 6,103 |  |  | 6,370 |  |  | 294 |  |  | (27 | ) |  | 5,360 |  |  | 5,372 |  |  | 156 |  |  | (144 | )
Foreign government | 195 |  |  | 204 |  |  | 9 |  |  | — |  |  | 198 |  |  | 208 |  |  | 10 |  |  | — |
Residential MBS | 4,189 |  |  | 4,589 |  |  | 416 |  |  | (16 | ) |  | 3,947 |  |  | 4,310 |  |  | 391 |  |  | (28 | )
Commercial MBS | 2,328 |  |  | 2,491 |  |  | 163 |  |  | — |  |  | 2,535 |  |  | 2,724 |  |  | 192 |  |  | (3 | )
Asset-backed securities | 3,601 |  |  | 3,619 |  |  | 37 |  |  | (19 | ) |  | 2,477 |  |  | 2,493 |  |  | 35 |  |  | (19 | )
Corporate and other | 11,633 |  |  | 12,327 |  |  | 725 |  |  | (31 | ) |  | 10,539 |  |  | 11,035 |  |  | 604 |  |  | (108 | )
Total fixed maturities | $ | 28,409 |  |  | $ | 29,965 |  |  | $ | 1,651 |  |  | $ | (95 | ) |  | $ | 25,366 |  |  | $ | 26,456 |  |  | $ | 1,395 |  |  | $ | (305 | )
Common stocks | $ | 908 |  |  | $ | 1,088 |  |  | $ | 216 |  |  | $ | (36 | ) |  | $ | 721 |  |  | $ | 914 |  |  | $ | 209 |  |  | $ | (16 | )
Perpetual preferred stocks | $ | 371 |  |  | $ | 386 |  |  | $ | 19 |  |  | $ | (4 | ) |  | $ | 266 |  |  | $ | 265 |  |  | $ | 9 |  |  | $ | (10 | )
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, 2014 and December 31, 2013, respectively, were $222 million and $229 million. Gross unrealized gains on such securities at September 30, 2014 and December 31, 2013 were $154 million and $150 million, respectively. Gross unrealized losses on such securities at September 30, 2014 and December 31, 2013 were $7 million and $13 million, respectively. These amounts represent the non-credit other-than-temporary impairment charges recorded in AOCI adjusted for subsequent changes in fair values and nearly all relate to residential MBS. 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 September 30, 2014 and December 31, 2013.
| 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, 2014 |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and government agencies | $ | — |  |  | $ | 22 |  |  | 100 | % |  | $ | (2 | ) |  | $ | 15 |  |  | 88 | %
States, municipalities and political subdivisions | (7 | ) |  | 617 |  |  | 99 | % |  | (20 | ) |  | 566 |  |  | 97 | %
Foreign government | — |  |  | 84 |  |  | 100 | % |  | — |  |  | — |  |  | — | %
Residential MBS | (4 | ) |  | 330 |  |  | 99 | % |  | (12 | ) |  | 225 |  |  | 95 | %
Commercial MBS | — |  |  | 44 |  |  | 100 | % |  | — |  |  | 11 |  |  | 100 | %
Asset-backed securities | (10 | ) |  | 1,490 |  |  | 99 | % |  | (9 | ) |  | 485 |  |  | 98 | %
Corporate and other | (13 | ) |  | 1,277 |  |  | 99 | % |  | (18 | ) |  | 580 |  |  | 97 | %
Total fixed maturities | $ | (34 | ) |  | $ | 3,864 |  |  | 99 | % |  | $ | (61 | ) |  | $ | 1,882 |  |  | 97 | %
Common stocks | $ | (36 | ) |  | $ | 278 |  |  | 89 | % |  | $ | — |  |  | $ | — |  |  | — | %
Perpetual preferred stocks | $ | (1 | ) |  | $ | 61 |  |  | 98 | % |  | $ | (3 | ) |  | $ | 57 |  |  | 95 | %
December 31, 2013 |  |  |  |  |  |  |  |  |  |  |
Fixed maturities: |  |  |  |  |  |  |  |  |  |  |
U.S. Government and government agencies | $ | (3 | ) |  | $ | 60 |  |  | 95 | % |  | $ | — |  |  | $ | — |  |  | — | %
States, municipalities and political subdivisions | (135 | ) |  | 2,219 |  |  | 94 | % |  | (9 | ) |  | 73 |  |  | 89 | %
Residential MBS | (9 | ) |  | 553 |  |  | 98 | % |  | (19 | ) |  | 212 |  |  | 92 | %
Commercial MBS | (3 | ) |  | 106 |  |  | 97 | % |  | — |  |  | 2 |  |  | 100 | %
Asset-backed securities | (18 | ) |  | 1,310 |  |  | 99 | % |  | (1 | ) |  | 28 |  |  | 97 | %
Corporate and other | (101 | ) |  | 2,634 |  |  | 96 | % |  | (7 | ) |  | 85 |  |  | 92 | %
Total fixed maturities | $ | (269 | ) |  | $ | 6,882 |  |  | 96 | % |  | $ | (36 | ) |  | $ | 400 |  |  | 92 | %
Common stocks | $ | (16 | ) |  | $ | 158 |  |  | 91 | % |  | $ | — |  |  | $ | — |  |  | — | %
Perpetual preferred stocks | $ | (6 | ) |  | $ | 91 |  |  | 94 | % |  | $ | (4 | ) |  | $ | 20 |  |  | 83 | %
At September 30, 2014, the gross unrealized losses on fixed maturities of $95 million relate to 824 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 80% of the gross unrealized loss and 89% 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 2014, AFG recorded less than $1 million in other-than-temporary impairment charges related to its residential MBS. 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, 2014. 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).
| 2014 |  | 2013
Balance at June 30 | $ | 175 |  |  | $ | 191 |
Additional credit impairments on: |  |  |
Previously impaired securities | — |  |  | — |
Securities without prior impairments | — |  |  | — |
Reductions due to sales or redemptions | (2 | ) |  | — |
Balance at September 30 | $ | 173 |  |  | $ | 191 |
Balance at January 1 | $ | 194 |  |  | $ | 192 |
Additional credit impairments on: |  |  |
Previously impaired securities | — |  |  | — |
Securities without prior impairments | — |  |  | — |
Reductions due to sales or redemptions | (21 | ) |  | (1 | )
Balance at September 30 | $ | 173 |  |  | $ | 191 |
The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 30, 2014 (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 | $ | 812 |  |  | $ | 826 |  |  | 3 | %
After one year through five years | 4,144 |  |  | 4,483 |  |  | 15 | %
After five years through ten years | 7,910 |  |  | 8,277 |  |  | 27 | %
After ten years | 5,425 |  |  | 5,680 |  |  | 19 | %
| 18,291 |  |  | 19,266 |  |  | 64 | %
ABS (average life of approximately 3-1/2 years) | 3,601 |  |  | 3,619 |  |  | 12 | %
MBS (average life of approximately 4-1/2 years) | 6,517 |  |  | 7,080 |  |  | 24 | %
Total | $ | 28,409 |  |  | $ | 29,965 |  |  | 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 September 30, 2014 or December 31, 2013. 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 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 and Amounts Attributable to Noncontrolling Interests |  | Net
September 30, 2014 |  |  |  |  |
Unrealized gain on: |  |  |  |  |
Fixed maturities — annuity segment (*) | $ | 1,077 |  |  | $ | (377 | ) |  | $ | 700 |
Fixed maturities — all other | 479 |  |  | (177 | ) |  | 302 |
Equity securities | 195 |  |  | (71 | ) |  | 124 |
Deferred policy acquisition costs — annuity segment | (496 | ) |  | 174 |  |  | (322 | )
Annuity benefits accumulated | (108 | ) |  | 38 |  |  | (70 | )
Life, accident and health reserves | (41 | ) |  | 13 |  |  | (28 | )
Unearned revenue | 30 |  |  | (10 | ) |  | 20 |
| $ | 1,136 |  |  | $ | (410 | ) |  | $ | 726 |
December 31, 2013 |  |  |  |  |
Unrealized gain on: |  |  |  |  |
Fixed maturities — annuity segment (*) | $ | 729 |  |  | $ | (255 | ) |  | $ | 474 |
Fixed maturities — all other | 361 |  |  | (133 | ) |  | 228 |
Equity securities | 192 |  |  | (70 | ) |  | 122 |
Deferred policy acquisition costs — annuity segment | (345 | ) |  | 121 |  |  | (224 | )
Annuity benefits accumulated | (71 | ) |  | 25 |  |  | (46 | )
Life, accident and health reserves | (8 | ) |  | 3 |  |  | (5 | )
Unearned revenue | 22 |  |  | (8 | ) |  | 14 |
| $ | 880 |  |  | $ | (317 | ) |  | $ | 563 |
(*) | 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 September 30, |  | Nine months ended September 30,
| 2014 |  | 2013 |  | 2014 |  | 2013
Investment income: |  |  |  |  |  |  |
Fixed maturities | $ | 342 |  |  | $ | 310 |  |  | $ | 1,007 |  |  | $ | 920 |
Equity securities | 16 |  |  | 15 |  |  | 48 |  |  | 36 |
Equity in earnings of partnerships and similar investments | 2 |  |  | — |  |  | 15 |  |  | — |
Other | 20 |  |  | 17 |  |  | 56 |  |  | 52 |
Gross investment income | 380 |  |  | 342 |  |  | 1,126 |  |  | 1,008 |
Investment expenses | (3 | ) |  | (4 | ) |  | (9 | ) |  | (12 | )
Net investment income | $ | 377 |  |  | $ | 338 |  |  | $ | 1,117 |  |  | $ | 996 |
Equity in the earnings of partnerships has not been material and was included in realized gains (losses) on securities prior to 2014. 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 September 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |
Realized before impairments | $ | 10 |  |  | $ | 16 |  |  | $ | (1 | ) |  | $ | (1 | ) |  | $ | (10 | ) |  | $ | — |  |  | $ | 14 |
Realized — impairments | (9 | ) |  | (5 | ) |  | — |  |  | 3 |  |  | 5 |  |  | — |  |  | (6 | )
Change in unrealized | (145 | ) |  | (40 | ) |  | — |  |  | 60 |  |  | 44 |  |  | 2 |  |  | (79 | )
Quarter ended September 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |
Realized before impairments | $ | 6 |  |  | $ | 54 |  |  | $ | — |  |  | $ | 1 |  |  | $ | (22 | ) |  | $ | (1 | ) |  | $ | 38 |
Realized — impairments | — |  |  | (5 | ) |  | — |  |  | — |  |  | 2 |  |  | — |  |  | (3 | )
Change in unrealized | (57 | ) |  | (28 | ) |  | — |  |  | 37 |  |  | 16 |  |  | — |  |  | (32 | )
Nine months ended September 30, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |
Realized before impairments | $ | 32 |  |  | $ | 26 |  |  | $ | — |  |  | $ | (1 | ) |  | $ | (21 | ) |  | $ | (1 | ) |  | $ | 35 |
Realized — impairments | (10 | ) |  | (6 | ) |  | — |  |  | 3 |  |  | 5 |  |  | — |  |  | (8 | )
Change in unrealized | 466 |  |  | 3 |  |  | — |  |  | (213 | ) |  | (90 | ) |  | (3 | ) |  | 163 |
Nine months ended September 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |
Realized before impairments | $ | 33 |  |  | $ | 125 |  |  | $ | 2 |  |  | $ | — |  |  | $ | (57 | ) |  | $ | (2 | ) |  | $ | 101 |
Realized — impairments | — |  |  | (5 | ) |  | (1 | ) |  | — |  |  | 2 |  |  | — |  |  | (4 | )
Change in unrealized | (797 | ) |  | 26 |  |  | — |  |  | 370 |  |  | 140 |  |  | 6 |  |  | (255 | )
(a) | Primarily adjustments to deferred policy acquisition costs and reserves related to annuities and long-term care business.
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):
| Nine months ended September 30,
2014 |  | 2013
Fixed maturities: |  |  |
Gross gains | $ | 28 |  |  | $ | 36 |
Gross losses | (2 | ) |  | (4 | )
Equity securities: |  |  |
Gross gains | 27 |  |  | 126 |
Gross losses | — |  |  | (6 | )

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