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Derivatives | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | Derivatives As discussed under “Derivatives” in Note A — “Accounting Policies,” AFG uses derivatives in certain areas of its operations. Derivatives That Do Not Qualify for Hedge Accounting The following derivatives that do not qualify for hedge accounting under GAAP are included in AFG’s Balance Sheet at fair value (in millions):
|  |  |  | September 30, 2017 |  | December 31, 2016
Derivative |  | Balance Sheet Line |  | Asset |  | Liability |  | Asset |  | Liability
MBS with embedded derivatives |  | Fixed maturities |  | $ | 111 |  |  | $ | — |  |  | $ | 107 |  |  | $ | — |
Public company warrants |  | Equity securities |  | 3 |  |  | — |  |  | 4 |  |  | — |
Fixed-indexed annuities (embedded derivative) |  | Annuity benefits accumulated |  | — |  |  | 2,293 |  |  | — |  |  | 1,759 |
Equity index call options |  | Equity index call options |  | 629 |  |  | — |  |  | 492 |  |  | — |
Reinsurance contracts (embedded derivative) |  | Other liabilities |  | — |  |  | 10 |  |  | — |  |  | 8 |
|  |  |  | $ | 743 |  |  | $ | 2,303 |  |  | $ | 603 |  |  | $ | 1,767 |
The MBS with embedded derivatives consist primarily of interest-only MBS with interest rates that float inversely with short-term rates. AFG records the entire change in the fair value of these securities in earnings. These investments are part of AFG’s overall investment strategy and represent a small component of AFG’s overall investment portfolio. Warrants to purchase shares of publicly traded companies, which represent a small component of AFG’s overall investment portfolio, are considered to be derivatives that are required to be carried at fair value through earnings. AFG’s fixed-indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase of call options on the appropriate index. AFG receives collateral from its counterparties to support its purchased call option assets. This collateral ($374 million at September 30, 2017 and $380 million at December 31, 2016) is included in other assets in AFG’s Balance Sheet with an offsetting liability to return the collateral, which is included in other liabilities. AFG’s strategy is designed so that the change in the fair value of the call option assets will generally offset the economic change in the liabilities from the index participation. Both the index-based component of the annuities and the related call options are considered derivatives. Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products. As discussed under “Reinsurance” in Note A, certain reinsurance contracts are considered to contain embedded derivatives. The following table summarizes the gain (loss) included in AFG’s Statement of Earnings for changes in the fair value of derivatives that do not qualify for hedge accounting for the third quarter and first nine months of 2017 and 2016 (in millions):
|  |  |  | Three months ended September 30, |  | Nine months ended September 30,
Derivative |  | Statement of Earnings Line |  | 2017 |  | 2016 |  | 2017 |  | 2016
MBS with embedded derivatives |  | Realized gains on securities |  | $ | — |  |  | $ | (4 | ) |  | $ | (3 | ) |  | $ | — |
Public company warrants |  | Realized gains on securities |  | (1 | ) |  | 1 |  |  | (1 | ) |  | — |
Fixed-indexed annuities (embedded derivative) |  | Annuity benefits |  | (127 | ) |  | (109 | ) |  | (386 | ) |  | (188 | )
Equity index call options |  | Annuity benefits |  | 116 |  |  | 105 |  |  | 338 |  |  | 81 |
Reinsurance contracts (embedded derivative) |  | Net investment income |  | — |  |  | — |  |  | (2 | ) |  | (6 | )
|  |  |  | $ | (12 | ) |  | $ | (7 | ) |  | $ | (54 | ) |  | $ | (113 | )
Derivatives Designated and Qualifying as Cash Flow Hedges As of September 30, 2017, AFG has entered into eight interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of AFG’s floating-rate fixed maturity securities to fixed rates by offsetting the variability in cash flows attributable to changes in short-term LIBOR. Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on short-term LIBOR. The notional amounts of the interest rate swaps generally decline over each swap’s respective life (the swaps expire between August 2019 and June 2030) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR. The total outstanding notional amount of AFG’s interest rate swaps was $1.35 billion at September 30, 2017 compared to $1.08 billion at December 31, 2016, reflecting a new swap with an aggregate notional amount at issuance of $400 million entered into in the third quarter of 2017, partially offset by the scheduled amortization discussed above. The fair value of the effective portion of the interest rate swaps in an asset position and included in other assets was $1 million at both September 30, 2017 and December 31, 2016. The fair value of the effective portion of the interest rate swaps in a liability position and included in other liabilities was $21 million at September 30, 2017 and $22 million at December 31, 2016. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of DPAC and deferred taxes. Amounts reclassified from AOCI (before DPAC and taxes) to net investment income were $1 million and $2 million in the third quarters and $4 million and $5 million in the first nine months of 2017 and 2016, respectively. There was no ineffectiveness recorded in net earnings during these periods. A collateral receivable supporting these swaps of $60 million at both September 30, 2017 and December 31, 2016 is included in other assets in AFG’s Balance Sheet. Derivative Designated and Qualifying as a Fair Value Hedge In June 2015, AFG entered into an interest rate swap to mitigate the interest rate risk associated with its fixed-rate 9-7/8% Senior Notes due June 2019 by effectively converting the interest rate on those notes to a floating rate of three-month LIBOR plus 8.099% (9.4190% at September 30, 2017). Since the terms of the interest rate swap match the terms of the hedged debt, changes in the fair value of the interest rate swap are offset by changes in the fair value of the hedged debt attributable to changes in interest rates. The fair value of the interest rate swap (a liability of less than $1 million at September 30, 2017 and an asset of $1 million at December 31, 2016) and the offsetting adjustment to the carrying value of the 9-7/8% Senior Notes are both included in long-term debt on AFG’s Balance Sheet. Accordingly, the net impact on AFG’s current period earnings is that the interest expense associated with the hedged debt is effectively recorded at the floating rate. The net reduction in interest expense from the swap was less than $1 million and $1 million in the third quarters and $1 million and $3 million in the first nine months of 2017 and 2016, respectively.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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