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Investments | 3 Months Ended
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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 | )

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