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Derivatives
 12 Months Ended
Dec. 31, 2019
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):
  
 
 
 
December 31, 2019
 
December 31, 2018
Derivative
 
Balance Sheet Line
 
Asset
 
Liability
 
Asset
 
Liability
MBS with embedded derivatives
 
Fixed maturities
 
$
102

 
$
—

 
$
109

 
$
—

Public company warrants
 
Equity securities
 
—

 
—

 
—

 
—

Fixed-indexed and variable-indexed annuities (embedded derivative)
 
Annuity benefits accumulated
 
—

 
3,730

 
—

 
2,720

Equity index call options
 
Equity index call options
 
924

 
—

 
184

 
—

Equity index put options
 
Other liabilities
 
—

 
1

 
—

 
1

Reinsurance contract (embedded derivative)
 
Other liabilities
 
—

 
4

 
—

 
2

 
 
 
 
$
1,026

 
$
3,735

 
$
293

 
$
2,723



The MBS with embedded derivatives consist of primarily interest-only and principal-only MBS. 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 and variable-indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG receives collateral from certain counterparties to support its purchased call option assets (net of collateral required under put option contracts with the same counterparties). This collateral ($577 million at December 31, 2019 and $103 million at December 31, 2018) 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 net change in the fair value of the call and put options will generally offset the economic change in the net liability from the index participation. Both the index-based component of the annuities (an embedded derivative) and the related call and put options are considered derivatives that must be adjusted for changes in fair value through earnings each period. The fair values of these derivatives are impacted by actual and expected stock market performance and interest rates as well as other factors. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.

As discussed under “Reinsurance” in Note A, AFG has a reinsurance contract that is considered to contain an embedded derivative.

The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives that do not qualify for hedge accounting for 2019, 2018 and 2017 (in millions):
Derivative
 
Statement of Earnings Line
 
2019
 
2018
 
2017
MBS with embedded derivatives
 
Realized gains (losses) on securities
 
$
10

 
$
(7
)
 
$
(6
)
Public company warrants
 
Realized gains (losses) on securities
 
(1
)
 
(3
)
 
—

Fixed-indexed and variable-indexed annuities (embedded derivative) (*)
 
Annuity benefits
 
(919
)
 
204

 
(589
)
Equity index call options
 
Annuity benefits
 
804

 
(298
)
 
494

Equity index put options
 
Annuity benefits
 
2

 
(1
)
 
—

Reinsurance contracts (embedded derivative)
 
Net investment income
 
(2
)
 
2

 
(2
)
 
 
 
 
$
(106
)
 
$
(103
)
 
$
(103
)


(*)
The change in fair value of the embedded derivative includes a favorable adjustment related to unlocking of actuarial assumptions of $181 million in 2019 and losses of $44 million in 2018 and $25 million in 2017.

Derivatives Designated and Qualifying as Cash Flow Hedges   As of December 31, 2019, AFG has thirteen active 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 April 2020 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 $1.98 billion at December 31, 2019 compared to $2.35 billion at December 31, 2018, reflecting the scheduled amortization discussed above, the termination of two swaps with notional amounts of $138 million and $100 million (on the settlement dates) in the second quarter and fourth quarter of 2019, respectively, and the expiration of a swap with a notional amount of $78 million (on the expiration date) in the third quarter of 2019. The fair value of the interest rate swaps in an asset position and included in other assets was $50 million at December 31, 2019 and $16 million at December 31, 2018. The fair value of the interest rate swaps in a liability position and included in other liabilities was $5 million at December 31, 2019 and $46 million at December 31, 2018. 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 income of $3 million in 2019, losses of $3 million in 2018 and income of $6 million in 2017. A collateral receivable supporting these swaps of $20 million at December 31, 2019 and $135 million at December 31, 2018 is included in other assets in AFG’s Balance Sheet.