UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, ~~2020~~2021

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____

Commission File No. 1-13653

AMERICAN FINANCIAL GROUP, INC.

Incorporated under the Laws of Ohio IRS Employer I.D. No. 31-1544320

301 East Fourth Street, Cincinnati, Ohio 45202

(513) 579-2121

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes ☑ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock

AFG

New York Stock Exchange

~~6% Subordinated Debentures due November 15, 2055~~

~~AFGH~~

~~New York Stock Exchange~~

5.875% Subordinated Debentures due March 30, 2059

AFGB

New York Stock Exchange

5.625% Subordinated Debentures due June 1, 2060

AFGD

New York Stock Exchange

5.125% Subordinated Debentures due December 15, 2059

AFGC

New York Stock Exchange

4.50% Subordinated Debentures due September 15, 2060

AFGE

New York Stock Exchange

As of August 1, ~~2020,~~2021, there were ~~88,540,128~~84,749,383 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

TABLE OF CONTENTS

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

PART I

ITEM 1. — FINANCIAL STATEMENTS

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

(Dollars in Millions)


		June 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	2,698	$	2,314	Cash and cash equivalents	$	3,365	$	1,665
Investments:	Investments:					Investments:
Fixed maturities, available for sale at fair value (amortized cost — $45,670 and $44,524; allowance for expected credit losses of $61 at June 30, 2020)		48,046		46,505
Fixed maturities, available for sale at fair value (amortized cost — $9,481 and $8,812; allowance for expected credit losses of $9 and $12)						Fixed maturities, available for sale at fair value (amortized cost — $9,481 and $8,812; allowance for expected credit losses of $9 and $12)	9,732		9,084
Fixed maturities, trading at fair value	Fixed maturities, trading at fair value	97		113		Fixed maturities, trading at fair value	26		24
Equity securities, at fair value	Equity securities, at fair value	1,602		1,937		Equity securities, at fair value	965		889
Investments accounted for using the equity method	Investments accounted for using the equity method	1,781		1,688		Investments accounted for using the equity method	1,378		1,235
Mortgage loans	Mortgage loans	1,475		1,329		Mortgage loans	461		377
Policy loans		158		164
Equity index call options		605		924
Real estate and other investments	Real estate and other investments	279		278		Real estate and other investments	198		220
Total cash and investments	Total cash and investments	56,741		55,252		Total cash and investments	16,125		13,494
Recoverables from reinsurers	Recoverables from reinsurers	3,476		3,415		Recoverables from reinsurers	3,330		3,288
Prepaid reinsurance premiums	Prepaid reinsurance premiums	733		678		Prepaid reinsurance premiums	865		768
Agents’ balances and premiums receivable	Agents’ balances and premiums receivable	1,366		1,335		Agents’ balances and premiums receivable	1,423		1,229
Deferred policy acquisition costs	Deferred policy acquisition costs	818		1,037		Deferred policy acquisition costs	258		244
Assets of managed investment entities	Assets of managed investment entities	4,393		4,736		Assets of managed investment entities	5,086		4,971
Other receivables	Other receivables	880		975		Other receivables	682		678
Variable annuity assets (separate accounts)		577		628
Other assets	Other assets	1,676		1,867		Other assets	835		977
Goodwill	Goodwill	207		207		Goodwill	176		176
Assets of discontinued annuity operations						Assets of discontinued annuity operations	0		47,885
Total assets	Total assets	$	70,867	$	70,130	Total assets	$	28,780	$	73,710

Liabilities and Equity:	Liabilities and Equity:					Liabilities and Equity:
Unpaid losses and loss adjustment expenses	Unpaid losses and loss adjustment expenses	$	10,321	$	10,232	Unpaid losses and loss adjustment expenses	$	10,498	$	10,392
Unearned premiums	Unearned premiums	2,778		2,830		Unearned premiums	3,054		2,803
Annuity benefits accumulated		41,392		40,406
Life, accident and health reserves		606		612
Payable to reinsurers	Payable to reinsurers	746		814		Payable to reinsurers	829		807
Liabilities of managed investment entities	Liabilities of managed investment entities	4,236		4,571		Liabilities of managed investment entities	5,029		4,914
Long-term debt	Long-term debt	1,912		1,473		Long-term debt	1,963		1,963
Variable annuity liabilities (separate accounts)		577		628
Other liabilities	Other liabilities	2,173		2,295		Other liabilities	1,806		1,584
Liabilities of discontinued annuity operations						Liabilities of discontinued annuity operations	0		44,458
Total liabilities	Total liabilities	64,741		63,861		Total liabilities	23,179		66,921

Redeemable noncontrolling interests		—		—

Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Common Stock, 0 par value — 200,000,000 shares authorized — 88,659,407 and 90,303,686 shares outstanding		89		90
Common Stock, 0 par value — 200,000,000 shares authorized — 84,713,927 and 86,345,246 shares outstanding						Common Stock, 0 par value — 200,000,000 shares authorized — 84,713,927 and 86,345,246 shares outstanding	85		86
Capital surplus	Capital surplus	1,299		1,307		Capital surplus	1,303		1,281
Retained earnings	Retained earnings	3,685		4,009		Retained earnings	4,023		4,149��
Accumulated other comprehensive income, net of tax	Accumulated other comprehensive income, net of tax	1,053		863		Accumulated other comprehensive income, net of tax	190		1,273
Total shareholders’ equity	Total shareholders’ equity	6,126		6,269		Total shareholders’ equity	5,601		6,789
Noncontrolling interests	Noncontrolling interests	—		—		Noncontrolling interests	0		0
Total equity	Total equity	6,126		6,269		Total equity	5,601		6,789
Total liabilities and equity	Total liabilities and equity	$	70,867	$	70,130	Total liabilities and equity	$	28,780	$	73,710

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

(In Millions, Except Per Share Data)


		Three months ended June 30,						Six months ended June 30,							Three months ended June 30,				Six months ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Revenues:	Revenues:									Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,184	$	1,200	$	2,393	$	2,373	Property and casualty insurance net earned premiums	$	1,250	$	1,184	$	2,423	$	2,393
Net investment income	Net investment income	468		580		1,012		1,122		Net investment income	164		88		352		192

Realized gains (losses) on securities		204		56		(347)		240

Income (loss) of managed investment entities:
Realized gains (losses) on:										Realized gains (losses) on:
Securities										Securities	43		108		120		(220)
Subsidiary										Subsidiary	4		0		4		0
Income of managed investment entities:										Income of managed investment entities:
Investment income	Investment income	49		70		108		139		Investment income	44		49		90		108
Loss on change in fair value of assets/liabilities		(5)		(2)		(48)		(2)
Gain (loss) on change in fair value of assets/liabilities										Gain (loss) on change in fair value of assets/liabilities	6		(3)		8		(16)
Other income	Other income	51		56		108		112		Other income	20		19		43		43
Total revenues	Total revenues	1,951		1,960		3,226		3,984		Total revenues	1,531		1,445		3,040		2,500

Costs and Expenses:	Costs and Expenses:									Costs and Expenses:
Property and casualty insurance:	Property and casualty insurance:									Property and casualty insurance:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	771		723		1,478		1,415		Losses and loss adjustment expenses	714		771		1,381		1,478
Commissions and other underwriting expenses	Commissions and other underwriting expenses	409		426		829		825		Commissions and other underwriting expenses	390		409		770		829
Annuity benefits		426		339		702		650
Annuity and supplemental insurance acquisition expenses		(35)		33		78		61
Interest charges on borrowed money	Interest charges on borrowed money	23		17		40		33		Interest charges on borrowed money	23		23		47		40
Expenses of managed investment entities	Expenses of managed investment entities	38		59		86		114		Expenses of managed investment entities	39		42		78		95
Other expenses	Other expenses	101		104		183		214		Other expenses	77		60		141		103
Total costs and expenses	Total costs and expenses	1,733		1,701		3,396		3,312		Total costs and expenses	1,243		1,305		2,417		2,545
Earnings (loss) before income taxes		218		259		(170)		672
Earnings (loss) from continuing operations before income taxes										Earnings (loss) from continuing operations before income taxes	288		140		623		(45)
Provision (credit) for income taxes	Provision (credit) for income taxes	51		50		(33)		137		Provision (credit) for income taxes	48		37		116		(4)
Net earnings (loss) from continuing operations, including noncontrolling interests										Net earnings (loss) from continuing operations, including noncontrolling interests	240		103		507		(41)
Net earnings (loss) from discontinued operations										Net earnings (loss) from discontinued operations	762		64		914		(96)
Net earnings (loss), including noncontrolling interests	Net earnings (loss), including noncontrolling interests	167		209		(137)		535		Net earnings (loss), including noncontrolling interests	1,002		167		1,421		(137)
Less: Net earnings (loss) attributable to noncontrolling interests		(10)		(1)		(13)		(4)
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests										Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	0		(10)		0		(13)
Net Earnings (Loss) Attributable to Shareholders	Net Earnings (Loss) Attributable to Shareholders	$	177	$	210	$	(124)	$	539	Net Earnings (Loss) Attributable to Shareholders	$	1,002	$	177	$	1,421	$	(124)

Earnings (Loss) Attributable to Shareholders per Common Share:
Basic		$	1.98	$	2.34	$	(1.38)	$	6.02
Diluted		$	1.97	$	2.31	$	(1.38)	$	5.94
Earnings (Loss) Attributable to Shareholders per Basic Common Share from:										Earnings (Loss) Attributable to Shareholders per Basic Common Share from:
Continuing operations										Continuing operations	$	2.83	$	1.26	$	5.94	$	(0.31)
Discontinued operations										Discontinued operations	8.95		0.72		10.69		(1.07)
Total basic earnings (loss) attributable to shareholders										Total basic earnings (loss) attributable to shareholders	$	11.78	$	1.98	$	16.63	$	(1.38)
Earnings (Loss) Attributable to Shareholders per Diluted Common Share:										Earnings (Loss) Attributable to Shareholders per Diluted Common Share:
Continuing operations										Continuing operations	$	2.81	$	1.26	$	5.90	$	(0.31)
Discontinued operations										Discontinued operations	8.89		0.71		10.61		(1.07)
Total diluted earnings (loss) attributable to shareholders										Total diluted earnings (loss) attributable to shareholders	$	11.70	$	1.97	$	16.51	$	(1.38)
Average number of Common Shares:	Average number of Common Shares:									Average number of Common Shares:
Basic	Basic	89.7		89.7		90.0		89.6		Basic	85.0		89.7		85.5		90.0
Diluted	Diluted	90.0		91.0		90.0		90.8		Diluted	85.6		90.0		86.1		90.0

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

(In Millions)


		Three months ended June 30,						Six months ended June 30,							Three months ended June 30,				Six months ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Net earnings (loss), including noncontrolling interests	Net earnings (loss), including noncontrolling interests	$	167	$	209	$	(137)	$	535	Net earnings (loss), including noncontrolling interests	$	1,002	$	167	$	1,421	$	(137)

Other comprehensive income (loss), net of tax:	Other comprehensive income (loss), net of tax:									Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities:	Net unrealized gains (losses) on securities:									Net unrealized gains (losses) on securities:
Unrealized holding gains on securities arising during the period		1,021		356		156		740
Unrealized holding gains (losses) on securities arising during the period										Unrealized holding gains (losses) on securities arising during the period	133		1,021		(148)		156
Reclassification adjustment for realized (gains) losses included in net earnings	Reclassification adjustment for realized (gains) losses included in net earnings	(7)		(8)		12		(11)		Reclassification adjustment for realized (gains) losses included in net earnings	(7)		(7)		(18)		12
Reclassification adjustment for unrealized gains of subsidiaries sold										Reclassification adjustment for unrealized gains of subsidiaries sold	(884)		0		(884)		0
Total net unrealized gains (losses) on securities										Total net unrealized gains (losses) on securities	(758)		1,014		(1,050)		168
Net unrealized gains (losses) on cash flow hedges:										Net unrealized gains (losses) on cash flow hedges:
Unrealized holding gains (losses) on cash flow hedges arising during the period										Unrealized holding gains (losses) on cash flow hedges arising during the period	6		12		(1)		48
Reclassification adjustment for investment income included in net earnings										Reclassification adjustment for investment income included in net earnings	(4)		(9)		(11)		(18)
Reclassification adjustment for unrealized gains on cash flow hedges of subsidiaries sold										Reclassification adjustment for unrealized gains on cash flow hedges of subsidiaries sold	(29)		0		(29)		0
Total net unrealized gains (losses) on cash flow hedges										Total net unrealized gains (losses) on cash flow hedges	(27)		3		(41)		30
Foreign currency translation adjustments										Foreign currency translation adjustments	0		4		0		(6)
Pension and other postretirement plans adjustments (“OPRP”):										Pension and other postretirement plans adjustments (“OPRP”):
Unrealized holding losses on pension and OPRP arising during the period										Unrealized holding losses on pension and OPRP arising during the period	(1)		0		(1)		0
Reclassification adjustment for pension settlement loss included in net earnings										Reclassification adjustment for pension settlement loss included in net earnings	9		0		9		0
Total pension and OPRP adjustments										Total pension and OPRP adjustments	8		0		8		0
Other comprehensive income (loss), net of tax										Other comprehensive income (loss), net of tax	(777)		1,021		(1,083)		192

Total net unrealized gains on securities		1,014		348		168		729
Net unrealized gains on cash flow hedges		3		18		30		29
Foreign currency translation adjustments		4		—		(6)		4

Other comprehensive income, net of tax		1,021		366		192		762
Total comprehensive income, net of tax	Total comprehensive income, net of tax	1,188		575		55		1,297		Total comprehensive income, net of tax	225		1,188		338		55
Less: Comprehensive income (loss) attributable to noncontrolling interests	Less: Comprehensive income (loss) attributable to noncontrolling interests	(10)		—		(11)		(3)		Less: Comprehensive income (loss) attributable to noncontrolling interests	0		(10)		0		(11)
Comprehensive income attributable to shareholders	Comprehensive income attributable to shareholders	$	1,198	$	575	$	66	$	1,300	Comprehensive income attributable to shareholders	$	225	$	1,198	$	338	$	66

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(Dollars in Millions)


		Shareholders’ Equity												Redeemable
	Common	Common Stock and Capital		Retained		Accumulated Other Comp.				Noncon- trolling		Total		Noncon- trolling
	Shares	Surplus		Earnings		Income		Total		Interests		Equity		Interests
Balance at March 31, 2021	85,126,062	$	1,364	$	4,354	$	967	$	6,685	$	0	$	6,685

Net earnings	—	—		1,002		—		1,002		0		1,002
Other comprehensive loss	—	—		—		(777)		(777)		—		(777)
Dividends ($14.50 per share)	—	—		(1,232)		—		(1,232)		—		(1,232)
Shares issued:
Exercise of stock options	561,732	30		—		—		30		—		30
Restricted stock awards	0	—		—		—		—		—		—
Other benefit plans	27,833	3		—		—		3		—		3
Dividend reinvestment plan	34,348	4		—		—		4		—		4
Stock-based compensation expense	—	2		—		—		2		—		2
Shares acquired and retired	(916,520)	(15)		(99)		—		(114)		—		(114)
Shares exchanged — benefit plans	(14,380)	0		(2)		—		(2)		—		(2)
Forfeitures of restricted stock	(105,148)	—		—		—		—		—		—

Balance at June 30, 2021	84,713,927	$	1,388	$	4,023	$	190	$	5,601	$	0	$	5,601

Balance at March 31, 2020	89,827,336	$	1,399	$	3,616	$	32	$	5,047	$	0	$	5,047	$	0
Net earnings (loss)	—	—		177		—		177		0		177		(10)
Other comprehensive income	—	—		—		1,021		1,021		—		1,021		0
Dividends ($0.45 per share)	—	—		(41)		—		(41)		—		(41)		0
Shares issued:
Exercise of stock options	5,250	0		—		—		0		—		0		—
Restricted stock awards	0	—		—		—		—		—		—		—
Other benefit plans	51,955	4		—		—		4		—		4		—
Dividend reinvestment plan	2,733	—		—		—		—		—		—		—
Stock-based compensation expense	—	4		—		—		4		—		4		—
Shares acquired and retired	(1,194,236)	(19)		(57)		—		(76)		—		(76)		—
Shares exchanged — benefit plans	(540)	0		0		—		0		—		0		—
Forfeitures of restricted stock	(33,091)	0		0		—		0		—		0		—
Other	0	—		(10)		—		(10)		0		(10)		10
Balance at June 30, 2020	88,659,407	$	1,388	$	3,685	$	1,053	$	6,126	$	0	$	6,126	$	0

Shareholders’ Equity Redeemable
Common Common Stock
and Capital Retained Accumulated
Other Comp. Noncon-
trolling Total Noncon-
trolling
Shares Surplus Earnings Inc. (Loss) Total Interests Equity Interests
Balance at March 31, 2020 89,827,336 $ 1,399 $ 3,616 $ 32 $ 5,047 $ — $ 5,047 $ —
Net earnings (loss) — — 177 — 177 — 177 (10)
Other comprehensive income — — — 1,021 1,021 — 1,021 —
Dividends ($0.45 per share) — — (41) — (41) — (41) —
Shares issued:
Exercise of stock options 5,250 — — — — — — —
Restricted stock awards — — — — — — — —
Other benefit plans 51,955 4 — — 4 — 4 —
Dividend reinvestment plan 2,733 — — — — — — —
Stock-based compensation expense — 4 — — 4 — 4 —
Shares acquired and retired (1,194,236) (19) (57) — (76) — (76) —
Shares exchanged — benefit plans (540) — — — — — — —
Forfeitures of restricted stock (33,091) — — — — — — —
Other — — (10) — (10) — (10) 10
Balance at June 30, 2020 88,659,407 $ 1,388 $ 3,685 $ 1,053 $ 6,126 $ — $ 6,126 $ —
Balance at March 31, 2019 89,637,713 $ 1,346 $ 3,875 $ 444 $ 5,665 $ — $ 5,665 $ —
Net earnings (loss) — — 210 — 210 — 210 (1)
Other comprehensive income — — — 365 365 — 365 1
Dividends ($1.90 per share) — — (170) — (170) — (170) —
Shares issued:
Exercise of stock options 247,753 11 — — 11 — 11 —
Restricted stock awards — — — — — — — —
Other benefit plans 30,081 3 — — 3 — 3 —
Dividend reinvestment plan 7,596 1 — — 1 — 1 —
Stock-based compensation expense — 6 — — 6 — 6 —
Shares exchanged — benefit plans (3,519) — (1) — (1) — (1) —
Forfeitures of restricted stock (2,023) — — — — — — —
Other — — — — — — — —
Balance at June 30, 2019 89,917,601 $ 1,367 $ 3,914 $ 809 $ 6,090 $ — $ 6,090 $ —

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) — CONTINUED

(Dollars in Millions)

Shareholders’ Equity Redeemable
Common Common Stock
and Capital Retained Accumulated
Other Comp. Noncon-
trolling Total Noncon-
trolling
Shares Surplus Earnings Inc. (Loss) Total Interests Equity Interests
Balance at December 31, 2019 90,303,686 $ 1,397 $ 4,009 $ 863 $ 6,269 $ — $ 6,269 $ —
Cumulative effect of accounting change — — 7 — 7 — 7 —
Net loss — — (124) — (124) — (124) (13)
Other comprehensive income — — — 190 190 — 190 2
Dividends ($0.90 per share) — — (81) — (81) — (81) —
Shares issued:
Exercise of stock options 209,343 9 — — 9 — 9 —
Restricted stock awards 227,867 — — — — — — —
Other benefit plans 66,496 5 — — 5 — 5 —
Dividend reinvestment plan 4,350 — — — — — — —
Stock-based compensation expense — 10 — — 10 — 10 —
Shares acquired and retired (2,020,519) (31) (106) — (137) — (137) —
Shares exchanged — benefit plans (96,394) (2) (9) — (11) — (11) —
Forfeitures of restricted stock (35,422) — — — — — — —
Other — — (11) — (11) — (11) 11
Balance at June 30, 2020 88,659,407 $ 1,388 $ 3,685 $ 1,053 $ 6,126 $ — $ 6,126 $ —
Balance at December 31, 2018 89,291,724 $ 1,334 $ 3,588 $ 48 $ 4,970 $ 2 $ 4,972 $ —
Net earnings (loss) — — 539 — 539 — 539 (4)
Other comprehensive income — — — 761 761 — 761 1
Dividends ($2.30 per share) — — (206) — (206) — (206) —
Shares issued:
Exercise of stock options 400,006 17 — — 17 — 17 —
Restricted stock awards 232,565 — — — — — — —
Other benefit plans 41,143 4 — — 4 — 4 —
Dividend reinvestment plan 9,489 1 — — 1 — 1 —
Stock-based compensation expense — 12 — — 12 — 12 —
Shares exchanged — benefit plans (46,989) (1) (4) — (5) — (5) —
Forfeitures of restricted stock (10,337) — — — — — — —
Other — — (3) — (3) (2) (5) 3
Balance at June 30, 2019 89,917,601 $ 1,367 $ 3,914 $ 809 $ 6,090 $ — $ 6,090 $ —


		Shareholders’ Equity												Redeemable
	Common	Common Stock and Capital		Retained		Accumulated Other Comp.				Noncon- trolling		Total		Noncon- trolling
	Shares	Surplus		Earnings		Income		Total		Interests		Equity		Interests
Balance at December 31, 2020	86,345,246	$	1,367	$	4,149	$	1,273	$	6,789	$	0	$	6,789

Net earnings	—	—		1,421		—		1,421		0		1,421
Other comprehensive loss	—	—		—		(1,083)		(1,083)		—		(1,083)
Dividends ($15.00 per share)	—	—		(1,275)		—		(1,275)		—		(1,275)
Shares issued:
Exercise of stock options	964,744	49		—		—		49		—		49
Restricted stock awards	207,020	—		—		—		—		—		—
Other benefit plans	43,465	5		—		—		5		—		5
Dividend reinvestment plan	36,654	4		—		—		4		—		4
Stock-based compensation expense	—	7		—		—		7		—		7
Shares acquired and retired	(2,674,222)	(43)		(263)		—		(306)		—		(306)
Shares exchanged — benefit plans	(91,364)	(1)		(9)		—		(10)		—		(10)
Forfeitures of restricted stock	(117,616)	—		—		—		—		—		—

Balance at June 30, 2021	84,713,927	$	1,388	$	4,023	$	190	$	5,601	$	0	$	5,601

Balance at December 31, 2019	90,303,686	$	1,397	$	4,009	$	863	$	6,269	$	0	$	6,269	$	0
Cumulative effect of accounting change	—	—		7		—		7		—		7		—
Net loss	—	—		(124)		—		(124)		0		(124)		(13)
Other comprehensive income	—	—		—		190		190		—		190		2
Dividends ($0.90 per share)	—	—		(81)		—		(81)		—		(81)		—
Shares issued:
Exercise of stock options	209,343	9		—		—		9		—		9		—
Restricted stock awards	227,867	—		—		—		—		—		—		—
Other benefit plans	66,496	5		—		—		5		—		5		—
Dividend reinvestment plan	4,350	—		—		—		—		—		—		—
Stock-based compensation expense	—	10		—		—		10		—		10		—
Shares acquired and retired	(2,020,519)	(31)		(106)		—		(137)		—		(137)		—
Shares exchanged — benefit plans	(96,394)	(2)		(9)		—		(11)		—		(11)		—
Forfeitures of restricted stock	(35,422)	—		—		—		—		—		—		—
Other	—	—		(11)		—		(11)		0		(11)		11
Balance at June 30, 2020	88,659,407	$	1,388	$	3,685	$	1,053	$	6,126	$	0	$	6,126	$	0

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AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(In Millions)


		Six months ended June 30,							Six months ended June 30,
		2020		2019			2021		2020
Operating Activities:	Operating Activities:					Operating Activities:
Net earnings (loss), including noncontrolling interests	Net earnings (loss), including noncontrolling interests	$	(137)	$	535	Net earnings (loss), including noncontrolling interests	$	1,421	$	(137)
Adjustments:	Adjustments:					Adjustments:
Depreciation and amortization	Depreciation and amortization	79		72		Depreciation and amortization	133		79
Annuity benefits	Annuity benefits	702		650		Annuity benefits	377		702
Realized (gains) losses on investing activities	Realized (gains) losses on investing activities	346		(241)		Realized (gains) losses on investing activities	(1,141)		346
Net sales of trading securities		11		—
Net (purchases) sales of trading securities						Net (purchases) sales of trading securities	(1)		11
Deferred annuity and life policy acquisition costs	Deferred annuity and life policy acquisition costs	(79)		(120)		Deferred annuity and life policy acquisition costs	(98)		(79)
Change in:	Change in:					Change in:
Reinsurance and other receivables	Reinsurance and other receivables	46		85		Reinsurance and other receivables	(147)		46
Other assets	Other assets	211		(298)		Other assets	250		211
Insurance claims and reserves	Insurance claims and reserves	30		(92)		Insurance claims and reserves	349		30
Payable to reinsurers	Payable to reinsurers	(68)		3		Payable to reinsurers	22		(68)
Other liabilities	Other liabilities	(233)		329		Other liabilities	123		(233)
Managed investment entities’ assets/liabilities	Managed investment entities’ assets/liabilities	116		(3)		Managed investment entities’ assets/liabilities	(22)		116
Other operating activities, net	Other operating activities, net	63		(43)		Other operating activities, net	(296)		63
Net cash provided by operating activities	Net cash provided by operating activities	1,087		877		Net cash provided by operating activities	970		1,087

Investing Activities:	Investing Activities:					Investing Activities:
Purchases of:	Purchases of:					Purchases of:
Fixed maturities	Fixed maturities	(6,121)		(3,761)		Fixed maturities	(5,573)		(6,121)
Equity securities	Equity securities	(324)		(80)		Equity securities	(66)		(324)
Mortgage loans	Mortgage loans	(152)		(43)		Mortgage loans	(90)		(152)
Equity index options and other investments	Equity index options and other investments	(501)		(467)		Equity index options and other investments	(294)		(501)
Real estate, property and equipment	Real estate, property and equipment	(20)		(20)		Real estate, property and equipment	(26)		(20)

Proceeds from:	Proceeds from:					Proceeds from:
Maturities and redemptions of fixed maturities	Maturities and redemptions of fixed maturities	2,343		2,347		Maturities and redemptions of fixed maturities	3,466		2,343
Repayments of mortgage loans	Repayments of mortgage loans	7		38		Repayments of mortgage loans	14		7
Sales of fixed maturities	Sales of fixed maturities	2,777		459		Sales of fixed maturities	665		2,777
Sales of equity securities	Sales of equity securities	342		139		Sales of equity securities	452		342
Sales and settlements of equity index options and other investments	Sales and settlements of equity index options and other investments	404		329		Sales and settlements of equity index options and other investments	530		404
Sales of real estate, property and equipment	Sales of real estate, property and equipment	4		2		Sales of real estate, property and equipment	1		4

Sales of businesses						Sales of businesses	3,547		0
Cash and cash equivalents of businesses sold						Cash and cash equivalents of businesses sold	(2,060)		0
Managed investment entities:	Managed investment entities:					Managed investment entities:
Purchases of investments	Purchases of investments	(603)		(697)		Purchases of investments	(987)		(603)
Proceeds from sales and redemptions of investments	Proceeds from sales and redemptions of investments	540		702		Proceeds from sales and redemptions of investments	1,061		540
Other investing activities, net	Other investing activities, net	8		—		Other investing activities, net	21		8
Net cash used in investing activities		(1,296)		(1,052)
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	661		(1,296)

Financing Activities:	Financing Activities:					Financing Activities:
Annuity receipts	Annuity receipts	2,097		2,744		Annuity receipts	2,403		2,097
Ceded annuity receipts						Ceded annuity receipts	(311)		(78)
Annuity surrenders, benefits and withdrawals	Annuity surrenders, benefits and withdrawals	(1,641)		(1,668)		Annuity surrenders, benefits and withdrawals	(1,931)		(1,641)
Ceded annuity receipts		(78)		—
Ceded annuity surrenders, benefits and withdrawals						Ceded annuity surrenders, benefits and withdrawals	282		0
Net transfers from variable annuity assets	Net transfers from variable annuity assets	28		28		Net transfers from variable annuity assets	34		28
Additional long-term borrowings	Additional long-term borrowings	439		121		Additional long-term borrowings	0		439

Issuances of managed investment entities’ liabilities						Issuances of managed investment entities’ liabilities	1,017		0
Retirements of managed investment entities’ liabilities	Retirements of managed investment entities’ liabilities	(46)		(5)		Retirements of managed investment entities’ liabilities	(1,045)		(46)
Issuances of Common Stock	Issuances of Common Stock	12		19		Issuances of Common Stock	52		12
Repurchases of Common Stock	Repurchases of Common Stock	(137)		—		Repurchases of Common Stock	(306)		(137)
Cash dividends paid on Common Stock	Cash dividends paid on Common Stock	(81)		(205)		Cash dividends paid on Common Stock	(1,271)		(81)

Net cash provided by financing activities		593		1,034
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(1,076)		593
Net Change in Cash and Cash Equivalents	Net Change in Cash and Cash Equivalents	384		859		Net Change in Cash and Cash Equivalents	555		384
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	2,314		1,515		Cash and cash equivalents at beginning of period	2,810		2,314
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	2,698	$	2,374	Cash and cash equivalents at end of period	$	3,365	$	2,698

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO NOTES

Accounting Policies

~~Managed Investment Entities~~

~~Acquisition of Businesses~~

Goodwill and Other Intangibles

Discontinued Operations

Long-Term Debt

Sales of Businesses

Shareholders’ Equity

Segments of Operations

J.K.

~~Long-Term Debt~~Income Taxes

D.E.

Fair Value Measurements

~~Shareholders’ Equity~~

~~Investments~~

~~Income Taxes~~Contingencies

~~Derivatives~~Investments

MM.

~~Contingencies~~Insurance

~~Deferred Policy Acquisition Costs~~Managed Investment Entities

~~Insurance~~

A. Accounting Policies

Basis of Presentation The accompanying consolidated financial statements for American Financial Group, Inc. and its subsidiaries (“AFG”) are unaudited; however, management believes that all adjustments (consisting only of normal recurring accruals unless otherwise disclosed herein) necessary for fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary to be in conformity with U.S. generally accepted accounting principles (“GAAP”).

Certain reclassifications have been made to prior periods to conform to the current year’s ~~presentation.~~presentation including reclassifying the assets and liabilities of the Annuity subsidiaries sold in May 2021 to assets and liabilities of discontinued annuity operations and their earnings to net earnings (loss) from discontinued operations. See Note B — “Discontinued Operations.” All significant intercompany balances and transactions have been eliminated. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements. Events or transactions occurring subsequent to June 30, ~~2020,~~2021, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

Unless otherwise stated, the information in the Notes to the Consolidated Financial Statements relates to AFG’s continuing operations.

The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.

Discontinued Operations Disposals of components of an entity that represent a strategic shift and that have a major effect on a reporting entity’s operations and financial results are reported as discontinued operations.

Fair Value Measurements Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first six months of ~~2020.~~2021.

Credit Losses on Financial Instruments On January 1, 2020, AFG adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides a new loss model for determining credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses considers historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. Expected credit losses, and subsequent increases or decreases in such expected losses, are recorded immediately through net earnings as an allowance that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the balance sheet at the amount expected to be collected. AFG’s portfolio of mortgage loans crosses a wide variety of commercial properties with very strong loan to value ratios and no credit losses in recent years. In addition, the reinsurance used in AFG’s insurance operations is purchased from financially

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

strong (highly rated) reinsurers and the Company has a long history of collecting premiums receivable through various economic cycles. At the date of adoption, the impact of adjusting AFG’s existing allowances for uncollectable mortgage loans, premiums receivable and reinsurance recoverables to the allowances calculated under the new guidance resulted in a reduction in the net allowance, which was recorded as the cumulative effect of an accounting change ($7 million increase in retained earnings at January 1, 2020).

The updated guidance also amended the current other-than-temporary impairment model for available for sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance and limits the amount

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

of credit loss to the difference between a security’s amortized cost basis and its fair value. Subsequent increases or decreases in expected credit losses ~~will be~~are recorded immediately in net earnings through realized gains (losses).

Investments Equity securities other than those accounted for under the equity method are reported at fair value with holding gains and losses generally recorded in realized gains (losses) on securities. However, AFG records holding gains and losses on securities classified as “trading” under previous guidance, its small portfolio of limited partnerships and similar investments carried at fair value and certain other securities classified at purchase as “fair value through net investment income” in net investment income.

Fixed maturity securities classified as “available for sale” are reported at fair value with unrealized gains and losses included in ~~AOCI~~accumulated other comprehensive income (“AOCI”) in AFG’s Balance Sheet. Fixed maturity securities classified as “trading” are reported at fair value with changes in unrealized holding gains or losses during the period included in net investment income. Mortgage loans (net of any allowance) ~~and policy loans~~ are carried primarily at the aggregate unpaid balance.

Premiums and discounts on fixed maturity securities are amortized using the effective interest method. Mortgage-backed securities (“MBS”) are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.

Limited partnerships and similar investments are generally accounted for using the equity method of accounting. Under the equity method, AFG records its share of the earnings or losses of the investee based on when ~~they are~~it is reported by the investee in its financial statements rather than in the period in which the investee declares a dividend. AFG’s share of the earnings or losses from equity method investments is generally recorded on a quarter lag due to the timing of the receipt of the investee’s financial statements. AFG’s equity in the earnings (losses) of limited partnerships and similar investments is included in net investment income.

Realized gains or losses on the disposal of fixed maturity securities are determined on the specific identification basis. When a decline in the value of an available for sale fixed maturity is considered to be other-than-temporary at the balance sheet date, an allowance for credit losses (impairment), including any write-off of accrued interest, is charged to earnings (included in realized gains (losses) on securities). If management can assert that it does not intend to sell the security and it is not more likely than not that it will have to sell it before recovery of its amortized cost basis (net of allowance), then the impairment allowance is separated into two components: (i) the amount related to credit losses (recorded in earnings) and (ii) the amount related to all other factors (recorded in other comprehensive income). The credit-related portion is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the charge. If management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment is recorded in earnings to reduce the amortized cost (net of allowance) of that security to fair value. ~~See~~ ~~“Credit Losses on Financial Instruments”~~ ~~above for a discussion of new guidance adopted on January 1, 2020.~~

~~Derivatives~~ Derivatives included in AFG’s Balance Sheet are recorded at fair value. Changes in fair value of derivatives are included in earnings unless the derivatives are designated and qualify as highly effective cash flow hedges. Derivatives that do not qualify for hedge accounting under GAAP consist primarily of (i) components of certain fixed maturity securities (primarily interest-only and principal-only MBS) and (ii) the equity-based component of certain annuity products (included in annuity benefits accumulated) and related equity index options designed to be consistent with the characteristics of the liabilities and used to mitigate the risk embedded in those annuity products.

To qualify for hedge accounting, at the inception of a derivative contract, AFG formally documents the relationship between the terms of the hedge and the hedged items and its risk management objective. This documentation includes defining how hedge effectiveness and ineffectiveness will be measured on a retrospective and prospective basis.

Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI and are reclassified into earnings when the variability of the cash flows from the hedged items impacts earnings. When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item in the statement of earnings as the cash flows from the hedged item. AFG uses 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.

Goodwill Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net ~~assets.~~assets at the date of acquisition. Goodwill is not amortized, but is subject to an impairment test at least annually. An entity is not required to complete the

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

quantitative annual goodwill impairment test on a reporting unit if the entity elects to perform a qualitative analysis and determines that it is more likely than not that the reporting unit’s fair value exceeds its carrying amount.

Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG’s property and casualty insurance subsidiaries report as assets (i) the estimated reinsurance recoverable on paid and unpaid losses, including an estimate for losses incurred but not reported, and (ii) amounts paid or due to reinsurers applicable to the unexpired terms of policies in force. Payable to reinsurers includes ceded premiums due to reinsurers, as well as ceded premiums retained by ~~AFG’s property and casualty insurance subsidiaries~~AFG under contracts to fund ceded

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

losses as they become due. ~~AFG’s insurance subsidiaries~~AFG also ~~assume~~assumes reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

An AFG subsidiary cedes life insurance policies to a third party on a funds withheld basis whereby the subsidiary retains the assets (securities) associated with the reinsurance contract. Interest is credited to the reinsurer based on the actual investment performance of the retained assets. This reinsurance contract is considered to contain an embedded derivative (that must be adjusted to fair value) because the yield on the payable is based on a specific block of the ceding company’s assets, rather than the overall creditworthiness of the ceding company. AFG determined that changes in the fair value of the underlying portfolio of fixed maturity securities is an appropriate measure of the value of the embedded derivative. The securities related to this contract are classified as “trading.” The adjustment to fair value on the embedded derivative offsets the investment income recorded on the adjustment to fair value of the related trading portfolio.

Certain reinsurance arrangements in AFG’s annuity operations do not transfer significant insurance risk and are therefore accounted for using the deposit method. This accounting treatment results in amounts paid by AFG to the reinsurer to be recorded as a deposit asset. The reinsurance deposit asset is adjusted as amounts are paid or received under the underlying contracts.

Deferred Policy Acquisition Costs (“DPAC”) Policy acquisition costs (principally commissions, premium taxes and certain underwriting and policy issuance costs) directly related to the successful acquisition or renewal of an insurance contract are deferred. ~~DPAC also includes capitalized costs associated with sales inducements offered to fixed annuity policyholders such as enhanced interest rates and premium and persistency bonuses.~~

~~For the property and casualty companies,~~ DPAC is limited based upon recoverability without any consideration for anticipated investment income and is charged against income ratably over the terms of the related policies. A premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses and unamortized acquisition costs exceed the related unearned premiums. A premium deficiency is first recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency and reported with unpaid losses and loss adjustment expenses.

DPAC related to annuities is deferred to the extent deemed recoverable and amortized, with interest, in relation to the present value of actual and expected gross profits on the policies. Expected gross profits consist principally of estimated future investment margin (estimated future net investment income less interest credited on policyholder funds) and surrender, mortality, and other life and annuity policy charges, less death, annuitization and guaranteed withdrawal benefits in excess of account balances and estimated future policy administration expenses. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, such adjustments are reflected as components of realized gains (losses) on securities.

DPAC related to traditional life and health insurance is amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. See ~~“Life, Accident and Health Reserves”~~ ~~below for details on the impact of loss recognition on the accounting for traditional life and health insurance contracts.~~

DPAC includes the present value of future profits on business in force of annuity and life, accident and health insurance companies acquired (“PVFP”). PVFP represents the portion of the costs to acquire companies that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. PVFP is amortized with interest in relation to expected gross profits of the acquired policies for annuities and universal life products and in relation to the premium paying period for traditional life and health insurance products.

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

DPAC and certain other balance sheet amounts related to annuity and life businesses are also adjusted, net of tax, for the change in expense that would have been recorded if the unrealized gains (losses) from securities had actually been realized. These adjustments are included in unrealized gains (losses) on marketable securities, a component of AOCI in AFG’s Balance Sheet.

Managed Investment Entities A company is considered the primary beneficiary of, and therefore must consolidate, a variable interest entity (“VIE”) based primarily on its ability to direct the activities of the VIE that most significantly impact that entity’s economic performance and the obligation to absorb losses of, or receive benefits from, the entity that could potentially be significant to the VIE.

AFG manages, and has investments in, collateralized loan obligations (“CLOs”) that are VIEs (see Note HG — “Managed Investment Entities”). AFG has determined that it is the primary beneficiary of these CLOs because (i) its role as asset manager gives it the power to direct the activities that most significantly impact the economic performance of the CLOs and (ii) through its investment in the CLO debt tranches, it has exposure to CLO losses (limited to the amount AFG invested) and the right to receive CLO benefits that could potentially be significant to the CLOs.

Because AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities, the assets and liabilities of the CLOs are shown separately in AFG’s Balance Sheet. AFG has elected the fair value option for reporting on the CLO assets and liabilities to improve the transparency of financial reporting related to the CLOs. The net gain or loss from accounting for the CLO assets and liabilities at fair value is presented separately in AFG’s Statement of Earnings.

The fair values of a CLO’s assets may differ from the separately measured fair values of its liabilities even though the CLO liabilities only have recourse to the CLO assets. AFG has set the carrying value of the CLO liabilities equal to the fair value of the CLO assets (which have more observable fair values) as an alternative to reporting those liabilities at a separately measured fair value. CLO earnings attributable to AFG’s shareholders are measured by the change in the fair value of AFG’s investments in the CLOs and management fees earned.

Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims represent management’s best estimate and are based upon (i) the accumulation of case estimates for losses reported prior to the close of the accounting period on direct business written; (ii) estimates received from ceding reinsurers and insurance pools and associations; (iii) estimates of unreported losses (including possible development on known claims) based on past experience; (iv) estimates based on experience of expenses for investigating and adjusting claims; and (v) the current state of the law and coverage litigation. Establishing reserves for asbestos, environmental and other mass tort claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage.

Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency and other factors. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the statement of earnings in the period in which determined. Despite the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.

~~Annuity Benefits Accumulated~~ Annuity receipts and benefit payments are recorded as increases or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in this liability for interest credited are charged to annuity benefits expense and decreases for annuity policy charges are recorded in other income. For traditional fixed annuities, the liability for annuity benefits accumulated represents the account value that had accrued to the benefit of the policyholder as of the balance sheet date. For fixed-indexed annuities (“FIAs”), the liability for annuity benefits accumulated includes an embedded derivative that represents the estimated fair value of the index participation with the remaining component representing the discounted value of the guaranteed minimum contract benefits.

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, guaranteed withdrawals and excess benefits expected to be paid on future deaths and annuitizations (“EDAR”). The liabilities for EDAR and guaranteed withdrawals are accrued for and modified using assumptions consistent with those used in determining DPAC and DPAC amortization, except that amounts are determined in relation to the present value of total expected assessments. Total expected assessments consist principally of estimated future investment margin, surrender, mortality, and other life and annuity policy charges, and unearned revenues once they are recognized as income.

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

~~Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati.~~

~~Unearned Revenue~~ Certain upfront policy charges on annuities are deferred as unearned revenue (included in other liabilities) and recognized in net earnings (included in other income) using the same assumptions and estimated gross profits used to amortize DPAC.

~~Life, Accident and Health Reserves~~ Liabilities for future policy benefits under traditional life, accident and health policies are computed using the net level premium method. Computations are based on the original projections of investment yields, mortality, morbidity and surrenders and include provisions for unfavorable deviations unless a loss recognition event (premium deficiency) occurs. Claim reserves and liabilities established for accident and health claims are modified as necessary to reflect actual experience and developing trends.

For long-duration contracts (such as traditional life and long-term care policies), loss recognition occurs when, based on current expectations as of the measurement date, existing contract liabilities plus the present value of future premiums (including reasonably expected rate increases) are not expected to cover the present value of future claims payments and related settlement and maintenance costs (excluding overhead) as well as unamortized acquisition costs. If a block of business is determined to be in loss recognition, a charge is recorded in earnings in an amount equal to the excess of the present value of expected future claims costs and unamortized acquisition costs over existing reserves plus the present value of expected future premiums (with no provision for adverse deviation). The charge is recorded first to reduce unamortized acquisition costs and then as an additional reserve (if unamortized acquisition costs have been reduced to zero).

In addition, reserves for traditional life and long-term care policies are subject to adjustment for loss recognition charges that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in unrealized gains (losses) on marketable securities, a component of AOCI in AFG’s Balance Sheet.

Debt Issuance Costs Debt issuance costs related to AFG’s outstanding debt are presented in its Balance Sheet as a direct reduction in the carrying value of long-term debt and are amortized over the life of the related debt using the effective interest method as a component of interest expense. Debt issuance costs related to AFG’s revolving credit facilities are included in other assets in AFG’s Balance Sheet.

~~Variable Annuity Assets and Liabilities~~ Separate accounts related to variable annuities represent the fair value of deposits invested in underlying investment funds on which AFG earns a fee. Investment funds are selected and may be changed only by the policyholder, who retains all investment risk.

AFG’s variable annuity contracts contain a guaranteed minimum death benefit (“GMDB”) to be paid if the policyholder dies before the annuity payout period commences. In periods of declining equity markets, the GMDB may exceed the value of the policyholder’s account. A GMDB liability is established for future excess death benefits using assumptions together with a range of reasonably possible scenarios for investment fund performance that are consistent with DPAC capitalization and amortization assumptions.

Leases ~~On January 1, 2019, AFG adopted ASU 2016-02, which requires entities that lease assets~~Leases for terms of longer than one year ~~to recognize~~are recognized as assets and liabilities for the rights and obligations created by those leases on the balance sheet based on the present value of contractual cash flows. ~~The adoption of the new guidance did not have a material effect on AFG’s results of operations or liquidity.~~

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At June 30, ~~2020~~2021 AFG has a ~~$184~~$143 million lease liability included in other liabilities and a lease right-of-use asset of ~~$163~~$124 million included in other assets compared to ~~$180~~$159 million and ~~$158~~$139 million, respectively, at December 31, ~~2019.~~2020.

Noncontrolling Interests For balance sheet purposes, noncontrolling interests represent the interests of shareholders other than AFG in consolidated entities. In the statement of earnings, net earnings and losses attributable to noncontrolling interests represents such shareholders’ interest in the earnings and losses of those entities. ~~Noncontrolling interests that are redeemable at the option of the holder are presented separately in the mezzanine section of the balance sheet (between liabilities and equity).~~

Premium Recognition Property and casualty premiums are earned generally over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations. ~~For~~

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traditional life, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. For interest-sensitive life and universal life products, premiums are recorded in a policyholder account, which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses.

Income Taxes Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. A valuation allowance is established to reduce total deferred tax assets to an amount that will more likely than not be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recorded in net earnings in the period that includes the enactment date.

AFG recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on AFG’s reserve for uncertain tax positions are recognized as a component of tax expense.

Stock-Based Compensation All share-based grants are recognized as compensation expense on a straight-line basis over their vesting periods based on their calculated fair value at the date of grant. ~~AFG uses the Black Scholes pricing model to measure the fair value of employee stock options.~~

AFG records excess tax benefits or deficiencies for share-based payments through income tax expense in the statement of earnings. In addition, AFG accounts for forfeitures of awards when they occur.

Benefit Plans AFG provides retirement benefits to qualified employees of participating companies through the AFG 401(k) Retirement and Savings Plan, a defined contribution plan. AFG makes all contributions to the retirement fund portion of the plan and matches a percentage of employee contributions to the savings fund. Company contributions are expensed in the year for which they are declared. AFG and many of its subsidiaries provide health care and life insurance benefits to eligible retirees. AFG also provides postemployment benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. The projected future cost of providing these benefits is expensed over the period employees earn such benefits.

Earnings Per Share Although basic earnings per share only considers shares of common stock outstanding during the period, the calculation of diluted earnings per share includes the following adjustments to weighted average common shares related to stock-based compensation plans: second quarter of 2021 and 2020 ~~and 2019~~ — ~~0.3~~0.6 million and ~~1.3~~0.3 million; first six months of 2021 and 2020 — 0.6 million and ~~2019 —~~ NaN, ~~and 1.2 million,~~ respectively.

There were 0 anti-dilutive potential common shares for the second quarter of 2021 or 2020 or the first six months of 2021 and 0.6 million anti-dilutive potential common shares for the first six months of 2020 due to AFG’s net loss ~~and 0 anti-dilutive potential common shares for the second quarter of 2020 or 2019 or the first six months of 2019.~~attributable to shareholders in that period.

Statement of Cash Flows For cash flow purposes, “investing activities” are defined as making and collecting loans and acquiring and disposing of debt or equity instruments, property and equipment and businesses. “Financing activities” include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. ~~Annuity receipts, surrenders, benefits and withdrawals are also reflected as financing activities.~~ All other activities are considered “operating.” Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements.

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B. ~~Acquisition~~Discontinued Operations

Annuity Business On May 28, 2021, AFG completed the sale of its Annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”) with an effective date of May 31, 2021. MassMutual acquired Great American Life Insurance Company (“GALIC”) and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. In addition to AFG’s annuity operations, these subsidiaries included AFG’s run-off life and long-term care operations. Proceeds from the sale were $3.57 billion (including $32 million in preliminary post-closing adjustments). AFG realized a $656 million net gain on the sale. The sale continues to be subject to post-closing adjustments which are expected to be final by the end of 2021. Beginning with the first quarter of 2021, the results of the Annuity business sold were reported as discontinued operations in accordance with generally accepted accounting principles, which included adjusting prior period results to reflect these operations as discontinued.

Prior to the sale, AFG acquired approximately $480 million in investments accounted for using the equity method and approximately $100 million of directly owned real estate from GALIC.

Details of the assets and liabilities of the Annuity subsidiaries sold were as follows (in millions):


	May 31, 2021		December 31, 2020
Assets of businesses sold:
Cash and cash equivalents	$	2,060	$	1,145
Investments	38,322		38,011
Recoverables from reinsurers	6,748		6,804
Other assets	2,139		1,925
Total assets of discontinued annuity operations	49,269		47,885
Liabilities of businesses sold:
Annuity benefits accumulated	43,690		42,573
Other liabilities	1,801		1,885
Total liabilities of discontinued annuity operations	45,491		44,458
Receivable from AFG for real estate-related investments	0		537
Reclassify AOCI	(913)		(1,071)
Net investment in annuity businesses sold, excluding AOCI	$	2,865	$	2,893

Details of the results of operations for the discontinued annuity operations were (in millions):


	Three months ended June 30,				Six months ended June 30,
	2021 (*)		2020		2021 (*)		2020
Net investment income	$	299	$	382	$	746	$	797
Realized gains (losses) on securities	31		96		112		(127)
Other income	20		32		52		65
Total revenues	350		510		910		735
Annuity benefits	216		426		377		702
Annuity and supplemental insurance acquisition expenses	24		(35)		136		78
Other expenses	27		41		73		80
Total costs and expenses	267		432		586		860
Earnings (loss) before income taxes from discontinued operations	83		78		324		(125)
Provision (credit) for income taxes on operations	18		14		66		(29)
Net earnings (loss) from operations, net of tax	65		64		258		(96)
Gain on sale, net of tax	697		0		656		0
Net earnings (loss) from discontinued operations	$	762	$	64	$	914	$	(96)

(*)Results through the May 31, 2021 effective date of the sale.

Net investment income in the table above excludes $22 million and $7 million in the second quarter of 2021 and 2020 and $51 million and $19 million in first six months of 2021 and 2020, respectively, related to the real estate-related entities that AFG acquired from the discontinued annuity operations prior to the completion of the sale.

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The impact of the sale of the annuity business is shown below (in millions):


	May 31, 2021
Cash proceeds	$	3,537
Receivable from MassMutual	32
Sale related expenses	(8)
Total net proceeds	3,561

Net investment in annuity businesses sold, excluding AOCI	2,865
Reclassify net deferred tax asset	(210)
Pretax gain on sale	906
Income tax expense:
Reclassify net deferred tax asset	210
Tax liabilities triggered by pending sale in the first quarter of 2021	41
Other	(1)
Total income tax expense	250
Net gain on sale	$	656

Summarized cash flows for the discontinued annuity operations were (in millions):


	Six months ended June 30,
	2021		2020
Net cash provided by operating activities	$	87	$	605
Net cash used in investing activities	(1,709)		(1,008)
Net cash provided by financing activities	477		406

Derivatives The vast majority of AFG’s derivatives were held by the sold annuity subsidiaries. The following table summarizes the gains (losses) included in net earnings (loss) from discontinued operations for changes in the fair value of derivatives that do not qualify for hedge accounting for the first six months of 2021 and 2020 (in millions):


	Three months ended June 30,				Six months ended June 30,
Derivative	2021		2020		2021		2020
MBS with embedded derivatives	$	(1)	$	2	$	(1)	$	5

Fixed-indexed and variable-indexed annuities (embedded derivative)	(182)		(601)		(222)		46
Equity index call options	123		383		237		(245)
Equity index put options	3		5		5		(1)
Reinsurance contract (embedded derivative)	0		(3)		1		(1)
	$	(57)	$	(214)	$	20	$	(196)

C. Sales of Businesses

~~Effective~~Annuity Operations See Note B — “Discontinued Operations,” for information on the sale of AFG’s annuity operations.

Neon In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing Neon Underwriting Ltd. and its other Lloyd’s subsidiaries in ~~June 2019, National Interstate,~~run-off. Neon and its predecessor, Marketform, failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008. In December 2020, AFG completed the sale of GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited for proceeds of $6 million. The sale completed AFG’s exit from the Lloyd’s of London insurance market. In the second quarter of 2021, AFG recognized a ~~property and casualty insurance~~pretax gain on sale of a subsidiary of ~~AFG, entered into~~$4 million related to contingent consideration received on the sale of Neon.

Under GAAP accounting guidance, only disposals of components of an ~~agreement with Atlas Financial Holdings, Inc. (“AFH”) to become the exclusive underwriter of AFH’s paratransit book of business. National Interstate estimates~~entity that the majority of AFH’s $110 million paratransit business will be eligible for quotation under this arrangement following inception of the agreement. Under the terms of the agreement (as extended in 2020), AFH will actrepresent a strategic shift and that have a major effect on a reporting entity’s operations and financial results are reported as an underwriting manager for National Interstate until at least August 2021 for fleets with seven or fewer vehicles and until November 2020 for accounts with eight or more vehicles, after which time National Interstate is entitled to acquire the renewal rights for the business from AFH for a purchase price equal to 15% of the in force gross written premiums at that date. The majority of the purchase price ultimately paid for the renewal rights will be recorded as an intangible renewal rights asset and will be amortized over the estimated life of the business acquired. In connection with the transaction, AFG was granted a five-year warrant to acquire approximately 2.4 million shares of AFH (19.9% at the acquisition date). The estimated fair value of the warrant was approximately $1 million at the date it was received.discontinued operations. Because

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AFG’s primary business continues to be commercial property and casualty insurance, as well as the immaterial expected impact on AFG’s ongoing results of operations, the sale of Neon was not reported as a discontinued operation.

~~On June 30, 2020, AFG acquired 100% of~~Revenues, costs and expenses, and earnings before income taxes for the indirect noncontrolling interest in Neon, its United Kingdom-based Lloyd’s insurer from certain former and current Neon executives for cash based on the nominal fair value of the interest acquired as determined by a third-party valuation firm.subsidiaries sold were (in millions):


	Three months ended		Six months ended
	June 30, 2020		June 30, 2020
Net earned premiums	$	61	$	132
Loss and loss adjustment expenses	66		106
Commissions and other underwriting expenses	38		70
Underwriting loss	(43)		(44)

Net investment income	0		(6)
Other income and expenses, net	1		(2)
Loss before income taxes and noncontrolling interests	$	(42)	$	(52)

C.D. Segments of Operations

Subsequent to the sale of its annuity operations, see Note B — “Discontinued Operations,” AFG manages its business as 32 segments: ~~(i)~~ Property and casualty insurance ~~(ii) Annuity~~ and ~~(iii)~~ Other, which includes holding company costs ~~revenues and costs of AFG’s limited insurance operations outside of property and casualty insurance and annuity segments,~~ and operations attributable to the noncontrolling interests of the managed investment entities.

AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes physical damage and liability coverage for buses and trucks, inland and ocean marine, agricultural-related products and other commercial property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, executive and professional liability, general liability, umbrella and excess liability, specialty coverages in targeted markets, customized programs for small to mid-sized businesses and workers’ compensation insurance, and (iii) Specialty financial, which includes risk management insurance programs for lending and leasing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), fidelity and surety products and trade credit insurance. Premiums and underwriting profit included under Other specialty represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments and amortization of deferred gains on retroactive reinsurance transactions related to the sales of businesses in prior years. AFG’s ~~annuity business sells traditional fixed and indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets. AFG’s~~ reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.

~~The following tables (in millions) show AFG’s revenues and earnings before income taxes by segment and sub-segment.~~

Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation $ 390 $ 379 $ 776 $ 740
Specialty casualty 547 634 1,103 1,263
Specialty financial 144 151 300 297
Other specialty 42 36 82 73
Other lines (a) 61 — 132 —
Total premiums earned 1,184 1,200 2,393 2,373
Net investment income (b) 72 124 165 228
Other income 3 2 8 5
Total property and casualty insurance 1,259 1,326 2,566 2,606
Annuity:
Net investment income 384 451 806 886
Other income 30 30 65 58
Total annuity 414 481 871 944
Other 74 97 136 194
Total revenues before realized gains (losses) 1,747 1,904 3,573 3,744
Realized gains (losses) on securities 204 56 (347) 240
Total revenues $ 1,951 $ 1,960 $ 3,226 $ 3,984

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The following tables (in millions) show AFG’s revenues and earnings before income taxes by segment and sub-segment.


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	453	$	390	$	847	$	776
Specialty casualty	588		547		1,159		1,103
Specialty financial	157		144		314		300
Other specialty	52		42		103		82
Other lines (a)	0		61		0		132
Total premiums earned	1,250		1,184		2,423		2,393
Net investment income (b)	143		72		302		165
Other income	1		3		5		8
Total property and casualty insurance	1,394		1,259		2,730		2,566
Other (c)	90		78		186		154
Total revenues before realized gains (losses)	1,484		1,337		2,916		2,720
Realized gains (losses) on securities	43		108		120		(220)
Realized gain on subsidiary	4		0		4		0
Total revenues	$	1,531	$	1,445	$	3,040	$	2,500

(a)Represents premiums earned in the Neon exited lines (which were sold in December 2020) during the second quarter and first six months of 2020. ~~Neon’s $89 million and $177 million in earned premiums during the second quarter and first six months of 2019, respectively, are included in the Specialty casualty sub-segment.~~

(b)Includes income of less than $1 million for the second quarter of 2020 and a loss of $6 million in the Neon exited lines in the first six months of 2020 (primarily from the change in fair value of equity securities).

Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Earnings (Loss) Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation $ 33 $ 4 $ 60 $ 43
Specialty casualty 27 47 79 83
Specialty financial — 21 17 34
Other specialty (6) (12) (13) (12)
Other lines (a) (45) (1) (47) (2)
Total underwriting 9 59 96 146
Investment and other income, net (b) 65 115 149 210
Total property and casualty insurance 74 174 245 356
Annuity (17) 71 12 161
Other (c) (43) (42) (80) (85)
Total earnings before realized gains (losses) and income taxes 14 203 177 432
Realized gains (losses) on securities 204 56 (347) 240
Total earnings (loss) before income taxes $ 218 $ 259 $ (170) $ 672
(c)Includes $22 million and $7 million in the second quarter of 2021 and 2020 and $51 million and $19 million in first six months of 2021 and 2020, respectively, in investment income from real estate-related entities acquired from the discontinued annuity operations prior to closing of the sale.

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	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Earnings (Loss) Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	62	$	33	$	118	$	60
Specialty casualty	71		27		127		79
Specialty financial	21		0		46		17
Other specialty	(1)		(6)		(4)		(13)
Other lines (a)	(1)		(45)		(1)		(47)
Total underwriting	152		9		286		96
Investment and other income, net (b)	136		65		290		149
Total property and casualty insurance	288		74		576		245
Other (c)	(47)		(42)		(77)		(70)
Total earnings before realized gains (losses) and income taxes	241		32		499		175
Realized gains (losses) on securities	43		108		120		(220)
Realized gain on subsidiary	4		0		4		0
Total earnings (loss) before income taxes	$	288	$	140	$	623	$	(45)

(a)Includes an underwriting loss of $43 million in the second quarter of 2020 and $44 million in the first six months of 2020 in the Neon exited lines. ~~Neon’s $4 million and $14 million underwriting losses in the second quarter and first six months of 2019, respectively, are included in the Specialty casualty sub-segment.~~

(b)Includes $1 million and $10 million in the second quarter and first six months of 2020, respectively, in net expenses from the Neon exited lines, before noncontrolling interest.

(c)Includes holding company interest and ~~expenses.~~expenses and $22 million and $2 million (net of DAC) in the second quarter of 2021 and 2020 and $51 million and $8 million (net of DAC) in the first six months of 2021 and 2020, respectively, of earnings from the real estate-related entities acquired from the discontinued annuity operations prior to closing of the sale.

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D.E. 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, 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, asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), certain non-affiliated common stocks ~~equity index options~~ 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 at the valuation date. Financial instruments 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 are classified as Level 3.

As discussed in Note A — “Accounting Policies — Managed Investment Entities,” AFG has set the carrying value of its CLO liabilities equal to the fair value of the CLO assets (which have more observable fair values) as an alternative to reporting those liabilities at separately measured fair values. As a result, the CLO liabilities are categorized within the fair value hierarchy on the same basis (proportionally) as the related CLO assets. Since the portion of the CLO liabilities allocated to Level 3 is derived from the fair value of the CLO assets, these amounts are excluded from the progression of Level 3 financial instruments.

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~~investment professionals 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 services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the service to value specific securities.

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Assets and liabilities of continuing operations measured and carried at fair value in the financial statements are summarized below (in millions):

Level 1 Level 2 Level 3 Total
June 30, 2020
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies $ 167 $ 28 $ 15 $ 210
States, municipalities and political subdivisions — 6,844 107 6,951
Foreign government — 184 — 184
Residential MBS — 3,066 156 3,222
Commercial MBS — 856 33 889
Collateralized loan obligations — 4,300 207 4,507
Other asset-backed securities — 5,987 1,328 7,315
Corporate and other 28 23,215 1,525 24,768
Total AFS fixed maturities 195 44,480 3,371 48,046
Trading fixed maturities 1 96 — 97
Equity securities 1,075 75 452 1,602
Equity index call options — 605 — 605
Assets of managed investment entities (“MIE”) 151 4,225 17 4,393
Variable annuity assets (separate accounts) (*) — 577 — 577
Other assets — derivatives — 124 — 124
Total assets accounted for at fair value $ 1,422 $ 50,182 $ 3,840 $ 55,444
Liabilities:
Liabilities of managed investment entities $ 145 $ 4,074 $ 17 $ 4,236
Derivatives in annuity benefits accumulated — — 3,675 3,675
Other liabilities — derivatives — 10 — 10
Total liabilities accounted for at fair value $ 145 $ 4,084 $ 3,692 $ 7,921
December 31, 2019
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies $ 151 $ 43 $ 15 $ 209
States, municipalities and political subdivisions — 6,858 105 6,963
Foreign government — 172 — 172
Residential MBS — 2,987 173 3,160
Commercial MBS — 892 35 927
Collateralized loan obligations — 4,265 15 4,280
Other asset-backed securities — 5,842 1,286 7,128
Corporate and other 29 21,879 1,758 23,666
Total AFS fixed maturities 180 42,938 3,387 46,505
Trading fixed maturities 2 111 — 113
Equity securities 1,433 67 437 1,937
Equity index call options — 924 — 924
Assets of managed investment entities 213 4,506 17 4,736
Variable annuity assets (separate accounts) (*) — 628 — 628
Other assets — derivatives — 50 — 50
Total assets accounted for at fair value $ 1,828 $ 49,224 $ 3,841 $ 54,893
Liabilities:
Liabilities of managed investment entities $ 206 $ 4,349 $ 16 $ 4,571
Derivatives in annuity benefits accumulated — — 3,730 3,730
Other liabilities — derivatives — 10 — 10
Total liabilities accounted for at fair value $ 206 $ 4,359 $ 3,746 $ 8,311

~~(*)Variable annuity liabilities equal the fair value of variable annuity assets.~~


	Level 1		Level 2		Level 3		Total
June 30, 2021
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	218	$	3	$	0	$	221
States, municipalities and political subdivisions	0		2,024		36		2,060
Foreign government	0		208		0		208
Residential MBS	0		770		28		798
Commercial MBS	0		130		0		130
Collateralized loan obligations	0		1,378		6		1,384
Other asset-backed securities	0		2,044		315		2,359
Corporate and other	4		2,348		220		2,572
Total AFS fixed maturities	222		8,905		605		9,732
Trading fixed maturities	0		26		0		26
Equity securities	672		48		245		965
Assets of managed investment entities (“MIE”)	269		4,802		15		5,086

Total assets of continuing operations accounted for at fair value	$	1,163	$	13,781	$	865	$	15,809
Liabilities:
Liabilities of managed investment entities	$	266	$	4,749	$	14	$	5,029

Total liabilities of continuing operations accounted for at fair value	$	266	$	4,749	$	14	$	5,029

December 31, 2020
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	195	$	3	$	0	$	198
States, municipalities and political subdivisions	0		2,273		39		2,312
Foreign government	0		176		0		176
Residential MBS	0		877		38		915
Commercial MBS	0		90		2		92
Collateralized loan obligations	0		1,046		16		1,062
Other asset-backed securities	0		1,742		305		2,047
Corporate and other	4		2,140		138		2,282
Total AFS fixed maturities	199		8,347		538		9,084
Trading fixed maturities	0		24		0		24
Equity securities	665		48		176		889
Assets of managed investment entities	217		4,733		21		4,971

Total assets of continuing operations accounted for at fair value	$	1,081	$	13,152	$	735	$	14,968
Liabilities:
Liabilities of managed investment entities	$	215	$	4,678	$	21	$	4,914

Total liabilities of continuing operations accounted for at fair value	$	215	$	4,678	$	21	$	4,914

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

Approximately 7%5% of the total assets of continuing operations carried at fair value at June 30, ~~2020,~~2021, were Level 3 assets. Approximately ~~37%~~24% ($~~1.40 billion)~~206 million) of ~~the~~those 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. Approximately $68 million (8%) of the Level 3 assets were priced by pricing services where either a single price was not corroborated, prices varied enough among the providers, or other market factors led management to determine these securities be classified as Level 3 assets.

Internally developed Level 3 asset fair values of continuing operations represent approximately ~~$1.87 billion~~$491 million (57%) of the total fair value of Level 3 assets at June 30, ~~2020. Of this amount, approximately $736 million relates to~~2021. Internally priced fixed ~~maturity securities that were~~maturities are priced using ~~management’s best estimate~~a variety of aninputs, including appropriate credit ~~spread~~spreads over the treasury yield (of a similar duration) ~~to discount future expected cash flows using a third-party model. The credit spread applied by management is the significant unobservable input. For this group~~, trade information and prices of 41comparable securities ~~the average spread used was 389 basis points over the reference treasury yield~~ and ~~the spreads ranged from 53 basis points to 1,253 basis points (approximately 70%~~other security specific features (such as optional early redemption). Internally developed prices for equity securities are based primarily on financial information of the ~~spreads were between 200~~entities invested in and ~~700 basis points). Had management used higher spreads, the fair value~~sales of this group of securities would have been lower. Conversely, if the spreads used were lower, the fair values would have been higher. For the remainder of the internally developed prices, any justifiable changes in unobservable inputs used to determine fair value would not have resulted in a material change in AFG’s financial position.

The derivatives embedded in AFG’s fixed-indexed and variable-indexed annuity liabilities are measured using a discounted cash flow approach and had a fair value of $3.68 billion at June 30, 2020. The following table presents information about the unobservable inputs used by management in determining fair value of these Level 3 liabilities. See ~~Note F — “Derivatives.”~~

~~Unobservable Input~~

~~Range~~

~~Adjustment for insurance subsidiary’s credit risk~~

~~0.2% – 3.5% over the risk-free rate~~

~~Risk margin for uncertainty in cash flows~~

~~0.80% reduction in the discount rate~~

~~Surrenders~~

~~4% – 21% of indexed account value~~

~~Partial surrenders~~

~~2% – 9% of indexed account value~~

~~Annuitizations~~

~~0.1% – 1% of indexed account value~~

~~Deaths~~

~~1.9% – 10.7% of indexed account value~~

~~Budgeted option costs~~

~~2.5% – 3.3% of indexed account value~~

The range of adjustments for insurance subsidiary’s credit risk is based on the Moody’s corporate A2 bond index and 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 and variable-indexed annuity products with an expected range of 7% to 10% in the majority of future calendar years (4% to 21% over all periods). Increasing the budgeted option cost or risk margin for uncertainty in cash flow assumptions in the table above would increase the fair value of the fixed-indexed and variable-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.

comparable

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

companies. Since internally developed Level 3 asset fair values represent less than 10% of AFG’s Shareholders’ Equity, any justifiable changes in unobservable inputs used to determine internally developed fair values would not have a material impact on AFG’s financial position.

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the second quarter and first six months of ~~2020~~2021 and ~~2019~~2020 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																											Total realized/unrealized gains (losses) included in
				Balance at March 31, 2020			Net earnings (loss)			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Balance at June 30, 2020			Balance at March 31, 2021			Net earnings (loss)			OCI			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Sale of annuity business			Balance at June 30, 2021
AFS fixed maturities:	AFS fixed maturities:																								AFS fixed maturities:
U.S. government agency	U.S. government agency	$	15		$	1		$	(1)		$	—		$	—		$	—		$	—		$	15	U.S. government agency	$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
State and municipal	State and municipal	105			—			5			—			(1)			—			(2)			107		State and municipal	39			0			0			0			(3)			0			0			0			36
Residential MBS	Residential MBS	163			—			4			—			(4)			—			(7)			156		Residential MBS	27			0			0			0			(1)			3			(1)			0			28
Commercial MBS	Commercial MBS	32			1			—			—			—			—			—			33		Commercial MBS	0			0			0			0			0			0			0			0			0
Collateralized loan obligations	Collateralized loan obligations	168			(3)			13			—			—			29			—			207		Collateralized loan obligations	6			0			0			0			0			0			0			0			6
Other asset-backed securities	Other asset-backed securities	1,030			—			4			198			(25)			121			—			1,328		Other asset-backed securities	326			0			1			38			(49)			0			(1)			0			315
Corporate and other	Corporate and other	1,548			1			47			48			(20)			4			(103)			1,525		Corporate and other	204			(2)			0			22			(2)			1			(3)			0			220
Total AFS fixed maturities	Total AFS fixed maturities	3,061			—			72			246			(50)			154			(112)			3,371		Total AFS fixed maturities	602			(2)			1			60			(55)			4			(5)			0			605
Equity securities	Equity securities	436			(1)			—			17			—			—			—			452		Equity securities	227			18			0			12			(5)			0			(7)			0			245
Assets of MIE	Assets of MIE	16			(1)			—			—			—			2			—			17		Assets of MIE	14			(1)			0			1			0			1			0			0			15
Assets of discontinued annuity operations																									Assets of discontinued annuity operations	2,806			15			21			13			(136)			0			0			(2,719)			0
Total Level 3 assets	Total Level 3 assets	$	3,513		$	(2)		$	72		$	263		$	(50)		$	156		$	(112)		$	3,840	Total Level 3 assets	$	3,649		$	30		$	22		$	86		$	(196)		$	5		$	(12)		$	(2,719)		$	865

Embedded derivatives		$	(3,099)		$	(601)		$	—		$	(46)		$	71		$	—		$	—		$	(3,675)
Liabilities of discontinued annuity operations																									Liabilities of discontinued annuity operations	$	(3,954)		$	(183)		$	0		$	(72)		$	66		$	0		$	0		$	4,143		$	0
Total Level 3 liabilities (*)	Total Level 3 liabilities (*)	$	(3,099)		$	(601)		$	—		$	(46)		$	71		$	—		$	—		$	(3,675)	Total Level 3 liabilities (*)	$	(3,954)		$	(183)		$	0		$	(72)		$	66		$	0		$	0		$	4,143		$	0


					Total realized/unrealized gains (losses) included in																											Total realized/unrealized gains (losses) included in
				Balance at March 31, 2019			Net earnings (loss)			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Balance at June 30, 2019			Balance at March 31, 2020			Net earnings (loss)			OCI			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Balance at June 30, 2020
AFS fixed maturities:	AFS fixed maturities:																								AFS fixed maturities:
U.S. government agency	U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—		$	—		$	8	U.S. government agency	$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
State and municipal	State and municipal	63			—			2			—			(1)			18			—			82		State and municipal	41			0			1			0			(1)			0			0			41
Residential MBS	Residential MBS	169			4			—			—			(4)			2			(32)			139		Residential MBS	44			0			1			0			(1)			0			(2)			42
Commercial MBS	Commercial MBS	55			2			—			—			(2)			—			(5)			50		Commercial MBS	6			0			0			0			0			0			0			6
Collateralized loan obligations	Collateralized loan obligations	37			—			—			—			—			13			—			50		Collateralized loan obligations	44			(1)			3			0			0			9			0			55
Other asset-backed securities	Other asset-backed securities	633			—			3			17			(18)			—			(268)			367		Other asset-backed securities	238			1			1			39			(6)			20			0			293
Corporate and other	Corporate and other	2,346			—			20			229			(161)			2			(422)			2,014		Corporate and other	172			0			2			8			(4)			0			0			178
Total AFS fixed maturities	Total AFS fixed maturities	3,311			6			25			246			(186)			35			(727)			2,710		Total AFS fixed maturities	545			0			8			47			(12)			29			(2)			615
Equity securities	Equity securities	354			(1)			—			19			(1)			6			—			377		Equity securities	155			1			0			8			0			0			0			164
Assets of MIE	Assets of MIE	20			(1)			—			—			—			—			—			19		Assets of MIE	16			(1)			0			0			0			2			0			17
Assets of discontinued annuity operations																									Assets of discontinued annuity operations	2,797			(2)			64			208			(38)			125			(110)			3,044
Total Level 3 assets	Total Level 3 assets	$	3,685		$	4		$	25		$	265		$	(187)		$	41		$	(727)		$	3,106	Total Level 3 assets	$	3,513		$	(2)		$	72		$	263		$	(50)		$	156		$	(112)		$	3,840

Embedded derivatives		$	(3,247)		$	(251)		$	—		$	(101)		$	58		$	—		$	—		$	(3,541)
Liabilities of discontinued annuity operations																									Liabilities of discontinued annuity operations	$	(3,099)		$	(601)		$	0		$	(46)		$	71		$	0		$	0		$	(3,675)
Total Level 3 liabilities (*)	Total Level 3 liabilities (*)	$	(3,247)		$	(251)		$	—		$	(101)		$	58		$	—		$	—		$	(3,541)	Total Level 3 liabilities (*)	$	(3,099)		$	(601)		$	0		$	(46)		$	71		$	0		$	0		$	(3,675)

(*)As previously discussed, these tables exclude the portion of MIE liabilities allocated to Level 3, which are derived from the fair value of the MIE assets.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED


					Total realized/unrealized gains (losses) included in																											Total realized/unrealized gains (losses) included in
				Balance at December 31, 2019			Net earnings (loss)			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Balance at June 30, 2020			Balance at December 31, 2020			Net earnings (loss)			OCI			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Sale of annuity business			Balance at June 30, 2021
AFS fixed maturities:	AFS fixed maturities:																								AFS fixed maturities:
U.S. government agency	U.S. government agency	$	15		$	2		$	(2)		$	—		$	—		$	—		$	—		$	15	U.S. government agency	$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
State and municipal	State and municipal	105			—			6			—			(2)			—			(2)			107		State and municipal	39			0			0			0			(3)			0			0			0			36
Residential MBS	Residential MBS	173			5			(8)			—			(9)			2			(7)			156		Residential MBS	38			(3)			0			6			(1)			6			(18)			0			28
Commercial MBS	Commercial MBS	35			1			—			—			(3)			—			—			33		Commercial MBS	2			0			0			0			0			0			(2)			0			0
Collateralized loan obligations	Collateralized loan obligations	15			(10)			15			—			—			187			—			207		Collateralized loan obligations	16			1			(1)			0			(1)			0			(9)			0			6
Other asset-backed securities	Other asset-backed securities	1,286			(14)			(7)			275			(203)			134			(143)			1,328		Other asset-backed securities	305			0			1			90			(72)			14			(23)			0			315
Corporate and other	Corporate and other	1,758			(2)			20			167			(56)			9			(371)			1,525		Corporate and other	138			(1)			(1)			106			(20)			3			(5)			0			220
Total AFS fixed maturities	Total AFS fixed maturities	3,387			(18)			24			442			(273)			332			(523)			3,371		Total AFS fixed maturities	538			(3)			(1)			202			(97)			23			(57)			0			605
Equity securities	Equity securities	437			(25)			—			23			—			17			—			452		Equity securities	176			71			0			24			(19)			0			(7)			0			245
Assets of MIE	Assets of MIE	17			(2)			—			—			—			2			—			17		Assets of MIE	21			3			0			2			0			1			(12)			0			15
Assets of discontinued annuity operations																									Assets of discontinued annuity operations	2,971			85			(21)			209			(328)			32			(229)			(2,719)			0
Total Level 3 assets	Total Level 3 assets	$	3,841		$	(45)		$	24		$	465		$	(273)		$	351		$	(523)		$	3,840	Total Level 3 assets	$	3,706		$	156		$	(22)		$	437		$	(444)		$	56		$	(305)		$	(2,719)		$	865

Embedded derivatives		$	(3,730)		$	46		$	—		$	(124)		$	133		$	—		$	—		$	(3,675)
Liabilities of discontinued annuity operations																									Liabilities of discontinued annuity operations	$	(3,933)		$	(222)		$	0		$	(146)		$	158		$	0		$	0		$	4,143		$	0
Total Level 3 liabilities (*)	Total Level 3 liabilities (*)	$	(3,730)		$	46		$	—		$	(124)		$	133		$	—		$	—		$	(3,675)	Total Level 3 liabilities (*)	$	(3,933)		$	(222)		$	0		$	(146)		$	158		$	0		$	0		$	4,143		$	0


					Total realized/unrealized gains (losses) included in																											Total realized/unrealized gains (losses) included in
				Balance at December 31, 2018			Net earnings (loss)			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Balance at June 30, 2019			Balance at December 31, 2019			Net earnings (loss)			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3			Transfer out of Level 3			Balance at June 30, 2020
AFS fixed maturities:	AFS fixed maturities:																								AFS fixed maturities:
U.S. government agency	U.S. government agency	$	9		$	—		$	—		$	—		$	(1)		$	—		$	—		$	8	U.S. government agency	$	0		$	0		$	0		$	0		$	0		$	0		$	0		$	0
State and municipal	State and municipal	59			—			7			—			(2)			18			—			82		State and municipal	40			0			2			0			(1)			0			0			41
Residential MBS	Residential MBS	197			9			(5)			—			(10)			2			(54)			139		Residential MBS	45			1			(1)			0			(2)			1			(2)			42
Commercial MBS	Commercial MBS	56			2			—			—			(3)			—			(5)			50		Commercial MBS	6			0			0			0			0			0			0			6
Collateralized loan obligations	Collateralized loan obligations	116			(3)			6			—			—			13			(82)			50		Collateralized loan obligations	1			(1)			3			0			0			52			0			55
Other asset-backed securities	Other asset-backed securities	731			—			5			92			(132)			—			(329)			367		Other asset-backed securities	256			(5)			1			61			(47)			27			0			293
Corporate and other	Corporate and other	1,996			2			51			661			(249)			2			(449)			2,014		Corporate and other	223			(1)			(1)			32			(11)			2			(66)			178
Total AFS fixed maturities	Total AFS fixed maturities	3,164			10			64			753			(397)			35			(919)			2,710		Total AFS fixed maturities	571			(6)			4			93			(61)			82			(68)			615
Equity securities	Equity securities	336			—			—			20			(1)			22			—			377		Equity securities	161			(17)			0			11			0			9			0			164
Assets of MIE	Assets of MIE	21			(2)			—			—			—			—			—			19		Assets of MIE	17			(2)			0			0			0			2			0			17
Assets of discontinued annuity operations																									Assets of discontinued annuity operations	3,092			(20)			20			361			(212)			258			(455)			3,044
Total Level 3 assets	Total Level 3 assets	$	3,521		$	8		$	64		$	773		$	(398)		$	57		$	(919)		$	3,106	Total Level 3 assets	$	3,841		$	(45)		$	24		$	465		$	(273)		$	351		$	(523)		$	3,840

Embedded derivatives		$	(2,720)		$	(713)		$	—		$	(213)		$	105		$	—		$	—		$	(3,541)
Liabilities of discontinued annuity operations																									Liabilities of discontinued annuity operations	$	(3,730)		$	46		$	0		$	(124)		$	133		$	0		$	0		$	(3,675)
Total Level 3 liabilities (*)	Total Level 3 liabilities (*)	$	(2,720)		$	(713)		$	—		$	(213)		$	105		$	—		$	—		$	(3,541)	Total Level 3 liabilities (*)	$	(3,730)		$	46		$	0		$	(124)		$	133		$	0		$	0		$	(3,675)

(*)As previously discussed, these tables exclude the portion of MIE liabilities allocated to Level 3, which are derived from the fair value of the MIE assets.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Fair Value of Financial Instruments The carrying value and fair value of financial instruments of continuing operations that are not carried at fair value in the financial statements are summarized below (in millions):


		Carrying		Fair Value															Carrying		Fair Value
		Value		Total		Level 1		Level 2		Level 3			Value		Total		Level 1		Level 2		Level 3
June 30, 2020
June 30, 2021												June 30, 2021
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	2,698	$	2,698	$	2,698	$	—	$	—	Cash and cash equivalents	$	3,365	$	3,365	$	3,365	$	0	$	0
Mortgage loans	Mortgage loans	1,475		1,492		—		—		1,492		Mortgage loans	461		479		0		0		479
Policy loans		158		158		—		—		158
Total financial assets not accounted for at fair value	Total financial assets not accounted for at fair value	$	4,331	$	4,348	$	2,698	$	—	$	1,650	Total financial assets not accounted for at fair value	$	3,826	$	3,844	$	3,365	$	0	$	479
Financial liabilities:
Annuity benefits accumulated (*)		$	41,137	$	42,462	$	—	$	—	$	42,462

Long-term debt	Long-term debt	1,912		2,060		—		2,057		3		Long-term debt	$	1,963	$	2,294	$	0	$	2,291	$	3
Total financial liabilities not accounted for at fair value	Total financial liabilities not accounted for at fair value	$	43,049	$	44,522	$	—	$	2,057	$	42,465	Total financial liabilities not accounted for at fair value	$	1,963	$	2,294	$	0	$	2,291	$	3

December 31, 2019
December 31, 2020												December 31, 2020
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	2,314	$	2,314	$	2,314	$	—	$	—	Cash and cash equivalents	$	1,665	$	1,665	$	1,665	$	0	$	0
Mortgage loans	Mortgage loans	1,329		1,346		—		—		1,346		Mortgage loans	377		382		0		0		382
Policy loans		164		164		—		—		164
Total financial assets not accounted for at fair value	Total financial assets not accounted for at fair value	$	3,807	$	3,824	$	2,314	$	—	$	1,510	Total financial assets not accounted for at fair value	$	2,042	$	2,047	$	1,665	$	0	$	382
Financial liabilities:
Annuity benefits accumulated (*)		$	40,159	$	40,182	$	—	$	—	$	40,182

Long-term debt	Long-term debt	1,473		1,622		—		1,619		3		Long-term debt	$	1,963	$	2,325	$	0	$	2,322	$	3
Total financial liabilities not accounted for at fair value	Total financial liabilities not accounted for at fair value	$	41,632	$	41,804	$	—	$	1,619	$	40,185	Total financial liabilities not accounted for at fair value	$	1,963	$	2,325	$	0	$	2,322	$	3

~~(*)~~

F. Investments

~~Excludes $255 million and $247 million of life contingent annuities in the payout phase~~

Available for sale fixed maturities held by AFG’s continuing operations at June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020, consisted of the following (in millions):


	Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized				Net Unrealized		Fair Value
					Gains		Losses
June 30, 2021
Fixed maturities:
U.S. Government and government agencies	$	218	$	0	$	4	$	(1)	$	3	$	221
States, municipalities and political subdivisions	1,967		0		93		0		93		2,060
Foreign government	206		0		2		0		2		208
Residential MBS	747		0		53		(2)		51		798
Commercial MBS	127		0		3		0		3		130
Collateralized loan obligations	1,382		1		5		(2)		3		1,384
Other asset-backed securities	2,341		7		29		(4)		25		2,359
Corporate and other	2,493		1		83		(3)		80		2,572
Total fixed maturities	$	9,481	$	9	$	272	$	(12)	$	260	$	9,732

December 31, 2020
Fixed maturities:
U.S. Government and government agencies	$	192	$	0	$	6	$	0	$	6	$	198
States, municipalities and political subdivisions	2,196		0		116		0		116		2,312
Foreign government	172		0		4		0		4		176
Residential MBS	859		0		57		(1)		56		915
Commercial MBS	89		0		3		0		3		92
Collateralized loan obligations	1,065		3		4		(4)		0		1,062
Other asset-backed securities	2,040		7		27		(13)		14		2,047
Corporate and other	2,199		2		88		(3)		85		2,282
Total fixed maturities	$	8,812	$	12	$	305	$	(21)	$	284	$	9,084

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

~~E. Investments~~

Available for sale fixed maturities that are included in assets of discontinued annuity operations at ~~June 30, 2020 and~~ December 31, ~~2019,~~2020, consisted of the following (in millions):


		Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized						Net Unrealized				Fair Value	Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized						Net Unrealized				Fair Value
																							Gains			Losses						Net Unrealized	Fair Value
June 30, 2020
December 31, 2020														December 31, 2020
Fixed maturities:	Fixed maturities:													Fixed maturities:
U.S. Government and government agencies	U.S. Government and government agencies	$	196	$	—	$	14	$	—	$	14	$	210	U.S. Government and government agencies	$	39	$	0	$	5	$	0		$	5				$	44
States, municipalities and political subdivisions	States, municipalities and political subdivisions	6,373		—		581		(3)		578		6,951		States, municipalities and political subdivisions	3,053		0		370		(2)			368			3,421
Foreign government	Foreign government	176		—		8		—		8		184		Foreign government	31		0		4		0			4			35
Residential MBS	Residential MBS	3,000		5		239		(12)		227		3,222		Residential MBS	1,953		3		194		(4)			190			2,140
Commercial MBS	Commercial MBS	852		—		39		(2)		37		889		Commercial MBS	659		0		40		(1)			39			698
Collateralized loan obligations	Collateralized loan obligations	4,625		20		16		(114)		(98)		4,507		Collateralized loan obligations	3,491		10		23		(13)			10			3,491
Other asset-backed securities	Other asset-backed securities	7,400		14		118		(189)		(71)		7,315		Other asset-backed securities	5,098		11		142		(53)			89			5,176
Corporate and other	Corporate and other	23,048		22		1,879		(137)		1,742		24,768		Corporate and other	17,272		4		1,874		(24)			1,850			19,118
Total fixed maturities	Total fixed maturities	$	45,670	$	61	$	2,894	$	(457)	$	2,437	$	48,046	Total fixed maturities	$	31,596	$	28	$	2,652	$	(97)		$	2,555		$	34,123

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 held by AFG’s continuing operations, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 (in millions):


		June 30, 2020												December 31, 2019																	June 30, 2021						December 31, 2020
							Fair Value							Fair Value										Fair Value										Fair Value
		Actual Cost					over (under)			Actual Cost				over (under)			Actual Cost							over (under)				Actual Cost						over (under)
						Fair Value			Cost					Fair Value					Cost	Actual Cost				Fair Value						Actual Cost			Fair Value			Cost
Common stocks	Common stocks	$	1,178	$	885		$	(293)		$	1,164	$	1,283	$	119	Common stocks	$	455				$	106			$	516							$	(6)
Perpetual preferred stocks	Perpetual preferred stocks	730		717			(13)			640		654		14		Perpetual preferred stocks	358					404				46				369			379			10
Total equity securities carried at fair value	Total equity securities carried at fair value	$	1,908	$	1,602		$	(306)		$	1,804	$	1,937	$	133	Total equity securities carried at fair value	$	813		$	965			$	152			$	885		$	889		$	4

Investments accounted for using the equity method held by AFG’s continuing operations, by category, carrying value and net investment income are as follows (in millions):


	Carrying Value				Net Investment Income
	June 30, 2021		December 31, 2020		Three months ended June 30,				Six months ended June 30,
					2021		2020		2021		2020
Real estate-related investments (*)	$	1,014	$	915	$	45	$	13	$	99	$	38
Private equity	314		266		24		(13)		45		(17)
Private debt	50		54		2		(6)		5		(4)
Total investments accounted for using the equity method	$	1,378	$	1,235	$	71	$	(6)	$	149	$	17

(*)Includes 88% invested in multi-family properties, 2% in single family properties and 10% in other property types as of June 30, 2021 and 87% invested in multi-family properties, 2% in single family properties and 11% in other property types as of December 31, 2020.

The earnings (losses) from these investments are generally reported on a three-month lag due to the timing required to obtain the necessary information from the funds. AFG regularly reviews and discusses fund performance with the fund managers to corroborate the reasonableness of the underlying reported asset values and to assess whether any events have occurred within the lag period that may materially affect the valuation of these investments.

With respect to partnerships and similar investments, AFG’s continuing operations had unfunded commitments of $275 million and $290 million as of June 30, 2021 and December 31, 2020, respectively.

Assets of discontinued annuity operations includes investments accounted for under the equity method of $646 million as of December 31, 2020.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The following ~~tables show~~table shows gross unrealized losses (dollars in millions) on available for sale fixed maturities held by AFG’s continuing operations 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																		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			Unrealized Loss				Fair Value			Fair Value as % of Cost					Unrealized Loss				Fair Value			Fair Value as % of Cost
June 30, 2020
June 30, 2021																			June 30, 2021
Fixed maturities:	Fixed maturities:																		Fixed maturities:
U.S. Government and government agencies	U.S. Government and government agencies	$	—		$	4		100	%		$	—		$	—		—	%	U.S. Government and government agencies	$		(1)			$	109		99		%			$	0			$	0		0		%
States, municipalities and political subdivisions	States, municipalities and political subdivisions	(3)			112			97	%		—			18			100	%	States, municipalities and political subdivisions	0			6				100	%			0				17				100	%
Foreign government	Foreign government	—			2			100	%		—			—			—	%	Foreign government	0			35				100	%			0				0				0	%
Residential MBS	Residential MBS	(10)			328			97	%		(2)			34			94	%	Residential MBS	(1)			82				99	%			(1)				10				91	%
Commercial MBS	Commercial MBS	(2)			57			97	%		—			—			—	%	Commercial MBS	0			0				0	%			0				0				0	%
Collateralized loan obligations	Collateralized loan obligations	(44)			1,732			98	%		(70)			1,510			96	%	Collateralized loan obligations	(1)			297				100	%			(1)				235				100	%
Other asset-backed securities	Other asset-backed securities	(176)			2,918			94	%		(13)			133			91	%	Other asset-backed securities	(1)			288				100	%			(3)				92				97	%
Corporate and other	Corporate and other	(121)			2,826			96	%		(16)			204			93	%	Corporate and other	(2)			119				98	%			(1)				55				98	%
Total fixed maturities	Total fixed maturities	$	(356)		$	7,979		96	%		$	(101)		$	1,899		95	%	Total fixed maturities	$	(6)		$	936			99	%			$	(6)			$	409			99	%

December 31, 2019
December 31, 2020																			December 31, 2020
Fixed maturities:	Fixed maturities:																		Fixed maturities:
U.S. Government and government agencies	U.S. Government and government agencies	$	—		$	16		100	%		$	—		$	11		100	%	U.S. Government and government agencies	$	0		$	23			100	%			$	0			$	0			0	%
States, municipalities and political subdivisions	States, municipalities and political subdivisions	(3)			254			99	%		(1)			82			99	%	States, municipalities and political subdivisions	0			39				100	%			0				10				100	%
Foreign government	Foreign government	(1)			70			99	%		—			—			—	%	Foreign government	0			7				100	%			0				0				0	%
Residential MBS	Residential MBS	(4)			509			99	%		(1)			69			99	%	Residential MBS	(1)			86				99	%			0				7				100	%
Commercial MBS	Commercial MBS	—			17			100	%		—			—			—	%	Commercial MBS	0			7				100	%			0				5				100	%
Collateralized loan obligations	Collateralized loan obligations	(11)			1,284			99	%		(26)			1,728			99	%	Collateralized loan obligations	(1)			192				99	%			(3)				366				99	%
Other asset-backed securities	Other asset-backed securities	(12)			1,211			99	%		(8)			123			94	%	Other asset-backed securities	(10)			465				98	%			(3)				92				97	%
Corporate and other	Corporate and other	(13)			1,100			99	%		(8)			211			96	%	Corporate and other	(2)			133				99	%			(1)				17				94	%
Total fixed maturities	Total fixed maturities	$	(44)		$	4,461		99	%		$	(44)		$	2,224		98	%	Total fixed maturities	$	(14)		$	952			99	%			$	(7)			$	497			99	%

At June 30, ~~2020,~~2021, the gross unrealized losses on fixed maturities of ~~$457~~$12 million relate to ~~993~~366 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately ~~83%~~69% of the gross unrealized loss and ~~86%~~91% 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.

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 June 30, ~~2020.~~2021.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

~~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~~are measured based on the present value of expected future cash flows compared to amortized ~~cost; however,~~cost. Beginning January 1, 2020, impairment losses are ~~now~~ recognized through an allowance instead of ~~a direct writedown of~~directly writing down the amortized cost. ~~Under the new guidance, recoveries~~Recoveries of previously impaired amounts are recorded as an immediate reversal of all or a portion of the ~~allowance instead of accreted as investment income through a yield adjustment.~~allowance. 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) result in increases or decreases in the allowance, which are recorded through realized gains (losses) on securities. A progression of the allowance for expected credit losses on fixed maturity securities held by AFG’s continuing operations is shown below (in millions):


		Structured Securities (*)		Corporate and Other		Total			Structured Securities (*)		Corporate and Other		Total
Balance at March 31		$	37	$	24	$	61
Balance at March 31, 2021								Balance at March 31, 2021	$	9	$	1	$	10
Initial allowance for purchased securities with credit deterioration								Initial allowance for purchased securities with credit deterioration	0		0		0
Provision for expected credit losses on securities with no previous allowance								Provision for expected credit losses on securities with no previous allowance	0		0		0
Additions (reductions) to previously recognized expected credit losses								Additions (reductions) to previously recognized expected credit losses	(1)		1		0
Reductions due to sales or redemptions								Reductions due to sales or redemptions	0		(1)		(1)
Balance at June 30, 2021								Balance at June 30, 2021	$	8	$	1	$	9

Balance at March 31, 2020								Balance at March 31, 2020	$	11	$	3	$	14
Initial allowance for purchased securities with credit deterioration								Initial allowance for purchased securities with credit deterioration	0		0		0
Provision for expected credit losses on securities with no previous allowance								Provision for expected credit losses on securities with no previous allowance	1		1		2
Additions (reductions) to previously recognized expected credit losses								Additions (reductions) to previously recognized expected credit losses	(1)		(1)		(2)
Reductions due to sales or redemptions								Reductions due to sales or redemptions	0		0		0
Balance at June 30, 2020								Balance at June 30, 2020	$	11	$	3	$	14

Balance at January 1, 2021								Balance at January 1, 2021	$	10	$	2	$	12

Initial allowance for purchased securities with credit deterioration	Initial allowance for purchased securities with credit deterioration	1		—		1		Initial allowance for purchased securities with credit deterioration	0		0		0
Provision for expected credit losses on securities with no previous allowance	Provision for expected credit losses on securities with no previous allowance	2		4		6		Provision for expected credit losses on securities with no previous allowance	0		0		0
Additions (reductions) to previously recognized expected credit losses	Additions (reductions) to previously recognized expected credit losses	(1)		(6)		(7)		Additions (reductions) to previously recognized expected credit losses	(2)		1		(1)
Reductions due to sales or redemptions	Reductions due to sales or redemptions	—		—		—		Reductions due to sales or redemptions	0		(2)		(2)
Balance at June 30		$	39	$	22	$	61
Balance at June 30, 2021								Balance at June 30, 2021	$	8	$	1	$	9

Balance at January 1		$	—	$	—	$	—
Balance at January 1, 2020								Balance at January 1, 2020	$	0	$	0	$	0
Impact of adoption of new accounting policy	Impact of adoption of new accounting policy	—		—		—		Impact of adoption of new accounting policy	0		0		0
Initial allowance for purchased securities with credit deterioration	Initial allowance for purchased securities with credit deterioration	1		—		1		Initial allowance for purchased securities with credit deterioration	0		0		0
Provision for expected credit losses on securities with no previous allowance	Provision for expected credit losses on securities with no previous allowance	39		28		67		Provision for expected credit losses on securities with no previous allowance	12		4		16
Additions (reductions) to previously recognized expected credit losses	Additions (reductions) to previously recognized expected credit losses	(1)		(6)		(7)		Additions (reductions) to previously recognized expected credit losses	(1)		(1)		(2)
Reductions due to sales or redemptions	Reductions due to sales or redemptions	—		—		—		Reductions due to sales or redemptions	0		0		0
Balance at June 30		$	39	$	22	$	61
Balance at June 30, 2020								Balance at June 30, 2020	$	11	$	3	$	14

(*)Includes mortgage-backed securities, collateralized loan obligations and other asset-backed securities.

In the second quarter and first six months of 2021 and 2020, ~~AFG purchased 2 residential mortgage-backed~~AFG’s continuing operations did not purchase any securities with expected credit losses. ~~In aggregate at the time~~

Table of ~~purchase, the par value was $8 million, the purchase price was $6 million and both the allowance for credit losses and the discount were $1 million.~~Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturities as of June 30, ~~2020~~2021 (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									Amortized			Fair Value
				Cost, net (*)			Amount			%			Cost, net (*)			Amount			%
Maturity	Maturity									Maturity
One year or less	One year or less	$	1,851		$	1,874		4	%	One year or less	$	1,045		$	1,059		11	%
After one year through five years	After one year through five years	10,604			11,212			23	%	After one year through five years	2,553			2,656			27	%
After five years through ten years	After five years through ten years	14,125			15,485			32	%	After five years through ten years	1,002			1,053			11	%
After ten years	After ten years	3,191			3,542			7	%	After ten years	283			293			3	%
		29,771			32,113			66	%		4,883			5,061			52	%
Collateralized loan obligations and other ABS (average life of approximately 4 years)		11,991			11,822			25	%
MBS (average life of approximately 3-1/2 years)		3,847			4,111			9	%
Collateralized loan obligations and other ABS (average life of approximately 3-1/2 years)										Collateralized loan obligations and other ABS (average life of approximately 3-1/2 years)	3,715			3,743			38	%
MBS (average life of approximately 3 years)										MBS (average life of approximately 3 years)	874			928			10	%
Total	Total	$	45,609		$	48,046		100	%	Total	$	9,472		$	9,732		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 June 30, 2021 or December 31, 2020.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

~~There were no investments in individual issuers that exceeded 10% of shareholders’ equity at June 30, 2020 or December 31, 2019.~~

Net Unrealized Gain on ~~Marketable~~Fixed Maturity Securities 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
June 30, 2021
Net unrealized gain on fixed maturities	$	260	$	(55)	$	205










December 31, 2020
Net unrealized gain on fixed maturities held by continuing operations	$	284	$	(60)	$	224

Discontinued operations (*):
Net unrealized gain on fixed maturities	$	2,555	$	(536)	$	2,019
Deferred policy acquisition costs — annuity segment	(934)		196		(738)
Annuity benefits accumulated	(324)		68		(256)
Life, accident and health reserves	(3)		0		(3)
Unearned revenue	11		(2)		9
Total net unrealized gain from discontinued operations	1,305		(274)		1,031
Total net unrealized gain on fixed maturity securities	$	1,589	$	(334)	$	1,255

(*)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 AFG’s discontinued 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
June 30, 2020
Net unrealized gain on:
Fixed maturities — annuity segment (*) $ 2,031 $ (427) $ 1,604
Fixed maturities — all other 406 (85) 321
Total fixed maturities 2,437 (512) 1,925
Deferred policy acquisition costs — annuity segment (877) 184 (693)
Annuity benefits accumulated (269) 57 (212)
Life, accident and health reserves (1) — (1)
Unearned revenue 14 (3) 11
Total net unrealized gain on marketable securities $ 1,304 $ (274) $ 1,030
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.~~incurred in AFG’s continuing operations.

Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Investment income:
Fixed maturities $ 485 $ 478 $ 976 $ 947
Equity securities:
Dividends 16 22 33 44
Change in fair value (a) (b) 9 7 (3) 18
Equity in earnings of partnerships and similar investments (54) 45 (29) 66
Other 18 34 46 59
Gross investment income 474 586 1,023 1,134
Investment expenses (6) (6) (11) (12)
Net investment income (b) $ 468 $ 580 $ 1,012 $ 1,122

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Investment income:
Fixed maturities	$	72	$	77	$	144	$	159
Equity securities:
Dividends	7		8		15		18
Change in fair value (a) (b)	8		9		34		(8)
Equity in earnings of partnerships and similar investments	71		(6)		149		17
Other	8		1		14		9
Gross investment income	166		89		356		195
Investment expenses	(2)		(1)		(4)		(3)
Net investment income (b)	$	164	$	88	$	352	$	192

(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 second quarter and first six months of 2020 includes income of less than $1 million and losses of $6 million ~~respectively,~~ on investments held by the companies that comprise the Neon exited lines due primarily to the $7 million loss ~~in first quarter of 2020~~ recorded on equity securities that are carried at fair value through net investment income.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Realized gains (losses) and changes in unrealized appreciation (depreciation) from continuing operations included in AOCI related to fixed maturity ~~and equity security investments~~securities are summarized as follows (in millions):

Three months ended June 30, 2020 Three months ended June 30, 2019
Realized gains (losses) Realized gains (losses)
Before Impairments Impairment Allowance Total Change in Unrealized Before Impairments Impairments Total Change in Unrealized
Fixed maturities $ 3 $ 1 $ 4 $ 2,343 $ 11 $ (3) $ 8 $ 789
Equity securities 202 — 202 — 44 — 44 —
Mortgage loans and other investments — — — — 3 — 3 —
Other (*) (2) — (2) (1,059) — 1 1 (349)
Total pretax 203 1 204 1,284 58 (2) 56 440
Tax effects (43) — (43) (270) (12) 1 (11) (92)
Net of tax $ 160 $ 1 $ 161 $ 1,014 $ 46 $ (1) $ 45 $ 348
Six months ended June 30, 2020 Six months ended June 30, 2019
Realized gains (losses) Realized gains (losses)
Before Impairments Impairment Allowance Total Change in Unrealized Before Impairments Impairments Total Change in Unrealized
Fixed maturities $ 32 $ (60) $ (28) $ 456 $ 14 $ (6) $ 8 $ 1,642
Equity securities (333) — (333) — 226 — 226 —
Mortgage loans and other investments 4 — 4 — 3 — 3 —
Other (*) (5) 15 10 (243) 1 2 3 (719)
Total pretax (302) (45) (347) 213 244 (4) 240 923
Tax effects 63 10 73 (45) (51) 1 (50) (194)
Net of tax $ (239) $ (35) $ (274) $ 168 $ 193 $ (3) $ 190 $ 729

~~(*)Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.~~


	Three months ended June 30, 2021								Three months ended June 30, 2020
	Realized gains (losses)								Realized gains (losses)
	Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairment Allowance		Total		Change in Unrealized
Fixed maturities	$	1	$	0	$	1	$	20	$	1	$	0	$	1	$	257
Equity securities	42		0		42		0		107		0		107		0
Mortgage loans and other investments	0		0		0		0		0		0		0		0
Total pretax	43		0		43		20		108		0		108		257
Tax effects	(9)		0		(9)		(4)		(23)		0		(23)		(54)
Net of tax	$	34	$	0	$	34	$	16	$	85	$	0	$	85	$	203

	Six months ended June 30, 2021								Six months ended June 30, 2020
	Realized gains (losses)								Realized gains (losses)
	Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairment Allowance		Total		Change in Unrealized
Fixed maturities	$	0	$	1	$	1	$	(24)	$	4	$	(14)	$	(10)	$	(20)
Equity securities	119		0		119		0		(211)		0		(211)		0
Mortgage loans and other investments	0		0		0		0		1		0		1		0
Total pretax	119		1		120		(24)		(206)		(14)		(220)		(20)
Tax effects	(25)		0		(25)		5		43		3		46		4
Net of tax	$	94	$	1	$	95	$	(19)	$	(163)	$	(11)	$	(174)	$	(16)

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 from continuing operations during the second quarter and first six months of ~~2020~~2021 and ~~2019~~2020 on securities that were still owned at June 30, ~~2020~~2021 and June 30, ~~2019~~2020 as follows (in millions):


		Three months ended June 30,						Six months ended June 30,							Three months ended June 30,				Six months ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020
Included in realized gains (losses)	Included in realized gains (losses)	$	161	$	38	$	(340)	$	193	Included in realized gains (losses)	$	36	$	86	$	98	$	(206)
Included in net investment income	Included in net investment income	10		7		4		18		Included in net investment income	8		9		34		(1)
		$	171	$	45	$	(336)	$	211		$	44	$	95	$	132	$	(207)

Gross realized gains and losses (excluding changes in impairment ~~write-downs~~allowance and mark-to-market of derivatives) on available for sale fixed maturity investment transactions from continuing operations consisted of the following (in millions):

Six months ended June 30,
2020 2019
Gross gains $ 56 $ 11
Gross losses (31) (9)

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

~~F. 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):~~

June 30, 2020 December 31, 2019
Derivative Balance Sheet Line Asset Liability Asset Liability
MBS with embedded derivatives Fixed maturities $ 171 $ — $ 102 $ —
Fixed-indexed and variable-indexed annuities (embedded derivative) Annuity benefits accumulated — 3,675 — 3,730
Equity index call options Equity index call options 605 — 924 —
Equity index put options Other liabilities — 5 — 1
Reinsurance contracts (embedded derivative) Other liabilities — 5 — 4
$ 776 $ 3,685 $ 1,026 $ 3,735

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.

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 ($284 million at June 30, 2020 and $577 million at December 31, 2019) 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 option assets and put option liabilities 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 the second quarter and first six months of 2020 and 2019 (in millions):

Three months ended June 30, Six months ended June 30,
Derivative Statement of Earnings Line 2020 2019 2020 2019
MBS with embedded derivatives Realized gains (losses) on securities $ 3 $ 6 $ 7 $ 12
Fixed-indexed and variable-indexed annuities (embedded derivative) Annuity benefits (601) (251) 46 (713)
Equity index call options Annuity benefits 383 148 (245) 514
Equity index put options Annuity benefits 5 — (1) 1
Reinsurance contract (embedded derivative) Net investment income (3) (1) (1) (2)
$ (213) $ (98) $ (194) $ (188)


	Six months ended June 30,
	2021		2020
Gross gains	$	3	$	5
Gross losses	(1)		(3)

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

~~Derivatives Designated and Qualifying as Cash Flow Hedges~~ As of June 30, 2020, AFG has 9 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 December 2023 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 $1.68 billion at June 30, 2020 compared to $1.98 billion at December 31, 2019, reflecting the scheduled amortization discussed above, the termination of a swap with a total notional amount of $83 million in the first quarter of 2020, the termination of 2 swaps with a total notional amount of $166 million in the second quarter of 2020 and the expiration of a swap with a notional amount of $44 million in the second quarter of 2020. The fair value of the interest rate swaps in an asset position and included in other assets was $124 million at June 30, 2020 and $50 million at December 31, 2019. The fair value of the interest rate swaps in a liability position and included in other liabilities was 0 at June 30, 2020 and $5 million at December 31, 2019. 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 $11 million in the second quarter of 2020 and $1 million in the second quarter of 2019 and income of $23 million and losses of $1 million for the first six months of 2020 and 2019, respectively. AFG had a $13 million liability to return collateral related to these swaps (included in other liabilities) at June 30, 2020 and a $20 million receivable for collateral posted related to these swaps (included in other assets) at December 31, 2019.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

G. ~~Deferred Policy Acquisition Costs~~

~~A progression of deferred policy acquisition costs is presented below (in millions):~~

P&C Annuity and Other
Deferred Deferred Sales Consolidated
Costs Costs Inducements PVFP Subtotal Unrealized (*) Total Total
Balance at March 31, 2020 $ 310 $ 1,264 $ 73 $ 34 $ 1,371 $ (108) $ 1,263 $ 1,573
Additions 148 30 — — 30 — 30 178
Amortization:
Periodic amortization (160) 50 (1) (1) 48 — 48 (112)
Included in realized gains — (2) 1 — (1) — (1) (1)
Foreign currency translation (2) — — — — — — (2)
Change in unrealized — — — — — (818) (818) (818)
Balance at June 30, 2020 $ 296 $ 1,342 $ 73 $ 33 $ 1,448 $ (926) $ 522 $ 818
Balance at March 31, 2019 $ 312 $ 1,336 $ 84 $ 40 $ 1,460 $ (325) $ 1,135 $ 1,447
Additions 194 56 — — 56 — 56 250
Amortization:
Periodic amortization (175) (19) (4) (2) (25) — (25) (200)
Included in realized gains — — 1 — 1 — 1 1
Foreign currency translation (1) — — — — — — (1)
Change in unrealized — — — — — (294) (294) (294)
Balance at June 30, 2019 $ 330 $ 1,373 $ 81 $ 38 $ 1,492 $ (619) $ 873 $ 1,203
Balance at December 31, 2019 $ 322 $ 1,303 $ 75 $ 36 $ 1,414 $ (699) $ 715 $ 1,037
Additions 306 79 1 — 80 — 80 386
Amortization:
Periodic amortization (330) (48) (4) (3) (55) — (55) (385)
Included in realized gains — 8 1 — 9 — 9 9
Foreign currency translation (2) — — — — — — (2)
Change in unrealized — — — — — (227) (227) (227)
Balance at June 30, 2020 $ 296 $ 1,342 $ 73 $ 33 $ 1,448 $ (926) $ 522 $ 818
Balance at December 31, 2018 $ 299 $ 1,285 $ 86 $ 42 $ 1,413 $ (30) $ 1,383 $ 1,682
Additions 381 120 1 — 121 — 121 502
Amortization:
Periodic amortization (350) (34) (7) (4) (45) — (45) (395)
Included in realized gains — 2 1 — 3 — 3 3
Foreign currency translation — — — — — — — —
Change in unrealized — — — — — (589) (589) (589)
Balance at June 30, 2019 $ 330 $ 1,373 $ 81 $ 38 $ 1,492 $ (619) $ 873 $ 1,203

~~(*)Adjustments to DPAC related to net unrealized gains/losses on securities and cash flow hedges.~~

The present value of future profits (“PVFP”) amounts in the table above are net of $157 million and $154 million of accumulated amortization at June 30, 2020 and December 31, 2019, respectively.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

H. Managed Investment Entities

AFG is the investment manager and its subsidiaries have investments ranging from ~~15.0%~~4.5% to ~~100.0%~~46.8% of the most subordinate debt tranche of 1112 active collateralized loan obligation entities (“CLOs”), which are considered variable interest entities. ~~AFG’s subsidiaries~~AFG also ~~own~~owns portions of the senior debt tranches of certain of these CLOs. Upon formation between 2012 and ~~2018,~~2020, these entities issued securities in various senior and subordinate classes and invested the proceeds primarily in secured bank loans, which serve as collateral for the debt securities issued by each CLO. None of the collateral was purchased from AFG. AFG’s investments in the subordinate debt tranches of these entities receive residual income from the CLOs only after the CLOs pay expenses (including management fees to AFG) and interest on and returns of capital to senior levels of debt securities. There are no contractual requirements for AFG to provide additional funding for these entities. AFG has not provided and does not intend to provide any financial support to these entities.

AFG’s maximum exposure to economic loss on the CLOs that it manages is limited to its investment in those CLOs, which had an aggregate fair value of ~~$157~~$57 million (including ~~$72~~$45 million invested in the most subordinate tranches) at June 30, ~~2020,~~2021, and ~~$165~~$200 million at December 31, ~~2019.~~2020.

During the first six months of 2020, AFG subsidiaries purchased $57 million face amount of senior ~~debt~~ and subordinate tranches of existing CLOs for $39 million. During ~~both~~ the first six months of ~~2020~~2021 and ~~2019,~~2020, AFG subsidiaries received $38 million and less than $1 million, respectively, in sale and redemption proceeds from its CLO investments.

The revenues and expenses of the CLOs are separately identified in AFG’s Statement of Earnings, after the elimination of management fees and earnings attributable to shareholders of AFG as measured by the change in the fair value of AFG’s investments in the CLOs. Selected financial information related to the CLOs is shown below (in millions):


		Three months ended June 30,									Six months ended June 30,										Three months ended June 30,								Six months ended June 30,
				2020			2019			2020			2019			2021				2020				2021				2020
Investment in CLO tranches at end of period		$	157		$	191		$	157		$	191
Gains (losses) on change in fair value of assets/liabilities (a):
Investment in CLO tranches at end of period:													Investment in CLO tranches at end of period:
Held by continuing operations													Held by continuing operations	$		57			$	39			$	57			$	39
Held by discontinued annuity operations													Held by discontinued annuity operations	0			118				0				118
Total													Total	$	57		$	157			$	57			$	157
Gains (losses) on change in fair value of assets/liabilities (*):													Gains (losses) on change in fair value of assets/liabilities (*):
Assets	Assets	363			—			(316)			87		Assets	$	21		$	363			$	67			$	(316)
Liabilities	Liabilities	(368)			(2)			268			(89)		Liabilities	(15)			(366)				(59)				300
Management fees paid to AFG	Management fees paid to AFG	4			4			8			7		Management fees paid to AFG	4			4				8				8
CLO earnings (losses) attributable to AFG shareholders (b)		2			5			(34)			16
CLO earnings (losses) attributable to AFG shareholders:													CLO earnings (losses) attributable to AFG shareholders:
From continuing operations													From continuing operations	$	7		$	0			$	12			$	(11)
From discontinued annuity operations													From discontinued annuity operations	7			2				20				(23)
Total													Total	$	14		$	2			$	32			$	(34)

~~(a)~~(*)Included in revenues ~~in AFG’s Statement of Earnings.~~

~~(b)Included in earnings before income taxes~~ in AFG’s Statement of Earnings.

The aggregate unpaid principal balance of the CLOs’ fixed maturity investments exceeded the fair value of the investments by ~~$439~~$69 million and ~~$146~~$150 million at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by ~~$379~~$182 million and ~~$129~~$141 million at those dates. The CLO assets include loans with an aggregate fair value of ~~$42~~$5 million at June 30, ~~2020~~2021 and ~~$10~~$11 million at December 31, ~~2019,~~2020, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of ~~$92~~$15 million at June 30, ~~2020~~2021 and ~~$25~~$28 million at December 31, ~~2019)~~2020).

In addition to the CLOs that it manages, ~~AFG~~AFG’s continuing operations had investments in CLOs that are managed by third parties (therefore not consolidated), which are included in available for sale fixed maturity securities and had a fair value of ~~$4.51~~$1.38 billion at June 30, ~~2020~~2021 and ~~$4.28~~$1.06 billion at December 31, ~~2019.~~2020.

I.H. Goodwill and Other Intangibles

There were 0 changes in the goodwill balance from AFG’s continuing operations of ~~$207~~$176 million during the first six months of 2020. Included in other assets in AFG’s Balance Sheet is $37 million at June 30, 2020 and $43 million at December 31, 2019 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of $56 million and $50 million, respectively. Amortization of intangibles was $3 million in both the second quarters of 2020 and 2019, and $6 million in both the first six months of 2020 and 2019.2021.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

J.Included in other assets in AFG’s Balance Sheet is $30 million at June 30, 2021 and $34 million at December 31, 2020 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of $65 million and $62 million, respectively. Amortization of intangibles was $1 million and $3 million in the second quarter of 2021 and 2020, respectively, and $4 million and $6 million in the first six months of 2021 and 2020, respectively.

I. Long-Term Debt

Long-term debt consisted of the following (in millions):


		June 30, 2020										December 31, 2019											June 30, 2021				December 31, 2020
		Principal		Discount and Issue Costs		Carrying Value		Principal		Discount and Issue Costs		Carrying Value			Principal		Discount and Issue Costs		Carrying Value		Principal		Discount and Issue Costs		Carrying Value
Direct Senior Obligations of AFG:	Direct Senior Obligations of AFG:													Direct Senior Obligations of AFG:
4.50% Senior Notes due June 2047	4.50% Senior Notes due June 2047	$	590	$	(2)	$	588	$	590	$	(2)	$	588	4.50% Senior Notes due June 2047	$	590	$	(2)	$	588	$	590	$	(2)	$	588
3.50% Senior Notes due August 2026	3.50% Senior Notes due August 2026	425		(3)		422		425		(3)		422		3.50% Senior Notes due August 2026	425		(3)		422		425		(3)		422
5.25% Senior Notes due April 2030	5.25% Senior Notes due April 2030	300		(7)		293		—		—		—		5.25% Senior Notes due April 2030	300		(6)		294		300		(6)		294
Other	Other	3		—		3		3		—		3		Other	3		0		3		3		0		3
		1,318		(12)		1,306		1,018		(5)		1,013			1,318		(11)		1,307		1,318		(11)		1,307

Direct Subordinated Obligations of AFG:	Direct Subordinated Obligations of AFG:													Direct Subordinated Obligations of AFG:
4.50% Subordinated Debentures due September 2060														4.50% Subordinated Debentures due September 2060	200		(5)		195		200		(5)		195
5.125% Subordinate Debentures due December 2059	5.125% Subordinate Debentures due December 2059	200		(6)		194		200		(6)		194		5.125% Subordinate Debentures due December 2059	200		(6)		194		200		(6)		194
6% Subordinated Debentures due November 2055		150		(5)		145		150		(5)		145
5.625% Subordinated Debentures due June 2060	5.625% Subordinated Debentures due June 2060	150		(4)		146		—		—		—		5.625% Subordinated Debentures due June 2060	150		(4)		146		150		(4)		146
5.875% Subordinated Debentures due March 2059	5.875% Subordinated Debentures due March 2059	125		(4)		121		125		(4)		121		5.875% Subordinated Debentures due March 2059	125		(4)		121		125		(4)		121
		625		(19)		606		475		(15)		460			675		(19)		656		675		(19)		656
		$	1,943	$	(31)	$	1,912	$	1,493	$	(20)	$	1,473		$	1,993	$	(30)	$	1,963	$	1,993	$	(30)	$	1,963

In April and May 2020, AFG issued $300 million in 5.25% Senior Notes due in 2030 and $150 million in 5.625% Subordinated Debentures due in June 2060, respectively. The net proceeds of these offerings will be used for general corporate purposes, which includes repurchases of outstanding common shares.

~~AFG has 0 scheduled~~Scheduled principal payments on ~~its long-term~~ debt for the balance of ~~2020 or in~~2021, the subsequent five ~~years.~~years and thereafter are as follows: 2021 — NaN; 2022 — NaN; 2023 — NaN; 2024 — NaN; 2025 — NaN; 2026 — $425 million and thereafter — $1.57 billion.

K.J. Shareholders’ Equity

AFG is authorized to issue 12.5 million shares of Voting Preferred Stock and 12.5 million shares of Nonvoting Preferred Stock, each without par value.

Accumulated Other Comprehensive Income, Net of Tax (“AOCI”) Comprehensive income is defined as all changes in shareholders’ equity except those arising from transactions with shareholders. Comprehensive income includes net earnings and other comprehensive income, which consists primarily of changes in net unrealized gains or losses on available for sale securities.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The progression of the components of accumulated other comprehensive income follows (in millions):


				Other Comprehensive Income (Loss)																							Other Comprehensive Income (Loss)
																	AOCI Beginning Balance		Pretax		Tax		Net of tax		Attributable to noncontrolling interests		Attributable to shareholders		AOCI Ending Balance
Quarter ended June 30, 2021																Quarter ended June 30, 2021
Net unrealized gains (losses) on securities:																Net unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period																Unrealized holding gains (losses) on securities arising during the period			$	168	$	(35)	$	133	$	0	$	133
Reclassification adjustment for realized (gains) losses included in net earnings (*)																Reclassification adjustment for realized (gains) losses included in net earnings (*)			(9)		2		(7)		0		(7)
Reclassification for unrealized gains on securities of subsidiaries sold																Reclassification for unrealized gains on securities of subsidiaries sold			(1,119)		235		(884)		0		(884)
Total net unrealized gains (losses) on securities																Total net unrealized gains (losses) on securities	$	963	(960)		202		(758)		0		(758)		$	205
Net unrealized gains (losses) on cash flow hedges:																Net unrealized gains (losses) on cash flow hedges:
Unrealized holding gains on cash flow hedges arising during the period																Unrealized holding gains on cash flow hedges arising during the period			7		(1)		6		0		6
Reclassification adjustment for investment income included in net earnings from discontinued operations																Reclassification adjustment for investment income included in net earnings from discontinued operations			(5)		1		(4)		0		(4)
Reclassification for unrealized gains on cash flow hedges of subsidiaries sold																Reclassification for unrealized gains on cash flow hedges of subsidiaries sold			(37)		8		(29)		0		(29)
Total net unrealized gains (losses) on cash flow hedges																Total net unrealized gains (losses) on cash flow hedges	27		(35)		8		(27)		0		(27)		0
Foreign currency translation adjustments																Foreign currency translation adjustments	(16)		0		0		0		0		0		(16)
Pension and other postretirement plans (“OPRP”) adjustments:																Pension and other postretirement plans (“OPRP”) adjustments:
Unrealized holding losses on pension and OPRP arising during the period																Unrealized holding losses on pension and OPRP arising during the period			(1)		0		(1)		0		(1)
Reclassification adjustment for pension settlement loss included in other expense in net earnings																Reclassification adjustment for pension settlement loss included in other expense in net earnings			11		(2)		9		0		9
Total Pension and OPRP adjustments																Total Pension and OPRP adjustments	(7)		10		(2)		8		0		8		1
Total																Total	$	967	$	(985)	$	208	$	(777)	$	0	$	(777)	$	190
		AOCI Beginning Balance		Pretax		Tax		Net of tax		Attributable to noncontrolling interests		Attributable to shareholders		AOCI Ending Balance
Quarter ended June 30, 2020	Quarter ended June 30, 2020															Quarter ended June 30, 2020
Net unrealized gains on securities:	Net unrealized gains on securities:															Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period	Unrealized holding gains on securities arising during the period			$	1,293	$	(272)	$	1,021	$	—	$	1,021			Unrealized holding gains on securities arising during the period			$	1,293	$	(272)	$	1,021	$	0	$	1,021
Reclassification adjustment for realized (gains) losses included in net earnings (*)	Reclassification adjustment for realized (gains) losses included in net earnings (*)			(9)		2		(7)		—		(7)				Reclassification adjustment for realized (gains) losses included in net earnings (*)			(9)		2		(7)		0		(7)
Total net unrealized gains (losses) on securities	Total net unrealized gains (losses) on securities	$	16	1,284		(270)		1,014		—		1,014		$	1,030	Total net unrealized gains (losses) on securities	$	16	1,284		(270)		1,014		0		1,014		$	1,030
Net unrealized gains on cash flow hedges		44		4		(1)		3		—		3		47
Net unrealized gains (losses) on cash flow hedges:																Net unrealized gains (losses) on cash flow hedges:
Unrealized holding gains on cash flow hedges arising during the period																Unrealized holding gains on cash flow hedges arising during the period			16		(4)		12		0		12
Reclassification adjustment for investment income included in net earnings from discontinued operations																Reclassification adjustment for investment income included in net earnings from discontinued operations			(12)		3		(9)		0		(9)
Total net unrealized gains on cash flow hedges																Total net unrealized gains on cash flow hedges	44		4		(1)		3		0		3		47
Foreign currency translation adjustments	Foreign currency translation adjustments	(21)		4		—		4		—		4		(17)		Foreign currency translation adjustments	(21)		4		0		4		0		4		(17)
Pension and other postretirement plans adjustments	Pension and other postretirement plans adjustments	(7)		—		—		—		—		—		(7)		Pension and other postretirement plans adjustments	(7)		0		0		0		0		0		(7)
Total	Total	$	32	$	1,292	$	(271)	$	1,021	$	—	$	1,021	$	1,053	Total	$	32	$	1,292	$	(271)	$	1,021	$	0	$	1,021	$	1,053

Quarter ended June 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	450	$	(94)	$	356	$	—	$	356
Reclassification adjustment for realized (gains) losses included in net earnings (*)				(10)		2		(8)		—		(8)
Total net unrealized gains on securities		$	464	440		(92)		348		—		348		$	812
Net unrealized gains on cash flow hedges		—		23		(5)		18		—		18		18
Foreign currency translation adjustments		(12)		(1)		1		—		(1)		(1)		(13)
Pension and other postretirement plans adjustments		(8)		—		—		—		—		—		(8)
Total		$	444	$	462	$	(96)	$	366	$	(1)	$	365	$	809

Six months ended June 30, 2020
Net unrealized gains (losses) on securities:
Unrealized holding gains on securities arising during the period				$	198	$	(42)	$	156	$	—	$	156
Reclassification adjustment for realized (gains) losses included in net earnings (*)				15		(3)		12		—		12
Total net unrealized gains (losses) on securities		$	862	213		(45)		168		—		168		$	1,030
Net unrealized gains on cash flow hedges		17		38		(8)		30		—		30		47
Foreign currency translation adjustments		(9)		(6)		—		(6)		(2)		(8)		(17)
Pension and other postretirement plans adjustments		(7)		—		—		—		—		—		(7)
Total		$	863	$	245	$	(53)	$	192	$	(2)	$	190	$	1,053

Six months ended June 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	937	$	(197)	$	740	$	—	$	740
Reclassification adjustment for realized (gains) losses included in net earnings (*)				(14)		3		(11)		—		(11)
Total net unrealized gains on securities		$	83	923		(194)		729		—		729		$	812
Net unrealized gains (losses) on cash flow hedges		(11)		37		(8)		29		—		29		18
Foreign currency translation adjustments		(16)		3		1		4		(1)		3		(13)
Pension and other postretirement plans adjustments		(8)		—		—		—		—		—		(8)
Total		$	48	$	963	$	(201)	$	762	$	(1)	$	761	$	809

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED


			Other Comprehensive Income (Loss)
	AOCI Beginning Balance		Pretax		Tax		Net of tax		Attributable to noncontrolling interests		Attributable to shareholders		AOCI Ending Balance
Six months ended June 30, 2021
Net unrealized gains (losses) on securities:
Unrealized holding gains on securities arising during the period			$	(187)	$	39	$	(148)	$	0	$	(148)
Reclassification adjustment for realized (gains) losses included in net earnings (*)			(23)		5		(18)		0		(18)
Reclassification for unrealized gains of subsidiaries sold			(1,119)		235		(884)		0		(884)
Total net unrealized gains (losses) on securities	$	1,255	(1,329)		279		(1,050)		0		(1,050)		$	205
Net unrealized gains (losses) on cash flow hedges:
Unrealized holding losses on cash flow hedges arising during the period			(1)		0		(1)		0		(1)
Reclassification adjustment for investment income included in net earnings from discontinued operations			(14)		3		(11)		0		(11)
Reclassification for unrealized gains on cash flow hedges of subsidiaries sold			(37)		8		(29)		0		(29)
Total net unrealized gains (losses) on cash flow hedges	41		(52)		11		(41)		0		(41)		0
Foreign currency translation adjustments	(16)		0		0		0		0		0		(16)
Pension and OPRP adjustments:
Unrealized holding losses on pension and OPRP arising during the period			(1)		0		(1)		0		(1)
Reclassification adjustment for pension settlement loss included in other expense in net earnings			11		(2)		9		0		9
Total Pension and OPRP adjustments	(7)		10		(2)		8		0		8		1
Total	$	1,273	$	(1,371)	$	288	$	(1,083)	$	0	$	(1,083)	$	190

Six months ended June 30, 2020
Net unrealized gains (losses) on securities:
Unrealized holding gains on securities arising during the period			$	198	$	(42)	$	156	$	0	$	156
Reclassification adjustment for realized (gains) losses included in net earnings (*)			15		(3)		12		0		12
Total net unrealized gains (losses) on securities	$	862	213		(45)		168		0		168		$	1,030
Net unrealized gains (losses) on cash flow hedges:
Unrealized holding gains on cash flow hedges arising during the period			61		(13)		48		0		48
Reclassification adjustment for investment income included in net earnings from discontinued operations			(23)		5		(18)		0		(18)
Total net unrealized gains on cash flow hedges	17		38		(8)		30		0		30		47
Foreign currency translation adjustments	(9)		(6)		0		(6)		(2)		(8)		(17)
Pension and other postretirement plans adjustments	(7)		0		0		0		0		0		(7)
Total	$	863	$	245	$	(53)	$	192	$	(2)	$	190	$	1,053

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

(*)The reclassification adjustment out of net unrealized gains (losses) on securities affected the following lines in AFG’s Statement of Earnings:

OCI component

Affected line in the statement of earnings

Pretax - continuing operations

Realized gains (losses) on securities

Pretax - discontinued operations

Net earnings (loss) from discontinued operations

Tax - continuing operations

Provision (credit) for income taxes

Tax - discontinued operations

Net earnings (loss) from discontinued operations

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

Stock Incentive Plans Under AFG’s stock incentive plans, employees of AFG and its subsidiaries are eligible to receive equity awards in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock awards. In the first six months of ~~2020,~~2021, AFG issued ~~227,867~~207,020 shares of restricted Common Stock (fair value of ~~$104.15~~$111.13 per share) under the Stock Incentive Plan.

Total compensation expense related to stock incentive plans of AFG and its subsidiaries was $4$2 million and $6$4 million in the second ~~quarters~~quarter of 2021 and 2020 and ~~2019, respectively,~~$7 million and $9 ~~million and $12~~ million in the first six months of ~~2020~~2021 and ~~2019, respectively.~~2020.

L.K. Income Taxes

The following is a reconciliation of income taxes on continuing operations at the statutory rate of 21% to the provision for income taxes as shown in AFG’s Statement of Earnings (dollars in millions):


		Three months ended June 30,														Six months ended June 30,																Three months ended June 30,					Six months ended June 30,
		2020						2019						2020								2019						2021				2020				2021	2020
		Amount		% of EBT		Amount		% of EBT		Amount		% of EBT		Amount		% of EBT			Amount		% of EBT			Amount		% of EBT		Amount		% of EBT		Amount		% of EBT
Earnings (loss) before income taxes (“EBT”)		$	218			$	259			$	(170)			$	672
Earnings (loss) from continuing operations before income taxes (“EBT”)																		Earnings (loss) from continuing operations before income taxes (“EBT”)	$	288				$	140			$	623			$	(45)

Income taxes at statutory rate	Income taxes at statutory rate	$	45	21	%	$	54	21	%	$	(36)	21	%	$	141	21	%	Income taxes at statutory rate	$	61	21		%	$	30	21	%	$	131	21	%	$	(9)	21	%
Effect of:	Effect of:																	Effect of:

Stock-based compensation																		Stock-based compensation	(8)		(3		%)	0		0	%	(10)		(2	%)	(3)		7	%
Employee stock ownership plan dividend paid deduction																		Employee stock ownership plan dividend paid deduction	(8)		(3		%)	0		0	%	(8)		(1	%)	0		0	%
Tax exempt interest	Tax exempt interest	(3)		(1	%)	(3)		(1	%)	(6)		4	%	(7)		(1	%)	Tax exempt interest	(2)		(1		%)	(3)		(2	%)	(4)		(1	%)	(5)		11	%
Stock-based compensation		—		—	%	(2)		(1	%)	(4)		2	%	(4)		(1	%)
Dividends received deduction	Dividends received deduction	—		—	%	(1)		—	%	(1)		1	%	(2)		—	%	Dividends received deduction	(1)		0		%	0		0	%	(1)		0	%	(1)		2	%
Employee Stock Ownership Plan dividends paid deduction		—		—	%	(1)		—	%	—		—	%	(1)		—	%
Change in valuation allowance		9		4	%	1		—	%	11		(6	%)	3		—	%
Nondeductible expenses		—		—	%	2		1	%	2		(1	%)	4		1	%

Foreign operations	Foreign operations	—		—	%	—		—	%	1		(1	%)	—		—	%	Foreign operations	(1)		0		%	0		0	%	(2)		0	%	1		(2	%)
Nondeductible expenses																		Nondeductible expenses	2		1		%	1		1	%	4		1	%	2		(4	%)
Change in valuation allowance																		Change in valuation allowance	3		1		%	9		6	%	3		0	%	11		(25	%)

Other	Other	—		(1	%)	—		(1	%)	—		(1	%)	3		—	%	Other	2		1		%	0		0	%	3		1	%	0		(1	%)
Provision (credit) for income taxes as shown in the statement of earnings	Provision (credit) for income taxes as shown in the statement of earnings	$	51	23	%	$	50	19	%	$	(33)	19	%	$	137	20	%	Provision (credit) for income taxes as shown in the statement of earnings	$	48	17		%	$	37	26	%	$	116	19	%	$	(4)	9	%

~~The changes in valuation allowance in the table above are primarily increases in the valuation allowance on tax benefits related to losses in the Neon Lloyd’s insurance business.~~ Approximately ~~$23~~$27 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, ~~2020.~~2021. Since AFG maintains a full valuation allowance against its SRLY NOLs, the expiration of these loss carryforwards will be offset by a corresponding reduction in the valuation allowance and will have no overall impact on AFG’s income tax expense or results of operations.

M.L. Contingencies

In December 2015, AFG completed the sale of substantially all of its run-off long-term care insurance business to HC2 Holdings, Inc. (“HC2”). As part of the transaction, AFG agreed to provide up to an aggregate of $35 million of capital support for the insurance companies, on an as-needed basis to maintain specified surplus levels, subject to immediate reimbursement by HC2 through a five-year capital maintenance agreement. AFG was released of any obligation to perform under this agreement in the first quarter of 2020.

~~Other than the matter described above, there~~There have been no significant changes to the matters discussed and referred to in Note N — “Contingencies” of AFG’s ~~2019~~2020 Form 10-K, which covers property and casualty insurance reserves for claims related to environmental exposures, asbestos and other mass tort claims and environmental and occupational injury and disease claims of subsidiaries’ former ~~subsidiary~~ railroad and manufacturing operations.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

N.M. Insurance

Property and Casualty Insurance Reserves The following table provides an analysis of changes in the liability for losses and loss adjustment expenses during the first six months of ~~2020~~2021 and ~~2019~~2020 (in millions):


		Six months ended June 30,							Six months ended June 30,
		2020		2019			2021		2020
Balance at beginning of year	Balance at beginning of year	$	10,232	$	9,741	Balance at beginning of year	$	10,392	$	10,232
Less reinsurance recoverables, net of allowance	Less reinsurance recoverables, net of allowance	3,024		2,942		Less reinsurance recoverables, net of allowance	3,117		3,024
Net liability at beginning of year	Net liability at beginning of year	7,208		6,799		Net liability at beginning of year	7,275		7,208
Provision for losses and LAE occurring in the current period	Provision for losses and LAE occurring in the current period	1,597		1,501		Provision for losses and LAE occurring in the current period	1,507		1,597
Net increase (decrease) in the provision for claims of prior years		(119)		(86)
Total losses and LAE incurred (*)		1,478		1,415

Net decrease in the provision for claims of prior years						Net decrease in the provision for claims of prior years	(126)		(119)
Total losses and LAE incurred						Total losses and LAE incurred	1,381		1,478
Payments for losses and LAE of:	Payments for losses and LAE of:					Payments for losses and LAE of:
Current year	Current year	(284)		(291)		Current year	(258)		(284)
Prior years	Prior years	(1,068)		(1,079)		Prior years	(1,083)		(1,068)
Total payments	Total payments	(1,352)		(1,370)		Total payments	(1,341)		(1,352)

Foreign currency translation and other	Foreign currency translation and other	(20)		1		Foreign currency translation and other	1		(20)
Net liability at end of period	Net liability at end of period	7,314		6,845		Net liability at end of period	7,316		7,314
Add back reinsurance recoverables, net of allowance	Add back reinsurance recoverables, net of allowance	3,007		2,732		Add back reinsurance recoverables, net of allowance	3,182		3,007
Gross unpaid losses and LAE included in the balance sheet at end of period	Gross unpaid losses and LAE included in the balance sheet at end of period	$	10,321	$	9,577	Gross unpaid losses and LAE included in the balance sheet at end of period	$	10,498	$	10,321

~~(*)~~
~~Includes $106 million in losses and LAE incurred~~

The net decrease in the ~~Neon exited lines in~~provision for claims of prior years during the first six months of ~~2020.~~2021 reflects (i) lower than anticipated claim frequency and severity in the transportation businesses, lower than expected losses in the crop business and lower than expected claim severity in the property and inland marine business (within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses (within the Specialty casualty sub-segment) and (iii) lower than anticipated claim frequency in the surety business and lower than expected claim frequency and severity in the financial institutions business (within the Specialty financial sub-segment). This favorable development was partially offset by (i) higher than expected claim frequency and severity in the equine business (within the Property and transportation sub-segment) and (ii) higher than anticipated claim severity in the general liability, targeted markets and professional liability businesses (within the Specialty casualty sub-segment).

The net decrease in the provision for claims of prior years during the first six months of 2020 reflects (i) lower than expected claim frequency and severity in the agricultural ~~businesses~~ and ~~lower than anticipated claim frequency and severity in the~~ transportation businesses (within the Property and transportation sub-segment), (ii) lower than anticipated claim frequency and severity in the workers’ compensation businesses and lower than anticipated claim frequency in the executive liability business (within the Specialty casualty sub-segment) and (iii) lower than anticipated claim frequency in the trade credit and surety businesses (within the Specialty financial sub-segment). This favorable development was partially offset by higher than expected claim frequency and severity in the excess and surplus lines businesses (within the Specialty casualty sub-segment).

The net decrease in the provision for claims of prior years during the first six months of 2019 reflects (i) lower than expected losses in the crop business and lower than expected claim frequency and severity in the transportation businesses (all within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses (within the Specialty casualty sub-segment), and (iii) lower than expected claim frequency and severity in the surety and financial institutions businesses and lower than anticipated claim severity in the fidelity business (all within the Specialty financial sub-segment). This favorable development was partially offset by higher than expected claim severity in the in the excess and surplus lines businesses and higher than expected losses at ~~Neon (all within the Specialty casualty sub-segment).~~

Neon.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Recoverables from Reinsurers and Premiums Receivable ~~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 of recoverables from reinsurers and premiums receivable.~~ Progressions of the 2021 and 2020 allowance for expected credit losses on recoverables from reinsurers and premiums receivable related to continuing operations are shown below (in millions):

Recoverables from Reinsurers Premiums Receivable
Balance at March 31 $ 13 $ 9
Provision for expected credit losses — 1
Write-offs charged against the allowance — —
Balance at June 30 $ 13 $ 10
Balance at January 1 $ 18 $ 13
Impact of adoption of new accounting policy (6) (3)
Provision (credit) for expected credit losses 1 —
Write-offs charged against the allowance — —
Balance at June 30 $ 13 $ 10


	Recoverables from Reinsurers				Premiums Receivable
	2021		2020		2021		2020
Balance at March 31	$	7	$	7	$	11	$	9
Provision (credit) for expected credit losses	1		0		(2)		1
Write-offs charged against the allowance	0		0		0		0
Balance at June 30	$	8	$	7	$	9	$	10

Balance at January 1	$	6	$	18	$	10	$	13
Impact of adoption of new accounting policy	—		(11)		—		(3)
Provision (credit) for expected credit losses	2		0		(1)		0
Write-offs charged against the allowance	0		0		0		0
Balance at June 30	$	8	$	7	$	9	$	10

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AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


INDEX TO MD&A	INDEX TO MD&A								INDEX TO MD&A
		Page		Page		Page		Page
Forward-Looking Statements	Forward-Looking Statements	36	Results of Operations — Second Quarte r	52	Forward-Looking Statements	35	Results of Operations — Second Quarter	49
Overview	Overview	37	Segmented Statement of Earnings	52	Overview	36	Segmented Statement of Earnings	49
Critical Accounting Policies	Critical Accounting Policies	38	Property and Casualty Insurance	53	Critical Accounting Policies	37	Property and Casualty Insurance	51
Liquidity and Capital Resources	Liquidity and Capital Resources	38	Annuity	63	Liquidity and Capital Resources	37	Holding Company, Other and Unallocated	60
Ratios	Ratios	38	Holding Company, Other and Unallocated	70	Ratios	37	Real Estate Entities Acquired from the Annuity Operations	63
Condensed Consolidated Cash Flows	Condensed Consolidated Cash Flows	39	Results of Operations — F irst Six Months	74	Condensed Consolidated Cash Flows	38	Discontinued Annuity Operations	63
Parent and Subsidiary Liquidity	Parent and Subsidiary Liquidity	40	Segmented Statement of Earnings	74	Parent and Subsidiary Liquidity	39	Results of Operations — First Six Months	65
Investments	Investments	42	Property and Casualty Insurance	75	Investments	40	Segmented Statement of Earnings	65
Uncertainties	Uncertainties	45	Annuity	84	Uncertainties	42	Property and Casualty Insurance	66
Managed Investment Entities	Managed Investment Entities	45	Holding Company, Other and Unallocated	94	Managed Investment Entities	43	Holding Company, Other and Unallocated	75
Results of Operations	Results of Operations	49	Recent and Pending Accounting Standards	96	Results of Operations	47	Real Estate Entities Acquired from the Annuity Operations	78
General	General	49			General	47	Discontinued Annuity Operations	78

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of words such as “anticipates”, “believes”, “expects”, “projects”, “estimates”, “intends”, “plans”, “seeks”, “could”, “may”, “should”, “will” or the negative version of those words or other comparable terminology. Such forward-looking statements include statements relating to: expectations concerning market and other conditions and their effect on future premiums, revenues, earnings, investment activities, and the amount and timing of share repurchases; recoverability of asset values; expected losses and the adequacy of reserves for asbestos, environmental pollution and mass tort claims; rate changes; and improved loss experience.

Actual results and/or financial condition could differ materially from those contained in or implied by such forward-looking statements for a variety of reasons including but not limited to:

•changes in financial, political and economic conditions, including changes in interest and inflation rates, currency fluctuations and extended economic recessions or expansions in the U.S. and/or abroad;

•performance of securities ~~markets, including the cost of equity index options;~~markets;

•new legislation or declines in credit quality or credit ratings that could have a material impact on the valuation of securities in AFG’s investment portfolio;

•the availability of capital;

•changes in insurance law or regulation, including changes in statutory accounting rules, ~~and changes in regulation of the Lloyd’s market,~~ including modifications to capital ~~requirements, changes in costs associated with the exit from the Lloyd’s market and the run-off of AFG’s Lloyd’s based insurer, Neon;~~requirements;

•the effects of the COVID-19 outbreak, including the effects on the international and national economy and credit markets, legislative or regulatory developments affecting the insurance industry, quarantines or other travel or health-related restrictions;

•changes in the legal environment affecting AFG or its customers;

•tax law and accounting changes;

•levels of natural catastrophes and severe weather, terrorist activities (including any nuclear, biological, chemical or radiological events), incidents of war or losses resulting from pandemics, civil unrest and other major losses;

•disruption caused by cyber-attacks or other technology breaches or failures by AFG or its business partners and service providers, which could negatively impact AFG’s business and/or expose AFG to litigation;

•development of insurance loss reserves and establishment of other reserves, particularly with respect to amounts associated with asbestos and environmental claims;

•availability of reinsurance and ability of reinsurers to pay their obligations;

•~~trends in persistency and mortality;~~

•competitive pressures;

•the ability to obtain adequate rates and policy terms;

•changes in AFG’s credit ratings or the financial strength ratings assigned by major ratings agencies to AFG’s operating subsidiaries; and

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

•the impact of the conditions in the international financial markets and the global economy relating to AFG’s international operations.

The forward-looking statements herein are made only as of the date of this report. The Company assumes no obligation to publicly update any forward-looking statements.

OVERVIEW

Financial Condition

AFG is organized as a holding company with almost all of its operations being conducted by subsidiaries. AFG, however, has continuing cash needs for administrative expenses, the payment of principal and interest on borrowings, shareholder dividends, and taxes. Therefore, certain analyses are most meaningfully presented on a parent only basis while others are best done on a total enterprise basis. In addition, because most of its businesses are financial in nature, AFG does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful.

Sale of the Annuity Business

On May 28, 2021, AFG sold its annuity business consisting of Great American Life Insurance Company (“GALIC”) and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company, as well as a broker-dealer affiliate, Great American Advisors, Inc., and insurance distributor, AAG Insurance Agency, Inc. to Massachusetts Mutual Life Insurance Company (“MassMutual”). Total proceeds from the sale were $3.57 billion. AFG realized an after-tax non-core gain on the sale of $697 million ($8.14 per share) in the second quarter of 2021. Beginning with the first quarter of 2021 the results of the annuity businesses sold are reported as discontinued operations, in accordance with generally accepted accounting principles (“GAAP”), which included adjusting prior period results to reflect these operations as discontinued.

Results of Operations

Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for ~~businesses, and in the sale of traditional fixed and indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets.~~businesses. As discussed above, AFG’s former annuity operations are reported as discontinued operations.

AFG reported net earnings from continuing operations attributable to shareholders of ~~$177~~$240 million ($~~1.97~~2.81 per share, diluted) for the second quarter of 2021 compared to $113 million ($1.26 per share, diluted) for the second quarter of 2020, reflecting higher underwriting profit and net investment income, partially offset by lower net realized gains on securities and higher holding company expenses.

AFG reported net earnings from continuing operations attributable to shareholders of $507 million ($5.90 per share, diluted) for the first six months of 2021 compared to a net loss of ~~$124~~$28 million ($~~1.38~~0.31 per share, diluted) for the first six months of 2020 compared to net earnings of $210 million ($2.31 per share, diluted) for the second quarter of 2019 and $539 million ($5.94 per share, diluted) for the first six months of 2019. The COVID-19 pandemic has had widespread financial and economic impacts, including a significant decrease in both the equity and credit markets, which adversely impacted returns on AFG’s $3.64 billion of investments that are accounted for using the equity method or carried at fair value through net earnings. AFG’s results reflect:

•~~higher~~reflecting net realized gains on securities ~~in the second quarter of 2020 compared to the second quarter of 2019 and net realized losses on securities in the first six months of 2020~~ compared to net realized ~~gains~~losses in ~~the first six months of 2019,~~

•~~lower earnings in the annuity segment, including losses from investments accounted for using the equity method~~2020 and ~~lower earnings from AFG-managed CLOs,~~

•~~lower~~higher underwriting profit and net investment income, ~~in the property and casualty insurance segment due primarily to losses from investments accounted for using the equity method and AFG-managed CLOs,~~

•~~lower underwriting profit in the property and casualty insurance segment,~~

•partially offset by higher interest charges on borrowed money ~~due to higher average indebtedness,~~ and

•~~lower~~ holding company expenses.

Outlook

The COVID-19 pandemic began to have a significant impact on global, social and economic activity during the first quarter of 2020. AFG has taken actions under its business continuity plan to minimize risk to the Company’s employees and to prevent any significant disruption to AFG’s business, agents or policyholders.

Management believes that AFG’s strong financial position ~~coming into 2020~~ and current liquidity and capital at its subsidiaries will give AFG the flexibility to continue to effectively address and respond to the ongoing uncertainties presented by the pandemic. Even with management’s expectation that the impacts of the pandemic will continue ~~through 2020,~~throughout 2021, AFG’s insurance subsidiaries ~~are projected to~~ have capital at or in excess of the levels required by ratings agencies in order to maintain their current ratings, and the parent company does not have any near-term debt maturities.

~~The widespread economic impacts~~As a result of the ~~pandemic, including a significant decrease~~contracted economy, exposures in ~~both equity and credit markets, adversely affected AFG’s investment returns during the first six months of 2020. Because the majority~~many of AFG’s ~~investments~~property and casualty businesses changed due to workforce reduction, fewer miles driven and reduced revenue. This has and may continue to lead to lower frequency in ~~limited partnerships~~certain lines while there has and similar investments accounted for using the equity method are reported on a quarter lag, second quarter 2020 returns from those investments reflect the financial results and valuations as of March 31, 2020, including the impact of the downturn in financial markets during the first quarter. Management expects theremay continue to be ~~continued volatility~~COVID-19 related increases in ~~the financial markets for the remainder~~claim frequency in other lines of ~~2020.~~

business.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Management anticipates that the pandemic and current recessionary economic conditions will continue to impact premiums and earnings for the remainder of 2020. As a result of the contracted economy, exposures in many of AFG’s property and casualty businesses have changed due to workforce reduction, fewer miles driven and reduced revenue. This may lead to lower frequency in certain lines while there may be COVID-19 related increases in claim frequency in other lines of business. With longer state mandated grace periods for premium payments, AFG’s property and casualty subsidiaries could see a slowdown in cash collections and higher premiums receivable balances throughout the remainder of 2020, which will require management to monitor the reinvestment of cash flows from the property and casualty subsidiaries’ investment portfolios.

There is also uncertainty as to potential government decree or legislation that could alter the coverage landscape, such as the imposition of retroactive business interruption insurance. Like most of the insurance industry, AFG’s business interruption coverages require direct physical damage to covered property for business interruption coverage to apply and the vast majority of AFG’s property policies also contain virus exclusions.

While AFG has not experienced an increase in death claims or surrender activity in the annuity business related to COVID-19, stay at home orders and other restrictions are likely to continue to reduce annuity sales for the remainder of 2020. See ~~Part II, Item 1A — “Risk Factors.”~~

CRITICAL ACCOUNTING POLICIES

Significant accounting policies are summarized in Note A — “Accounting Policies” to the financial statements. The preparation of financial statements in conformity with ~~U.S. generally accepted accounting principles (“GAAP”)~~GAAP requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions change and, thus, impact amounts reported in the future. The areas related to AFG’s continuing operations where management believes the degree of judgment required to determine amounts recorded in the financial statements is most significant are as follows:

•the establishment of insurance reserves, especially asbestos and environmental-related reserves,

•the recoverability of reinsurance,

•~~the amortization of annuity deferred policy acquisition costs,~~

•~~the measurement of the derivatives embedded in indexed annuity liabilities,~~

•the establishment of asbestos and environmental reserves of former railroad and manufacturing operations, and

•the valuation of investments, including the determination of impairment allowances.

For a discussion of these policies, see Management’s Discussion and Analysis — “Critical Accounting Policies” in AFG’s ~~2019~~2020 Form 10-K.

LIQUIDITY AND CAPITAL RESOURCES

Ratios

AFG’s debt to total capital ratio on a consolidated basis is shown below (dollars in millions):


		June 30, 2020			December 31,												June 30, 2021			December 31,
									2019					2018		June 30, 2021				2020					2019
Principal amount of long-term debt	Principal amount of long-term debt	$	1,943				$	1,493			$	1,318		Principal amount of long-term debt			$	1,993		$	1,993		$	1,493
Total capital	Total capital	6,992			6,883				6,218		Total capital		7,389				7,486			6,883
Ratio of debt to total capital:	Ratio of debt to total capital:										Ratio of debt to total capital:
Including subordinated debt	Including subordinated debt	27.8		%	21.7	%			21.2	%	Including subordinated debt		27.0		%		26.6		%	21.7		%
Excluding subordinated debt	Excluding subordinated debt	18.9		%	14.8	%			16.4	%	Excluding subordinated debt		17.8		%		17.6		%	14.8		%

The ratio of debt to total capital is a non-GAAP measure that management believes is useful for investors, analysts and ratings agencies to evaluate AFG’s financial strength and liquidity and to provide insight into how AFG finances its operations. In addition, maintaining a ratio of debt, excluding subordinated debt and debt secured by real estate (if any), to total capital of 35% or lower is a financial covenant in AFG’s bank credit facility. The ratio is calculated by dividing the principal amount of AFG’s long-term debt by its total capital, which includes long-term debt, noncontrolling interests and shareholders’ equity (excluding unrealized gains (losses) related to fixed maturity investments).

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Fixed charges are computed on a “total enterprise” basis. For purposes of calculating the ratios, “earnings (loss)” have been computed by adding to pretax earnings (loss) the fixed charges and the noncontrolling interests in earnings of subsidiaries having fixed charges and the undistributed equity in earnings or losses of investees. Fixed charges include interest (including annuity benefits as indicated), amortization of debt premium/discount and expense, preferred dividend and distribution requirements of subsidiaries and a portion of rental expense deemed to be representative of the interest factor. The ratio of core earnings to fixed charges excluding annuity benefits and the ratio of earnings (loss) to fixed charges excluding and including annuity benefits are shown in the table below:

Six months ended June 30, 2020 Year ended December 31, 2019
Ratio of core earnings to fixed charges excluding annuity benefits 9.56 12.78
Impact of non-core items (11.03) 1.83
Ratio of earnings to fixed charges excluding annuity benefits * 14.61
Impact of including interest on annuities as a fixed charge (2.32) (12.76)
Ratio of earnings to fixed charges including annuity benefits * 1.85

*~~Earnings for the six months ended June 30, 2020 were insufficient to cover fixed charges by $111 million.~~

Although the ratio of earnings to fixed charges excluding annuity benefits is not required or encouraged to be disclosed under Securities and Exchange Commission rules, some investors and lenders may not consider interest credited to annuity policyholders’ accounts a borrowing cost for an insurance company, and accordingly, believe this ratio is meaningful.

Condensed Consolidated Cash Flows

AFG’s principal sources of cash include insurance premiums, income from its investment portfolio and proceeds from the maturities, redemptions and sales of investments. Insurance premiums in excess of acquisition expenses and operating costs are invested until they are needed to meet policyholder obligations or made available to the parent company through dividends to cover debt obligations and corporate expenses, and to provide returns to shareholders through share repurchases and dividends. Cash flows from operating, investing and financing activities as detailed in AFG’s Consolidated Statement of Cash Flows are shown below (in millions):


		Six months ended June 30,							Six months ended June 30,
		2020		2019			2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	1,087	$	877	Net cash provided by operating activities	$	970	$	1,087
Net cash used in investing activities		(1,296)		(1,052)
Net cash provided by financing activities		593		1,034
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	661		(1,296)
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(1,076)		593
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	384	$	859	Net change in cash and cash equivalents	$	555	$	384

Net Cash Provided by Operating Activities AFG’s property and casualty insurance operations typically produce positive net operating cash flows as premiums collected and investment income exceed policy acquisition costs, claims payments and operating expenses. AFG’s net cash provided by operating activities is impacted by the level and timing of property and casualty premiums, claim and expense payments and recoveries from reinsurers. AFG’s discontinued annuity operations typically produce positive net operating cash flows as investment income exceeds acquisition costs and operating expenses. Interest credited on annuity policyholder funds is a non-cash increase in AFG’s annuity benefits accumulated liability and annuity premiums, benefits and withdrawals are considered financing activities due to the deposit-type nature of annuities. Cash flows provided by operating activities also include the activity of AFG’s managed investment entities (collateralized loan ~~obligations)~~obligations (“CLO”)) other than those activities included in investing or financing activities. The changes in the assets and liabilities of the managed investment entities included in operating activities reduced cash flows from operating activities by $22 million during the first six months of 2021 and increased cash flows from operating activities by $116 million ~~during~~in the first six months of 2020, ~~and reduced cash flows from operating activities by $3 million in the first six months of 2019,~~ accounting for a ~~$119~~$138 million ~~increase~~decline in cash flows from operating activities in the ~~2020~~2021 period compared to the ~~2019~~2020 period. As discussed in Note A — “Accounting Policies — Managed Investment Entities” to the financial statements, AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities and such assets and liabilities are shown separately in AFG’s Balance Sheet. Excluding the impact of the managed investment entities, net cash provided by operating activities was $992 million in the first six months of 2021 compared to $971 million in the first six months of 2020, ~~compared to $880 million in the first six months of 2019,~~ an increase of ~~$91~~$21 million.

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Net Cash ~~Used in~~Provided by (Used in) Investing Activities AFG’s investing activities consist primarily of the investment of funds provided by its property and casualty businesses and discontinued annuity ~~businesses. Net~~operations. In May 2021, AFG sold its annuity business to MassMutual for initial cash proceeds of $3.54 billion. This increase in cash provided by investing activities was partially offset by a decrease in cash and cash equivalents of $2.06 billion representing balances held in the annuity subsidiaries that were sold. Excluding the impact of the May 2021 sale of the annuity business, net cash used in investing activities was ~~$1.30 billion~~$816 million for the first six months of ~~2020~~2021 compared to ~~$1.05~~$1.30 billion in the first six months of ~~2019, an increase~~2020, a decrease of ~~$244~~$480 million. As discussed below (under net cash provided by (used in) financing activities), AFG’s discontinued annuity ~~segment~~operations had net cash flows from annuity policyholders of $477 million in the first six months of 2021 compared to $406 million in the first six months of ~~2020 and $1.10 billion in the first six months of 2019.~~2020. In addition to the investment of funds provided by the insurance operations, investing activities also include the purchase and disposal of managed investment entity investments, which are presented separately in AFG’s Balance Sheet. Net investment activity in the managed investment entities was a ~~$63~~$74 million ~~use~~source of cash in the first six months of ~~2020~~2021 compared to a $5$63 million ~~source~~use of cash in the ~~2019~~2020 period, accounting for a ~~$68~~$137 million ~~increase~~decrease in net cash used in investing activities in the first six months of ~~2020~~2021 compared to the same ~~2019~~2020 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note HG — “Managed Investment Entities” to the financial statements.

Net Cash Provided by (Used in) Financing Activities AFG’s financing activities consist primarily of transactions with annuity policyholders, issuances and retirements of long-term debt, issuances and repurchases of common stock, and dividend payments. Net cash ~~provided by~~used in financing activities was ~~$593 million~~$1.08 billion for the first six months of ~~2020~~2021 compared to ~~$1.03 billion~~net cash provided by financing activities of $593 million in the first six months of ~~2019,~~2020, a decrease in net cash provided by financing activities of ~~$441 million.~~$1.67 billion. Net annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $477 million in the first six months of 2021 compared to $406 million in the first six months of 2020, ~~compared to $1.10 billion in the first six months of 2019,~~ accounting for a ~~$698~~$71 million ~~decrease~~increase in net cash provided by financing activities in the ~~2020~~2021 period compared to the ~~2019~~2020 period. In May 2020, AFG issued $150 million of 5.625% Subordinated Debentures due in 2060 and in April 2020,

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

AFG issued $300 million of 5.25% Senior Notes due in 2030. The net proceeds of these offerings contributed $439 million to net cash provided by financing activities in the first six ~~month~~months of 2020. In March 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in 2059, the net proceeds of which contributed $121 million to net cash provided by financing activities in the first six months of 2019. During the first six months of ~~2020,~~2021, AFG repurchased ~~$137~~$306 million of its Common Stock compared to ~~no share repurchases~~$137 million in the ~~2019~~2020 period. In addition to its regular quarterly cash dividends, AFG paid a special cash dividend of ~~$1.50~~$14.00 per share in ~~May 2019~~June 2021 totaling ~~$135 million,~~$1.19 billion, which resulted in total cash dividends of ~~$205 million~~$1.27 billion in the first six months of ~~2019~~2021 compared to $81 million in the first six months of 2020. Financing activities also include issuances and retirements of managed investment entity liabilities, which are nonrecourse to AFG and presented separately in AFG’s Balance Sheet. Retirements of managed investment entity liabilities ~~were~~exceeded issuances by $28 million in the first six months of 2021 compared to $46 million in the first six months of 2020, ~~compared to $5 million in the first six months of 2019,~~ accounting for a ~~$41~~$18 million ~~decrease~~increase in net cash provided by financing activities in the ~~2020~~2021 period compared to the ~~2019~~2020 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note HG — “Managed Investment Entities” to the financial statements.

Parent and Subsidiary Liquidity

Parent Holding Company Liquidity Management believes AFG has sufficient resources to meet its liquidity requirements. If funds generated from operations, including dividends, tax payments and borrowings from subsidiaries, are insufficient to meet fixed charges in any period, AFG would be required to utilize parent company cash and ~~marketable securities~~investments or to generate cash through borrowings, sales of other assets, or similar transactions.

As discussed above, AFG sold its annuity business to MassMutual for proceeds of $3.57 billion (including $32 million in preliminary post-closing adjustments). AFG’s capital and liquidity was significantly enhanced as a result of the transaction. During the first six months of 2021, AFG repurchased 2,674,222 shares of its Common Stock for $306 million and paid a special cash dividend of $14.00 per share in June totaling approximately $1.19 billion. On August 2, 2021, AFG paid an additional special cash dividend of $2.00 per share of AFG Common Stock totaling approximately $170 million. Management will continue to evaluate opportunities for deploying AFG’s significant remaining excess capital, including returning capital to shareholders in the form of regular and special cash dividends and through opportunistic share repurchases. In addition, excess capital will be deployed into AFG’s core businesses as management identifies the potential for healthy, profitable organic growth, and opportunities to expand the Specialty property and casualty niche businesses through acquisitions and start-ups that meet target return thresholds.

In 2020, AFG repurchased 4,531,394 shares of its Common Stock for $313 million and paid a special cash dividend of $2.00 per share of AFG Common Stock in December totaling approximately $173 million.

In 2020, AFG issued $300 million of 5.25% Senior Notes due in April 2030, $150 million of 5.625% Subordinated Debentures due in June 2060 and $200 million of 4.50% Subordinated Debentures due in September 2060 to increase liquidity and provide flexibility at the parent holding company in its response to the uncertainties of the economic environment. The net proceeds from the offerings were used for general corporate purposes, which included repurchases of outstanding common shares and the November 2020 redemption of AFG’s $150 million outstanding principal amount of 6% Subordinated Debentures due in November 2055 at par value.

AFG can borrow up to $500 million under its revolving credit facility, which expires in ~~June 2021.~~December 2025. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG’s credit rating. The credit facility also includes provisions relating to the replacement of LIBOR with different floating rates in the event of the discontinuance of LIBOR. There were no borrowings under this agreement, or under any other parent company short-term borrowing arrangements, during ~~2019~~2020 or the first six months of ~~2020.~~

In April and May 2020, AFG issued $300 million of 5.25% Senior Notes due in April 2030 and $150 million of 5.625% Subordinated Debentures due in June 2060 to increase liquidity and provide flexibility at the parent holding company in its response to the uncertainties of the current economic environment. The net proceeds of the offerings will be used for general corporate purposes.

~~During the first six months of 2020, AFG repurchased 2,020,519 shares of its Common Stock for $137 million.~~

In December 2019, AFG issued $200 million of 5.125% Subordinated Debentures due in December 2059. A portion of the net proceeds of the offering were used to redeem AFG’s $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due in September 2054, at par value, with the remainder used for general corporate purposes.

~~In March 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in March 2059. The net proceeds of the offering were used for general corporate purposes.~~

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

In 2019, AFG paid special cash dividends of $3.30 per share of AFG Common Stock ($1.50 per share in May and $1.80 per share in November) resulting in a total distribution of approximately $297 million.2021.

Under a tax allocation agreement with AFG, its 80%-owned U.S. subsidiaries generally pay taxes to (or recover taxes from) AFG based on each subsidiary’s contribution to amounts due under AFG’s consolidated tax return.

Subsidiary Liquidity Great American Life Insurance Company (“GALIC”), a wholly-owned annuity subsidiary, is a member of the Federal Home Loan Bank of Cincinnati (“FHLB”). The FHLB makes advances and provides other banking services to member institutions, which provides the annuity operations with an additional source of liquidity. At June 30, 2020, GALIC had $1.26��billion in outstanding advances from the FHLB (included in annuity benefits accumulated), bearing interest at rates ranging from 0.36% to 1.35% (average rate of 0.54% at June 30, 2020). While these advances must be repaid between 2020 and 2025 ($125 million in 2020, $931 million in 2021 and $200 million in 2025), GALIC has the option to prepay all or a portion on the majority of the advances. GALIC has invested the proceeds from the advances in fixed maturity securities with similar expected lives as the advances for the purpose of earning a spread over the interest payments due to the FHLB. At June 30, 2020, GALIC estimated that it had additional borrowing capacity of approximately $740 million from the FHLB.

The liquidity requirements of AFG’s insurance subsidiaries relate primarily to the ~~liabilities associated with their products as well as operating costs~~policyholder claims and underwriting expenses and payments of dividends and taxes to ~~AFG and contributions of capital to their subsidiaries.~~AFG. Historically, cash flows from premiums and investment income have generally provided more than sufficient funds to meet these requirements. Funds received in excess of cash requirements are generally invested in additional marketable securities. In addition, the insurance subsidiaries generally hold a significant amount of highly liquid, ~~short-term~~short duration investments.

The excess cash flow of AFG’s property and casualty group allows it to extend the duration of its investment portfolio somewhat beyond that of its claim reserves. ~~Due to the anticipated slowdown in cash collections from the state mandated increases in grace periods for premium payments, AFG’s property~~

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and casualty insurance subsidiaries have maintained higher than typical cash balances since March 2020. AFG has not experienced a material increase in uncollectable premiums receivable as policyholders continue to make payments in accordance with the agreed upon terms.

~~In the annuity business, where profitability is largely dependent on earning a spread between invested assets~~Analysis of Financial Condition and ~~annuity liabilities, the duration~~Results of investments is generally maintained close to that of liabilities. In a rising interest rate environment, significant protection from withdrawals exists in the form of temporary and permanent surrender charges on AFG’s annuity products. With declining rates, AFG receives some protection (from spread compression) due to the ability to lower crediting rates, subject to contractually guaranteed minimum interest rates (“GMIRs”). With interest rates at historic lows, AFG began to lower crediting rates on existing policies in the first six months of 2020, particularly on policies near or after the end of the surrender charge period. At June 30, 2020, AFG could reduce the average crediting rate on approximately $32 billion of traditional fixed, fixed-indexed and variable-indexed annuities without guaranteed withdrawal benefits by approximately 114 basis points (on a weighted average basis). The table below shows the breakdown of annuity reserves by GMIR. The current interest crediting rates on substantially all of AFG’s annuities with a GMIR of 3% or higher are at their minimum.Operations — Continued

% of Reserves
June 30, December 31,
GMIR 2020 2019 2018
1 — 1.99% 85% 84% 81%
2 — 2.99% 3% 3% 4%
3 — 3.99% 6% 7% 8%
4.00% and above 6% 6% 7%
Annuity benefits accumulated (in millions) $41,392 $40,406 $36,616

AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and ~~benefits and operating~~underwriting expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Even in the current uncertain COVID-19 environment, management believes that the capital levels in AFG’s insurance subsidiaries are adequate to maintain its ~~businesses~~business and rating agency ratings. ~~Should the current adverse financial conditions continue through 2020, AFG’s insurance subsidiaries will reduce dividend payments to AFG parent as needed to maintain sufficient capital at the~~

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~insurance companies.~~ Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries’ investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.

Investments

AFG’s investment portfolio at June 30, ~~2020,~~2021, contained ~~$48.05~~$9.73 billion in fixed maturity securities classified as available for sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income and ~~$97~~$26 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG’s investment portfolio includes ~~$1.27 billion~~$708 million in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and ~~$330~~$257 million in equity securities carried at fair value with holding gains and losses included in net investment income.

Fair values for AFG’s portfolio are determined by AFG’s internal investment professionals using data from nationally recognized pricing services as well as non-binding broker quotes. Fair values of equity securities are generally based on published closing prices. For AFG’s fixed maturity portfolio, approximately ~~90%~~84% was priced using pricing services at June 30, ~~2020~~2021 and the balance was priced primarily by using non-binding broker quotes. When prices obtained for the same security vary, AFG’s internal investment professionals select the price they believe is most indicative of an exit price.

The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of mortgage-backed securities (“MBS”) are estimates of the rate of future prepayments and defaults of principal over the remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers’ prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs.

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, AFG communicates directly with pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the services to value specific securities.

In general, the fair value of AFG’s fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG’s fixed maturity portfolio ~~and accumulated other comprehensive income~~ that an immediate increase of 100 basis points in the interest rate yield curve would have at June 30, ~~2020~~2021 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional.


Fair value of fixed maturity portfolio	$	~~48,143~~9,758
Percentage impact on fair value of 100 bps increase in interest rates	(~~4.0~~2.5		%)
Pretax impact on fair value of fixed maturity portfolio	$	~~(1,926)~~(244)
~~Offsetting adjustments to deferred policy acquisition costs and other balance sheet amounts~~	~~850~~
~~Estimated pretax impact on accumulated other comprehensive income~~	~~(1,076)~~
~~Deferred income tax~~	~~226~~
~~Estimated after-tax impact on accumulated other comprehensive income~~	$	~~(850)~~

Approximately ~~91%~~88% of the fixed maturities ~~held by AFG~~ at June 30, ~~2020,~~2021, were rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating ~~agencies.~~agencies, 4% were rated “non-investment grade” and 8% were not rated. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade. Management believes that the high-quality investment portfolio should generate a stable and predictable investment return.

MBS are subject to significant prepayment risk because, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of lower rates.

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~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Summarized information for AFG’s MBS (including those classified as trading) at June 30, 2020, is shown in the table below (dollars in millions). Agency-backed securities are those issued by a U.S. government-backed agency; Alt-A mortgages are those with risk profiles between prime and subprime. The average life of the residential and commercial MBS is approximately 4 years and 3 years, respectively.

Amortized
Cost, net (*) Fair Value Fair Value as
% of Cost Unrealized
Gain (Loss) % Rated
Investment
Grade
Collateral type
Residential:
Agency-backed $ 437 $ 445 102 % $ 8 100 %
Non-agency prime 1,330 1,435 108 % 105 60 %
Alt-A 843 929 110 % 86 36 %
Subprime 386 414 107 % 28 36 %
Commercial 852 889 104 % 37 94 %
$ 3,848 $ 4,112 107 % $ 264 64 %

~~(*)Amortized cost, net of allowance for expected credit losses.~~

The National Association of Insurance Commissioners (“NAIC”) assigns creditworthiness designations on a scale of 1 to 6 with 1 being the highest quality and 6 being the lowest quality. The NAIC retains third-party investment management firms to assist in the determination of appropriate NAIC designations for MBS based not only on the probability of loss (which is the primary basis of ratings by the major ratings firms), but also on the severity of loss and statutory carrying value. At June 30, 2020, 97% (based on statutory carrying value of $3.80 billion) of AFG’s MBS had an NAIC designation of 1.

Municipal bonds represented approximately ~~14%~~22% of AFG’s fixed maturity portfolio at June 30, ~~2020.~~2021. AFG’s municipal bond portfolio is high quality, with 99% of the securities rated investment grade at that date. The portfolio is well diversified across the states of issuance and individual issuers. At June 30, ~~2020,~~2021, approximately ~~78%~~90% of the municipal bond portfolio was held in revenue bonds, with the remaining ~~22%~~10% held in general obligation bonds.

Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at June 30, 2020, is shown in the following table (dollars in millions). Approximately $1.54 billion of available for sale fixed maturity securities had no unrealized gains or losses at June 30, 2020.

Securities
With
Unrealized
Gains Securities
With
Unrealized
Losses
Available for Sale Fixed Maturities
Fair value of securities $ 36,628 $ 9,878
Amortized cost of securities, net of allowance for expected credit losses $ 33,734 $ 10,335
Gross unrealized gain (loss) $ 2,894 $ (457)
Fair value as % of amortized cost 109 % 96 %
Number of security positions 4,322 993
Number individually exceeding $2 million gain or loss 331 43
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):
States and municipalities $ 581 $ (3)
Banks, savings and credit institutions 404 (15)
Mortgage-backed securities 278 (14)
Insurance 200 (3)
Technology 175 (2)
Other asset-backed securities 118 (189)
Collateralized loan obligations 16 (114)
Percentage rated investment grade 94 % 86 %

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Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at June 30, 2021, is shown in the following table (dollars in millions). Approximately $902 million of available for sale fixed maturity securities had no unrealized gains or losses at June 30, 2021.


	Securities With Unrealized Gains			Securities With Unrealized Losses
Available for Sale Fixed Maturities
Fair value of securities	$	7,485		$	1,345
Amortized cost of securities, net of allowance for expected credit losses	$	7,213		$	1,357
Gross unrealized gain (loss)	$	272		$	(12)
Fair value as % of amortized cost	104		%	99		%
Number of security positions	1,794			366
Number individually exceeding $2 million gain or loss	2			—
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):
States and municipalities	$	93		$	—

Mortgage-backed securities	56			(2)

Other asset-backed securities	29			(4)
Collateralized loan obligations	5			(2)
U.S. Government and government agencies	4			(1)


Percentage rated investment grade	93		%	91		%

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturity securities at June 30, ~~2020,~~2021, based on their fair values. 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.


		Securities With Unrealized Gains		Securities With Unrealized Losses			Securities With Unrealized Gains		Securities With Unrealized Losses
Maturity	Maturity					Maturity
One year or less	One year or less	4	%	4	%	One year or less	10	%	—	%
After one year through five years	After one year through five years	27	%	11	%	After one year through five years	30	%	19	%
After five years through ten years	After five years through ten years	38	%	14	%	After five years through ten years	13	%	5	%
After ten years	After ten years	9	%	3	%	After ten years	4	%	1	%
		78	%	32	%		57	%	25	%
Collateralized loan obligations and other asset-backed securities (average life of approximately 4 years)		12	%	64	%
Mortgage-backed securities (average life of approximately 3-1/2 years)		10	%	4	%
Collateralized loan obligations and other asset-backed securities (average life of approximately 3-1/2 years)						Collateralized loan obligations and other asset-backed securities (average life of approximately 3-1/2 years)	34	%	68	%
Mortgage-backed securities (average life of approximately 3 years)						Mortgage-backed securities (average life of approximately 3 years)	9	%	7	%
		100	%	100	%		100	%	100	%

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The table below (dollars in millions) summarizes the unrealized gains and losses on fixed maturity securities by dollar amount:

Aggregate
Fair
Value Aggregate
Unrealized
Gain (Loss) Fair
Value as
% of Cost
Fixed Maturities at June 30, 2020
Securities with unrealized gains:
Exceeding $500,000 (1,617 securities) $ 24,210 $ 2,467 111 %
$500,000 or less (2,705 securities) 12,418 427 104 %
$ 36,628 $ 2,894 109 %
Securities with unrealized losses:
Exceeding $500,000 (288 securities) $ 5,397 $ (381) 93 %
$500,000 or less (705 securities) 4,481 (76) 98 %
$ 9,878 $ (457) 96 %


	Aggregate Fair Value		Aggregate Unrealized Gain (Loss)		Fair Value as % of Cost
Fixed Maturities at June 30, 2021
Securities with unrealized gains:
Exceeding $500,000 (120 securities)	$	1,409	$	108	108	%
$500,000 or less (1,674 securities)	6,076		164		103	%
	$	7,485	$	272	104	%
Securities with unrealized losses:
Exceeding $500,000 (3 securities)	$	10	$	(2)	83	%
$500,000 or less (363 securities)	1,335		(10)		99	%
	$	1,345	$	(12)	99	%

The following table (dollars in millions) summarizes the unrealized losses for all securities with unrealized losses by issuer quality and the length of time those securities have been in an unrealized loss position:

Aggregate
Fair
Value Aggregate
Unrealized
Loss Fair
Value as
% of Cost
Securities with Unrealized Losses at June 30, 2020
Investment grade fixed maturities with losses for:
Less than one year (531 securities) $ 6,704 $ (292) 96 %
One year or longer (131 securities) 1,824 (88) 95 %
$ 8,528 $ (380) 96 %
Non-investment grade fixed maturities with losses for:
Less than one year (296 securities) $ 1,275 $ (64) 95 %
One year or longer (35 securities) 75 (13) 85 %
$ 1,350 $ (77) 95 %


	Aggregate Fair Value		Aggregate Unrealized Loss		Fair Value as % of Cost
Securities with Unrealized Losses at June 30, 2021
Investment grade fixed maturities with losses for:
Less than one year (126 securities)	$	868	$	(5)	99	%
One year or longer (96 securities)	354		(3)		99	%
	$	1,222	$	(8)	99	%
Non-investment grade fixed maturities with losses for:
Less than one year (42 securities)	$	68	$	(1)	99	%
One year or longer (102 securities)	55		(3)		95	%
	$	123	$	(4)	97	%

When a decline in the value of a specific investment is considered to be other-than-temporary, an allowance for credit losses (impairment) is charged to earnings (accounted for as a realized loss). The determination of whether unrealized losses are other-than-temporary requires judgment based on subjective as well as objective factors as detailed in AFG’s ~~2019~~2020 Form 10-K under Management’s Discussion and Analysis — “Investments.”

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Based on its analysis, management believes AFG will recover its cost basis (net of any allowance) in the fixed maturity 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 June 30, ~~2020.~~2021. Although AFG has the ability to continue holding its fixed maturity investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers’ creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG’s ability or intent change regarding a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, ~~charges~~increases in the allowance for ~~other-than-temporary impairment~~credit losses could be material to results of operations in future periods. Significant declines in the fair value of AFG’s investment portfolio could have a significant adverse effect on AFG’s liquidity. For information on AFG’s realized gains (losses) on securities, ~~including charges for other-than-temporary impairment,~~ see “Results of Operations — ~~Consolidated~~ Realized Gains (Losses) on Securities.”

Uncertainties

Management believes that the areas posing the greatest risk of material loss are the adequacy of its insurance reserves and contingencies arising out of its former railroad and manufacturing operations. See Management’s Discussion and Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves” in AFG’s ~~2019~~2020 Form 10-K. In the third quarter of 2020, AFG expects to complete a comprehensive external study of its asbestos and environmental exposures relating to the run-off operations of its property and casualty insurance segment and exposures related to its former railroad and manufacturing operations with the aid of specialty actuarial, engineering and consulting firms and outside counsel. AFG generally conducts an external study of these exposures every few years with an in-depth internal review during the intervening years.10–K.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

MANAGED INVESTMENT ENTITIES

Accounting standards require AFG to consolidate its investments in collateralized loan obligation (“CLO”) entities that it manages and owns an interest in (in the form of debt). See Note A — “Accounting Policies — Managed Investment Entities” and Note HG — “Managed Investment Entities” to the financial statements. The effect of consolidating these entities is shown in the tables below (in millions). The “Before CLO Consolidation” columns include AFG’s investment and earnings in the CLOs on an unconsolidated basis.

4543

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

CONDENSED CONSOLIDATING BALANCE SHEET


		Before CLO Consolidation		Managed Investment Entities		Consol. Entries			Consolidated As Reported			Before CLO Consolidation		Managed Investment Entities		Consol. Entries			Consolidated As Reported
June 30, 2020
June 30, 2021											June 30, 2021
Assets:	Assets:										Assets:
Cash and investments	Cash and investments	$	56,898	$	—	$	(157)	(a)	$	56,741	Cash and investments	$	16,182	$	—	$	(57)	(*)	$	16,125
Assets of managed investment entities	Assets of managed investment entities	—		4,393		—			4,393		Assets of managed investment entities	—		5,086		—			5,086
Other assets	Other assets	9,733		—		—		(a)	9,733		Other assets	7,569		—		—		(*)	7,569
Assets of discontinued annuity operations											Assets of discontinued annuity operations	—		—		—			—
Total assets	Total assets	$	66,631	$	4,393	$	(157)		$	70,867	Total assets	$	23,751	$	5,086	$	(57)		$	28,780
Liabilities:	Liabilities:										Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	Unpaid losses and loss adjustment expenses and unearned premiums	$	13,099	$	—	$	—		$	13,099	Unpaid losses and loss adjustment expenses and unearned premiums	$	13,552	$	—	$	—		$	13,552
Annuity, life, accident and health benefits and reserves		41,998		—		—			41,998
Liabilities of managed investment entities	Liabilities of managed investment entities	—		4,393		(157)		(a)	4,236		Liabilities of managed investment entities	—		5,086		(57)		(*)	5,029
Long-term debt and other liabilities	Long-term debt and other liabilities	5,408		—		—			5,408		Long-term debt and other liabilities	4,598		—		—			4,598
Liabilities of discontinued annuity operations											Liabilities of discontinued annuity operations	—		—		—			—
Total liabilities	Total liabilities	60,505		4,393		(157)			64,741		Total liabilities	18,150		5,086		(57)			23,179

Redeemable noncontrolling interests		—		—		—			—

Shareholders’ equity:	Shareholders’ equity:										Shareholders’ equity:
Common Stock and Capital surplus	Common Stock and Capital surplus	1,388		—		—			1,388		Common Stock and Capital surplus	1,388		—		—			1,388
Retained earnings	Retained earnings	3,685		—		—			3,685		Retained earnings	4,023		—		—			4,023
Accumulated other comprehensive income, net of tax	Accumulated other comprehensive income, net of tax	1,053		—		—			1,053		Accumulated other comprehensive income, net of tax	190		—		—			190
Total shareholders’ equity	Total shareholders’ equity	6,126		—		—			6,126		Total shareholders’ equity	5,601		—		—			5,601
Noncontrolling interests	Noncontrolling interests	—		—		—			—		Noncontrolling interests	—		—		—			—
Total equity	Total equity	6,126		—		—			6,126		Total equity	5,601		—		—			5,601
Total liabilities and equity	Total liabilities and equity	$	66,631	$	4,393	$	(157)		$	70,867	Total liabilities and equity	$	23,751	$	5,086	$	(57)		$	28,780

December 31, 2019
December 31, 2020											December 31, 2020
Assets:	Assets:										Assets:
Cash and investments	Cash and investments	$	55,416	$	—	$	(164)	(a)	$	55,252	Cash and investments	$	13,550	$	—	$	(56)	(*)	$	13,494
Assets of managed investment entities	Assets of managed investment entities	—		4,736		—			4,736		Assets of managed investment entities	—		4,971		—			4,971
Other assets	Other assets	10,143		—		(1)		(a)	10,142		Other assets	7,361		—		(1)		(*)	7,360
Assets of discontinued annuity operations											Assets of discontinued annuity operations	47,885		—		—			47,885
Total assets	Total assets	$	65,559	$	4,736	$	(165)		$	70,130	Total assets	$	68,796	$	4,971	$	(57)		$	73,710
Liabilities:	Liabilities:										Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	Unpaid losses and loss adjustment expenses and unearned premiums	$	13,062	$	—	$	—		$	13,062	Unpaid losses and loss adjustment expenses and unearned premiums	$	13,195	$	—	$	—		$	13,195
Annuity, life, accident and health benefits and reserves		41,018		—		—			41,018
Liabilities of managed investment entities	Liabilities of managed investment entities	—		4,736		(165)		(a)	4,571		Liabilities of managed investment entities	—		4,971		(57)		(*)	4,914
Long-term debt and other liabilities	Long-term debt and other liabilities	5,210		—		—			5,210		Long-term debt and other liabilities	4,354		—		—			4,354
Liabilities of discontinued annuity operations											Liabilities of discontinued annuity operations	44,458		—		—			44,458
Total liabilities	Total liabilities	59,290		4,736		(165)			63,861		Total liabilities	62,007		4,971		(57)			66,921

Redeemable noncontrolling interests		—		—		—			—

Shareholders’ equity:	Shareholders’ equity:										Shareholders’ equity:
Common Stock and Capital surplus	Common Stock and Capital surplus	1,397		—		—			1,397		Common Stock and Capital surplus	1,367		—		—			1,367
Retained earnings	Retained earnings	4,009		—		—			4,009		Retained earnings	4,149		—		—			4,149
Accumulated other comprehensive income, net of tax	Accumulated other comprehensive income, net of tax	863		—		—			863		Accumulated other comprehensive income, net of tax	1,273		—		—			1,273
Total shareholders’ equity	Total shareholders’ equity	6,269		—		—			6,269		Total shareholders’ equity	6,789		—		—			6,789
Noncontrolling interests	Noncontrolling interests	—		—		—			—		Noncontrolling interests	—		—		—			—
Total equity	Total equity	6,269		—		—			6,269		Total equity	6,789		—		—			6,789
Total liabilities and equity	Total liabilities and equity	$	65,559	$	4,736	$	(165)		$	70,130	Total liabilities and equity	$	68,796	$	4,971	$	(57)		$	73,710

~~(a)~~(*)Elimination of the fair value of AFG’s investment in CLOs and related accrued interest.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS


		Before CLO Consolidation (a)		Managed Investment Entities		Consol. Entries			Consolidated As Reported			Before CLO Consolidation (a)		Managed Investment Entities		Consol. Entries			Consolidated As Reported
Three months ended June 30, 2020
Three months ended June 30, 2021											Three months ended June 30, 2021
Revenues:	Revenues:										Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,184	$	—	$	—		$	1,184	Property and casualty insurance net earned premiums	$	1,250	$	—	$	—		$	1,250
Net investment income	Net investment income	470		—		(2)		(b)	468		Net investment income	171		—		(7)		(b)	164
Realized gains (losses) on securities		204		—		—			204
Income (loss) of managed investment entities:
Realized gains (losses) on:											Realized gains (losses) on:
Securities											Securities	43		—		—			43
Subsidiary											Subsidiary	4		—		—			4
Income of managed investment entities:											Income of managed investment entities:
Investment income	Investment income	—		49		—			49		Investment income	—		44		—			44
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		(2)		(3)		(b)	(5)		Gain (loss) on change in fair value of assets/liabilities	—		3		3		(b)	6
Other income	Other income	55		—		(4)		(c)	51		Other income	24		—		(4)		(c)	20
Total revenues	Total revenues	1,913		47		(9)			1,951		Total revenues	1,492		47		(8)			1,531
Costs and Expenses:	Costs and Expenses:										Costs and Expenses:
Insurance benefits and expenses	Insurance benefits and expenses	1,571		—		—			1,571		Insurance benefits and expenses	1,104		—		—			1,104
Expenses of managed investment entities	Expenses of managed investment entities	—		47		(9)		(b)(c)	38		Expenses of managed investment entities	—		47		(8)		(b)(c)	39
Interest charges on borrowed money and other expenses	Interest charges on borrowed money and other expenses	124		—		—			124		Interest charges on borrowed money and other expenses	100		—		—			100
Total costs and expenses	Total costs and expenses	1,695		47		(9)			1,733		Total costs and expenses	1,204		47		(8)			1,243
Earnings (loss) before income taxes		218		—		—			218
Earnings (loss) from continuing operations before income taxes											Earnings (loss) from continuing operations before income taxes	288		—		—			288
Provision (credit) for income taxes	Provision (credit) for income taxes	51		—		—			51		Provision (credit) for income taxes	48		—		—			48
Net earnings (loss), including noncontrolling interests		167		—		—			167
Less: Net earnings (loss) attributable to noncontrolling interests		(10)		—		—			(10)
Net earnings (loss) from continuing operations, including noncontrolling interests											Net earnings (loss) from continuing operations, including noncontrolling interests	240		—		—			240
Net earnings (loss) from discontinued operations											Net earnings (loss) from discontinued operations	762		—		—			762
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests											Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		—		—			—
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	177	$	—	$	—		$	177	Net earnings (loss) attributable to shareholders	$	1,002	$	—	$	—		$	1,002

Three months ended June 30, 2019
Three months ended June 30, 2020											Three months ended June 30, 2020
Revenues:	Revenues:										Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,200	$	—	$	—		$	1,200	Property and casualty insurance net earned premiums	$	1,184	$	—	$	—		$	1,184
Net investment income	Net investment income	585		—		(5)		(b)	580		Net investment income	88		—		—		(b)	88
Realized gains (losses) on securities	Realized gains (losses) on securities	56		—		—			56		Realized gains (losses) on securities	108		—		—			108
Income (loss) of managed investment entities:
Income of managed investment entities:											Income of managed investment entities:
Investment income	Investment income	—		70		—			70		Investment income	—		49		—			49
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		(1)		(1)		(b)	(2)		Gain (loss) on change in fair value of assets/liabilities	—		(2)		(1)		(b)	(3)
Other income	Other income	60		—		(4)		(c)	56		Other income	23		—		(4)		(c)	19
Total revenues	Total revenues	1,901		69		(10)			1,960		Total revenues	1,403		47		(5)			1,445
Costs and Expenses:	Costs and Expenses:										Costs and Expenses:
Insurance benefits and expenses	Insurance benefits and expenses	1,521		—		—			1,521		Insurance benefits and expenses	1,180		—		—			1,180
Expenses of managed investment entities	Expenses of managed investment entities	—		69		(10)		(b)(c)	59		Expenses of managed investment entities	—		47		(5)		(b)(c)	42
Interest charges on borrowed money and other expenses	Interest charges on borrowed money and other expenses	121		—		—			121		Interest charges on borrowed money and other expenses	83		—		—			83
Total costs and expenses	Total costs and expenses	1,642		69		(10)			1,701		Total costs and expenses	1,263		47		(5)			1,305
Earnings (loss) before income taxes		259		—		—			259
Earnings (loss) from continuing operations before income taxes											Earnings (loss) from continuing operations before income taxes	140		—		—			140
Provision (credit) for income taxes	Provision (credit) for income taxes	50		—		—			50		Provision (credit) for income taxes	37		—		—			37
Net earnings (loss), including noncontrolling interests		209		—		—			209
Less: Net earnings (loss) attributable to noncontrolling interests		(1)		—		—			(1)
Net earnings (loss) from continuing operations, including noncontrolling interests											Net earnings (loss) from continuing operations, including noncontrolling interests	103		—		—			103
Net earnings (loss) from discontinued operations											Net earnings (loss) from discontinued operations	64		—		—			64
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests											Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	(10)		—		—			(10)
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	210	$	—	$	—		$	210	Net earnings (loss) attributable to shareholders	$	177	$	—	$	—		$	177

(a)Includes income of $2$7 million in the second quarter of 2021 and less than $1 million in the second quarter of 2020, ~~and $5 million in the second quarter of 2019,~~ representing the change in fair value of AFG’s CLO investments plus $4 million in both the second quarter of ~~2020~~2021 and ~~2019~~2020, in CLO management fees earned.

(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including ~~$5 million and $6~~$4 million in the second quarter of ~~2020~~2021 and ~~2019, respectively,~~$1 million in the second quarter of 2020, in distributions recorded as interest expense by the CLOs.

(c)Elimination of management fees earned by AFG.

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Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS


		Before CLO Consolidation (a)		Managed Investment Entities		Consol. Entries			Consolidated As Reported			Before CLO Consolidation (a)		Managed Investment Entities		Consol. Entries			Consolidated As Reported
Six months ended June 30, 2020
Six months ended June 30, 2021											Six months ended June 30, 2021
Revenues:	Revenues:										Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	2,393	$	—	$	—		$	2,393	Property and casualty insurance net earned premiums	$	2,423	$	—	$	—		$	2,423
Net investment income	Net investment income	978		—		34		(b)	1,012		Net investment income	364		—		(12)		(b)	352
Realized gains (losses) on securities		(347)		—		—			(347)
Income (loss) of managed investment entities:
Realized gains (losses) on:											Realized gains (losses) on:
Securities											Securities	120		—		—			120
Subsidiary											Subsidiary	4		—		—			4
Income of managed investment entities:											Income of managed investment entities:
Investment income	Investment income	—		108		—			108		Investment income	—		90		—			90
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		(2)		(46)		(b)	(48)		Gain (loss) on change in fair value of assets/liabilities	—		2		6		(b)	8
Other income	Other income	116		—		(8)		(c)	108		Other income	51		—		(8)		(c)	43
Total revenues	Total revenues	3,140		106		(20)			3,226		Total revenues	2,962		92		(14)			3,040
Costs and Expenses:	Costs and Expenses:										Costs and Expenses:
Insurance benefits and expenses	Insurance benefits and expenses	3,087		—		—			3,087		Insurance benefits and expenses	2,151		—		—			2,151
Expenses of managed investment entities	Expenses of managed investment entities	—		106		(20)		(b)(c)	86		Expenses of managed investment entities	—		92		(14)		(b)(c)	78
Interest charges on borrowed money and other expenses	Interest charges on borrowed money and other expenses	223		—		—			223		Interest charges on borrowed money and other expenses	188		—		—			188
Total costs and expenses	Total costs and expenses	3,310		106		(20)			3,396		Total costs and expenses	2,339		92		(14)			2,417
Earnings (loss) before income taxes		(170)		—		—			(170)
Earnings (loss) from continuing operations before income taxes											Earnings (loss) from continuing operations before income taxes	623		—		—			623
Provision (credit) for income taxes	Provision (credit) for income taxes	(33)		—		—			(33)		Provision (credit) for income taxes	116		—		—			116
Net earnings (loss), including noncontrolling interests		(137)		—		—			(137)
Less: Net earnings (loss) attributable to noncontrolling interests		(13)		—		—			(13)
Net earnings (loss) from continuing operations, including noncontrolling interests											Net earnings (loss) from continuing operations, including noncontrolling interests	507		—		—			507
Net earnings (loss) from discontinued operations											Net earnings (loss) from discontinued operations	914		—		—			914
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests											Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		—		—			—
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	(124)	$	—	$	—		$	(124)	Net earnings (loss) attributable to shareholders	$	1,421	$	—	$	—		$	1,421

Six months ended June 30, 2019
Six months ended June 30, 2020											Six months ended June 30, 2020
Revenues:	Revenues:										Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	2,373	$	—	$	—		$	2,373	Property and casualty insurance net earned premiums	$	2,393	$	—	$	—		$	2,393
Net investment income	Net investment income	1,138		—		(16)		(b)	1,122		Net investment income	181		—		11		(b)	192
Realized gains (losses) on securities	Realized gains (losses) on securities	240		—		—			240		Realized gains (losses) on securities	(220)		—		—			(220)
Income (loss) of managed investment entities:
Income of managed investment entities:											Income of managed investment entities:
Investment income	Investment income	—		139		—			139		Investment income	—		108		—			108
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		(6)		4		(b)	(2)		Gain (loss) on change in fair value of assets/liabilities	—		(2)		(14)		(b)	(16)
Other income	Other income	119		—		(7)		(c)	112		Other income	51		—		(8)		(c)	43
Total revenues	Total revenues	3,870		133		(19)			3,984		Total revenues	2,405		106		(11)			2,500
Costs and Expenses:	Costs and Expenses:										Costs and Expenses:
Insurance benefits and expenses	Insurance benefits and expenses	2,951		—		—			2,951		Insurance benefits and expenses	2,307		—		—			2,307
Expenses of managed investment entities	Expenses of managed investment entities	—		133		(19)		(b)(c)	114		Expenses of managed investment entities	—		106		(11)		(b)(c)	95
Interest charges on borrowed money and other expenses	Interest charges on borrowed money and other expenses	247		—		—			247		Interest charges on borrowed money and other expenses	143		—		—			143
Total costs and expenses	Total costs and expenses	3,198		133		(19)			3,312		Total costs and expenses	2,450		106		(11)			2,545
Earnings (loss) before income taxes		672		—		—			672
Earnings (loss) from continuing operations before income taxes											Earnings (loss) from continuing operations before income taxes	(45)		—		—			(45)
Provision (credit) for income taxes	Provision (credit) for income taxes	137		—		—			137		Provision (credit) for income taxes	(4)		—		—			(4)
Net earnings (loss), including noncontrolling interests		535		—		—			535
Less: Net earnings (loss) attributable to noncontrolling interests		(4)		—		—			(4)
Net earnings (loss) from continuing operations, including noncontrolling interests											Net earnings (loss) from continuing operations, including noncontrolling interests	(41)		—		—			(41)
Net earnings (loss) from discontinued operations											Net earnings (loss) from discontinued operations	(96)		—		—			(96)
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests											Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	(13)		—		—			(13)
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	539	$	—	$	—		$	539	Net earnings (loss) attributable to shareholders	$	(124)	$	—	$	—		$	(124)

(a)Includes ~~a loss~~income of ~~$34~~$12 million in the first six monthsof 2021 and losses of $11 million in the first six months of 2020, ~~and income of $16 million in the first six months of 2019,~~ representing the change in fair value of AFG’s CLO investments plus $8 million ~~and $7 million~~ in both the first six months of ~~2020~~2021 and ~~2019, respectively,~~the first six months of 2020, in CLO management fees earned.

(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including ~~$12~~$6 million in ~~both~~ the first six months of ~~2020~~2021 and ~~2019,~~$3 million in the first six months of 2020, in distributions recorded as interest expense by the CLOs.

(c)Elimination of management fees earned by AFG.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

RESULTS OF OPERATIONS

General

AFG’s net earnings (loss) attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. ~~For example,~~In addition to discontinued operations, core net operating earnings excludes realized gains (losses) on securities because such gains and losses are influenced significantly by financial markets, interest rates and the timing of sales. Similarly, significant gains and losses from the sale of real estate are excluded from core earnings as they are influenced by the timing of sales and realized gains (losses) and significant tax benefits (charges) related to subsidiaries are excluded because such gains and losses are largely the result of the changing business strategy and market opportunities. In addition, special charges related to coverage that AFG no longer writes, such as ~~the Neon exited lines discussed below and~~ for asbestos and environmental exposures, are excluded from core earnings.

In January 2021, AFG entered into a definitive agreement to sell its annuity business to MassMutual. Beginning ~~prospectively~~ with the first quarter of 2021 and through the May 31, 2021 effective date of the sale, the results of its annuity segment and the run-off life and long-term care operations are reported as discontinued operations, in accordance with GAAP, which included adjusting prior period results to reflect these operations as discontinued.

AFG recorded $762 million in non-core net earnings from its discontinued annuity operations in the second quarter of ~~2019, AFG’s core~~2021, which includes a $697 million after tax gain on the sale, compared to $64 million in the second quarter of 2020. The first six months of 2021 include $914 million in non-core net ~~operating~~ earnings from the discontinued annuity operations compared to non-core net losses of $96 million in the first six months of 2020. See “Discontinued Annuity Operations” below for ~~its annuity segment excludes unlocking,~~details of the impact of ~~changes in~~ the ~~fair value of derivatives related to fixed-indexed annuities (“FIAs”), and other impacts of changes in the stock market and interest rates~~discontinued annuity operations on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs (“annuity non-core earnings (losses)”). Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of FIA liabilities that management believes can be inconsistent with the long-term economics of this growing portion of AFG’s annuity business. Management believes that separating these impacts as “non-core” will provide investors with a better view of the fundamental performance of the business, and a more comparable measure of the annuity segment’s business compared to the results identified as “core” by its peers. Core net operating earnings for the annuity segment for the first quarter of 2019 and prior periods were not adjusted, so results for the six months ended June 30, 2020 are not directly comparable to the six months ended June 30, 2019. The impact of the items now considered annuity non-core earnings (losses) on prior periods is highlighted in the discussion following the reconciliation of net earnings (loss) attributable to shareholders ~~to core net operating earnings.~~for the second quarter and first six months of 2021 and 2020.

In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off. Neon and its predecessor, Marketform, ~~have~~ failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008. Consistent with the treatment of other items that are not indicative of AFG’s ongoing operations (both favorable and unfavorable), beginning ~~prospectively~~ with the first quarter of 2020, AFG’s core net operating earnings for its property and casualty insurance segment excludes the run-off operations of Neon (“Neon exited lines”). In December 2020, AFG sold GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited.

AFG recorded non-core net losses of $32 million in the second quarter of 2020 and $39 million in the first six months of 2020 related to the run-off of the Neon business. In the second quarter of 2021, AFG recognized a non-core after tax gain of $3 million related to contingent consideration received on the sale of Neon. The Neon exited lines impact is highlighted in the discussion following the reconciliation of net earnings (loss) attributable to shareholders to core net operating earnings.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The following table (in millions, except per share amounts) identifies non-core items and reconciles net earnings (loss) attributable to shareholders to core net operating earnings, a non-GAAP financial measure. AFG believes core net operating earnings is a useful tool for investors and analysts in analyzing ongoing operating trends and for management to evaluate financial performance against historical results because it believes this provides a more comparable measure of its continuing business.


		Three months ended June 30,									Six months ended June 30,										Three months ended June 30,						Six months ended June 30,
				2020			2019			2020			2019				2021			2020			2021			2020
Components of net earnings (loss) attributable to shareholders:	Components of net earnings (loss) attributable to shareholders:													Components of net earnings (loss) attributable to shareholders:
Core operating earnings before income taxes	Core operating earnings before income taxes	$	115		$	236		$	326		$	465		Core operating earnings before income taxes	$	252		$	74		$	510		$	227
Pretax non-core items:	Pretax non-core items:													Pretax non-core items:
Realized gains (losses) on securities	Realized gains (losses) on securities	204			56			(347)			240			Realized gains (losses) on securities	43			108			120			(220)
Annuity non-core earnings (losses) (a)		(59)			(33)			(97)			(33)
Neon exited lines (b)		(42)			—			(52)			—

Neon exited lines (*)														Neon exited lines (*)	4			(42)			4			(52)

Other														Other	(11)			—			(11)			—
Earnings (loss) before income taxes	Earnings (loss) before income taxes	218			259			(170)			672			Earnings (loss) before income taxes	288			140			623			(45)
Provision (credit) for income taxes:	Provision (credit) for income taxes:													Provision (credit) for income taxes:
Core operating earnings	Core operating earnings	20			45			60			93			Core operating earnings	47			14			99			42
Non-core items:	Non-core items:													Non-core items:
Realized gains (losses) on securities	Realized gains (losses) on securities	43			11			(73)			50			Realized gains (losses) on securities	9			23			25			(46)
Annuity non-core earnings (losses) (a)		(12)			(6)			(20)			(6)

Total provision for income taxes		51			50			(33)			137
Net earnings (loss), including noncontrolling interests		167			209			(137)			535
Less net earnings (loss) attributable to noncontrolling interests:
Core operating earnings (loss)		—			(1)			—			(4)
Neon exited lines (b)		(10)			—			(13)			—
Total net earnings (loss) attributable to noncontrolling interests		(10)			(1)			(13)			(4)
Neon exited lines (*)														Neon exited lines (*)	1			—			1			—

Other														Other	(9)			—			(9)			—
Total provision (credit) for income taxes														Total provision (credit) for income taxes	48			37			116			(4)
Net earnings (loss) from continuing operations, including noncontrolling interests														Net earnings (loss) from continuing operations, including noncontrolling interests	240			103			507			(41)
Net earnings (loss) from discontinued operations														Net earnings (loss) from discontinued operations	762			64			914			(96)
Less net earnings (loss) from continuing operations attributable to noncontrolling interests:														Less net earnings (loss) from continuing operations attributable to noncontrolling interests:

Neon exited lines (*)														Neon exited lines (*)	—			(10)			—			(13)
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	177		$	210		$	(124)		$	539		Net earnings (loss) attributable to shareholders	$	1,002		$	177		$	1,421		$	(124)

Net earnings (loss):	Net earnings (loss):													Net earnings (loss):
Core net operating earnings	Core net operating earnings	$	95		$	192		$	266		$	376		Core net operating earnings	$	205		$	60		$	411		$	185
Realized gains (losses) on securities	Realized gains (losses) on securities	161			45			(274)			190			Realized gains (losses) on securities	34			85			95			(174)
Annuity non-core earnings (losses) (a)		(47)			(27)			(77)			(27)
Neon exited lines (b)		(32)			—			(39)			—

Neon exited lines (*)														Neon exited lines (*)	3			(32)			3			(39)

Other														Other	(2)			—			(2)			—
Net earnings (loss) from continuing operations														Net earnings (loss) from continuing operations	240			113			507			(28)
Discontinued annuity operations														Discontinued annuity operations	762			64			914			(96)
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	177		$	210		$	(124)		$	539		Net earnings (loss) attributable to shareholders	$	1,002		$	177		$	1,421		$	(124)

Diluted per share amounts:	Diluted per share amounts:													Diluted per share amounts:
Core net operating earnings	Core net operating earnings	$	1.05		$	2.12		$	2.94		$	4.14		Core net operating earnings	$	2.39		$	0.67		$	4.78		$	2.04
Realized gains (losses) on securities	Realized gains (losses) on securities	1.80			0.48			(3.03)			2.09			Realized gains (losses) on securities	0.40			0.95			1.10			(1.92)
Annuity non-core earnings (losses) (a)		(0.52)			(0.29)			(0.86)			(0.29)
Neon exited lines (b)		(0.36)			—			(0.43)			—

Neon exited lines (*)														Neon exited lines (*)	0.04			(0.36)			0.04			(0.43)

Other														Other	(0.02)			—			(0.02)			—
Diluted per share amounts, continuing operations														Diluted per share amounts, continuing operations	2.81			1.26			5.90			(0.31)
Discontinued annuity operations														Discontinued annuity operations	8.89			0.71			10.61			(1.07)
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	1.97		$	2.31		$	(1.38)		$	5.94		Net earnings (loss) attributable to shareholders	$	11.70		$	1.97		$	16.51		$	(1.38)

~~(a)~~(*)As discussed above, beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered annuity non-core earnings (losses).

~~(b)As discussed above, beginning prospectively with the first quarter of 2020,~~ the Neon run-off operations are considered property and casualty insurance non-core earnings (losses). In the second quarter of 2021, AFG recognized a non-core after tax gain of $3 million related to contingent consideration received on the sale of Neon.

~~Because AFG’s limited partnerships and similar investments accounted for using the equity method are reported on a quarter lag,~~Net earnings attributable to shareholders were $1.00 billion in the second quarter ~~returns reflect March 31,~~of 2021 compared to $177 million in the second quarter of 2020. The improvement reflects higher core net operating earnings, higher net earnings from the discontinued annuity operations, non-core losses from the Neon exited lines in the second quarter of 2020 ~~results provided by third party sources~~ and ~~incorporate the downturn in financial markets during the first quarter.~~

lower net

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~Net earnings attributable~~realized gains on securities in the second quarter of 2021 compared to ~~shareholders was $177~~the second quarter of 2020. The discontinued annuity operations includes an after-tax gain from the sale of the annuity subsidiaries of $697 million in the second quarter of 2020 compared to $210 million in the second quarter of 2019 reflecting lower core net operating earnings, higher losses from the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs, and non-core losses from the Neon exited lines, partially offset by higher net realized gains on securities.2021. Core net operating earnings for the second quarter of ~~2020 decreased $97~~2021 increased $145 million compared to the second quarter of ~~2019~~2020 reflecting ~~the negative impact of the COVID-19 pandemic on partnerships~~higher underwriting profit and ~~similar investments and AFG-managed CLOs~~net investment income in ~~both~~ the property and casualty insurance ~~and annuity segments.~~segment, partially offset by higher holding company expenses. Realized gains (losses) on securities in the second quarter of ~~2020~~2021 and ~~2019~~2020 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

Net earnings ~~(loss)~~ attributable to shareholders ~~was~~were $1.42 billion in the first six months of 2021 compared to a net loss of $124 million for the first six months of 2020 compared to net earnings of $539 million for the first six months of 2019 reflecting net realized losses on securities in the 2020 period compared to net realized gains in the 2019 period, lower core net operating earnings and non-core losses from the Neon exited lines. In addition, net earnings (loss) attributable to shareholders includes after-tax losses of $77 million in the first six months of ~~2020 and $36 million~~2020. The improved results reflect higher core net operating earnings, net realized gains on securities in the first six months of ~~2019 ($9~~2021 compared to net realized losses in the first six months of 2020, non-core losses from the Neon exited lines in the 2020 period and net earnings from the discontinued annuity operations in the first six months of 2021 compared to a net loss in the first six months of 2020. The discontinued annuity operations includes an after-tax gain from the sale of the annuity subsidiaries of $656 million in the 2021 period (including $41 million in tax liabilities triggered by the pending sale in the first quarter ~~and $27 million in the second quarter) from the impact~~ of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs. As discussed above, this impact on the accounting for FIAs is considered non-core earnings (losses) beginning prospectively with the second quarter of 2019. Excluding the $9 million after-tax negative impact of these items on results for the first quarter of 2019, core2021). Core net operating earnings for the first six months of ~~2020 decreased $119~~2021 increased $226 million compared to the first six months of ~~2019~~2020 reflecting ~~the negative impact of the COVID-19 pandemic on partnerships~~higher underwriting profit and ~~similar investments and AFG-managed CLOs~~net investment income in ~~both~~ the property and casualty insurance ~~and annuity segments,~~segment, partially offset by ~~lower~~higher interest charges on borrowed money and higher holding company expenses. Realized gains (losses) on securities in the first six months of ~~2020~~2021 and ~~2019~~2020 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

RESULTS OF OPERATIONS — THREE MONTHS ENDED JUNE 30, 2021 AND 2020

Segmented Statement of Earnings

Subsequent to the agreement to sell the Annuity subsidiaries, AFG reports its continuing operations as two segments: (i) Property and casualty insurance (“P&C”) and (ii) Other, which includes holding company costs and income and expenses related to the managed investment entities (“MIEs”).

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~RESULTS OF OPERATIONS — THREE MONTHS ENDED JUNE 30, 2020 AND 2019~~

~~Segmented Statement of Earnings~~

AFG reports its business as three segments: (i) Property and casualty insurance (“P&C”), (ii) Annuity and (iii) Other, which includes run-off long-term care and life, holding company costs and income and expenses related to the managed investment entities (“MIEs”).

AFG’s net earnings (loss) attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the three months ended June 30, ~~2020~~2021 and ~~2019~~2020 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions):


						Other																	Other
		P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated		Total		Non-core reclass		Neon exited lines (c)		GAAP Total			P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated		Total		Non-core reclass		GAAP Total
Three months ended June 30, 2020
Three months ended June 30, 2021																		Three months ended June 30, 2021
Revenues:	Revenues:																	Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,123	$	—	$	—	$	—	$	1,123	$	—	$	61	$	1,184	Property and casualty insurance net earned premiums	$	1,250	$	—	$	—	$	—	$	1,250	$	—	$	1,250
Net investment income	Net investment income	72		384		(2)		14		468		—		—		468		Net investment income	143		22		(7)		6		164		—		164
Realized gains (losses) on securities		—		—		—		—		—		204		—		204
Income (loss) of MIEs:
Realized gains (losses) on:																		Realized gains (losses) on:
Securities																		Securities	—		—		—		—		—		43		43
Subsidiary																		Subsidiary	—		—		—		—		—		4		4
Income of MIEs:																		Income of MIEs:
Investment income	Investment income	—		—		49		—		49		—		—		49		Investment income	—		—		44		—		44		—		44
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		—		(5)		—		(5)		—		—		(5)		Gain (loss) on change in fair value of assets/liabilities	—		—		6		—		6		—		6
Other income	Other income	3		30		(4)		22		51		—		—		51		Other income	1		—		(4)		23		20		—		20
Total revenues	Total revenues	1,198		414		38		36		1,686		204		61		1,951		Total revenues	1,394		22		39		29		1,484		47		1,531

Costs and Expenses:	Costs and Expenses:																	Costs and Expenses:
Property and casualty insurance:	Property and casualty insurance:																	Property and casualty insurance:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	705		—		—		—		705		—		66		771		Losses and loss adjustment expenses	714		—		—		—		714		—		714
Commissions and other underwriting expenses	Commissions and other underwriting expenses	366		—		—		5		371		—		38		409		Commissions and other underwriting expenses	384		—		—		6		390		—		390
Annuity benefits		—		274		—		(5)		269		157		—		426
Annuity and supplemental insurance acquisition expenses		—		62		—		1		63		(98)		—		(35)
Interest charges on borrowed money	Interest charges on borrowed money	—		—		—		23		23		—		—		23		Interest charges on borrowed money	—		—		—		23		23		—		23
Expenses of MIEs	Expenses of MIEs	—		—		38		—		38		—		—		38		Expenses of MIEs	—		—		39		—		39		—		39
Other expenses	Other expenses	11		36		—		55		102		—		(1)		101		Other expenses	8		—		—		58		66		11		77
Total costs and expenses	Total costs and expenses	1,082		372		38		79		1,571		59		103		1,733		Total costs and expenses	1,106		—		39		87		1,232		11		1,243
Earnings (loss) before income taxes		116		42		—		(43)		115		145		(42)		218
Earnings (loss) from continuing operations before income taxes																		Earnings (loss) from continuing operations before income taxes	288		22		—		(58)		252		36		288
Provision (credit) for income taxes	Provision (credit) for income taxes	22		6		—		(8)		20		31		—		51		Provision (credit) for income taxes	57		5		—		(15)		47		1		48
Net earnings (loss), including noncontrolling interests		94		36		—		(35)		95		114		(42)		167
Less: Net earnings (loss) attributable to noncontrolling interests		—		—		—		—		—		—		(10)		(10)
Net earnings (loss) from continuing operations, including noncontrolling interests																		Net earnings (loss) from continuing operations, including noncontrolling interests	231		17		—		(43)		205		35		240
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests																		Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		—		—		—		—		—		—
Core Net Operating Earnings (Loss)	Core Net Operating Earnings (Loss)	94		36		—		(35)		95								Core Net Operating Earnings (Loss)	231		17		—		(43)		205
Non-core earnings (loss) attributable to shareholders (a):	Non-core earnings (loss) attributable to shareholders (a):																	Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax	Realized gains (losses) on securities, net of tax	—		—		—		161		161		(161)		—		—		Realized gains (losses) on securities, net of tax	—		—		—		34		34		(34)		—
Annuity non-core earnings (losses), net of tax (b)		—		(47)		—		—		(47)		47		—		—
Neon exited lines (c)		(32)		—		—		—		(32)		—		32		—

Discontinued operations, net of tax																		Discontinued operations, net of tax	—		762		—		—		762		—		762
Neon exited lines (b)																		Neon exited lines (b)	3		—		—		—		3		(3)		—

Other, net of tax																		Other, net of tax	—		—		—		(2)		(2)		2		—
Net Earnings (Loss) Attributable to Shareholders	Net Earnings (Loss) Attributable to Shareholders	$	62	$	(11)	$	—	$	126	$	177	$	—	$	—	$	177	Net Earnings (Loss) Attributable to Shareholders	$	234	$	779	$	—	$	(11)	$	1,002	$	—	$	1,002

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued


										Other																Other
		P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated			Total		Non-core reclass		GAAP Total			P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated			Total		Non-core reclass		Neon exited lines (b)		GAAP Total
Three months ended June 30, 2019
Three months ended June 30, 2020																	Three months ended June 30, 2020
Revenues:	Revenues:																Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,200	$	—	$	—	$	—		$	1,200	$	—	$	1,200	Property and casualty insurance net earned premiums	$	1,123	$	—	$	—	$	—		$	1,123	$	—	$	61	$	1,184
Net investment income	Net investment income	124		451		(5)		10			580		—		580		Net investment income	72		7		—		9			88		—		—		88
Realized gains (losses) on securities	Realized gains (losses) on securities	—		—		—		—			—		56		56		Realized gains (losses) on securities	—		—		—		—			—		108		—		108
Income (loss) of MIEs:
Income of MIEs:																	Income of MIEs:
Investment income	Investment income	—		—		70		—			70		—		70		Investment income	—		—		49		—			49		—		—		49
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		—		(2)		—			(2)		—		(2)		Gain (loss) on change in fair value of assets/liabilities	—		—		(3)		—			(3)		—		—		(3)
Other income	Other income	2		30		(4)		28			56		—		56		Other income	3		(1)		(4)		21			19		—		—		19
Total revenues	Total revenues	1,326		481		59		38			1,904		56		1,960		Total revenues	1,198		6		42		30			1,276		108		61		1,445

Costs and Expenses:	Costs and Expenses:																Costs and Expenses:
Property and casualty insurance:	Property and casualty insurance:																Property and casualty insurance:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	723		—		—		—			723		—		723		Losses and loss adjustment expenses	705		—		—		—			705		—		66		771
Commissions and other underwriting expenses	Commissions and other underwriting expenses	418		—		—		8			426		—		426		Commissions and other underwriting expenses	366		—		—		5			371		—		38		409
Annuity benefits		—		275		—		(3)			272		67		339
Annuity and supplemental insurance acquisition expenses		—		67		—		—			67		(34)		33
Interest charges on borrowed money	Interest charges on borrowed money	—		—		—		17			17		—		17		Interest charges on borrowed money	—		—		—		23			23		—		—		23
Expenses of MIEs	Expenses of MIEs	—		—		59		—			59		—		59		Expenses of MIEs	—		—		42		—			42		—		—		42
Other expenses	Other expenses	11		35		—		58			104		—		104		Other expenses	11		5		—		45			61		—		(1)		60
Total costs and expenses	Total costs and expenses	1,152		377		59		80			1,668		33		1,701		Total costs and expenses	1,082		5		42		73			1,202		—		103		1,305
Earnings (loss) before income taxes		174		104		—		(42)			236		23		259
Earnings (loss) from continuing operations before income taxes																	Earnings (loss) from continuing operations before income taxes	116		1		—		(43)			74		108		(42)		140
Provision (credit) for income taxes	Provision (credit) for income taxes	35		20		—		(10)			45		5		50		Provision (credit) for income taxes	22		—		—		(8)			14		23		—		37
Net earnings (loss), including noncontrolling interests		139		84		—		(32)			191		18		209
Less: Net earnings (loss) attributable to noncontrolling interests		(1)		—		—		—			(1)		—		(1)
Net earnings (loss) from continuing operations, including noncontrolling interests																	Net earnings (loss) from continuing operations, including noncontrolling interests	94		1		—		(35)			60		85		(42)		103
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests																	Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		—		—		—			—		—		(10)		(10)
Core Net Operating Earnings (Loss)	Core Net Operating Earnings (Loss)	140		84		—		(32)			192						Core Net Operating Earnings (Loss)	94		1		—		(35)			60
Non-core earnings (loss) attributable to shareholders (a):	Non-core earnings (loss) attributable to shareholders (a):																Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax	Realized gains (losses) on securities, net of tax	—		—		—		45			45		(45)		—		Realized gains (losses) on securities, net of tax	—		—		—		85			85		(85)		—		—
Discontinued operations, net of tax																	Discontinued operations, net of tax	—		64		—		—			64		—		—		64
Neon exited lines (b)																	Neon exited lines (b)	(32)		—		—		—			(32)		—		32		—

Annuity non-core earnings (losses), net of tax (b)		—		(27)		—		—			(27)		27		—
Net Earnings (Loss) Attributable to Shareholders	Net Earnings (Loss) Attributable to Shareholders	$	140	$	57	$	—	$	13		$	210	$	—	$	210	Net Earnings (Loss) Attributable to Shareholders	$	62	$	65	$	—	$	50		$	177	$	—	$	—	$	177

(a)See the reconciliation of core earnings to GAAP net earnings under “Results of Operations — General” for details on the tax and noncontrolling interest impacts of these reconciling items.

(b)As discussed under “Results of Operations — General,” beginning with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered annuity non-core earnings (losses).

~~(c)As discussed under “Results of Operations — General,” beginning with the first quarter of 2020,~~ the Neon run-off operations are considered property and casualty insurance non-core earnings (losses).

Property and Casualty Insurance Segment — Results of Operations

Performance measures such as underwriting profit or loss and related combined ratios are often used by property and casualty insurers to help users of their financial statements better understand the company’s performance. Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses and loss adjustment expenses, and commissions and other underwriting expenses to premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect net investment income, other income, other expenses or federal income taxes.

AFG’s property and casualty insurance operations contributed ~~$74~~$292 million in GAAP pretax earnings in the second quarter of ~~2020~~2021 compared to ~~$174~~$74 million in the second quarter of ~~2019, a decrease~~2020, an increase of ~~$100~~$218 million ~~(57%~~(295%). Property and casualty core pretax earnings were $288 million in the second quarter of 2021 compared to $116 million in the second quarter of 2020, ~~compared to $174~~an increase of $172 million (148%). The increase in GAAP pretax earnings reflects higher core pretax earnings and the impact of losses in the Neon exited lines in the second quarter of ~~2019, a decrease of $58 million (33%).~~2020. The ~~decrease~~increase in ~~both GAAP and~~ core pretax earnings reflects ~~lower net investment income~~higher core underwriting profit in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019~~2020 and significantly higher net investment income. Improved results from alternative investments (partnerships and similar investments and AFG-managed CLOs) were partially offset by lower other net investment income, due primarily to ~~the impact of financial market disruption on earnings (losses) from partnerships and similar investments.~~

lower short-term interest rates.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The following table details AFG’s GAAP and core earnings before income taxes from its property and casualty insurance operations for the three months ended June 30, ~~2020~~2021 and ~~2019~~2020 (dollars in millions):


		Three months ended June 30,													Three months ended June 30,
		2020			2019			% Change				2021			2020			% Change
Gross written premiums	Gross written premiums	$	1,539		$	1,664		(8		%)	Gross written premiums	$	1,937		$	1,539		26		%
Reinsurance premiums ceded	Reinsurance premiums ceded	(416)			(400)			4		%	Reinsurance premiums ceded	(568)			(416)			37		%
Net written premiums	Net written premiums	1,123			1,264			(11		%)	Net written premiums	1,369			1,123			22		%
Change in unearned premiums	Change in unearned premiums	—			(64)			(100		%)	Change in unearned premiums	(119)			—			—		%
Net earned premiums	Net earned premiums	1,123			1,200			(6		%)	Net earned premiums	1,250			1,123			11		%
Loss and loss adjustment expenses	Loss and loss adjustment expenses	705			723			(2		%)	Loss and loss adjustment expenses	714			705			1		%
Commissions and other underwriting expenses	Commissions and other underwriting expenses	366			418			(12		%)	Commissions and other underwriting expenses	384			366			5		%
Core underwriting gain	Core underwriting gain	52			59			(12		%)	Core underwriting gain	152			52			192		%

Net investment income	Net investment income	72			124			(42		%)	Net investment income	143			72			99		%
Other income and expenses, net	Other income and expenses, net	(8)			(9)			(11		%)	Other income and expenses, net	(7)			(8)			(13		%)
Core earnings before income taxes	Core earnings before income taxes	116			174			(33		%)	Core earnings before income taxes	288			116			148		%

Pretax non-core Neon exited lines (*)	Pretax non-core Neon exited lines (*)	(42)			—			—		%	Pretax non-core Neon exited lines (*)	4			(42)			(110		%)
GAAP earnings before income taxes		$	74		$	174		(57		%)

(*) In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd. (“Neon”), into run-off. As discussed under “Results of Operations — General,” following the December 2019 decision to exit the Lloyd’s of London insurance market, the results from the Neon exited lines are being treated as non-core earnings (losses) prospectively beginning in 2020. Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the three months ended June 30, 2020 (in millions):
GAAP earnings before income taxes and noncontrolling interests											GAAP earnings before income taxes and noncontrolling interests	$	292		$	74		295		%
(*) In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd. (“Neon”), into run-off. As discussed under “Results of Operations — General,” following the December 2019 decision to exit the Lloyd’s of London insurance market, the results from the Neon exited lines are treated as non-core earnings (losses). Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the three months ended June 30, 2020 (in millions):											(*) In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd. (“Neon”), into run-off. As discussed under “Results of Operations — General,” following the December 2019 decision to exit the Lloyd’s of London insurance market, the results from the Neon exited lines are treated as non-core earnings (losses). Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the three months ended June 30, 2020 (in millions):

		Three months ended June 30, 2020																Three months ended June 30, 2020
		Excluding Neon exited lines			Neon exited lines			Total				Excluding Neon exited lines			Neon exited lines			Total
Gross written premiums	Gross written premiums	$	1,539		$	14		$	1,553		Gross written premiums	$	1,539		$	14		$	1,553
Reinsurance premiums ceded	Reinsurance premiums ceded	(416)			(6)			(422)			Reinsurance premiums ceded	(416)			(6)			(422)
Net written premiums	Net written premiums	1,123			8			1,131			Net written premiums	1,123			8			1,131
Change in unearned premiums	Change in unearned premiums	—			53			53			Change in unearned premiums	—			53			53
Net earned premiums	Net earned premiums	1,123			61			1,184			Net earned premiums	1,123			61			1,184
Loss and loss adjustment expenses	Loss and loss adjustment expenses	705			66			771			Loss and loss adjustment expenses	705			66			771
Commissions and other underwriting expenses	Commissions and other underwriting expenses	366			38			404			Commissions and other underwriting expenses	366			38			404
Underwriting gain (loss)	Underwriting gain (loss)	52			(43)			9			Underwriting gain (loss)	52			(43)			9

Net investment income	Net investment income	72			—			72			Net investment income	72			—			72

Other income and expenses, net	Other income and expenses, net	(8)			1			(7)			Other income and expenses, net	(8)			1			(7)
Earnings (loss) before income taxes and noncontrolling interests	Earnings (loss) before income taxes and noncontrolling interests	$	116		$	(42)		$	74		Earnings (loss) before income taxes and noncontrolling interests	$	116		$	(42)		$	74

		Three months ended June 30,													Three months ended June 30,
		2020			2019			Change				2021			2020			Change
Combined Ratios:	Combined Ratios:										Combined Ratios:
Specialty lines	Specialty lines										Specialty lines
Loss and LAE ratio	Loss and LAE ratio	62.6		%	60.2		%	2.4		%	Loss and LAE ratio	57.2		%	62.6		%	(5.4		%)
Underwriting expense ratio	Underwriting expense ratio	32.6		%	34.8		%	(2.2		%)	Underwriting expense ratio	30.7		%	32.6		%	(1.9		%)
Combined ratio	Combined ratio	95.2		%	95.0		%	0.2		%	Combined ratio	87.9		%	95.2		%	(7.3		%)

Aggregate — including exited lines	Aggregate — including exited lines										Aggregate — including exited lines
Loss and LAE ratio	Loss and LAE ratio	65.1		%	60.3		%	4.8		%	Loss and LAE ratio	57.2		%	65.1		%	(7.9		%)
Underwriting expense ratio	Underwriting expense ratio	34.1		%	34.8		%	(0.7		%)	Underwriting expense ratio	30.7		%	34.1		%	(3.4		%)
Combined ratio	Combined ratio	99.2		%	95.1		%	4.1		%	Combined ratio	87.9		%	99.2		%	(11.3		%)

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

AFG reports the underwriting performance of its Specialty property and casualty insurance business in the following sub-segments: (i) Property and transportation, (ii) Specialty casualty and (iii) Specialty financial.

To understand the overall profitability of particular lines, the timing of claims payments and the related impact of investment income must be considered. Certain “short-tail” lines of business (primarily property coverages) generally have quick loss payouts, which reduce the time funds are held, thereby limiting investment income earned thereon. In contrast, “long-tail” lines of business (primarily liability coverages and workers’ compensation) generally have payouts that are either structured over many years or take many years to settle, thereby significantly increasing investment income earned on related premiums received.

Gross Written Premiums

Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $1.94 billion for the second quarter of 2021 compared to $1.55 billion for the second quarter of 2020, ~~compared to $1.66 billion for the second quarter~~an increase of ~~2019, a decrease of $111~~$384 million ~~(7%~~(25%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):


		Three months ended June 30,																	Three months ended June 30,
		2020						2019									2021				2020
		GWP		%		GWP		%		% Change			GWP		%		GWP		%		% Change
Property and transportation	Property and transportation	$	611	39	%	$	579	35	%	6	%	Property and transportation	$	851	44	%	$	611	39	%	39	%
Specialty casualty	Specialty casualty	752		49	%	896		54	%	(16	%)	Specialty casualty	897		46	%	752		49	%	19	%
Specialty financial	Specialty financial	176		11	%	189		11	%	(7	%)	Specialty financial	189		10	%	176		11	%	7	%
Total specialty	Total specialty	1,539		99	%	1,664		100	%	(8	%)	Total specialty	1,937		100	%	1,539		99	%	26	%
Neon exited lines	Neon exited lines	14		1	%	—		—	%	—	%	Neon exited lines	—		—	%	14		1	%	(100	%)
Aggregate	Aggregate	$	1,553	100	%	$	1,664	100	%	(7	%)	Aggregate	$	1,937	100	%	$	1,553	100	%	25	%

Reinsurance Premiums Ceded

Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 29% of gross written premiums for the second quarter of 2021 compared to 27% of gross written premiums for the second quarter of 2020, ~~compared to 24% of gross written premiums for the second quarter of 2019,~~ an increase of 32 percentage points. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):


		Three months ended June 30,																		Three months ended June 30,
		2020						2019								Change in		2021				2020		Change in
		Ceded		% of GWP		Ceded		% of GWP		% of GWP			Ceded		% of GWP			Ceded		% of GWP		% of GWP
Property and transportation	Property and transportation	$	(185)	30	%	$	(157)	27	%	3	%	Property and transportation	$	(287)	34		%	$	(185)	30	%	4	%
Specialty casualty	Specialty casualty	(241)		32	%	(234)		26	%	6	%	Specialty casualty	(305)		34		%	(241)		32	%	2	%
Specialty financial	Specialty financial	(37)		21	%	(40)		21	%	—	%	Specialty financial	(30)		16		%	(37)		21	%	(5	%)
Other specialty	Other specialty	47				31						Other specialty	54					47
Total specialty	Total specialty	(416)		27	%	(400)		24	%	3	%	Total specialty	(568)		29		%	(416)		27	%	2	%
Neon exited lines	Neon exited lines	(6)		43	%	—		—	%	43	%	Neon exited lines	—		—		%	(6)		43	%	(43	%)
Aggregate	Aggregate	$	(422)	27	%	$	(400)	24	%	3	%	Aggregate	$	(568)	29		%	$	(422)	27	%	2	%

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $1.37 billion for the second quarter of 2021 compared to $1.13 billion for the second quarter of 2020, ~~compared to $1.26 billion for the second quarter~~an increase of ~~2019, a decrease of $133~~$238 million ~~(11%~~(21%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):


		Three months ended June 30,																	Three months ended June 30,
		2020						2019									2021				2020
		NWP		%		NWP		%		% Change			NWP		%		NWP		%		% Change
Property and transportation	Property and transportation	$	426	38	%	$	422	33	%	1	%	Property and transportation	$	564	41	%	$	426	38	%	32	%
Specialty casualty	Specialty casualty	511		45	%	662		52	%	(23	%)	Specialty casualty	592		43	%	511		45	%	16	%
Specialty financial	Specialty financial	139		12	%	149		12	%	(7	%)	Specialty financial	159		12	%	139		12	%	14	%
Other specialty	Other specialty	47		4	%	31		3	%	52	%	Other specialty	54		4	%	47		4	%	15	%
Total specialty	Total specialty	1,123		99	%	1,264		100	%	(11	%)	Total specialty	1,369		100	%	1,123		99	%	22	%
Neon exited lines	Neon exited lines	8		1	%	—		—	%	—	%	Neon exited lines	—		—	%	8		1	%	(100	%)
Aggregate	Aggregate	$	1,131	100	%	$	1,264	100	%	(11	%)	Aggregate	$	1,369	100	%	$	1,131	100	%	21	%

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $1.25 billion for the second quarter of 2021 compared to $1.18 billion for the second quarter of 2020, ~~compared to $1.20 billion for the second quarter~~an increase of ~~2019, a decrease of $16~~$66 million ~~(1%~~(6%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):


		Three months ended June 30,																	Three months ended June 30,
		2020						2019									2021				2020
		NEP		%		NEP		%		% Change			NEP		%		NEP		%		% Change
Property and transportation	Property and transportation	$	390	33	%	$	379	32	%	3	%	Property and transportation	$	453	36	%	$	390	33	%	16	%
Specialty casualty	Specialty casualty	547		46	%	634		53	%	(14	%)	Specialty casualty	588		47	%	547		46	%	7	%
Specialty financial	Specialty financial	144		12	%	151		13	%	(5	%)	Specialty financial	157		13	%	144		12	%	9	%
Other specialty	Other specialty	42		4	%	36		2	%	17	%	Other specialty	52		4	%	42		4	%	24	%
Total specialty	Total specialty	1,123		95	%	1,200		100	%	(6	%)	Total specialty	1,250		100	%	1,123		95	%	11	%
Neon exited lines	Neon exited lines	61		5	%	—		—	%	—	%	Neon exited lines	—		—	%	61		5	%	(100	%)
Aggregate	Aggregate	$	1,184	100	%	$	1,200	100	%	(1	%)	Aggregate	$	1,250	100	%	$	1,184	100	%	6	%

Gross written premiums for the second quarter of ~~2020 decreased $111~~2021 increased $384 million ~~(7%~~(25%) compared to the second quarter of ~~2019~~2020 reflecting ~~a decrease in the Specialty casualty and Specialty financial sub-segments, partially offset by~~ an increase in each of the Specialty property and ~~transportation sub-segment.~~casualty insurance sub-segments due primarily to higher renewal rates and increased exposures. Overall average renewal rates increased approximately 9% in the second quarter of ~~2020.~~2021. Excluding rate decreases in the workers’ compensation business, renewal pricing increased approximately ~~13%~~12%.

Property and transportation Gross written premiums increased ~~$32~~$240 million ~~(6%~~(39%) in the second quarter of ~~2020 when~~2021 compared to the second quarter of ~~2019, which was impacted by delayed acreage reporting from insureds~~2020 due primarily to higher premiums in the transportation businesses, as a result of ~~excess moisture~~new accounts, combined with strong renewals and ~~late planting of corn~~increased exposures in the alternative risk transfer business and ~~soybean crops. Excluding~~higher premiums in the crop insurance ~~gross written premiums for the second quarter of 2020 decreased by 3% in this group when compared to the 2019 second quarter. Decreases in premiums due to return of premiums and reduced exposures~~business as a result of ~~the COVID-19 pandemic were partially offset by new business opportunities~~higher commodity futures pricing and timing differences in the ~~transportation, property and inland marine and ocean marine businesses.~~writing of premiums. Average renewal rates increased approximately 7% for this group in the second quarter of ~~2020.~~2021. Reinsurance premiums ceded as a percentage of gross written premiums increased 34 percentage points in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019~~2020 reflecting growth in the crop ~~and certain ocean marine business,~~insurance operations, which cede a larger percentage of premiums than the other businesses in the ~~Specialty property~~Property and transportation ~~sub-segment.~~sub-segment and the impact of $3 million in reinsurance reinstatement premiums in the second quarter of 2021 related to a large property loss.

Specialty casualty Gross written premiums ~~decreased $144~~increased $145 million ~~(16%~~(19%) in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019 due primarily~~2020. Significant renewal rate increases and new business opportunities contributed to higher premiums in the excess liability businesses. Higher renewal rates and increased exposures contributed to premium growth in the excess and surplus lines business. The executive liability and mergers and acquisitions businesses also contributed meaningfully to the ~~run-off of Neon. Excluding the impact of $159 million in gross written premiums from the Neon exited lines~~year-over-year growth. Average renewal rates increased approximately 11% for this group in the second quarter of ~~2019,~~2021. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 17%. Reinsurance premiums ceded as a percentage of gross written premiums increased 2%2 percentage points in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019. This increase reflects significant renewal rate increases, coupled with new business opportunities~~2020 reflecting growth in the excess ~~and surplus and excess liability businesses, partially offset by lower premiums due to reduced exposures in the workers’ compensation businesses as a result of the COVID-19 pandemic.~~

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Average renewal rates increased approximately 12% for this group in the second quarter of 2020. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 21%. Reinsurance premiums ceded as a percentage of gross written premiums increased 6 percentage points in the second quarter of 2020 compared to the second quarter of 2019 reflecting growth in the excess and surplus, mergers and ~~excess liability~~acquisitions and environmental businesses, which cede a larger percentage of premiums than the other businesses in the Specialty casualty sub-segment.

Specialty financial Gross written premiums ~~decreased~~increased $13 million (7%) in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019~~2020 due primarily to ~~lower premiums from~~renewal rate increases and new business opportunities within the ~~impact of various state regulations regarding policy cancellations~~lender services, surety and ~~the placement of forced coverage in the financial institutions business.~~fidelity businesses. Average renewal rates increased approximately 6%8% for this group in the second quarter of ~~2020.~~2021. Reinsurance premiums ceded as a percentage of gross written premiums ~~were comparable for~~decreased 5 percentage points in the second quarter of 2021 compared to the second quarter of 2020 ~~and~~reflecting lower cessions in the ~~second quarter of 2019.~~financial institutions business due to reduced premiums from collateral protection insurance that is 100% reinsured.

Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed increased ~~$16~~$7 million ~~(52%~~(15%) in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019,~~2020, reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment.

Combined Ratio

The table below (dollars in millions) details the components of the combined ratio and underwriting profit for AFG’s property and casualty insurance segment:


		Three months ended June 30,								Three months ended June 30,							Three months ended June 30,						Three months ended June 30,
		2020		2019		Change		2020		2019			2021		2020		Change		2021		2020
Property and transportation	Property and transportation											Property and transportation
Loss and LAE ratio	Loss and LAE ratio	61.3	%	68.4	%	(7.1	%)					Loss and LAE ratio	58.2	%	61.3	%	(3.1	%)
Underwriting expense ratio	Underwriting expense ratio	30.4	%	30.7	%	(0.3	%)					Underwriting expense ratio	28.4	%	30.4	%	(2.0	%)
Combined ratio	Combined ratio	91.7	%	99.1	%	(7.4	%)					Combined ratio	86.6	%	91.7	%	(5.1	%)
Underwriting profit	Underwriting profit							$	33	$	4	Underwriting profit							$	62	$	33

Specialty casualty	Specialty casualty											Specialty casualty
Loss and LAE ratio	Loss and LAE ratio	67.1	%	60.0	%	7.1	%					Loss and LAE ratio	61.9	%	67.1	%	(5.2	%)
Underwriting expense ratio	Underwriting expense ratio	27.8	%	32.5	%	(4.7	%)					Underwriting expense ratio	26.0	%	27.8	%	(1.8	%)
Combined ratio	Combined ratio	94.9	%	92.5	%	2.4	%					Combined ratio	87.9	%	94.9	%	(7.0	%)
Underwriting profit	Underwriting profit							$	27	$	47	Underwriting profit							$	71	$	27

Specialty financial	Specialty financial											Specialty financial
Loss and LAE ratio	Loss and LAE ratio	44.9	%	32.3	%	12.6	%					Loss and LAE ratio	33.0	%	44.9	%	(11.9	%)
Underwriting expense ratio	Underwriting expense ratio	55.5	%	53.3	%	2.2	%					Underwriting expense ratio	53.4	%	55.5	%	(2.1	%)
Combined ratio	Combined ratio	100.4	%	85.6	%	14.8	%					Combined ratio	86.4	%	100.4	%	(14.0	%)
Underwriting profit (loss)	Underwriting profit (loss)							$	—	$	21	Underwriting profit (loss)							$	21	$	—

Total Specialty	Total Specialty											Total Specialty
Loss and LAE ratio	Loss and LAE ratio	62.6	%	60.2	%	2.4	%					Loss and LAE ratio	57.2	%	62.6	%	(5.4	%)
Underwriting expense ratio	Underwriting expense ratio	32.6	%	34.8	%	(2.2	%)					Underwriting expense ratio	30.7	%	32.6	%	(1.9	%)
Combined ratio	Combined ratio	95.2	%	95.0	%	0.2	%					Combined ratio	87.9	%	95.2	%	(7.3	%)
Underwriting profit	Underwriting profit							$	54	$	60	Underwriting profit							$	153	$	54

Aggregate — including exited lines	Aggregate — including exited lines											Aggregate — including exited lines
Loss and LAE ratio	Loss and LAE ratio	65.1	%	60.3	%	4.8	%					Loss and LAE ratio	57.2	%	65.1	%	(7.9	%)
Underwriting expense ratio	Underwriting expense ratio	34.1	%	34.8	%	(0.7	%)					Underwriting expense ratio	30.7	%	34.1	%	(3.4	%)
Combined ratio	Combined ratio	99.2	%	95.1	%	4.1	%					Combined ratio	87.9	%	99.2	%	(11.3	%)
Underwriting profit	Underwriting profit							$	9	$	59	Underwriting profit							$	152	$	9

The Specialty property and casualty insurance operations generated an underwriting profit of $153 million in the second quarter of 2021 compared to $54 million in the second quarter of 2020, ~~compared to $60~~an increase of $99 million (183%). The higher underwriting profit in the second quarter of 2021 reflects higher underwriting profits in each of the Specialty property and casualty insurance sub-segments. Overall catastrophe losses were $10 million (0.9 points on the combined ratio) and related net reinstatement premiums were $1 million in the second quarter of ~~2019, a decrease~~2021 compared to catastrophe losses of ~~$6 million (10%). The lower~~

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~underwriting profit~~$26 million (2.3 points) in the second quarter of ~~2020 reflects lower underwriting profits in the Specialty casualty and Specialty financial sub-segments, partially offset by higher underwriting profit in the Property and transportation sub-segment.~~2020. Underwriting results for the Specialty property and casualty insurance operations includes ~~$85~~$2 million ~~in COVID-19 related losses (7.6~~(0.2 points on the combined ratio) and $85 million (7.6 points) in COVID-19 related losses in the second quarter of ~~2020.~~2021 and the second quarter of 2020, respectively.

Property and transportation Underwriting profit for this group was $62 million for the second quarter of 2021 compared to $33 million for the second quarter of 2020, ~~compared to $4 million for the second quarter of 2019,~~ an increase of $29 million ~~(725%~~(88%). This increase reflects higher ~~favorable prior year reserve development of $22~~underwriting profit in the crop, property and inland marine and transportation businesses. Catastrophe losses were $6 million (1.4 points on the combined ratio) compared to $15 million (3.8 points) in the second quarter of ~~2020 compared to the second quarter of 2019, primarily in the transportation businesses.~~2020. COVID-19 related losses for this group were $3 million (0.8 points on the combined ratio) in the second quarter of 2020. ~~Catastrophe losses were $15 million (3.8 points) in the second quarter of 2020 compared to $8 million (2.0 points) in the second quarter of 2019.~~

Specialty casualty Underwriting profit for this group was $71 million for the second quarter of 2021 compared to $27 million for the second quarter of 2020, ~~compared to $47~~an increase of $44 million ~~for~~(163%). This increase reflects higher underwriting profitability in the excess and surplus lines, excess liability, targeted markets and executive liability businesses in the second quarter of ~~2019, a decrease~~2021 compared to the second quarter of ~~$20~~2020. Catastrophe losses were $2 million ~~(43%).~~(0.3 points on the combined ratio) compared to $6 million (0.9 points) in the second quarter of 2020. COVID-19 related losses for this group were $52 million (9.5 points on the combined ratio) in the second quarter of 2020, primarily in the workers’ compensation and executive liability businesses. These losses, in addition to lower year-over-year underwriting profitability in the alternative markets and social services businesses were partially offset by higher favorable prior year reserve development of $20 million in the second quarter of 2020 compared to the second quarter of 2019, primarily in the workers’ compensation businesses, higher profitability in the excess and surplus and excess liability businesses, and the impact of $4 million of underwriting losses at Neon in the second quarter of 2019.

Specialty financial ~~This~~Underwriting profit for this group ~~reported~~was $21 million for the second quarter of 2021 compared to an underwriting loss of less than $1 million ~~for~~in the second quarter of 2020, an increase of $21 million. This increase reflects higher year-over-year underwriting profitability in the trade credit business. Catastrophe losses were $2 million (1.8 points on the combined ratio) compared to ~~an underwriting profit of $21~~$5 million (3.6 points) in the second quarter of ~~2019, a decrease of $21 million (100%).~~2020. COVID-19 related losses for this group were ~~$30~~$2 million ~~(21.1~~(1.3 points on the combined ratio) in the second quarter of 2021 compared to $30 million (21.1 points) in the second quarter of 2020, primarily related to trade credit insurance.

Other specialty This group reported an underwriting loss of $1 million in the second quarter of 2021 compared to $6 million in the second quarter of 2020, ~~compared to $12~~a decrease of $5 million ~~in the second quarter of 2019, reflecting~~(83%). This decrease reflects lower losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019.~~2020.

Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment includes an underwriting loss of $43 million at Neon in the second quarter of 2020, due primarily to losses related to the COVID-19 pandemic. AFG also recorded adverse prior year reserve development of $2$1 million and $1$2 million in the second quarter of ~~2020~~2021 and ~~2019,~~2020, respectively, related to business outside of the Specialty group that AFG no longer writes.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Losses and Loss Adjustment Expenses

AFG’s overall loss and LAE ratio was 57.2% for the second quarter of 2021 compared to 65.1% for the second quarter of 2020, ~~compared to 60.3% for the second quarter~~a decrease of ~~2019, an increase of 4.8~~7.9 percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions):


		Three months ended June 30,																	Three months ended June 30,
		Amount						Ratio								Change in	Amount				Ratio		Change in
		2020		2019		2020		2019		Ratio			2021		2020		2021		2020		Ratio
Property and transportation	Property and transportation											Property and transportation
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	249	$	257	63.9	%	68.0	%	(4.1	%)	Current year, excluding COVID-19 related and catastrophe losses	$	297	$	249	65.6	%	63.9	%	1.7	%
Prior accident years development	Prior accident years development	(28)		(6)		(7.2	%)	(1.6	%)	(5.6	%)	Prior accident years development	(40)		(28)		(8.8	%)	(7.2	%)	(1.6	%)
COVID-19 related losses		3		—		0.8	%	—	%	0.8	%
Current year COVID-19 related losses												Current year COVID-19 related losses	—		3		—	%	0.8	%	(0.8	%)
Current year catastrophe losses	Current year catastrophe losses	15		8		3.8	%	2.0	%	1.8	%	Current year catastrophe losses	6		15		1.4	%	3.8	%	(2.4	%)
Property and transportation losses and LAE and ratio	Property and transportation losses and LAE and ratio	$	239	$	259	61.3	%	68.4	%	(7.1	%)	Property and transportation losses and LAE and ratio	$	263	$	239	58.2	%	61.3	%	(3.1	%)

Specialty casualty	Specialty casualty											Specialty casualty
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	360	$	410	66.0	%	64.6	%	1.4	%	Current year, excluding COVID-19 related and catastrophe losses	$	381	$	360	64.9	%	66.0	%	(1.1	%)
Prior accident years development	Prior accident years development	(51)		(31)		(9.3	%)	(4.7	%)	(4.6	%)	Prior accident years development	(20)		(51)		(3.4	%)	(9.3	%)	5.9	%
COVID-19 related losses		52		—		9.5	%	—	%	9.5	%
Current year COVID-19 related losses												Current year COVID-19 related losses	—		52		0.1	%	9.5	%	(9.4	%)
Current year catastrophe losses	Current year catastrophe losses	6		1		0.9	%	0.1	%	0.8	%	Current year catastrophe losses	2		6		0.3	%	0.9	%	(0.6	%)
Specialty casualty losses and LAE and ratio	Specialty casualty losses and LAE and ratio	$	367	$	380	67.1	%	60.0	%	7.1	%	Specialty casualty losses and LAE and ratio	$	363	$	367	61.9	%	67.1	%	(5.2	%)

Specialty financial	Specialty financial											Specialty financial
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	41	$	55	28.2	%	36.4	%	(8.2	%)	Current year, excluding COVID-19 related and catastrophe losses	$	60	$	41	37.2	%	28.2	%	9.0	%
Prior accident years development	Prior accident years development	(11)		(9)		(8.0	%)	(5.9	%)	(2.1	%)	Prior accident years development	(12)		(11)		(7.3	%)	(8.0	%)	0.7	%
COVID-19 related losses		30		—		21.1	%	—	%	21.1	%
Current year COVID-19 related losses												Current year COVID-19 related losses	2		30		1.3	%	21.1	%	(19.8	%)
Current year catastrophe losses	Current year catastrophe losses	5		3		3.6	%	1.8	%	1.8	%	Current year catastrophe losses	2		5		1.8	%	3.6	%	(1.8	%)
Specialty financial losses and LAE and ratio	Specialty financial losses and LAE and ratio	$	65	$	49	44.9	%	32.3	%	12.6	%	Specialty financial losses and LAE and ratio	$	52	$	65	33.0	%	44.9	%	(11.9	%)

Total Specialty	Total Specialty											Total Specialty
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	677	$	752	60.3	%	62.7	%	(2.4	%)	Current year, excluding COVID-19 related and catastrophe losses	$	769	$	677	61.5	%	60.3	%	1.2	%
Prior accident years development	Prior accident years development	(85)		(42)		(7.6	%)	(3.4	%)	(4.2	%)	Prior accident years development	(68)		(85)		(5.4	%)	(7.6	%)	2.2	%
COVID-19 related losses		85		—		7.6	%	—	%	7.6	%
Current year COVID-19 related losses												Current year COVID-19 related losses	2		85		0.2	%	7.6	%	(7.4	%)
Current year catastrophe losses	Current year catastrophe losses	26		12		2.3	%	0.9	%	1.4	%	Current year catastrophe losses	10		26		0.9	%	2.3	%	(1.4	%)
Total Specialty losses and LAE and ratio	Total Specialty losses and LAE and ratio	$	703	$	722	62.6	%	60.2	%	2.4	%	Total Specialty losses and LAE and ratio	$	713	$	703	57.2	%	62.6	%	(5.4	%)

Aggregate — including exited lines	Aggregate — including exited lines											Aggregate — including exited lines
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	717	$	752	60.7	%	62.7	%	(2.0	%)	Current year, excluding COVID-19 related and catastrophe losses	$	769	$	717	61.5	%	60.7	%	0.8	%
Prior accident years development	Prior accident years development	(77)		(41)		(6.5	%)	(3.3	%)	(3.2	%)	Prior accident years development	(67)		(77)		(5.4	%)	(6.5	%)	1.1	%
COVID-19 related losses		105		—		8.8	%	—	%	8.8	%
Current year COVID-19 related losses												Current year COVID-19 related losses	2		105		0.2	%	8.8	%	(8.6	%)
Current year catastrophe losses	Current year catastrophe losses	26		12		2.1	%	0.9	%	1.2	%	Current year catastrophe losses	10		26		0.9	%	2.1	%	(1.2	%)
Aggregate losses and LAE and ratio	Aggregate losses and LAE and ratio	$	771	$	723	65.1	%	60.3	%	4.8	%	Aggregate losses and LAE and ratio	$	714	$	771	57.2	%	65.1	%	(7.9	%)

Current accident year losses and LAE, excluding COVID-19 related and catastrophe losses

The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG’s Specialty property and casualty insurance operations was 61.5% for the second quarter of 2021 compared to 60.3% for the second quarter of 2020, ~~compared to 62.7% for the second quarter~~an increase of ~~2019, an improvement of 2.4~~1.2 percentage points.

Property and transportation The ~~4.1~~1.7 percentage point ~~improvement~~increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects ~~a decrease~~growth in the crop operations, which has a higher loss and LAE ratio ~~at National Interstate,~~than many of the businesses in the property and transportation segment, a higher loss and LAE ratio in the ocean marine business due to higher claim frequency and severity in the second quarter of 2021 compared to the second quarter of 2020 and a higher loss and LAE ratio in the equine business due to higher claim severity in the second quarter of 2021 compared to the second quarter of 2020.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

due primarily to rate increases and lower claim frequency in the second quarter of 2020, and lower loss and LAE ratios in the Singapore branch and equine mortality business in the second quarter of 2020 compared to the second quarter of 2019.

Specialty casualty The ~~1.4~~1.1 percentage point increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects the impact of the Neon exited lines in the second quarter of 2019, which have a lower loss and LAE ratio than many of the other businesses in the Specialty casualty group. Excluding the impact of the Neon exited lines, the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses increased 0.4 percentage points in the second quarter of 2020 compared to the second quarter of 2019.

~~Specialty financial~~ ~~The 8.2 percentage point improvement~~decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects a decrease in the loss and LAE ratios of the excess and surplus businesses due primarily to the earned impact of rate increases obtained in 2020 and the first six months of 2021, partially offset by an increase in the loss and LAE ratio of the executive liability business.

Specialty financial The 9.0 percentage point increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects an increase in the loss and LAE ratio of the financial institutions ~~business.~~and trade credit businesses.

Net prior year reserve development

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $68 million in the second quarter of 2021 compared to $85 million in the second quarter of 2020, ~~compared to $42~~a decrease of $17 million ~~in the second quarter of 2019, an increase of $43 million (102%~~(20%).

Property and transportation Net favorable reserve development of $40 million in the second quarter of 2021 reflects lower than anticipated claim frequency and severity in the transportation and agricultural businesses and lower than expected claim severity in the property and inland marine business. Net favorable reserve development of $28 million in the second quarter of 2020 reflects lower than anticipated claim frequency and severity in the transportation and agricultural businesses.

Specialty casualty Net favorable reserve development of $20 million in the second quarter of 2021 reflects lower than anticipated claim severity in the workers’ compensation businesses and lower than expected claim frequency and severity in the ~~agricultural businesses. Net favorable reserve development of $6 million~~excess and surplus lines businesses, partially offset by higher than anticipated severity in ~~the second quarter of 2019 reflects lower than expected losses in the crop business.~~

~~Specialty casualty~~general liability claims. Net favorable reserve development of $51 million in the second quarter of 2020 reflects lower than anticipated claim frequency and severity in the workers’ compensation businesses. Net favorable reserve development of $31 million in the second quarter of 2019 reflects lower than anticipated claim severity in the workers’ compensation businesses, partially offset by higher than expected claim severity in the excess and surplus lines businesses.

Specialty financial Net favorable reserve development of $12 million in the second quarter of 2021 reflects lower than anticipated claim frequency in the surety business and lower than expected claim frequency and severity in the financial institutions business. Net favorable reserve development of $11 million in the second quarter of 2020 reflects lower than anticipated claim frequency in the trade credit and surety ~~businesses. Net favorable reserve development of $9 million in the second quarter of 2019 reflects lower than expected claim frequency and severity in the surety and financial institutions~~ businesses.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $4 million in the second quarter of 2021 and $5 million in the second quarter of 2020, ~~and $4 million in the second quarter of 2019,~~ reflecting net adverse reserve development ~~of $7 million and $6 million in the second quarter of 2020 and the second quarter of 2019, respectively,~~ associated with AFG’s internal reinsurance program, partially offset by the amortization of the deferred ~~gain~~gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001.

Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes net adverse reserve development of $6 million in the second quarter of 2020 from the Neon exited lines and net adverse reserve development of $2$1 million and $1$2 million in the second quarter of ~~2020~~2021 and ~~the second quarter of 2019,~~2020, respectively, related to ~~other~~ business outside of the Specialty group that AFG no longer writes.

COVID-19 related losses

~~Underwriting results for~~ AFG’s Specialty property and casualty insurance operations ~~for~~recorded $2 million in reserve charges related to COVID-19 in the second quarter of 2021 primarily related to the economic slowdown impacting the trade credit business, and released approximately $4 million of accident year 2020 ~~included $85 million in COVID-19 related losses.~~reserves based on loss experience. Given the uncertainties surrounding the ultimate number orand scope of claims relating to the pandemic, ~~these charges,~~ approximately ~~90%~~66% of ~~which establish reserves for claims that have been~~the $96 million in COVID-19 related losses are held as incurred but not reported ~~represent the Company’s current best estimate of losses from the pandemic and related economic disruption incurred through~~reserves at June 30, ~~2020.~~2021. Underwriting results for the second quarter of 2020 include $85 million of reserve charges related to COVID-19. Approximately 70% of AFG’s 2020 COVID-19 related losses were reported in the ~~workers’~~worker’s compensation, executive liability and trade credit businesses, with the remainder spread across numerous other businesses.

~~In addition, COVID related losses were the primary driver of the increased underwriting loss recorded in the Neon exited lines for the second quarter of 2020.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Catastrophe losses

AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. Based on data available at December 31, ~~2019,~~2020, AFG’s

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

exposure to a catastrophic earthquake or windstorm that industry models indicate should statistically occur once in every 100, 250 or 500 years as a percentage of AFG’s Shareholders’ Equity is shown below:

Approximate impact of modeled loss

Industry Model

on AFG’s Shareholders’ Equity

100-year event

250-year event

2%1%

500-year event

6%2%

AFG maintains comprehensive property catastrophe reinsurance coverage for its property and casualty insurance operations, including a $15 million per occurrence net retention, for ~~its U.S.-based property and casualty insurance operations for~~ losses up to ~~$109 million. Neon’s excess~~$125 million in the vast majority of circumstances. In certain unlikely events, AFG’s ultimate loss ~~catastrophe reinsurance limits the maximum retained loss per event to $15~~under this coverage could be as high as $24 million for ~~losses up to $145 million on direct business and $15 million for losses up to $45 million on assumed business. AFG’s property and casualty insurance operations~~a single occurrence. AFG further ~~maintain~~maintains supplemental fully collateralized reinsurance coverage up to ~~95%~~94% of ~~$200~~$325 million for catastrophe losses in excess of ~~$109~~$125 million of traditional catastrophe reinsurance through a catastrophe bond. Effective July 1, 2020, AFG purchased an additional $50 million of reinsurance coverage for losses in excess of $100 million. Recoveries from the catastrophe bond apply before calculating losses recoverable from this catastrophe excess of loss reinsurance.

Catastrophe losses of $10 million in the second quarter of 2021 resulted primarily from storms in multiple regions of the United States. Catastrophe losses of $26 million in the second quarter of 2020 resulted primarily from storms and tornadoes in multiple regions of the United States and included $4 million related to civil unrest. ~~Catastrophe losses of $12 million in the second quarter of 2019 resulted primarily from storms and tornadoes in multiple regions of the United States.~~

Commissions and Other Underwriting Expenses

AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were ~~$404~~$384 million in the second quarter of ~~2020~~2021 compared to ~~$418~~$404 million for the second quarter of ~~2019,~~2020, a decrease of ~~$14~~$20 million ~~(3%~~(5%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 30.7% for the second quarter of 2021 compared to 34.1% for the second quarter of 2020, ~~compared to 34.8% for the second quarter of 2019,~~ a decrease of ~~0.7~~3.4 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):


		Three months ended June 30,																		Three months ended June 30,
		2020						2019								Change in		2021				2020		Change in
		U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP			U/W Exp		% of NEP			U/W Exp		% of NEP		% of NEP
Property and transportation	Property and transportation	$	118	30.4	%	$	116	30.7	%	(0.3	%)	Property and transportation	$	128	28.4		%	$	118	30.4	%	(2.0	%)
Specialty casualty	Specialty casualty	153		27.8	%	207		32.5	%	(4.7	%)	Specialty casualty	154		26.0		%	153		27.8	%	(1.8	%)
Specialty financial	Specialty financial	79		55.5	%	81		53.3	%	2.2	%	Specialty financial	84		53.4		%	79		55.5	%	(2.1	%)
Other specialty	Other specialty	16		37.3	%	14		39.1	%	(1.8	%)	Other specialty	18		35.7		%	16		37.3	%	(1.6	%)
Total specialty	Total specialty	366		32.6	%	418		34.8	%	(2.2	%)	Total specialty	384		30.7		%	366		32.6	%	(1.9	%)
Neon exited lines	Neon exited lines	38				—						Neon exited lines	—					38
Aggregate	Aggregate	$	404	34.1	%	$	418	34.8	%	(0.7	%)	Aggregate	$	384	30.7		%	$	404	34.1	%	(3.4	%)

Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums decreased ~~0.3~~2.0 percentage points in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019~~2020 reflecting higher profitability-based ceding commissions received from reinsurers in the crop business and the impact of higher premiums on the ratio in the ~~property and inland marine business, partially offset by lower profitability-based ceding commissions received from reinsurers in the crop business~~transportation businesses in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019.~~2020.

Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums decreased ~~4.7~~1.8 percentage points in the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019 due~~2020 reflecting higher ceding commissions received from reinsurers as a result of growth in the excess liability and excess and surplus businesses and the impact of higher premiums on the ratio in the second quarter of 2021 compared to the ~~runoff~~second quarter of ~~Neon. Neon has~~2020.

Specialty financial Commissions and other underwriting expenses as a ~~higher expense ratio than many~~percentage of ~~the other businesses in the Specialty casualty sub-segment. Excluding Neon exited lines, the underwriting expense ratio~~net earned premiums decreased ~~2.2~~2.1 percentage points in the second quarter of 2021 compared to the second quarter of 2020 reflecting the impact of higher premiums on the ratio in the second quarter of 2021 compared to the second quarter of 2020.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~2020 compared to the second quarter of 2019 reflecting the impact of higher premiums on the ratio in the excess and surplus and excess liability businesses.~~

~~Specialty financial~~ Commissions and other underwriting expenses as a percentage of net earned premiums increased 2.2 percentage points in the second quarter of 2020 compared to the second quarter of 2019 reflecting the impact of lower premiums on the ratio.

Property and Casualty Net Investment Income

~~Excluding the Neon exited lines, net~~Net investment income in AFG’s property and casualty insurance operations was ~~$72~~$143 million in the second quarter of ~~2020~~2021 compared to ~~$124~~$72 million (excluding the Neon exited lines) in the second quarter of ~~2019, a decrease~~2020, an increase of ~~$52~~$71 million ~~(42%~~(99%). The average invested assets and overall yield earned on investments held by AFG’s property and casualty insurance operations are provided below (dollars in millions):


		Three months ended June 30,															Three months ended June 30,
		2020			2019			Change			% Change			2021			2020			Change			% Change
Net investment income		$	72		$	124		$	(52)		(42	%)
Net investment income:													Net investment income:
Net investment income excluding alternative investments													Net investment income excluding alternative investments	$	80		$	85		$	(5)		(6	%)
Alternative investments													Alternative investments	63			(13)			76			(585	%)
Total net investment income													Total net investment income	$	143		$	72		$	71		99	%

Average invested assets (at amortized cost)	Average invested assets (at amortized cost)	$	11,454		$	11,193		$	261		2	%	Average invested assets (at amortized cost)	$	12,630		$	11,454		$	1,176		10	%

Yield (net investment income as a % of average invested assets)	Yield (net investment income as a % of average invested assets)	2.51		%	4.43		%	(1.92		%)			Yield (net investment income as a % of average invested assets)	4.53		%	2.51		%	2.02		%

Tax equivalent yield (*)	Tax equivalent yield (*)	2.64		%	4.60		%	(1.96		%)			Tax equivalent yield (*)	4.67		%	2.64		%	2.03		%

(*)Adjusts the yield on equity securities and tax-exempt bonds to the fully taxable equivalent yield.

The property and casualty insurance segment’s ~~decrease~~increase in net investment income for the second quarter of ~~2020~~2021 compared to the second quarter of ~~2019~~2020 reflects ~~lower~~significantly higher earnings from ~~partnerships~~alternative investments (partnerships and similar investments inand AFG-managed CLOs), partially offset by the ~~second quarter~~effect of ~~2020, higher average cash balances~~lower fixed maturity yields and lower short-term interest ~~rates, partially offset by the impact of growth in the property and casualty insurance segment.~~rates. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 4.53% for the second quarter of 2021 compared to 2.51% for the second quarter of 2020, ~~compared to 4.43% for the second quarter~~an increase of ~~2019, a decrease of 1.92~~2.02 percentage points. ~~AFG’s property and casualty insurance operations recorded $13 million in losses from partnerships and similar~~The annualized return earned on alternative investments ~~and AFG-managed CLOs~~was 22.9% in the second quarter of ~~2020~~2021 compared to ~~$23 million in earnings in the second quarter of 2019, a $36 million (157%) decrease in earnings. The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was~~ a negative ~~yield~~return of 5.9% in the ~~second quarter of 2020 compared to a positive yield of 13.3% in the~~ prior year period. Because the property and casualty segment’s partnerships and similar investments accounted for using the equity method are reported on a quarter lag, the second quarter 2020 returns on those investments reflect the financial results and valuations for the quarter ended March 31, 2020, including the impact of the downturn in financial markets during the first quarter.

Property and Casualty Other Income and Expenses, Net

Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $7 million for the second quarter of 2021 compared to $8 million for the second quarter of 2020, ~~compared to $9 million for the second quarter of 2019,~~ a decrease of $1 million ~~(11%~~(13%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions):


		Three months ended June 30,							Three months ended June 30,
		2020		2019			2021		2020

Other income	Other income	$	3	$	2	Other income	$	1	$	3
Other expenses	Other expenses					Other expenses
Amortization of intangibles	Amortization of intangibles	3		3		Amortization of intangibles	1		3
Other	Other	8		8		Other	7		8
Total other expenses	Total other expenses	11		11		Total other expenses	8		11
Other income and expenses, net	Other income and expenses, net	$	(8)	$	(9)	Other income and expenses, net	$	(7)	$	(8)

In addition to the property and casualty segment’s other income and expenses, net from ongoing operations discussed above, the Neon exited lines incurred net income of $1 million in other income and expenses, net during the second quarter of 2020.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion~~Holding Company, Other and ~~Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Segment~~Unallocated — Results of Operations

AFG’s ~~annuity operations incurred a~~net GAAP pretax loss outside of ~~$17~~its property and casualty insurance segment (excluding realized gains and losses) totaled $69 million in the second quarter of 2021 compared to $43 million in the second quarter of 2020, ~~compared to~~an increase of $26 million (60%). AFG’s net core pretax ~~earnings~~loss outside of ~~$71~~its property and casualty insurance segment (excluding realized gains and losses) totaled $58 million in the second quarter of ~~2019, a change of $88 million (124%) due primarily~~2021 compared to the losses from partnerships and similar investments and the unfavorable impact of significantly lower than anticipated interest rates in the second quarter of 2020, partially offset by the positive impact of strong stock market performance in the 2020 quarter.

~~The following table details AFG’s GAAP and core earnings (loss) before income taxes from its annuity operations for the three months ended June 30, 2020 and 2019 (dollars in millions):~~

Three months ended June 30,
2020 2019 % Change
Revenues:
Net investment income $ 384 $ 451 (15 %)
Other income:
Guaranteed withdrawal benefit fees 17 17 — %
Policy charges and other miscellaneous income (a) 13 13 — %
Total revenues 414 481 (14 %)
Costs and Expenses:
Annuity benefits (a)(b) 274 275 — %
Acquisition expenses (a) 62 67 (7 %)
Other expenses 36 35 3 %
Total costs and expenses 372 377 (1 %)
Core earnings before income taxes 42 104 (60 %)
Pretax non-core earnings (losses) (a) (59) (33) 79 %
GAAP earnings (loss) before income taxes $ (17) $ 71 (124 %)

~~(a)As discussed under~~ ~~“Results of Operations — General,”~~ beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the second quarter of 2020 and 2019, annuity benefits exclude the $157 million and $67 million unfavorable impact, respectively, of these items and acquisition expenses exclude the related $98 million and $34 million favorable impact, respectively, on the amortization of deferred policy acquisition costs.

~~(b)Details of the components of annuity benefits are provided below.~~

~~Annuity core earnings before income taxes were $42~~$43 million in the second quarter of 2020, ~~compared to $104~~an increase of $15 million ~~in the second quarter of 2019, a decrease of $62 million (60%~~(35%), reflecting losses from partnerships and similar investments in the 2020 quarter and the impact of lower interest rates, partially offset by growth in the business, higher than expected persistency, lower than expected expenses related to guaranteed withdrawal benefits, strong stock market performance and a reduction in the cost of funds as a percentage of average annuity benefits accumulated. The table below highlights the impact of changes in the fair value of derivatives and other impacts of the changes in the stock market and interest rates on annuity segment results (dollars in millions):

Three months ended June 30,
2020 2019 % Change
Earnings before income taxes — before the impact of derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs $ 42 $ 104 (60 %)
Impact of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs:
Change in fair value of derivatives related to FIAs (213) (103) 107 %
Accretion of guaranteed minimum FIA benefits (106) (102) 4 %
Other annuity benefits 14 (8) (275 %)
Less cost of equity options 148 146 1 %
Related impact on the amortization of deferred policy acquisition costs 98 34 188 %
Earnings (loss) before income taxes $ (17) $ 71 (124 %)
.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~Annuity benefits consisted of the following (dollars in millions):~~

Three months ended June 30,
2020 2019 Total
Core Non-core Total Core Non-core Total % Change
Interest credited — fixed $ 103 $ — $ 103 $ 98 $ — $ 98 5 %
Accretion of guaranteed minimum FIA benefits — 106 106 — 102 102 4 %
Interest credited — fixed component of variable annuities 1 — 1 1 — 1 — %
Cost of equity options 148 (148) — 146 (146) — — %
Other annuity benefits:
Amortization of sales inducements 2 (1) 1 4 — 4 (75 %)
Change in guaranteed withdrawal benefit reserve:
Impact of change in the stock market and interest rates — (24) (24) — (4) (4) 500 %
Accretion of benefits and other 17 — 17 20 — 20 (15 %)
Change in expected death and annuitization reserves and other 3 — 3 6 — 6 (50 %)
Change in other benefit reserves — impact of changes in interest rates and the stock market — 11 11 — 12 12 (8 %)
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market — 601 601 — 251 251 139 %
Equity option mark-to-market — (388) (388) — (148) (148) 162 %
Impact of derivatives related to FIAs — 213 213 — 103 103 107 %
Total annuity benefits $ 274 $ 157 $ 431 $ 275 $ 67 $ 342 26 %

Because fluctuations in interest rates and the stock market, among other factors, can cause volatility in annuity benefits expense related to FIAs that can be inconsistent with the long-term economics of the FIA business, management believes that including the actual cost of the equity options purchased in the FIA business and excluding unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs provides investors with a better view of the true cost of funds in the business and a more comparable measure compared to the cost of funds reported by its peers. The cost of the equity options included in AFG’s cost of funds is the net purchase price of the option contracts amortized on a straight-line basis over the life of the contracts, which is generally one year. The following table reconciles AFG’s non-GAAP cost of funds measure to total annuity benefits expense (in millions):

Three months ended June 30,
2020 2019
Interest credited — fixed $ 103 $ 98
Include cost of equity options 148 146
Cost of funds 251 244
Interest credited — fixed component of variable annuities 1 1
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs 22 30
274 275
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates over or under option costs:
Impact of derivatives related to FIAs 213 103
Accretion of guaranteed minimum FIA benefits 106 102
Other annuity benefits — impact of the stock market and interest rates on FIAs (14) 8
Less cost of equity options (included in cost of funds) (148) (146)
Total annuity benefits expense $ 431 $ 342

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Net Spread on Fixed Annuities (excludes variable annuity earnings)~~

The profitability of a fixed annuity business is largely dependent on the ability of a company to earn income on the assets supporting the business in excess of the amounts credited to policyholder accounts plus expenses incurred (earning a “spread”). Performance measures such as net interest spread and net spread earned are often presented by annuity businesses to help users of their financial statements better understand the company’s performance.

~~The table below (dollars in millions) details the components of these spreads for AFG’s fixed annuity operations (including fixed-indexed and variable-indexed annuities):~~

Three months ended June 30,
2020 2019 % Change
Average fixed annuity investments (at amortized cost) $ 40,570 $ 37,907 7 %
Average fixed annuity benefits accumulated 40,601 38,202 6 %
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments) 3.77 % 4.73 %
Cost of funds (2.47 %) (2.55 %)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*) (0.06 %) (0.13 %)
Net interest spread 1.24 % 2.05 %
Policy charges and other miscellaneous income (*) 0.11 % 0.11 %
Acquisition expenses (*) (0.61 %) (0.68 %)
Other expenses (0.35 %) (0.37 %)
Net spread earned on fixed annuities excluding the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs 0.39 % 1.11 %
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs (0.58 %) (0.35 %)
Net spread earned on fixed annuities (0.19 %) 0.76 %

~~(*)~~Excluding the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on annuity benefits and the related impact on the amortization of deferred policy acquisition costs.

~~Annuity Net Investment Income~~

Net investment income for the second quarter of 2020 was $384 million compared to $451 million for the second quarter of 2019, a decrease of $67 million (15%), reflecting lower earnings from partnerships and similar investments, partially offset by growth in AFG’s annuity business. The overall yield earned on investments in AFG’s fixed annuity operations, calculated as net investment income divided by average investment balances (at amortized cost), decreased by 0.96 percentage points to 3.77% from 4.73% in the second quarter of 2020 compared to the second quarter of 2019. The decrease in the net investment yield between periods reflects the negative impact of lower earnings from partnerships and similar investments in the second quarter of 2020, lower short-term interest rates and the impact of the run-off of higher yielding investments. AFG’s annuity segment recorded $37 million in losses from partnerships and similar investments and AFG-managed CLOs in the second quarter of 2020 compared to $31 million in earnings in the second quarter of 2019, a change of $68 million (219%). The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was a negative yield of 11.3% in the second quarter of 2020 compared to a positive yield of 11.2% in the prior year period. Because the annuity segment’s partnerships and similar investments accounted for using the equity method are reported on a quarter lag, the second quarter 2020 returns from those investments reflect the financial results and valuations as of March 31, 2020, including the downturn in financial markets during the first quarter.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Cost of Funds~~

Cost of funds for the second quarter of 2020 was $251 million compared to $244 million for the second quarter of 2019, an increase of $7 million (3%). This increase reflects growth in the annuity business. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, decreased 0.08 percentage points to 2.47% in the second quarter of 2020 from 2.55% in the second quarter of 2019 reflecting the impact of offering lower renewal crediting rates on option costs.

~~The following table provides details of AFG’s interest credited and other cost of funds (in millions):~~

Three months ended June 30,
2020 2019
Cost of equity options (FIAs) $ 148 $ 146
Interest credited:
Traditional fixed annuities 64 61
Fixed component of fixed-indexed annuities 26 23
Immediate annuities 6 6
Pension risk transfer products 4 1
Federal Home Loan Bank advances 3 7
Total cost of funds $ 251 $ 244

~~Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees~~

Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of the stock market and interest rates, for the second quarter of 2020 were $5 million compared to $13 million for the second quarter of 2019, a decrease of $8 million (62%). As a percentage of average fixed annuity benefits accumulated, these net expenses decreased 0.07% to 0.06% from 0.13% in the second quarter of 2020 compared to the second quarter of 2019. In addition to interest credited to policyholders’ accounts and the change in fair value of derivatives related to fixed-indexed annuities, annuity benefits expense also includes the following expenses (in millions, net of guaranteed withdrawal benefit fees):

Three months ended June 30,
2020 2019
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements $ 2 $ 4
Change in guaranteed withdrawal benefit reserve 17 20
Change in other benefit reserves 3 6
Other annuity benefits 22 30
Offset guaranteed withdrawal benefit fees (17) (17)
Other annuity benefits excluding the impact of the stock market and interest rates, net 5 13
Other annuity benefits — impact of the stock market and interest rates (14) 8
Other annuity benefits, net $ (9) $ 21

~~As discussed under~~ ~~“Annuity Benefits Accumulated”~~ in ~~Note A — “Accounting Policies”~~ to the financial statements, guaranteed withdrawal benefit reserves are accrued for and modified using assumptions similar to those used in establishing and amortizing deferred policy acquisition costs. In addition, the guaranteed withdrawal benefit reserve related to FIAs can be inversely impacted by the calculated FIA embedded derivative reserve as the value to policyholders of the guaranteed withdrawal benefits decreases when the benefit of stock market participation increases. As shown in the table above, changes in the stock market and interest rates decreased AFG’s guaranteed withdrawal benefit reserve by $14 million in the second quarter of 2020 compared to an increase of $8 million in the second quarter of 2019. This $22 million (275%) change was the primary driver of the $30 million overall change in other annuity benefits, net of guaranteed withdrawal fees in the second quarter of 2020 compared to the second quarter of 2019.

~~Annuity Net Interest Spread~~

AFG’s net interest spread decreased 0.81 percentage points to 1.24% from 2.05% in the second quarter of 2020 compared to the same period in 2019 due primarily to the lower earnings from partnerships and similar investments in the second quarter of 2020. Features included in current annuity product offerings allow AFG to achieve its desired profitability at a lower net interest spread than historical product offerings. As a result, AFG expects its net interest spread to narrow in the future.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Policy Charges and Other Miscellaneous Income~~

~~Annuity Acquisition Expenses~~

The following table illustrates the acceleration/deceleration of the amortization of deferred policy acquisition costs (“DPAC”) resulting from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs (in millions):

Three months ended June 30,
2020 2019
Annuity acquisition expenses before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates $ 62 $ 67
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates (98) (34)
Annuity acquisition expenses $ (36) $ 33

Annuity acquisitions expenses before the acceleration/deceleration of the amortization resulting from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs were $62 million for the second quarter of 2020 compared to $67 million for the second quarter of 2019, a decrease of $5 million (7%), reflecting higher than expected persistency and the positive impact of the significant increase in stock market performance on variable annuities in the second quarter of 2020.

The negative impact of significantly lower than anticipated interest rates in the second quarter of 2020 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC. This deceleration of the amortization of DPAC in the second quarter of 2020 was partially offset by the positive impact of strong stock market performance in the 2020 period. The negative impact of lower than anticipated interest rates during the second quarter of 2019 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC.

The table below illustrates the estimated impact of changes in the fair value of derivatives related to fixed-indexed annuities and other impacts of changes in the stock market and interest rates on FIAs on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated:

Three months ended June 30,
2020 2019
Before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates 0.61 % 0.68 %
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates (0.97 %) (0.36 %)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated (0.36 %) 0.32 %

~~Annuity Other Expenses~~

Annuity other expenses were $36 million for the second quarter of 2020 compared to $35 million for the second quarter of 2019, an increase of $1 million (3%). Annuity other expenses represent primarily general and administrative expenses, as well as selling and issuance expenses that are not deferred. As a percentage of average fixed annuity benefits accumulated, these expenses decreased 0.02 percentage points to 0.35% for the second quarter of 2020 from 0.37% in the second quarter of 2019 due primarily to growth in the annuity business.

~~Change in Fair Value of Derivatives Related to Fixed-Indexed (Including Variable-Indexed) Annuities and Other Impacts of Changes in the Stock Market and Interest Rates on FIAs~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

strategy is designed so that the net change in the fair value of the call option assets and put option liabilities 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. For a list of other factors impacting the fair value of the embedded derivative component of AFG’s annuity benefits accumulated, see ~~Note D — “Fair Value Measurements”~~ to the financial statements. 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 above under~~ ~~“Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees”~~ ~~and~~ ~~“Annuity Acquisition Expenses,”~~ the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates. These impacts may be temporary in nature and not necessarily indicative of the long-term performance of the FIA business. The table below highlights the impact of changes in the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates over or under the cost of the equity index options (discussed above) on earnings before income taxes for the annuity segment (dollars in millions):

Three months ended June 30,
2020 2019 % Change
Change in the fair value of derivatives related to FIAs $ (213) $ (103) 107 %
Accretion of guaranteed minimum FIA benefits (106) (102) 4 %
Other annuity benefits 14 (8) (275 %)
Less cost of equity options 148 146 1 %
Related impact on the amortization of DPAC 98 34 188 %
Impact on annuity segment earnings before income taxes $ (59) $ (33) 79 %

During the second quarter of 2020, the negative impact of significantly lower than anticipated interest rates, partially offset by the positive impact of strong stock market performance, reduced earnings before income taxes for the annuity segment by $59 million compared to the $33 million impact of significantly lower than anticipated interest rates, partially offset by the favorable impact of positive stock market performance on annuity earnings before income taxes for the second quarter of 2019, an increase of $26 million (79%). As a percentage of average fixed annuity benefits accumulated, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense of 0.58% in the second quarter of 2020 compared to 0.35% in the second quarter of 2019.

The following table provides analysis of the primary factors impacting the change in the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options discussed above. Each factor is presented net of the estimated related impact on amortization of DPAC (dollars in millions).

Three months ended June 30,
2020 2019 % Change
Changes in the stock market, including volatility $ 38 $ 7 443 %
Changes in interest rates higher (lower) than expected (100) (38) 163 %
Other 3 (2) (250 %)
Impact on annuity segment earnings before income taxes $ (59) $ (33) 79 %

~~Annuity Net Spread Earned on Fixed Annuities~~

AFG’s net spread earned on fixed annuities excluding the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates over or under option costs decreased 0.72 percentage points to 0.39% in the second quarter of 2020 from 1.11% in the second quarter of 2019 due primarily to the 0.81 percentage points decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities changed 0.95 percentage points to a net loss of 0.19% in the second quarter of 2020 from net earnings of 0.76% in the second quarter of 2019 due to the decrease in AFG’s net interest spread, the impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates on the accounting for FIAs discussed above.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Benefits Accumulated~~

Annuity premiums received and benefit payments are recorded as increases or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in this liability for interest credited and other benefits are charged to expense and decreases for surrender and other policy charges are credited to other income.

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, excess benefits expected to be paid on future deaths and annuitizations (“EDAR”) and guaranteed withdrawal benefits. Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati. The following table is a progression of AFG’s annuity benefits accumulated liability for the three months ended June 30, 2020 and 2019 (in millions):

Three months ended June 30,
2020 2019
Beginning fixed annuity reserves $ 40,260 $ 37,724
Fixed annuity premiums (receipts) 682 1,343
Federal Home Loan Bank advances and repayments (40) —
Surrenders, benefits and other withdrawals (768) (862)
Interest and other annuity benefit expenses:
Cost of funds 251 244
Embedded derivative mark-to-market 601 251
Change in other benefit reserves (44) (20)
Ending fixed annuity reserves $ 40,942 $ 38,680
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above) $ 40,942 $ 38,680
Impact of unrealized investment related gains 285 192
Fixed component of variable annuities 165 172
Annuity benefits accumulated per balance sheet $ 41,392 $ 39,044

Annuity benefits accumulated includes a liability of $680 million at June 30, 2020 and $491 million at June 30, 2019 for guaranteed withdrawal benefits on annuities with features that allow the policyholder to take fixed periodic lifetime benefit payments that could exceed account value. As discussed above under ~~“Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees”~~ ~~and~~ ~~“Annuity Acquisition Expenses,”~~ ~~the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates.~~

~~Statutory Annuity Premiums~~

AFG’s annuity operations generated gross statutory premiums of $687 million in the second quarter of 2020 compared to $1.35 billion in the second quarter of 2019, a decrease of $662 million (49%). The following table summarizes AFG’s annuity sales (dollars in millions):

Three months ended June 30,
2020 2019 % Change
Financial institutions single premium annuities — indexed $ 258 $ 429 (40 %)
Financial institutions single premium annuities — fixed 98 313 (69 %)
Retail single premium annuities — indexed 138 274 (50 %)
Retail single premium annuities — fixed 31 36 (14 %)
Broker dealer single premium annuities — indexed 100 189 (47 %)
Broker dealer single premium annuities — fixed 2 8 (75 %)
Pension risk transfer 23 50 (54 %)
Education market — fixed and indexed annuities 32 44 (27 %)
Total fixed annuity premiums 682 1,343 (49 %)
Variable annuities 5 6 (17 %)
Total gross fixed annuity premiums 687 1,349 (49 %)
Ceded premiums (78) — — %
Total net annuity premiums $ 609 $ 1,349 (55 %)

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Management attributes the 49% decrease in total gross fixed annuity premiums in the second quarter of 2020 compared to the second quarter of 2019 to the lower market interest rate environment. In response to the continued drop in market interest rates during 2019 and 2020, AFG lowered crediting rates on several products, which has slowed annuity sales compared to 2019 levels. In addition, many of the restrictions from the COVID-19 pandemic impact the ability of agents to conduct business in the same manner as usual. As a result, management expects annuity premiums to be negatively impacted during the remainder of 2020.

~~Annuity Earnings before Income Taxes Reconciliation~~

~~The following table reconciles the net spread earned on AFG’s fixed annuities to overall annuity pretax earnings for the three months ended June 30, 2020 and 2019 (in millions):~~

Three months ended June 30,
2020 2019
Earnings (loss) on fixed annuity benefits accumulated $ (19) $ 73
Earnings impact of investments in excess of fixed annuity benefits accumulated (*) — (3)
Variable annuity earnings 2 1
Earnings (loss) before income taxes $ (17) $ 71

~~(*)~~Net investment income (as a % of investments) of 3.77% and 4.73% for the three months ended June 30, 2020 and 2019, respectively, multiplied by the difference between average fixed annuity investments (at amortized cost) and average fixed annuity benefits accumulated in each period.

~~Holding Company, Other and Unallocated — Results of Operations~~

AFG’s net pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $43 million in the second quarter of 2020 compared to $42 million in the second quarter of 2019, an increase of $1 million (2%).

The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance ~~and annuity segments~~segment for the three months ended June 30, ~~2020~~2021 and ~~2019~~2020 (dollars in millions):


		Three months ended June 30,									Three months ended June 30,
		2020		2019		% Change			2021		2020		% Change
Revenues:	Revenues:							Revenues:
Life, accident and health net earned premiums		$	5	$	5	—	%
Net investment income	Net investment income	14		10		40	%	Net investment income	$	6	$	9	(33	%)
Other income — P&C fees	Other income — P&C fees	16		20		(20	%)	Other income — P&C fees	18		16		13	%
Reclassify annuity segment option gains		(5)		(3)		67	%
Other income	Other income	6		6		—	%	Other income	5		5		—	%
Total revenues	Total revenues	36		38		(5	%)	Total revenues	29		30		(3	%)

Costs and Expenses:	Costs and Expenses:							Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses	Property and casualty insurance — commissions and other underwriting expenses	5		8		(38	%)	Property and casualty insurance — commissions and other underwriting expenses	6		5		20	%
Annuity — annuity benefits		(5)		(3)		67	%
Life, accident and health benefits		9		8		13	%
Life, accident and health acquisition expenses		1		—		—	%
Other expense — expenses associated with P&C fees	Other expense — expenses associated with P&C fees	11		12		(8	%)	Other expense — expenses associated with P&C fees	12		11		9	%
Other expenses		35		38		(8	%)
Other expenses (*)								Other expenses (*)	46		34		35	%
Costs and expenses, excluding interest charges on borrowed money	Costs and expenses, excluding interest charges on borrowed money	56		63		(11	%)	Costs and expenses, excluding interest charges on borrowed money	64		50		28	%
Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(20)		(25)		(20	%)	Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(35)		(20)		75	%
Interest charges on borrowed money	Interest charges on borrowed money	23		17		35	%	Interest charges on borrowed money	23		23		—	%
Core loss before income taxes, excluding realized gains and losses								Core loss before income taxes, excluding realized gains and losses	(58)		(43)		35	%

Loss before income taxes, excluding realized gains and losses		$	(43)	$	(42)	2	%
Pretax non-core loss on pension settlement								Pretax non-core loss on pension settlement	(11)		—		—	%
GAAP loss from continuing operations before income taxes, excluding realized gains and losses								GAAP loss from continuing operations before income taxes, excluding realized gains and losses	$	(69)	$	(43)	60	%

(*)

~~Table~~Excludes a pretax non-core loss of ~~Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis~~$11 million related to the settlement of ~~Financial Condition and Results~~pension liabilities of ~~Operations — Continued~~

~~Holding Company and Other — Life, Accident and Health Premiums, Benefits and Acquisition Expenses~~

~~AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $5 million and related benefits and acquisition expenses of $10 million~~a small former manufacturing operation in the second quarter of 2020 compared to net earned premiums of $5 million and related benefits and acquisition expenses of $8 million in the second quarter of 2019. The $1 million (13%) increase in life, accident and health benefits reflects higher claims in the run-off life insurance business.2021.

Holding Company and Other — Net Investment Income

AFG recorded net investment income on investments held outside of its property and casualty insurance ~~and annuity segments~~segment of ~~$14~~$6 million in the second quarter of 2021 compared to $9 million in the second quarter of 2020, ~~compared to $10~~a decrease of $3 million ~~in the second quarter of 2019, an increase of $4 million (40%~~(33%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities increased in value by $3 million in the second quarter of 2021 compared to $7 million in the second quarter of ~~2020 compared to an increase in value of $3 million in the second quarter of 2019.~~2020.

Holding Company and Other — P&C Fees and Related Expenses

Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the second quarter of ~~2020,~~2021, AFG collected ~~$16~~$18 million ~~in fees~~ for these services compared to ~~$20~~$16 million in the second quarter of ~~2019.~~2020. Management views this fee income, net of the $12 million in the second quarter of 2021 and the $11 million in the second quarter of 2020, ~~and $12 million the second quarter of 2019,~~ in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results.

Holding Company and Other — ~~Annuity Segment Option Gains~~

~~As discussed under~~ ~~“Annuity Segment — Results of Operations,”~~ AFG purchases and sells equity index options to mitigate the risk in the index-based component of its FIAs. In evaluating the performance of the annuity business, management views the cost of the equity options as a better measurement of the true expenses of the Annuity segment as compared to the GAAP accounting for these options as derivatives because any proceeds at expiration from the options generally are passed to policyholders through index credits. On occasion, policyholders surrender their annuity prior to receiving the index credit, which results in any option exercise proceeds being retained by AFG. For internal management reporting, AFG views these “option gains” as miscellaneous (other) income rather than as a component of annuity benefits expense. Consistent with internal management reporting, these option gains are reclassified from annuity benefits to other income in AFG’s segmented results. In the second quarter of 2020 and 2019, AFG had $5 million and $3 million, respectively, in such option gains.

~~Holding Company and Other —~~ Other Income

Other income in the table above includes $4 million in both the second quarter of ~~2020~~2021 and the second quarter of ~~2019,~~2020, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under “Results of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance ~~and annuity segments~~segment of $2$1 million in both the second quarter of ~~2020~~2021 and the second quarter of ~~2019.~~2020.

~~Holding Company and Other — Other Expenses~~

AFG’s holding companies and other operations outside of its property and casualty insurance and annuity segments recorded other expenses of $35 million in the second quarter of 2020 compared to $38 million in the second quarter of 2019, a decrease of $3 million (8%). This decrease reflects lower expenses associated with certain incentive compensation plans.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Holding Company and Other — Other Expenses

AFG’s holding companies and other operations outside of its property and casualty insurance segment recorded other expenses of $46 million in the second quarter of 2021 compared to $34 million in the second quarter of 2020, an increase of $12 million (35%), reflecting higher holding company expenses related to employee benefit plans that are tied to stock market performance and higher expenses associated with certain incentive compensation plans.

Holding Company and Other — Interest Charges on Borrowed Money

AFG’s holding companies and other operations outside of its property and casualty insurance ~~and annuity segments~~segment recorded interest expense of $23 million in both the second quarter of ~~2020 compared to $17 million~~2021 and in the second quarter of ~~2019, an increase of $6 million (35%).~~2020. The following table details the principal amount of AFG’s long-term debt balances as of June 30, ~~2020~~2021 compared to June 30, ~~2019~~2020 (dollars in millions):


		June 30, 2020			June 30, 2019				June 30, 2021			June 30, 2020
Direct obligations of AFG:	Direct obligations of AFG:							Direct obligations of AFG:
4.50% Senior Notes due June 2047	4.50% Senior Notes due June 2047	$	590		$	590		4.50% Senior Notes due June 2047	$	590		$	590
3.50% Senior Notes due August 2026	3.50% Senior Notes due August 2026	425			425			3.50% Senior Notes due August 2026	425			425
5.25% Senior Notes due April 2030	5.25% Senior Notes due April 2030	300			—			5.25% Senior Notes due April 2030	300			300
5.125% Subordinated Debentures due December 2059	5.125% Subordinated Debentures due December 2059	200			—			5.125% Subordinated Debentures due December 2059	200			200
4.50% Subordinated Debentures due September 2060								4.50% Subordinated Debentures due September 2060	200			—
6% Subordinated Debentures due November 2055	6% Subordinated Debentures due November 2055	150			150			6% Subordinated Debentures due November 2055	—			150
5.625% Subordinated Debentures due June 2060	5.625% Subordinated Debentures due June 2060	150			—			5.625% Subordinated Debentures due June 2060	150			150
5.875% Subordinated Debentures due March 2059	5.875% Subordinated Debentures due March 2059	125			125			5.875% Subordinated Debentures due March 2059	125			125
6-1/4% Subordinated Debentures due September 2054		—			150
Other	Other	3			3			Other	3			3
Total principal amount of Holding Company Debt	Total principal amount of Holding Company Debt	$	1,943		$	1,443		Total principal amount of Holding Company Debt	$	1,993		$	1,943

Weighted Average Interest Rate	Weighted Average Interest Rate	4.8		%	4.7		%	Weighted Average Interest Rate	4.6		%	4.8		%

~~The increase in interest~~Interest expense was $23 million for both the second quarter of 2021 and the second quarter of 2020 ~~as compared to the second quarter of 2019~~and reflects the following financial transactions completed by AFG between March 31, ~~2019~~2020 and June 30, ~~2020:~~

•~~Issued $200 million of 5.125% Subordinated Debentures in December 2019~~

•~~Redeemed $150 million of 6-1/4% Subordinated Debentures in December 2019~~2021:

•Issued $300 million of 5.25% Senior Notes in April 2020

•Issued $150 million of 5.625% Subordinated Debentures in May 2020

•Issued $200 million of 4.50% Subordinated Debentures in September 2020

•Redeemed $150 million of 6% Subordinated Debentures in November 2020

~~Consolidated~~ Holding Company and Other — Loss on Pension Settlement

In the second quarter of 2021, AFG settled pension liabilities related to a small former manufacturing operation resulting in a pretax non-core loss of $11 million.

Realized Gains (Losses) on Securities

AFG’s ~~consolidated~~ realized gains (losses) on securities ~~which are not allocated~~were net gains of $43 million in the second quarter of 2021 compared to ~~segments, were $204~~$108 million in the second quarter of 2020, ~~compared to $56~~a decrease of $65 million ~~in the second quarter of 2019, an increase of $148 million (264%~~(60%). Realized gains (losses) on securities consisted of the following (in millions):

Three months ended June 30,
2020 2019
Realized gains before impairments:
Disposals $ — $ 8
Change in the fair value of equity securities 202 44
Change in the fair value of derivatives 3 6
Adjustments to annuity deferred policy acquisition costs and related items (2) —
203 58
Change in allowance for impairments:
Securities 1 (3)
Adjustments to annuity deferred policy acquisition costs and related items — 1
1 (2)
Realized gains (losses) on securities $ 204 $ 56


	Three months ended June 30,
	2021		2020
Realized gains (losses) before impairments:
Disposals	$	1	$	1
Change in the fair value of equity securities	42		107
Change in the fair value of derivatives	—		—

	43		108

Change in allowance for impairments on securities	—		—

Realized gains (losses) on securities	$	43	$	108

The ~~$202~~$42 million net realized gain from the change in the fair value of equity securities in the second quarter of 2021 includes gains of $16 million on investments in energy and natural gas companies, $9 million on investments in banks and

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

financing companies, $7 million on investments in healthcare companies and $6 million on investments in media companies. The $107 million net realized gain from the change in the fair value of equity securities in the second quarter of 2020 includes gains of ~~$63~~$32 million on investments in banks and financing companies, ~~$34~~$18 million on investments in media companies, ~~$21~~$10 million on investments in natural gas, $8 million on investments in insurance companies, ~~$10~~$5 million on real estate investment trusts and $4 million on investments in energy ~~companies~~companies.

Realized Gain on Subsidiary

In the second quarter of 2021, AFG recognized a pretax gain on sale of subsidiary of $4 million related to contingent consideration received on the sale of Neon. See “Results of Operations — General” for the discussion of the December 2019 decision to exit the Lloyd’s of London insurance market.

Consolidated Income Taxes on Continuing Operations

AFG’s consolidated provision for income taxes on continuing operations was $48 million for the second quarter of 2021 compared to $37 million for the second quarter of 2020, an increase of $11 million (30%). See NoteK — “Income Taxes” to the financial statements for an analysis of items affecting AFG’s effective tax rate on continuing operations.

Consolidated Noncontrolling Interests in Continuing Operations

AFG’s consolidated net earnings (loss) from continuing operations attributable to noncontrolling interests was a net loss of $10 million for the second quarter of 2020, reflecting losses at Neon, which was sold in December 2020.

Real Estate Entities Acquired from the Annuity Operations

Beginning with the first quarter of 2021, the results of the annuity businesses to be sold are reported as discontinued operations, in accordance with GAAP, which included adjusting prior period results to reflect these operations as discontinued. Prior to the completion of the sale, AFG’s property and ~~$13~~casualty insurance operations acquired approximately $480 million onin real-estate related partnerships and AFG parent acquired approximately $100 million of directly owned real estate ~~investment trusts.~~ from those operations. GAAP pretax earnings from continuing operations includes the earnings from these entities and certain other expenses that will be retained from the annuity operations.

The ~~$44~~retained real estate entities contributed $22 million in GAAP pretax earnings in the second quarter of 2021 compared to $7 million in the second quarter of 2020, an increase of $15 million (214%). This increase reflects higher earnings from the real-estate related partnerships in the second quarter of 2021 compared to the second quarter of 2020.

Discontinued Annuity Operations

AFG’s discontinued annuity operations contributed $83 million in GAAP pretax earnings (excluding the gain on the sale of the annuity operations) in the second quarter of 2021 compared to $78 million in the second quarter of 2020, an increase of $5 million (6%) reflecting the following:

•significantly higher earnings from partnerships and similar investments,

•the negative impact from the run-off of higher yielding investments and lower short-term interest rates, and

•lower net realized ~~gain from the change in the fair value of equity~~gains on securities in the second quarter of ~~2019 includes gains~~2021 compared to the second quarter of ~~$18 million on investments in banks and financing companies, $13 million from investments in communications companies and $10 million on investments in asset management companies.~~2020.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The ~~$1 million reduction of previously recognized expected credit losses~~following table details AFG’s earnings before and after income taxes and the gain on the sale from its discontinued annuity operations for the three months ended June 30, 2021 and 2020 (dollars in ~~the second quarter of 2020 includes $2 million in income related to corporate bonds and other fixed maturities and $1 million in expense related to structured securities.~~millions):

~~Consolidated Income Taxes~~


	Three months ended June 30,
	2021 (*)		2020		% Change
Pretax annuity earnings historically reported as core operating earnings:
Pretax annuity earnings before items below	$	44	$	87	(49	%)
Earnings (loss) on partnerships and similar investments	63		(46)		(237	%)
Total pretax annuity earnings historically reported as core operating earnings	107		41		161	%

Pretax amounts previously reported outside of annuity core earnings:
Impact of reinsurance, derivatives related to fixed indexed annuities (“FIAs”) and other impacts of changes in the stock market and interest rates on FIAs over or under option costs	(55)		(59)		(7	%)
Realized gains (losses) on securities	31		96		(68	%)
Run-off life and long-term care	—		—		—	%
Total pretax amounts previously reported outside of annuity core earnings	(24)		37		(165	%)
GAAP pretax earnings (loss) from discontinued annuity operations, excluding the gain on sale of discontinued annuity operations	83		78		6	%
Provision (credit) for income taxes	18		14		29	%
GAAP net earnings (loss) from discontinued annuity operations, excluding the gain on sale of discontinued annuity operations	65		64		2	%
Gain on sale of discontinued annuity operations, net of tax	697		—		—	%
GAAP net earnings (loss) from discontinued annuity operations	$	762	$	64	1,091	%

~~AFG’s consolidated provision for income taxes was $51 million for~~(*)Results through the ~~second quarter~~May 31, 2021 effective date of ~~2020 compared to $50 million for~~ the ~~second quarter of 2019, an increase of $1 million (2%). See~~ ~~NoteL — “Income Taxes”~~ ~~to the financial statements for an analysis of items affecting AFG’s effective tax rate.~~sale.

~~Consolidated Noncontrolling Interests~~

AFG’s consolidated net earnings (loss) attributable to noncontrolling interests was a net loss of $10 million for the second quarter of 2020 compared to $1 million for the second quarter of 2019. Both periods reflect losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

RESULTS OF OPERATIONS — SIX MONTHS ENDED JUNE 30, ~~2020~~2021 AND ~~2019~~2020

Segmented Statement of Earnings

Subsequent to the agreement to sell the Annuity subsidiaries, AFG reports its ~~business~~continuing operations as ~~three~~two segments: (i) Property and casualty insurance (“P&C”), and (ii) ~~Annuity and (iii)~~ Other, which includes ~~run-off long-term care and life,~~ holding company costs and income and expenses related to the managed investment entities (“MIEs”).

AFG’s net earnings (loss) attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the six months ended June 30, ~~2020~~2021 and ~~2019~~2020 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions):


						Other																	Other
		P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated		Total		Non-core reclass		Neon exited lines (c)		GAAP Total			P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated		Total		Non-core reclass		GAAP Total
Six months ended June 30, 2020
Six months ended June 30, 2021																		Six months ended June 30, 2021
Revenues:	Revenues:																	Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	2,261	$	—	$	—	$	—	$	2,261	$	—	$	132	$	2,393	Property and casualty insurance net earned premiums	$	2,423	$	—	$	—	$	—	$	2,423	$	—	$	2,423
Net investment income	Net investment income	171		806		34		7		1,018		—		(6)		1,012		Net investment income	302		51		(12)		11		352		—		352
Realized gains (losses) on securities		—		—		—		—		—		(347)		—		(347)
Income (loss) of MIEs:
Realized gains (losses) on:																		Realized gains (losses) on:
Securities																		Securities	—		—		—		—		—		120		120
Subsidiary																		Subsidiary	—		—		—		—		—		4		4
Income of MIEs:																		Income of MIEs:
Investment income	Investment income	—		—		108		—		108		—		—		108		Investment income	—		—		90		—		90		—		90
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		—		(48)		—		(48)		—		—		(48)		Gain (loss) on change in fair value of assets/liabilities	—		—		8		—		8		—		8
Other income	Other income	8		65		(8)		43		108		—		—		108		Other income	5		—		(8)		46		43		—		43
Total revenues	Total revenues	2,440		871		86		50		3,447		(347)		126		3,226		Total revenues	2,730		51		78		57		2,916		124		3,040

Costs and Expenses:	Costs and Expenses:																	Costs and Expenses:
Property and casualty insurance:	Property and casualty insurance:																	Property and casualty insurance:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	1,372		—		—		—		1,372		—		106		1,478		Losses and loss adjustment expenses	1,381		—		—		—		1,381		—		1,381
Commissions and other underwriting expenses	Commissions and other underwriting expenses	749		—		—		10		759		—		70		829		Commissions and other underwriting expenses	756		—		—		14		770		—		770
Annuity benefits		—		561		—		(13)		548		154		—		702
Annuity and supplemental insurance acquisition expenses		—		133		—		2		135		(57)		—		78
Interest charges on borrowed money	Interest charges on borrowed money	—		—		—		40		40		—		—		40		Interest charges on borrowed money	—		—		—		47		47		—		47
Expenses of MIEs	Expenses of MIEs	—		—		86		—		86		—		—		86		Expenses of MIEs	—		—		78		—		78		—		78
Other expenses	Other expenses	22		68		—		91		181		—		2		183		Other expenses	17		1		—		112		130		11		141
Total costs and expenses	Total costs and expenses	2,143		762		86		130		3,121		97		178		3,396		Total costs and expenses	2,154		1		78		173		2,406		11		2,417
Earnings (loss) before income taxes		297		109		—		(80)		326		(444)		(52)		(170)
Earnings (loss) from continuing operations before income taxes																		Earnings (loss) from continuing operations before income taxes	576		50		—		(116)		510		113		623
Provision (credit) for income taxes	Provision (credit) for income taxes	60		20		—		(20)		60		(93)		—		(33)		Provision (credit) for income taxes	113		11		—		(25)		99		17		116
Net earnings (loss), including noncontrolling interests		237		89		—		(60)		266		(351)		(52)		(137)
Less: Net earnings (loss) attributable to noncontrolling interests		—		—		—		—		—		—		(13)		(13)
Net earnings (loss) from continuing operations, including noncontrolling interests																		Net earnings (loss) from continuing operations, including noncontrolling interests	463		39		—		(91)		411		96		507
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests																		Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		—		—		—		—		—		—
Core Net Operating Earnings (Loss)	Core Net Operating Earnings (Loss)	237		89		—		(60)		266								Core Net Operating Earnings (Loss)	463		39		—		(91)		411
Non-core earnings (loss) attributable to shareholders (a):	Non-core earnings (loss) attributable to shareholders (a):																	Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax	Realized gains (losses) on securities, net of tax	—		—		—		(274)		(274)		274		—		—		Realized gains (losses) on securities, net of tax	—		—		—		95		95		(95)		—
Annuity non-core earnings (losses), net of tax (b)		—		(77)		—		—		(77)		77		—		—
Neon exited lines (c)		(39)		—		—		—		(39)		—		39		—

Discontinued operations, net of tax																		Discontinued operations, net of tax	—		914		—		—		914		—		914
Neon exited lines (b)																		Neon exited lines (b)	3		—		—		—		3		(3)		—

Other, net of tax																		Other, net of tax	—		—		—		(2)		(2)		2		—
Net Earnings (Loss) Attributable to Shareholders	Net Earnings (Loss) Attributable to Shareholders	$	198	$	12	$	—	$	(334)	$	(124)	$	—	$	—	$	(124)	Net Earnings (Loss) Attributable to Shareholders	$	466	$	953	$	—	$	2	$	1,421	$	—	$	1,421

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued


						Other															Other
		P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated		Total		Non-core reclass		GAAP Total			P&C		Annuity		Consol. MIEs		Holding Co., other and unallocated		Total		Non-core reclass		Neon exited lines (b)		GAAP Total
Six months ended June 30, 2019
Six months ended June 30, 2020																Six months ended June 30, 2020
Revenues:	Revenues:															Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	2,373	$	—	$	—	$	—	$	2,373	$	—	$	2,373	Property and casualty insurance net earned premiums	$	2,261	$	—	$	—	$	—	$	2,261	$	—	$	132	$	2,393
Net investment income	Net investment income	228		886		(16)		24		1,122		—		1,122		Net investment income	171		19		11		(3)		198		—		(6)		192
Realized gains (losses) on securities	Realized gains (losses) on securities	—		—		—		—		—		240		240		Realized gains (losses) on securities	—		—		—		—		—		(220)		—		(220)
Income (loss) of MIEs:
Income of MIEs:																Income of MIEs:
Investment income	Investment income	—		—		139		—		139		—		139		Investment income	—		—		108		—		108		—		—		108
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		—		(2)		—		(2)		—		(2)		Gain (loss) on change in fair value of assets/liabilities	—		—		(16)		—		(16)		—		—		(16)
Other income	Other income	5		58		(7)		56		112		—		112		Other income	8		—		(8)		43		43		—		—		43
Total revenues	Total revenues	2,606		944		114		80		3,744		240		3,984		Total revenues	2,440		19		95		40		2,594		(220)		126		2,500

Costs and Expenses:	Costs and Expenses:															Costs and Expenses:
Property and casualty insurance:	Property and casualty insurance:															Property and casualty insurance:
Losses and loss adjustment expenses	Losses and loss adjustment expenses	1,415		—		—		—		1,415		—		1,415		Losses and loss adjustment expenses	1,372		—		—		—		1,372		—		106		1,478
Commissions and other underwriting expenses	Commissions and other underwriting expenses	812		—		—		13		825		—		825		Commissions and other underwriting expenses	749		—		—		10		759		—		70		829
Annuity benefits		—		587		—		(4)		583		67		650
Annuity and supplemental insurance acquisition expenses		—		93		—		2		95		(34)		61
Interest charges on borrowed money	Interest charges on borrowed money	—		—		—		33		33		—		33		Interest charges on borrowed money	—		—		—		40		40		—		—		40
Expenses of MIEs	Expenses of MIEs	—		—		114		—		114		—		114		Expenses of MIEs	—		—		95		—		95		—		—		95
Other expenses	Other expenses	23		70		—		121		214		—		214		Other expenses	22		12		—		67		101		—		2		103
Total costs and expenses	Total costs and expenses	2,250		750		114		165		3,279		33		3,312		Total costs and expenses	2,143		12		95		117		2,367		—		178		2,545
Earnings (loss) before income taxes		356		194		—		(85)		465		207		672
Earnings (loss) from continuing operations before income taxes																Earnings (loss) from continuing operations before income taxes	297		7		—		(77)		227		(220)		(52)		(45)
Provision (credit) for income taxes	Provision (credit) for income taxes	72		39		—		(18)		93		44		137		Provision (credit) for income taxes	60		1		—		(19)		42		(46)		—		(4)
Net earnings (loss), including noncontrolling interests		284		155		—		(67)		372		163		535
Less: Net earnings (loss) attributable to noncontrolling interests		(4)		—		—		—		(4)		—		(4)
Net earnings (loss) from continuing operations, including noncontrolling interests																Net earnings (loss) from continuing operations, including noncontrolling interests	237		6		—		(58)		185		(174)		(52)		(41)
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests																Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		—		—		—		—		—		(13)		(13)
Core Net Operating Earnings (Loss)	Core Net Operating Earnings (Loss)	288		155		—		(67)		376						Core Net Operating Earnings (Loss)	237		6		—		(58)		185
Non-core earnings (loss) attributable to shareholders (a):	Non-core earnings (loss) attributable to shareholders (a):															Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax	Realized gains (losses) on securities, net of tax	—		—		—		190		190		(190)		—		Realized gains (losses) on securities, net of tax	—		—		—		(174)		(174)		174		—		—
Annuity non-core earnings (losses), net of tax (b)		—		(27)		—		—		(27)		27		—
Discontinued operations, net of tax																Discontinued operations, net of tax	—		(94)		—		(2)		(96)		—		—		(96)
Neon exited lines (b)																Neon exited lines (b)	(39)		—		—		—		(39)		—		39		—

Net Earnings (Loss) Attributable to Shareholders	Net Earnings (Loss) Attributable to Shareholders	$	288	$	128	$	—	$	123	$	539	$	—	$	539	Net Earnings (Loss) Attributable to Shareholders	$	198	$	(88)	$	—	$	(234)	$	(124)	$	—	$	—	$	(124)

(a)See the reconciliation of core earnings to GAAP net earnings under “Results of Operations — General” for details on the tax and noncontrolling interest impacts of these reconciling items.

(b)As discussed under ““Results of Operations — General” beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses).

~~(c)As discussed under “Results of Operations —~~ ~~General~~,” ~~beginning with the first quarter of 2020,~~ the Neon run-off operations are considered property and casualty insurance non-core earnings (losses).

Property and Casualty Insurance Segment — Results of Operations

AFG’s property and casualty insurance operations contributed ~~$245~~$580 million in GAAP pretax earnings in the first six months of ~~2020~~2021 compared to ~~$356~~$245 million in the first six months of ~~2019, a decrease~~2020, an increase of ~~$111~~$335 million ~~(31%~~(137%). Property and casualty core pretax earnings were $576 million in the first six months of 2021 compared to $297 million in the first six months of 2020, ~~compared to $356~~an increase of $279 million (94%). The increase in GAAP pretax earnings reflects higher core pretax earnings and the impact of losses in the Neon exited lines in the first six months of ~~2019, a decrease of $59 million (17%).~~2020. The ~~decrease~~increase in ~~GAAP and~~ core pretax earnings reflects ~~lower net investment income~~higher core underwriting profit in the first six months of ~~2020~~2021 compared to the ~~same period in 2019 due primarily to the impact~~first six months of ~~financial market disruption on earnings (losses)~~2020 and significantly higher net investment income. Improved results from ~~partnerships~~alternative investments (partnerships and similar investments and AFG-managed ~~CLOs.~~CLOs) were partially offset by lower other net investment income, due primarily to lower short-term interest rates.

The following table details AFG’s GAAP and core earnings before income taxes from its property and casualty insurance operations for the six months ended June 30, 2020 and 2019 (dollars in millions):

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Six months ended June 30,
2020 2019 % Change
Gross written premiums $ 3,065 $ 3,199 (4 %)
Reinsurance premiums ceded (777) (788) (1 %)
Net written premiums 2,288 2,411 (5 %)
Change in unearned premiums (27) (38) (29 %)
Net earned premiums 2,261 2,373 (5 %)
Loss and loss adjustment expenses 1,372 1,415 (3 %)
Commissions and other underwriting expenses 749 812 (8 %)
Core underwriting gain 140 146 (4 %)
Net investment income 171 228 (25 %)
Other income and expenses, net (14) (18) (22 %)
Core earnings before income taxes 297 356 (17 %)
Pretax non-core Neon exited lines (*) (52) — — %
GAAP earnings before income taxes and noncontrolling interests $ 245 $ 356 (31 %)
(*) In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd. (“Neon”), into run-off. As discussed under “Results of Operations — General,” following the December 2019 decision to exit the Lloyd’s of London insurance market, the results from the Neon exited lines are being treated as non-core earnings (losses) prospectively beginning in 2020. Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the six months ended June 30, 2020 (in millions):
Six months ended June 30, 2020
Excluding Neon
exited lines
Neon
exited lines
Total
Gross written premiums $ 3,065 $ 70 $ 3,135
Reinsurance premiums ceded (777) (63) (840)
Net written premiums 2,288 7 2,295
Change in unearned premiums (27) 125 98
Net earned premiums 2,261 132 2,393
Loss and loss adjustment expenses 1,372 106 1,478
Commissions and other underwriting expenses 749 70 819
Underwriting gain (loss) 140 (44) 96
Net investment income 171 (6) 165
Other income and expenses, net (14) (2) (16)
Earnings (loss) before income taxes $ 297 $ (52) $ 245
Six months ended June 30,
2020 2019 Change
Combined Ratios:
Specialty lines
Loss and LAE ratio 60.5 % 59.6 % 0.9 %
Underwriting expense ratio 33.2 % 34.2 % (1.0 %)
Combined ratio 93.7 % 93.8 % (0.1 %)
Aggregate — including exited lines
Loss and LAE ratio 61.8 % 59.7 % 2.1 %
Underwriting expense ratio 34.2 % 34.2 % — %
Combined ratio 96.0 % 93.9 % 2.1 %
The following table details AFG’s GAAP and core earnings before income taxes from its property and casualty insurance operations for the six months ended June 30, 2021 and 2020 (dollars in millions):


	Six months ended June 30,
	2021			2020			% Change
Gross written premiums	$	3,553		$	3,065		16		%
Reinsurance premiums ceded	(979)			(777)			26		%
Net written premiums	2,574			2,288			13		%
Change in unearned premiums	(151)			(27)			459		%
Net earned premiums	2,423			2,261			7		%
Loss and loss adjustment expenses	1,381			1,372			1		%
Commissions and other underwriting expenses	756			749			1		%
Core underwriting gain	286			140			104		%

Net investment income	302			171			77		%
Other income and expenses, net	(12)			(14)			(14		%)
Core earnings before income taxes	576			297			94		%

Pretax non-core Neon exited lines (*)	4			(52)			(108		%)
GAAP earnings before income taxes and noncontrolling interests	$	580		$	245		137		%
(*) In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd. (“Neon”), into run-off. As discussed under “Results of Operations — General,” following the December 2019 decision to exit the Lloyd’s of London insurance market, the results from the Neon exited lines are treated as non-core earnings (losses). Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the six months ended June 30, 2020 (in millions):

	Six months ended June 30, 2020
	Excluding Neon exited lines			Neon exited lines			Total
Gross written premiums	$	3,065		$	70		$	3,135
Reinsurance premiums ceded	(777)			(63)			(840)
Net written premiums	2,288			7			2,295
Change in unearned premiums	(27)			125			98
Net earned premiums	2,261			132			2,393
Loss and loss adjustment expenses	1,372			106			1,478
Commissions and other underwriting expenses	749			70			819
Underwriting gain (loss)	140			(44)			96

Net investment income	171			(6)			165

Other income and expenses, net	(14)			(2)			(16)
Earnings (loss) before income taxes and noncontrolling interests	$	297		$	(52)		$	245



	Six months ended June 30,
	2021			2020			Change
Combined Ratios:
Specialty lines
Loss and LAE ratio	57.0		%	60.5		%	(3.5		%)
Underwriting expense ratio	31.2		%	33.2		%	(2.0		%)
Combined ratio	88.2		%	93.7		%	(5.5		%)

Aggregate — including exited lines
Loss and LAE ratio	57.0		%	61.8		%	(4.8		%)
Underwriting expense ratio	31.2		%	34.2		%	(3.0		%)
Combined ratio	88.2		%	96.0		%	(7.8		%)

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Gross Written Premiums

Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $3.55 billion for the first six months of 2021 compared to $3.14 billion for the first six months of 2020, ~~compared to $3.20 billion for the first six months~~an increase of ~~2019, a decrease of $64~~$418 million ~~(2%~~(13%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):


		Six months ended June 30,																	Six months ended June 30,
		2020						2019									2021				2020
		GWP		%		GWP		%		% Change			GWP		%		GWP		%		% Change
Property and transportation	Property and transportation	$	1,105	35	%	$	1,018	32	%	9	%	Property and transportation	$	1,371	38	%	$	1,105	35	%	24	%
Specialty casualty	Specialty casualty	1,601		51	%	1,808		57	%	(11	%)	Specialty casualty	1,801		51	%	1,601		51	%	12	%
Specialty financial	Specialty financial	359		12	%	373		11	%	(4	%)	Specialty financial	381		11	%	359		12	%	6	%
Total specialty	Total specialty	3,065		98	%	3,199		100	%	(4	%)	Total specialty	3,553		100	%	3,065		98	%	16	%
Neon exited lines	Neon exited lines	70		2	%	—		—	%	—	%	Neon exited lines	—		—	%	70		2	%	(100	%)
Aggregate	Aggregate	$	3,135	100	%	$	3,199	100	%	(2	%)	Aggregate	$	3,553	100	%	$	3,135	100	%	13	%

Reinsurance Premiums Ceded

Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 28% of gross written premiums for the first six months of 2021 compared to 27% of gross written premiums for the first six months of 2020, ~~compared to 25% of gross written premiums for the first six months of 2019,~~ an increase of 21 percentage ~~points.~~point. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):


		Six months ended June 30,																		Six months ended June 30,
		2020						2019								Change in		2021				2020		Change in
		Ceded		% of GWP		Ceded		% of GWP		% of GWP			Ceded		% of GWP			Ceded		% of GWP		% of GWP
Property and transportation	Property and transportation	$	(293)	27	%	$	(252)	25	%	2	%	Property and transportation	$	(404)	29		%	$	(293)	27	%	2	%
Specialty casualty	Specialty casualty	(504)		31	%	(520)		29	%	2	%	Specialty casualty	(621)		34		%	(504)		31	%	3	%
Specialty financial	Specialty financial	(71)		20	%	(79)		21	%	(1	%)	Specialty financial	(61)		16		%	(71)		20	%	(4	%)
Other specialty	Other specialty	91				63						Other specialty	107					91
Total specialty	Total specialty	(777)		25	%	(788)		25	%	—	%	Total specialty	(979)		28		%	(777)		25	%	3	%
Neon exited lines	Neon exited lines	(63)		90	%	—		—	%	90	%	Neon exited lines	—		—		%	(63)		90	%	(90	%)
Aggregate	Aggregate	$	(840)	27	%	$	(788)	25	%	2	%	Aggregate	$	(979)	28		%	$	(840)	27	%	1	%

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $2.57 billion for the first six months of 2021 compared to $2.30 billion for the first six months of 2020, ~~compared to $2.41 billion for the first six months~~an increase of ~~2019, a decrease of $116~~$279 million ~~(5%~~(12%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):


		Six months ended June 30,																	Six months ended June 30,
		2020						2019									2021				2020
		NWP		%		NWP		%		% Change			NWP		%		NWP		%		% Change
Property and transportation	Property and transportation	$	812	35	%	$	766	32	%	6	%	Property and transportation	$	967	38	%	$	812	35	%	19	%
Specialty casualty	Specialty casualty	1,097		48	%	1,288		53	%	(15	%)	Specialty casualty	1,180		46	%	1,097		48	%	8	%
Specialty financial	Specialty financial	288		13	%	294		12	%	(2	%)	Specialty financial	320		12	%	288		13	%	11	%
Other specialty	Other specialty	91		4	%	63		3	%	44	%	Other specialty	107		4	%	91		4	%	18	%
Total specialty	Total specialty	2,288		100	%	2,411		100	%	(5	%)	Total specialty	2,574		100	%	2,288		100	%	13	%
Neon exited lines	Neon exited lines	7		—	%	—		—	%	—	%	Neon exited lines	—		—	%	7		—	%	—	%
Aggregate	Aggregate	$	2,295	100	%	$	2,411	100	%	(5	%)	Aggregate	$	2,574	100	%	$	2,295	100	%	12	%

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $2.42 billion for the first six months of 2021 compared to $2.39 billion for the first six months of 2020, ~~compared to $2.37 billion for the first six months of 2019,~~ an increase of ~~$20~~$30 million (1%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):


		Six months ended June 30,																	Six months ended June 30,
		2020						2019									2021				2020
		NEP		%		NEP		%		% Change			NEP		%		NEP		%		% Change
Property and transportation	Property and transportation	$	776	32	%	$	740	31	%	5	%	Property and transportation	$	847	35	%	$	776	32	%	9	%
Specialty casualty	Specialty casualty	1,103		46	%	1,263		53	%	(13	%)	Specialty casualty	1,159		48	%	1,103		46	%	5	%
Specialty financial	Specialty financial	300		13	%	297		13	%	1	%	Specialty financial	314		13	%	300		13	%	5	%
Other specialty	Other specialty	82		3	%	73		3	%	12	%	Other specialty	103		4	%	82		3	%	26	%
Total specialty	Total specialty	2,261		94	%	2,373		100	%	(5	%)	Total specialty	2,423		100	%	2,261		94	%	7	%
Neon exited lines	Neon exited lines	132		6	%	—		—	%	—	%	Neon exited lines	—		—	%	132		6	%	(100	%)
Aggregate	Aggregate	$	2,393	100	%	$	2,373	100	%	1	%	Aggregate	$	2,423	100	%	$	2,393	100	%	1	%

The ~~$64~~$418 million ~~(2%~~(13%) ~~decrease~~increase in gross written premiums for the first six months of ~~2020~~2021 compared to the first six months of ~~2019~~2020 reflects ~~a decrease in the Specialty casualty and Specialty financial sub-segments, partially offset by~~ an increase in each of the Specialty property and ~~transportation sub-segment .~~casualty sub-segments due primarily to higher renewal rates and increased exposures. Overall average renewal rates increased approximately 8%10% in the first six months of ~~2020.~~2021. Excluding the workers’ compensation business, renewal pricing increased approximately ~~12%~~13%.

Property and transportation Gross written premiums increased ~~$87~~$266 million ~~(9%~~(24%) in the first six months of ~~2020 when~~2021 compared to the first six months of ~~2019, which was impacted by delayed acreage reporting from insureds~~2020 due primarily to higher premiums in the transportation businesses, as a result of ~~excess moisture~~new accounts, combined with strong renewals and ~~late planting of corn~~increased exposures in the alternative risk transfer business and ~~soybean crops. Excluding~~higher premiums in the crop insurance gross written premiums for the first six months of 2020 increased by 5% in this group when compared to the first six months of 2019. Decreases in premiums due to return of premiums and reduced exposuresbusiness as a result of ~~the COVID-19 pandemic were more than offset by new business opportunities~~higher commodity futures pricing and timing differences in the ~~transportation, property and inland marine and ocean marine businesses.~~writing of premiums. Average renewal rates increased approximately 7% for this group in the first six months of ~~2020.~~2021. Reinsurance premiums ceded as a percentage of gross written premiums increased 2 percentage points in the first six months of ~~2020~~2021 compared to the first six months of ~~2019,~~2020 reflecting growth in the crop ~~and certain ocean marine business,~~insurance operations, which cede a larger percentage of premiums than the other businesses in the ~~Specialty property~~Property and transportation ~~sub-segment.~~sub-segment and the impact of reinstatement premiums in the first six months of 2021 related to winter storms in Texas and a large property loss.

Specialty casualty Gross written premiums ~~decreased $207~~increased $200 million ~~(11%~~(12%) in the first six months of ~~2020~~2021 compared to the first six months of ~~2019 due primarily~~2020. Significant renewal rate increases and new business opportunities contributed to ~~the run-off of Neon. Excluding the $318 million in gross written~~higher premiums ~~from the Neon exited lines~~ in the ~~first six months of 2019, gross written premiums~~excess liability businesses. Higher renewal rates and increased ~~7% in the first six months of 2020 compared~~exposures contributed to ~~the first six months of 2019. This increase reflects~~premium growth in the excess and surplus lines business. The executive liability and ~~excess liability~~mergers and acquisitions businesses ~~primarily~~also contributed meaningfully to the ~~result of significant renewal rate~~year-over-year growth. These increases ~~new business opportunities and higher retentions on renewal business. This growth was~~were partially offset by lower year-over-year premiums ~~due to reduced exposures~~ in the workers’ compensation businesses, ~~as a~~which were primarily the result of ~~the COVID-19 pandemic.~~lower renewal rates and decreased exposure bases. Average renewal rates increased approximately ~~10%~~13% for this group in the first six months of ~~2020.~~2021. Excluding rate decreases in the workers’ compensation ~~businesses,~~business, renewal rates for this group increased approximately ~~19%~~21%. Reinsurance premiums ceded as a percentage of gross written premiums increased 23 percentage points in the first six months of ~~2020~~2021 compared to the first six months of ~~2019,~~2020 reflecting growth in the excess liability, mergers and ~~surplus~~acquisitions and ~~excess liability~~environmental businesses, which cede a larger percentage of premiums than the other businesses in the Specialty casualty ~~sub-segment, partially offset by the impact of the Neon exited lines.~~sub-segment.

Specialty financial Gross written premiums ~~decreased $14~~increased $22 million ~~(4%~~(6%) in the first six months of ~~2020~~2021 compared to the first six months of ~~2019~~2020 due primarily to ~~lower premiums from~~renewal rate increases and new business opportunities within the ~~impact of various state regulations regarding policy cancellations~~lender services, surety and ~~the placement of forced coverage in the financial institutions business, partially offset by higher premiums in the~~ fidelity ~~business.~~businesses. Average renewal rates increased approximately 7% for this group ~~increased approximately 6%~~ in the first six months of ~~2020.~~2021. Reinsurance premiums ceded as a percentage of gross written premiums decreased 14 percentage ~~point~~points for the first six months of ~~2020~~2021 compared to the first six months of ~~2019,~~2020 reflecting lower cessions in the financial institutions business due to reduced premiums from collateral protection insurance that is 100% reinsured and lower cessions in the innovative markets business.

Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed increased ~~$28~~$16 million ~~(44%~~(18%) in the first six months of ~~2020~~2021 compared to the first six months of 2020, reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~first six months of 2019, reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment.~~

Combined Ratio

The table below (dollars in millions) details the components of the combined ratio and underwriting profit for AFG’s property and casualty insurance segment:


		Six months ended June 30,								Six months ended June 30,							Six months ended June 30,						Six months ended June 30,
		2020		2019		Change		2020		2019			2021		2020		Change		2021		2020
Property and transportation	Property and transportation											Property and transportation
Loss and LAE ratio	Loss and LAE ratio	61.4	%	65.4	%	(4.0	%)					Loss and LAE ratio	57.1	%	61.4	%	(4.3	%)
Underwriting expense ratio	Underwriting expense ratio	30.9	%	28.8	%	2.1	%					Underwriting expense ratio	29.0	%	30.9	%	(1.9	%)
Combined ratio	Combined ratio	92.3	%	94.2	%	(1.9	%)					Combined ratio	86.1	%	92.3	%	(6.2	%)
Underwriting profit	Underwriting profit							$	60	$	43	Underwriting profit							$	118	$	60

Specialty casualty	Specialty casualty											Specialty casualty
Loss and LAE ratio	Loss and LAE ratio	64.1	%	60.8	%	3.3	%					Loss and LAE ratio	62.5	%	64.1	%	(1.6	%)
Underwriting expense ratio	Underwriting expense ratio	28.7	%	32.6	%	(3.9	%)					Underwriting expense ratio	26.5	%	28.7	%	(2.2	%)
Combined ratio	Combined ratio	92.8	%	93.4	%	(0.6	%)					Combined ratio	89.0	%	92.8	%	(3.8	%)
Underwriting profit	Underwriting profit							$	79	$	83	Underwriting profit							$	127	$	79

Specialty financial	Specialty financial											Specialty financial
Loss and LAE ratio	Loss and LAE ratio	41.2	%	35.3	%	5.9	%					Loss and LAE ratio	33.5	%	41.2	%	(7.7	%)
Underwriting expense ratio	Underwriting expense ratio	53.2	%	53.3	%	(0.1	%)					Underwriting expense ratio	51.9	%	53.2	%	(1.3	%)
Combined ratio	Combined ratio	94.4	%	88.6	%	5.8	%					Combined ratio	85.4	%	94.4	%	(9.0	%)
Underwriting profit	Underwriting profit							$	17	$	34	Underwriting profit							$	46	$	17

Total Specialty	Total Specialty											Total Specialty
Loss and LAE ratio	Loss and LAE ratio	60.5	%	59.6	%	0.9	%					Loss and LAE ratio	57.0	%	60.5	%	(3.5	%)
Underwriting expense ratio	Underwriting expense ratio	33.2	%	34.2	%	(1.0	%)					Underwriting expense ratio	31.2	%	33.2	%	(2.0	%)
Combined ratio	Combined ratio	93.7	%	93.8	%	(0.1	%)					Combined ratio	88.2	%	93.7	%	(5.5	%)
Underwriting profit	Underwriting profit							$	143	$	148	Underwriting profit							$	287	$	143

Aggregate — including exited lines	Aggregate — including exited lines											Aggregate — including exited lines
Loss and LAE ratio	Loss and LAE ratio	61.8	%	59.7	%	2.1	%					Loss and LAE ratio	57.0	%	61.8	%	(4.8	%)
Underwriting expense ratio	Underwriting expense ratio	34.2	%	34.2	%	—	%					Underwriting expense ratio	31.2	%	34.2	%	(3.0	%)
Combined ratio	Combined ratio	96.0	%	93.9	%	2.1	%					Combined ratio	88.2	%	96.0	%	(7.8	%)
Underwriting profit	Underwriting profit							$	96	$	146	Underwriting profit							$	286	$	96

The Specialty property and casualty insurance operations generated an underwriting profit of $287 million for the first six months of 2021 compared to $143 million for the first six months of 2020, ~~compared to $148~~an increase of $144 million ~~for the first six months of 2019, a decrease of $5 million (3%~~(101%). The ~~lower~~higher underwriting profit in the first six months of ~~2020~~2021 reflects ~~lower~~higher underwriting profits in each of the Specialty property and casualty ~~and Specialty financial sub-segments, partially offset by higher underwriting profit in the Property and transportation sub-segment.~~insurance sub-segments. Underwriting results for the Specialty property and casualty insurance operations include $11 million in COVID-19 related losses (0.5 points on the combined ratio) in the first six months of 2021 and $95 million in COVID-19 related losses (4.2 points) in the first six months of 2020. Catastrophe losses were $30 million (1.3 points on the combined ratio) and related net reinstatement premiums were $12 million in the first six months of 2021 compared to catastrophe losses of $35 million (1.5 points) in the first six months of 2020.

Property and transportation Underwriting profit for this group was $118 million for the first six months of 2021 compared to $60 million for the first six months of 2020, ~~compared to $43~~an increase of $58 million ~~for~~(97%). This increase reflects higher underwriting profit in the transportation, property and inland marine and crop businesses. Catastrophe losses were $20 million (2.4 points on the combined ratio), primarily the result of winter storms in Texas, and related net reinstatement premiums were $9 million in the first six months of ~~2019, an increase~~2021 compared to catastrophe losses of ~~$17~~$23 million ~~(40%), This increase reflects higher favorable prior year reserve development~~(3.0 points) in the ~~transportation businesses and higher underwriting profits at the Singapore branch, partially offset by lower underwriting profit in the crop business.~~first six months of 2020. COVID-19 related losses for this group were $6 million (0.7 ~~points on the combined ratio)~~points) in the first six months of 2020. ~~Catastrophe losses were $23 million (3.0 points on the combined ratio) in the first six months of 2020 compared to $17 million (2.3 points) in the first six months of 2019.~~

Specialty casualty Underwriting profit for this group was $127 million for the first six months of 2021 compared to $79 million for the first six months of 2020, ~~compared to $83~~an increase of $48 million ~~for~~(61%). This increase reflects higher underwriting profitability in the excess and surplus lines and excess liability businesses, partially offset by lower favorable prior year reserve development in the workers’ compensation business in the first six months of ~~2019, a decrease~~2021 compared to the first six months of ~~$4 million (5%).~~2020. COVID-19 related losses were ~~$59~~$7 million ~~(5.3~~(0.6 points on the combined ratio) in the first six months of 2021 compared to $59 million (5.3 points) in the first six months of 2020, primarily in the workers’ compensation and executive liability businesses. ~~These~~Catastrophe losses ~~in addition to lower year-over-year underwriting profitability in~~were $3 million (0.3 points on the ~~alternative markets~~combined ratio) and ~~public sector businesses were partially offset by higher favorable prior year reserve development of $31 million in the first~~related reinstatement

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

six months of 2020 compared to the first six months of 2019, primarily in the workers’ compensation and executive liability businesses, higher profitability in the excess and surplus and excess liability businesses, and the impact of $14premiums were $1 million ~~of underwriting losses at Neon~~ in the first six months of ~~2019.~~2021 compared to catastrophe losses of $6 million (0.5 points) in the first six months of 2020.

Specialty financial Underwriting profit for this group was $46 million for the first six months of 2021 compared to $17 million for the first six months of 2020, ~~compared to $34~~an increase of $29 million ~~for~~(171%). This increase reflects higher year-over-year underwriting profitability in the ~~first six months of 2019, a decrease of $17 million (50%).~~trade credit and financial institutions businesses. COVID-19 related losses were ~~$30~~$4 million ~~(10.2~~(1.4 points on the combined ratio) in the first six months of ~~2020~~2021 compared to $30 million (10.2 points), primarily related to trade credit insurance. ~~Lower underwriting profitability~~Catastrophe losses were $6 million (2.0 points on the combined ratio) and related net reinstatement premiums were $2 million in the ~~trade credit, surety and fidelity businesses was partially offset by higher underwriting profit~~first six months of 2021 compared to catastrophe losses of $6 million (2.0 points) in the ~~financial institutions business.~~first six months of 2020.

Other specialty This group reported an underwriting loss of ~~$13~~$4 million for the first six months of ~~2020~~2021 compared to ~~$12~~$13 million in the first six months of ~~2019, an increase~~2020, a decrease of $1$9 million ~~(8%~~(69%). This ~~increase~~decrease reflects ~~higher~~lower losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the first six months of ~~2020~~2021 compared to the first six months of ~~2019.~~2020.

Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment includes an underwriting loss of $44 million at Neon in the ~~second quarter~~first six months of 2020, due primarily to losses related to the COVID-19 pandemic. AFG also recorded adverse prior year reserve development of $3$1 million and $2$3 million in the ~~second quarter~~first six months of ~~2020~~2021 and ~~2019,~~2020, respectively, related to business outside of the Specialty group that AFG no longer writes.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Losses and Loss Adjustment Expenses

AFG’s overall loss and LAE ratio was 57.0% for the first six months of 2021 compared to 61.8% for the first six months of 2020, ~~compared to 59.7% for the first six months~~a decrease of ~~2019, an increase of 2.1~~4.8 percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions):


		Six months ended June 30,																	Six months ended June 30,
		Amount						Ratio								Change in	Amount				Ratio		Change in
		2020		2019		2020		2019		Ratio			2021		2020		2021		2020		Ratio
Property and transportation	Property and transportation											Property and transportation
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	499	$	499	64.4	%	67.5	%	(3.1	%)	Current year, excluding COVID-19 related and catastrophe losses	$	547	$	499	64.5	%	64.4	%	0.1	%
Prior accident years development	Prior accident years development	(52)		(32)		(6.7	%)	(4.4	%)	(2.3	%)	Prior accident years development	(83)		(52)		(9.8	%)	(6.7	%)	(3.1	%)
COVID-19 related losses		6		—		0.7	%	—	%	0.7	%
Current year COVID-19 related losses												Current year COVID-19 related losses	—		6		—	%	0.7	%	(0.7	%)
Current year catastrophe losses	Current year catastrophe losses	23		17		3.0	%	2.3	%	0.7	%	Current year catastrophe losses	20		23		2.4	%	3.0	%	(0.6	%)
Property and transportation losses and LAE and ratio	Property and transportation losses and LAE and ratio	$	476	$	484	61.4	%	65.4	%	(4.0	%)	Property and transportation losses and LAE and ratio	$	484	$	476	57.1	%	61.4	%	(4.3	%)

Specialty casualty	Specialty casualty											Specialty casualty
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	717	$	810	65.0	%	64.2	%	0.8	%	Current year, excluding COVID-19 related and catastrophe losses	$	743	$	717	64.1	%	65.0	%	(0.9	%)
Prior accident years development	Prior accident years development	(75)		(44)		(6.7	%)	(3.5	%)	(3.2	%)	Prior accident years development	(29)		(75)		(2.5	%)	(6.7	%)	4.2	%
COVID-19 related losses		59		—		5.3	%	—	%	5.3	%
Current year COVID-19 related losses												Current year COVID-19 related losses	7		59		0.6	%	5.3	%	(4.7	%)
Current year catastrophe losses	Current year catastrophe losses	6		2		0.5	%	0.1	%	0.4	%	Current year catastrophe losses	3		6		0.3	%	0.5	%	(0.2	%)
Specialty casualty losses and LAE and ratio	Specialty casualty losses and LAE and ratio	$	707	$	768	64.1	%	60.8	%	3.3	%	Specialty casualty losses and LAE and ratio	$	724	$	707	62.5	%	64.1	%	(1.6	%)

Specialty financial	Specialty financial											Specialty financial
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	101	$	115	33.5	%	38.8	%	(5.3	%)	Current year, excluding COVID-19 related and catastrophe losses	$	115	$	101	36.4	%	33.5	%	2.9	%
Prior accident years development	Prior accident years development	(13)		(15)		(4.5	%)	(5.1	%)	0.6	%	Prior accident years development	(20)		(13)		(6.3	%)	(4.5	%)	(1.8	%)
COVID-19 related losses		30		—		10.2	%	—	%	10.2	%
Current year COVID-19 related losses												Current year COVID-19 related losses	4		30		1.4	%	10.2	%	(8.8	%)
Current year catastrophe losses	Current year catastrophe losses	6		5		2.0	%	1.6	%	0.4	%	Current year catastrophe losses	6		6		2.0	%	2.0	%	—	%
Specialty financial losses and LAE and ratio	Specialty financial losses and LAE and ratio	$	124	$	105	41.2	%	35.3	%	5.9	%	Specialty financial losses and LAE and ratio	$	105	$	124	33.5	%	41.2	%	(7.7	%)

Total Specialty	Total Specialty											Total Specialty
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	1,372	$	1,477	60.6	%	62.3	%	(1.7	%)	Current year, excluding COVID-19 related and catastrophe losses	$	1,466	$	1,372	60.5	%	60.6	%	(0.1	%)
Prior accident years development	Prior accident years development	(133)		(88)		(5.8	%)	(3.7	%)	(2.1	%)	Prior accident years development	(127)		(133)		(5.3	%)	(5.8	%)	0.5	%
COVID-19 related losses		95		—		4.2	%	—	%	4.2	%
Current year COVID-19 related losses												Current year COVID-19 related losses	11		95		0.5	%	4.2	%	(3.7	%)
Current year catastrophe losses	Current year catastrophe losses	35		24		1.5	%	1.0	%	0.5	%	Current year catastrophe losses	30		35		1.3	%	1.5	%	(0.2	%)
Total Specialty losses and LAE and ratio	Total Specialty losses and LAE and ratio	$	1,369	$	1,413	60.5	%	59.6	%	0.9	%	Total Specialty losses and LAE and ratio	$	1,380	$	1,369	57.0	%	60.5	%	(3.5	%)

Aggregate — including exited lines	Aggregate — including exited lines											Aggregate — including exited lines
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	1,447	$	1,477	60.5	%	62.3	%	(1.8	%)	Current year, excluding COVID-19 related and catastrophe losses	$	1,466	$	1,447	60.5	%	60.5	%	—	%
Prior accident years development	Prior accident years development	(119)		(86)		(5.0	%)	(3.6	%)	(1.4	%)	Prior accident years development	(126)		(119)		(5.3	%)	(5.0	%)	(0.3	%)
COVID-19 related losses		115		—		4.8	%	—	%	4.8	%
Current year COVID-19 related losses												Current year COVID-19 related losses	11		115		0.5	%	4.8	%	(4.3	%)
Current year catastrophe losses	Current year catastrophe losses	35		24		1.5	%	1.0	%	0.5	%	Current year catastrophe losses	30		35		1.3	%	1.5	%	(0.2	%)
Aggregate losses and LAE and ratio	Aggregate losses and LAE and ratio	$	1,478	$	1,415	61.8	%	59.7	%	2.1	%	Aggregate losses and LAE and ratio	$	1,381	$	1,478	57.0	%	61.8	%	(4.8	%)

Current accident year losses and LAE, excluding COVID-19 related and catastrophe losses

The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG’s Specialty property and casualty insurance operations was 60.5% for the first six months of 2021 compared to 60.6% for the first six months of 2020, ~~compared to 62.3% for the first six months~~a decrease of ~~2019, an improvement of 1.7~~0.1 percentage points.

Property and transportation The 3.1 percentage point improvement in the loss and LAE ratio for the current year, excluding COVID-19 and catastrophe losses reflects a decrease in the loss and LAE ratio at National Interstate, due primarily to rate increases and lower claim frequency in the first six months of 2020, and lower loss and LAE ratios in the Singapore branch and equine mortality business in the first six months of 2020 compared to the first six months of 2019, partially offset by an increase in the loss and LAE ratio of the aviation business in the first six months of 2020 compared to the first six months of 2019.

~~Specialty casualty~~ ~~The 0.8~~0.1 percentage point increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects growth in the ~~impact~~crop operations, which has a higher loss and LAE ratio than many of the ~~Neon exited lines~~businesses in the property and transportation segment and a higher loss and LAE ratio in the equine business due to higher claim severity in the first six months of ~~2019, which have~~2021 compared to the first six months of 2020, partially offset by a lower loss and LAE ratio of the aviation business.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~lower loss and LAE ratio than many of the other businesses in the~~ Specialty casualty group. Excluding the impact of the Neon exited lines, the loss and LAE ratio for the current year, excluding catastrophe losses decreased 0.4 percentage points in the first six months of 2020 compared to the first six months of 2019.

~~Specialty financial~~ The ~~5.3~~0.9 percentage point ~~improvement~~decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects a decrease in the loss and LAE ratios of the excess and surplus businesses, partially offset by an increase in the loss and LAE ratio of the executive liability business.

Specialty financialThe 2.9 percentage point increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects an increase in the loss and LAE ratio of the financial institutions ~~business in the first six months of 2020 compared to the first six months of 2019.~~and trade credit businesses.

Net prior year reserve development

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $127 million in the first six months of 2021 compared to $133 million in the first six months of 2020, ~~compared to $88~~a decrease of $6 million ~~in the first six months of 2019, an increase of $45 million (51%~~(5%).

Property and transportation Net favorable reserve development of $83 million in the first six months of 2021 reflects lower than anticipated claim frequency and severity in the transportation businesses, lower than expected losses in the crop business and lower than expected claim severity in the property and inland marine business, partially offset by higher than expected claim frequency and severity in the equine business. Net favorable reserve development of $52 million in the first six months of 2020 reflects lower than expected claim frequency and severity in the agricultural businesses and lower than anticipated claim frequency and severity in the transportation businesses.

Specialty casualty Net favorable reserve development of ~~$32~~$29 million in the first six months of ~~2019~~2021 reflects lower than ~~expected losses in the crop business and lower than expected~~anticipated claim ~~frequency and~~ severity in the ~~transportation~~workers’ compensation businesses, partially offset by higher than anticipated claim severity in the general liability, targeted markets and professional liability businesses.

~~Specialty casualty~~ Net favorable reserve development of $75 million in the first six months of 2020 reflects lower than anticipated claim frequency and severity in the workers’ compensation businesses and lower than anticipated claim frequency in the executive liability business, partially offset by higher than expected claim frequency and severity in the excess and surplus businesses. Net favorable reserve development of $44 million in the first six months of 2019 reflects lower than anticipated claim severity in the workers’ compensation businesses, partially offset by higher than expected claim severity in the excess and surplus lines businesses and higher than expected losses at Neon.

Specialty financial Net favorable reserve development of $20 million in the first six months of 2021 reflects lower than anticipated claim frequency in the surety business and lower than expected claim frequency and severity in the financial institutions business. Net favorable reserve development of $13 million in the first six months of 2020 reflects lower than anticipated claim frequency in the trade credit and surety businesses. Net favorable reserve development of $15 million in the first six months of 2019 reflects lower than expected claim frequency and severity in the surety business and lower than expected claim severity in the fidelity business.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $5 million in the first six months of 2021 and $7 million in the first six months of 2020, ~~compared to $3 million in the first six months of 2019. The~~reflecting net adverse ~~reserve~~ development ~~reflects adverse development of $10 million and $6 million in the first six months of 2020 and the first six months of 2019, respectively,~~ associated with AFG’s internal reinsurance ~~program. Both periods include~~program, partially offset by the amortization of the deferred ~~gain~~gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001.

Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes net adverse reserve development of $11 million ~~from the Neon exited lines~~ in the first six months of 2020 from the Neon exited lines and net adverse reserve development of $3$1 million in the first six months of 2021 and $2$3 million in the first six months of 2020 ~~and the first six months of 2019, respectively,~~ related to business outside the Specialty group that AFG no longer writes.

~~Covid-19~~COVID-19 related losses

~~Underwriting results for~~ AFG’s Specialty property and casualty insurance operations recorded $11 million in reserve charges related to COVID-19 in the first six months of 2021 primarily related to the workers’ compensation and trade credit businesses, and released approximately $10 million of accident year 2020 reserves based on loss experience. Underwriting results for the first six months of 2020 ~~included~~include $95 million ~~in COVID-19~~of reserve charges related ~~losses.~~to COVID-19. Given the uncertainties surrounding the ultimate number orand scope of claims relating to the pandemic, ~~these charges,~~ approximately ~~90%~~66% of ~~which establish reserves for claims that have been~~the $96 million in COVID-19 related losses are held as incurred but not reported ~~represent the Company’s current best estimate of losses from the pandemic and related economic disruption incurred through~~reserves at June 30, 2020. Approximately 70% of AFG’s COVID-19 related losses were reported in the workers’ compensation, executive liability and trade credit businesses, with the remainder spread across numerous other businesses.2021.

In addition, COVID-19 related losses were the primary driver of the underwriting loss recorded in the Neon exited lines for the first six months of 2020.

Catastrophe losses

Catastrophe losses of $30 million in the first six months of 2021 resulted primarily from storms in in multiple regions of the United States, including the winter storms in Texas. Catastrophe losses of $35 million in the first six months of 2020

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~Catastrophe losses~~

~~Catastrophe losses of $35 million in the first six months of 2020~~ resulted primarily from storms and tornadoes in multiple regions of the United States and included $4 million related to civil unrest. ~~Catastrophe losses of $24 million in the first six months of 2019 resulted primarily from storms and tornadoes in multiple regions of the United States.~~

Commissions and Other Underwriting Expenses

AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were ~~$819~~$756 million in the first six months of ~~2020~~2021 compared to ~~$812~~$819 million for the first six months of ~~2019, an increase~~2020, a decrease of $7$63 million ~~(1%~~(8%). AFG’s underwriting expense ratio was 31.2% for the first six months of 2021 compared to 34.2% for ~~both~~ the first six months of 2020, ~~and the first six months~~a decrease of ~~2019.~~3.0 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):


		Six months ended June 30,																		Six months ended June 30,
		2020						2019								Change in		2021				2020		Change in
		U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP			U/W Exp		% of NEP			U/W Exp		% of NEP		% of NEP
Property and transportation	Property and transportation	$	240	30.9	%	$	213	28.8	%	2.1	%	Property and transportation	$	245	29.0		%	$	240	30.9	%	(1.9	%)
Specialty casualty	Specialty casualty	317		28.7	%	412		32.6	%	(3.9	%)	Specialty casualty	308		26.5		%	317		28.7	%	(2.2	%)
Specialty financial	Specialty financial	159		53.2	%	158		53.3	%	(0.1	%)	Specialty financial	163		51.9		%	159		53.2	%	(1.3	%)
Other specialty	Other specialty	33		40.4	%	29		39.1	%	1.3	%	Other specialty	40		39.0		%	33		40.4	%	(1.4	%)
Total Specialty	Total Specialty	749		33.2	%	812		34.2	%	(1.0	%)	Total Specialty	756		31.2		%	749		33.2	%	(2.0	%)
Neon exited lines	Neon exited lines	70				—						Neon exited lines	—					70
Aggregate	Aggregate	$	819	34.2	%	$	812	34.2	%	—	%	Aggregate	$	756	31.2		%	$	819	34.2	%	(3.0	%)

Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums ~~increased 2.1~~decreased 1.9 percentage points in the first six months of ~~2020~~2021 compared to the first six months of ~~2019,~~2020 reflecting ~~lower~~higher profitability-based ceding commissions received from reinsurers in the crop business ~~in the first six months of 2020 compared to the first six months of 2019, partially offset by~~and the impact of higher premiums on the ratio in the ~~property and inland marine business.~~transportation businesses in the first six months of 2021 compared to the first six months of 2020.

Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums decreased ~~3.9~~2.2 percentage points in the first six months of ~~2020~~2021 compared to the first six months of ~~2019, due to the run-off~~2020 reflecting higher ceding commissions received from reinsurers as a result of ~~Neon. Neon has a higher expense ratio than many of the other businesses~~growth in the Specialty casualty sub-segment. Excluding the Neon exited lines, the underwriting expense ratio decreased 1.3 percentage points in the first six months of 2020 compared to the first six months of 2019 reflectingexcess liability and excess and surplus businesses and the impact of higher premiums on the ratio in the ~~excess and surplus business.~~first six months of 2021 compared to the first six months of 2020.

Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums ~~is comparable~~decreased 1.3 percentage points in the first six months of ~~2020 and~~2021 compared to the first six months of ~~2019.~~2020 reflecting the impact of higher premiums on the ratio in the first six months of 2021 compared to the first six months of 2020.

Property and Casualty Net Investment Income

~~Excluding the Neon exited lines, net~~Net investment income in AFG’s property and casualty insurance operations was ~~$171~~$302 million in the first six months of ~~2020~~2021 compared to ~~$228~~$171 million (excluding the Neon exited lines) in the first six months of ~~2019, a decrease~~2020, an increase of ~~$57~~$131 million ~~(25%~~(77%). The average invested assets and overall yield earned on investments held by AFG’s property and casualty insurance operations are provided below (dollars in millions):


		Six months ended June 30,															Six months ended June 30,
		2020			2019			Change			% Change			2021			2020			Change			% Change
Net investment income		$	171		$	228		$	(57)		(25	%)
Net investment income:													Net investment income:
Net investment income excluding alternative investments													Net investment income excluding alternative investments	$	162		$	181		$	(19)		(10	%)
Alternative investments													Alternative investments	140			(10)			150			(1,500	%)
Total net investment income													Total net investment income	$	302		$	171		$	131		77	%

Average invested assets (at amortized cost)	Average invested assets (at amortized cost)	$	11,509		$	11,084		$	425		4	%	Average invested assets (at amortized cost)	$	12,539		$	11,509		$	1,030		9	%

Yield (net investment income as a % of average invested assets)	Yield (net investment income as a % of average invested assets)	2.97		%	4.11		%	(1.14		%)			Yield (net investment income as a % of average invested assets)	4.82		%	2.97		%	1.85		%

Tax equivalent yield (*)	Tax equivalent yield (*)	3.10		%	4.29		%	(1.19		%)			Tax equivalent yield (*)	4.96		%	3.10		%	1.86		%

(*)Adjusts the yield on equity securities and tax-exempt bonds to the fully taxable equivalent yield.

The property and casualty insurance segment’s decrease in net investment income for the first six months of 2020 compared to the first six months of 2019 reflects losses from partnerships and similar investments and AFG-managed

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~CLOs~~The property and casualty insurance segment’s increase in net investment income for the first six months of 2021 compared to the first six months of 2020 ~~as a result of the negative impact of the COVID-19 pandemic on financial markets,~~reflects significantly higher earnings from alternative investments (partnerships and similar investments and AFG-managed CLOs), partially offset by the ~~impact~~effect of ~~growth in the property~~lower fixed maturity yields, lower short-term interest rates and ~~casualty insurance segment.~~lower dividend income. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 4.82% for the first six months of 2021 compared to 2.97% for the first six months of 2020, ~~compared to 4.11% for the first six months~~an increase of ~~2019, a decrease of 1.14~~1.85 percentage points. ~~AFG’s property and casualty insurance operations recorded $10 million in losses from partnerships and similar~~The annualized return earned on alternative investments ~~and AFG-managed CLOs~~was 26.3% in the first six months of 2020 compared to $31 million in earnings in the first six months of 2019, a $41 million (132%) decrease in earnings. The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was a negative yield of 2.3% in the first six months of 20202021 compared to a ~~positive yield~~negative return of ~~9.1%~~2.3% in the prior year period.

In addition to the property and casualty segment’s net investment income from ongoing operations discussed above, the Neon exited lines reported a $6 million loss in the first six months of 2020 in net investment income, primarily from changes in the fair value of equity securities.

Property and Casualty Other Income and Expenses, Net

Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $12 million for the first six months of 2021 compared to $14 million for the first six months of 2020, ~~compared to $18 million for the first six months of 2019,~~ a decrease of $4$2 million ~~(22%~~(14%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions):


		Six months ended June 30,							Six months ended June 30,
		2020		2019			2021		2020

Other income	Other income	$	8	$	5	Other income	$	5	$	8
Other expenses	Other expenses					Other expenses
Amortization of intangibles	Amortization of intangibles	6		6		Amortization of intangibles	4		6
Other	Other	16		17		Other	13		16
Total other expense	Total other expense	22		23		Total other expense	17		22
Other income and expenses, net	Other income and expenses, net	$	(14)	$	(18)	Other income and expenses, net	$	(12)	$	(14)

In addition to the property and casualty segment’s other income and expenses, net from ongoing operations discussed above, the Neon exited lines incurred a net expense of $2 million in other income and expenses, net during the first six months of 2020.

~~Annuity Segment~~Holding Company, Other and Unallocated — Results of Operations

AFG’s ~~annuity operations contributed $12~~net GAAP pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled $127 million in ~~GAAP pretax earnings~~the first six months of 2021 compared to $77 million in the first six months of 2020, ~~compared to $161~~an increase of $50 million (65%). AFG’s net core pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled $116 million in the first six months of ~~2019, a decrease of $149~~2021 compared to $77 million (93%) due primarily to losses from partnerships and similar investments and AFG-managed CLOs. The decrease in the financial markets during the first six months of 2020 had a negative impact on liabilities for annuities with guaranteed withdrawal benefits and on the fair value of derivatives related to FIAs in the first six months of 2020, ~~compared to the favorable impact~~an increase of ~~strong stock market performance in the 2019 period.~~$39 million (51%).

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The following table details AFG’s GAAP and core ~~earnings before income taxes from its annuity operations for the six months ended June 30, 2020 and 2019 (dollars in millions):~~

Six months ended June 30,
2020 2019 % Change
Revenues:
Net investment income $ 806 $ 886 (9 %)
Other income:
Guaranteed withdrawal benefit fees 34 33 3 %
Policy charges and other miscellaneous income (a) 31 25 24 %
Total revenues 871 944 (8 %)
Costs and Expenses:
Annuity benefits (a)(b) 561 587 (4 %)
Acquisition expenses (a) 133 93 43 %
Other expenses 68 70 (3 %)
Total costs and expenses 762 750 2 %
Core earnings before income taxes 109 194 (44 %)
Pretax non-core losses (a) (97) (33) 194 %
GAAP earnings before income taxes $ 12 $ 161 (93 %)

~~(a)As discussed under~~ ~~“Results of Operations — General,”~~ beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the first six months of 2020 and 2019, annuity benefits exclude the $154 million and $67 million unfavorable impact, respectively, of these items and acquisition expenses exclude the $57 million and $34 million favorable impact, respectively, on the amortization of deferred policy acquisition costs.

~~(b)Details of the components of annuity benefits are provided below.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Annuity core earnings before income taxes were $109 million in the first six months of 2020 compared to $194 million in the first six months of 2019, a decrease of $85 million (44%). As discussed under ~~“Results of Operations — General,”~~ beginning with the second quarter of 2019, unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the first six months of 2020, the annuity segment’s core earnings before income taxes includes $97 million in pretax losses related to these items. Since annuity core earnings for the first quarter of 2019 and prior periods were not adjusted, the annuity segment’s core earnings before income taxes for the first six months of 2019 includes the $11 million negative impact from these items in first quarter of 2019. Excluding the $11 million unfavorable impact in the first quarter of 2019, annuity core net operating earnings for the first six months of 2020 decreased $96 million compared to the first six months of 2019 reflecting the losses from partnerships and similar investments and AFG-managed CLOs and the impact of lower short-term interest rates in the first six months of 2020, partially offset by growth in the business, higher than expected persistency and a reduction in the cost of funds as a percentage of average annuity benefits accumulated. The table below highlights the impact of changes in the fair value of derivatives and other impacts of the changes in the stock market and interest rates on annuity segment results (dollars in millions):

Six months ended June 30,
2020 2019 % Change
Earnings before income taxes — before the impact of derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs $ 109 $ 205 (47 %)
Impact of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs:
Change in fair value of derivatives related to FIAs (200) (198) 1 %
Accretion of guaranteed minimum FIA benefits (211) (201) 5 %
Other annuity benefits (41) — — %
Less cost of equity options 298 287 4 %
Related impact on the amortization of deferred policy acquisition costs 57 68 (16 %)
Earnings before income taxes $ 12 $ 161 (93 %)

~~Annuity benefits consisted of the following (dollars in millions):~~

Six months ended June 30,
2020 2019 Total
Core Non-core Total Core Non-core Total % Change
Interest credited — fixed $ 206 $ — $ 206 $ 193 $ — $ 193 7 %
Accretion of guaranteed minimum FIA benefits — 211 211 99 102 201 5 %
Interest credited — fixed component of variable annuities 2 — 2 2 — 2 — %
Cost of equity options 298 (298) — 146 (146) — — %
Other annuity benefits:
Amortization of sales inducements 4 — 4 8 — 8 (50 %)
Change in guaranteed withdrawal benefit reserve:
Impact of change in the stock market and interest rates — 20 20 (1) (4) (5) (500 %)
Accretion of benefits and other 42 — 42 39 — 39 8 %
Change in expected death and annuitization reserves and other 9 — 9 13 — 13 (31 %)
Change in other benefit reserves — impact of changes in interest rates and the stock market — 21 21 (7) 12 5 320 %
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market — (46) (46) 462 251 713 (106 %)
Equity option mark-to-market — 246 246 (367) (148) (515) (148 %)
Impact of derivatives related to FIAs — 200 200 95 103 198 1 %
Total annuity benefits $ 561 $ 154 $ 715 $ 587 $ 67 $ 654 9 %

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Six months ended June 30,
2020 2019
Interest credited — fixed $ 206 $ 193
Include cost of equity options 298 287
Cost of funds 504 480
Interest credited — fixed component of variable annuities 2 2
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs 55 60
561 542
Changes in fair value of derivatives related to FIAs, and other impacts of the stock market and interest rates over or under option costs:
Impact of derivatives related to FIAs 200 198
Accretion of guaranteed minimum FIA benefits 211 201
Other annuity benefits — impact of the stock market and interest rates on FIAs 41 —
Less cost of equity options (included in cost of funds) (298) (287)
Total annuity benefits expense $ 715 $ 654

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Net Spread on Fixed Annuities (excludes variable annuity earnings)~~

~~The table below (dollars in millions) details the components of the spreads for AFG’s fixed annuity operations (including fixed-indexed and variable-indexed annuities):~~

Six months ended June 30,
2020 2019 % Change
Average fixed annuity investments (at amortized cost) $ 40,322 $ 37,449 8 %
Average fixed annuity benefits accumulated 40,370 37,640 7 %
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments) 3.98 % 4.71 %
Cost of funds (2.50 %) (2.55 %)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*) (0.10 %) (0.13 %)
Net interest spread 1.38 % 2.03 %
Policy charges and other miscellaneous income (*) 0.13 % 0.10 %
Acquisition expenses (*) (0.64 %) (0.66 %)
Other expenses (0.33 %) (0.37 %)
Net spread earned on fixed annuities excluding the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on FIAs 0.54 % 1.10 %
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs:
Included in core — % (0.06 %)
Annuity non-core earnings (losses) (0.48 %) (0.18 %)
Net spread earned on fixed annuities 0.06 % 0.86 %

~~Annuity Net Investment Income~~

Net investment income for the first six months of 2020 was $806 million compared to $886 million for the first six months of 2019, a decrease of $80 million (9%). This decrease reflects losses from partnerships and similar investments and AFG-managed CLOs, partially offset by growth in AFG’s annuity business. The overall yield earned on investments in AFG’s fixed annuity operations, calculated as net investment income divided by average investment balances (at amortized cost), decreased by 0.73 percentage points to 3.98% from 4.71% for the first six months of 2020 compared to the first six months of 2019. The decrease in the net investment yield between periods reflects the negative impact of lower earnings from partnerships and similar investments and AFG-managed CLOs in the first six months of 2020, along with the impact of the run-off of higher yielding investments and lower short-term interest rates. AFG’s annuity segment recorded $43 million in losses from partnerships and similar investments and AFG-managed CLOs in the first six months of 2020 compared to $60 million in earnings in the first six months of 2019, a change of $103 million (172%). The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was a negative yield of 6.7% in the first six months of 2020 compared to a positive yield of 11.1% in the prior year period.

~~Annuity Cost of Funds~~

Cost of funds for the first six months of 2020 was $504 million compared to $480 million for the first six months of 2019, an increase of $24 million (5%). This increase reflects growth in the annuity business. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, decreased 0.05 percentage points to 2.50% from 2.55% in the first six months of 2020 compared to the first six months of 2019 reflecting the impact of offering lower renewal crediting rates on option costs.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~The following table provides details of AFG’s interest credited and other cost of funds (in millions):~~

Six months ended June 30,
2020 2019
Cost of equity options (FIAs) $ 298 $ 287
Interest credited:
Traditional fixed annuities 127 120
Fixed component of fixed-indexed annuities 51 45
Immediate annuities 12 12
Pension risk transfer products 8 2
Federal Home Loan Bank advances 8 14
Total cost of funds $ 504 $ 480

~~Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees~~

Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of the stock market and interest rates for the first six months of 2020 were $21 million compared to $27 million for the first six months of 2019, a decrease of $6 million (22%). As a percentage of average fixed annuity benefits accumulated, these net expenses decreased 0.03 percentage points to 0.10% from 0.13% in the first six months of 2020 compared to the first six months of 2019. In addition to interest credited to policyholders’ accounts and the change in fair value of derivatives related to fixed-indexed annuities, annuity benefits expense also includes the following expenses (in millions, net of guaranteed withdrawal benefit fees):

Six months ended June 30,
2020 2019
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements $ 4 $ 8
Change in guaranteed withdrawal benefit reserve 42 39
Change in other benefit reserves 9 13
Other annuity benefits 55 60
Offset guaranteed withdrawal benefit fees (34) (33)
Other annuity benefits excluding the impact of the stock market and interest rates, net 21 27
Other annuity benefits — impact of the stock market and interest rates 41 —
Other annuity benefits, net $ 62 $ 27

~~As discussed under~~ ~~“Annuity Benefits Accumulated”~~ in ~~Note A — “Accounting Policies”~~ to the financial statements, guaranteed withdrawal benefit reserves are accrued for and modified using assumptions similar to those used in establishing and amortizing deferred policy acquisition costs. In addition, the guaranteed withdrawal benefit reserve related to FIAs can be inversely impacted by the calculated FIA embedded derivative reserve as the value to policyholders of the guaranteed withdrawal benefits decreases when the benefit of stock market participation increases. As shown in the table above, changes in the stock market and interest rates increased AFG’s guaranteed withdrawal benefit reserve by $41 million in the first six months of 2020. This $41 million increase compared to the 2019 period was the primary driver of the $35 million (130%) overall increase in other annuity benefits, net of guaranteed withdrawal fees in the first six months of 2020 compared to the first six months of 2019.

~~Annuity Net Interest Spread~~

AFG’s net interest spread decreased 0.65 percentage points to 1.38% from 2.03% in the first six months of 2020 compared to the same period in 2019 due primarily to the negative impact of losses from partnerships and similar investments and AFG-managed CLOs in the first six months of 2020. Features included in current annuity product offerings allow AFG to achieve its desired profitability at a lower net interest spread than historical product offerings. As a result, AFG expects its net interest spread to narrow in the future.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Policy Charges and Other Miscellaneous Income~~

Annuity policy charges and other miscellaneous income, which consist primarily of surrender charges, amortization of deferred upfront policy charges (unearned revenue) and equity index call option proceeds received at maturity that are not passed to policyholders through index credits due to surrenders, were $31 million in the first six months of 2020 compared to $25 million in the first six months of 2019, an increase of $6 million (24%), reflecting higher gains on equity index options in excess of policyholder index credits in the first six months of 2020 compared to the first six months of 2019. Annuity policy charges and other miscellaneous income as a percentage of average fixed annuity benefits accumulated increased 0.03 percentage points to 0.13% from 0.10% in the first six months of 2020 compared to the first six months of 2019, reflecting the higher gains on equity index call options.

~~Annuity Acquisition Expenses~~

Six months ended June 30,
2020 2019
Annuity acquisition expenses before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates $ 133 $ 127
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates:
Included in core — (34)
Annuity non-core earnings (losses) (57) (34)
Annuity acquisition expenses $ 76 $ 59

Annuity acquisitions expenses before the acceleration/deceleration of the amortization resulting from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs were $133 million for the first six months of 2020 compared to $127 million for the first six months of 2019, an increase of $6 million (5%).

The negative impact of significantly lower than anticipated interest rates in both the first six months of 2020 and the first six months of 2019 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC. The offsetting deceleration of the amortization of DPAC in the 2019 period was partially offset by the positive impact of strong stock market performance on the fair value of derivatives and other liabilities related to FIAs.

The table below illustrates the impact of changes in the fair value of derivatives related to fixed-indexed annuities and other impacts of changes in the stock market and interest rates on FIAs on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated:

Six months ended June 30,
2020 2019
Before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates 0.64 % 0.66 %
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates (0.28 %) (0.36 %)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated 0.36 % 0.30 %

~~Annuity Other Expenses~~

Annuity other expenses were $68 million for the first six months of 2020 compared to $70 million for the first six months of 2019, a decrease of $2 million (3%). Annuity other expenses represent primarily general and administrative expenses, as well as selling and issuance expenses that are not deferred. As a percentage of average fixed annuity benefits accumulated, these expenses decreased 0.04 percentage points to 0.33% from 0.37% for the first six months of 2020 compared to the first six months of 2019 due primarily to growth in the annuity business.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Change in Fair Value of Derivatives Related to Fixed-Indexed (Including Variable-Indexed) Annuities and Other Impacts of Changes in the Stock Market and Interest Rates on FIAs~~

AFG’s fixed-indexed (including 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’s strategy is designed so that the net change in the fair value of the call option assets and put option liabilities 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. For a list of other factors impacting the fair value of the embedded derivative component of AFG’s annuity benefits accumulated, see ~~Note D — “Fair Value Measurements”~~ to the financial statements. 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.

Six months ended June 30,
2020 2019 % Change
Change in the fair value of derivatives related to FIAs $ (200) $ (198) 1 %
Accretion of guaranteed minimum FIA benefits (211) (201) 5 %
Other annuity benefits (41) — — %
Less cost of equity options 298 287 4 %
Related impact on the amortization of DPAC 57 68 (16 %)
Impact on annuity segment earnings before income taxes $ (97) $ (44) 120 %

During the first six months of 2020, the negative impact of significantly lower than anticipated interest rates and the decrease in stock market performance reduced the annuity segments’ earnings before income taxes by $97 million compared to the $44 million negative impact of interest rates and the stock market on annuity earnings before income taxes for the first six months of 2019, an increase of $53 million (120%). In the first six months of 2019, the negative impact of significantly lower than anticipated interest rates was partially offset by the positive impact of strong stock market performance. As a percentage of average fixed annuity benefits accumulated, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense of 0.48% in the first six months of 2020 compared to 0.24% in the first six months of 2019.

Six months ended June 30,
2020 2019 % Change
Change in the stock market, including volatility $ (26) $ 40 (165 %)
Changes in interest rates higher (lower) than expected (71) (83) (14 %)
Other — (1) (100 %)
Impact on annuity segment earnings before income taxes $ (97) $ (44) 120 %

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Net Spread Earned on Fixed Annuities~~

AFG’s net spread earned on fixed annuities excluding the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates over or under option costs decreased 0.56 percentage points to 0.54% in the first six months of 2020 from 1.10% in the first six months of 2019 due primarily to the 0.65 percentage point decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities decreased 0.80 percentage points to 0.06% in the first six months of 2020 from 0.86% in the first six months of 2019 due to the decrease in AFG’s net interest spread, the impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates on the accounting for FIAs discussed above.

~~Annuity Benefits Accumulated~~

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, excess benefits expected to be paid on future deaths and annuitizations (“EDAR”) and guaranteed withdrawal benefits. Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati. The following table is a progression of AFG’s annuity benefits accumulated liability for the six months ended June 30, 2020 and 2019 (in millions):

Six months ended June 30,
2020 2019
Beginning fixed annuity reserves $ 40,018 $ 36,431
Fixed annuity premiums (receipts) 1,887 2,733
Federal Home Loan Bank advances, net 160 —
Surrenders, benefits and other withdrawals (1,562) (1,623)
Interest and other annuity benefit expenses:
Cost of funds 504 480
Embedded derivative mark-to-market (46) 713
Change in other benefit reserves (19) (54)
Ending fixed annuity reserves $ 40,942 $ 38,680
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above) $ 40,942 $ 38,680
Impact of unrealized investment gains 285 192
Fixed component of variable annuities 165 172
Annuity benefits accumulated per balance sheet $ 41,392 $ 39,044

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Statutory Annuity Premiums~~

AFG’s annuity operations generated gross statutory premiums of $1.90 billion in the first six months of 2020 compared to $2.74 billion in the first six months of 2019, a decrease of $847 million (31%). The following table summarizes AFG’s annuity sales (dollars in millions):

Six months ended June 30,
2020 2019 % Change
Financial institutions single premium annuities — indexed $ 682 $ 853 (20 %)
Financial institutions single premium annuities — fixed 385 657 (41 %)
Retail single premium annuities — indexed 310 575 (46 %)
Retail single premium annuities — fixed 56 65 (14 %)
Broker dealer single premium annuities — indexed 238 416 (43 %)
Broker dealer single premium annuities — fixed 19 14 36 %
Pension risk transfer 126 60 110 %
Education market — fixed and indexed annuities 71 93 (24 %)
Total fixed annuity premiums 1,887 2,733 (31 %)
Variable annuities 10 11 (9 %)
Total gross fixed annuity premiums 1,897 2,744 (31 %)
Ceded premiums (78) — — %
Total net annuity premiums $ 1,819 $ 2,744 (34 %)

Management attributes the 31% decrease in gross fixed annuity premiums in the first six months of 2020 compared to the first six months of 2019 to the lower market interest rate environment. In response to the continued drop in market interest rates during 2019 and 2020, AFG lowered crediting rates on several products, which has slowed annuity sales compared to 2019 levels. In addition, many of the restrictions from the COVID-19 pandemic impact the ability of agents to conduct business in the same manner as usual. As a result, management expects annuity premiums to be negatively impacted during the remainder of 2020.

~~Annuity Earnings before Income Taxes Reconciliation~~

~~The following table reconciles the net spread earned on AFG’s fixed annuities to overall annuity pretax earnings for the six months ended June 30, 2020 and 2019 (in millions):~~

Six months ended June 30,
2020 2019
Earnings on fixed annuity benefits accumulated $ 12 $ 162
Earnings impact of investments in excess of fixed annuity benefits accumulated (*) (1) (4)
Variable annuity earnings 1 3
Earnings before income taxes $ 12 $ 161

~~(*)~~Net investment income (as a % of investments) of 3.98% and 4.71% for the six months ended June 30, 2020 and 2019, respectively, multiplied by the difference between average fixed annuity investments (at amortized cost) and average fixed annuity benefits accumulated in each period.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Holding Company, Other and Unallocated — Results of Operations~~

AFG’s net pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $80 million in the first six months of 2020 compared to $85 million in the first six months of 2019, a decrease of $5 million (6%).

~~The following table details AFG’s~~ loss before income taxes from operations outside of its property and casualty insurance ~~and annuity segments~~segment for the six months ended June 30, ~~2020~~2021 and ~~2019~~2020 (dollars in millions):


		Six months ended June 30,									Six months ended June 30,
		2020		2019		% Change			2021		2020		% Change
Revenues:	Revenues:							Revenues:
Life, accident and health net earned premiums		$	10	$	11	(9	%)
Net investment income	Net investment income	7		24		(71	%)	Net investment income	$	11	$	(3)	(467	%)
Other income — P&C fees	Other income — P&C fees	33		35		(6	%)	Other income — P&C fees	37		33		12	%
Reclassify annuity segment option gains		(13)		(4)		225	%
Other income	Other income	13		14		(7	%)	Other income	9		10		(10	%)
Total revenues	Total revenues	50		80		(38	%)	Total revenues	57		40		43	%

Costs and Expenses:	Costs and Expenses:							Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses	Property and casualty insurance — commissions and other underwriting expenses	10		13		(23	%)	Property and casualty insurance — commissions and other underwriting expenses	14		10		40	%
Annuity - annuity benefits		(13)		(4)		225	%
Life, accident and health benefits		19		17		12	%
Life, accident and health acquisition expenses		2		2		—	%
Other expense — expenses associated with P&C fees	Other expense — expenses associated with P&C fees	23		22		5	%	Other expense — expenses associated with P&C fees	23		23		—	%
Other expenses		49		82		(40	%)
Other expenses (*)								Other expenses (*)	89		44		102	%
Costs and expenses, excluding interest charges on borrowed money	Costs and expenses, excluding interest charges on borrowed money	90		132		(32	%)	Costs and expenses, excluding interest charges on borrowed money	126		77		64	%
Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(40)		(52)		(23	%)	Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(69)		(37)		86	%
Interest charges on borrowed money	Interest charges on borrowed money	40		33		21	%	Interest charges on borrowed money	47		40		18	%
Core loss from continuing operations before income taxes, excluding realized gains and losses								Core loss from continuing operations before income taxes, excluding realized gains and losses	(116)		(77)		51	%

Loss before income taxes, excluding realized gains and losses		$	(80)	$	(85)	(6	%)
Pretax non-core loss on pension settlement								Pretax non-core loss on pension settlement	(11)		—		—	%
GAAP loss from continuing operations before income taxes, excluding realized gains and losses								GAAP loss from continuing operations before income taxes, excluding realized gains and losses	$	(127)	$	(77)	65	%

(*)

~~Holding Company and Other — Life, Accident and Health Premiums, Benefits and Acquisition Expenses~~

AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $10 million and related benefits and acquisition expenses of $21 million in the first six months of 2020 compared to net earned premiumsExcludes a pretax non-core loss of $11 million ~~and~~ related ~~benefits and acquisition expenses~~to the settlement of ~~$19 million~~pension liabilities of a small former manufacturing operation in the ~~first six months~~second quarter of ~~2019. The $2 million (12%) increase in life, accident and health benefits reflects higher claims in the run-off life insurance business.~~2021.

Holding Company and Other — Net Investment Income

AFG recorded net investment income on investments held outside of its property and casualty insurance ~~and annuity segments~~segment of $7$11 million in the first six months of 2021 compared to a net investment loss of $3 million in the first six months of 2020, ~~compared to $24~~a change of $14 million ~~in the first six months of 2019, a decrease of $17 million (71%~~(467%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities ~~decreased~~increased in value by $6 million in the first six months of ~~2020~~2021 compared to ~~an increase~~a decrease in value of $9$6 million in the first six months of ~~2019.~~2020.

Holding Company and Other — P&C Fees and Related Expenses

Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the first six months of ~~2020,~~2021, AFG collected ~~$33~~$37 million in fees for these services compared to ~~$35~~$33 million in the first six months of ~~2019.~~2020. Management views this fee income, net of the $23 million in both the first six months of 2021 and the first six months of 2020, ~~and $22 million the first six months of 2019,~~ in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Holding Company and Other — Annuity Segment Option Gains~~

~~As discussed under~~ ~~“Annuity Segment — Results of Operations,”~~ ~~AFG~~ purchases and sells equity index options to mitigate the risk in the index-based component of its FIAs. In evaluating the performance of the annuity business, management views the cost of the equity options as a better measurement of the true expenses of the Annuity segment as compared to the GAAP accounting for these options as derivatives because any proceeds at expiration from the options generally are passed to policyholders through index credits. On occasion, policyholders surrender their annuity prior to receiving the index credit, which results in any option exercise proceeds being retained by AFG. For internal management reporting, AFG views these “option gains” as miscellaneous (other) income rather than as a component of annuity benefits expense. Consistent with internal management reporting, these option gains are reclassified from annuity benefits to other income in AFG’s segmented results. In the first six months of 2020 and 2019, AFG had $13 million and $4 million, respectively, in such option gains.

Holding Company and Other — Other Income

Other income in the table above includes $8 million ~~and $7 million~~ in both the first six months of ~~2020~~2021 and ~~2019, respectively,~~the first six months of 2020, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under “Results of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance ~~and annuity operations~~segment of $5$1 million in the first six months of ~~2020~~2021 compared to $7$2 million the first six months of ~~2019.~~

~~Holding Company and Other — Other Expenses~~

AFG’s holding companies and other operations outside of its property and casualty insurance and annuity segments recorded other expenses of $49 million in the first six months of 2020 compared to $82 million the first six months of 2019, a decrease of $33 million (40%). This decrease reflects lower holding company expenses related to employee benefit plans that are tied to stock market performance and lower expenses associated with certain incentive compensation plans in the first six months of 2020 compared to the first six months of 2019 and a $3 million charitable donation in the first six months of 2019.

~~Holding Company and Other — Interest Charges on Borrowed Money~~

AFG’s holding companies and other operations outside of its property and casualty insurance and annuity segments recorded interest expense of $40 million in the first six months of 2020 compared to $33 million in the first six months of 2019, an increase of $7 million (21%).

The increase in interest expense for the first six months of 2020 as compared to the first six months of 2019 reflects the following financial transactions completed by AFG between January 1, 2019 and June 30, 2020:

•~~Issued $125 million of 5.875% Subordinated Debentures in March 2019~~

•~~Issued $200 million of 5.125% Subordinated Debentures in December 2019~~

•~~Redeemed $150 million of 6-1/4% Subordinated Debentures in December 2019~~

•~~Issued $300 million of 5.25% Senior Notes in April 2020~~

•~~Issued $150 million of 5.625% Subordinated Debentures in May 2020~~2020.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~Consolidated Realized Gains (Losses) on Securities~~Holding Company and Other — Other Expenses

AFG’s ~~consolidated realized gains (losses)~~holding companies and other operations outside of its property and casualty insurance segment recorded other expenses of $89 million in the first six months of 2021 compared to $44 million the first six months of 2020, an increase of $45 million (102%) reflecting higher holding company expenses related to employee benefit plans that are tied to stock market performance and higher expenses associated with certain incentive compensation plans.

Holding Company and Other — Interest Charges on ~~securities, which are not allocated~~Borrowed Money

AFG’s holding companies and other operations outside of its property and casualty insurance segment recorded interest expense of $47 million in the first six months of 2021 compared to ~~segments, were net losses of $347~~$40 million in the first six months of 2020, an increase of $7 million (18%), reflecting higher average indebtedness.

The increase in interest expense for the first six months of 2021 as compared to the first six months of 2020 reflects the following financial transactions completed by AFG between January 1, 2020 and June 30, 2021:

•Issued $300 million of 5.25% Senior Notes in April 2020

•Issued $150 million of 5.625% Subordinated Debentures in May 2020

•Issued $200 million of 4.50% Subordinated Debentures in September 2020

•Redeemed $150 million of 6% Subordinated Debentures in November 2020

Holding Company and Other — Loss on Pension Settlement

In the second quarter of 2021, AFG settled pension liabilities related to a small former manufacturing operation resulting in a pretax non-core loss of $11 million.

Realized Gains (Losses) on Securities

AFG’s realized gains (losses) on securities were net gains of ~~$240~~$120 million in the first six months of ~~2019,~~2021 compared to net losses of $220 million in the first six months of 2020, a change of ~~$587~~$340 million ~~(245%~~(155%). Realized gains (losses) on securities consisted of the following (in millions):


		Six months ended June 30,									Six months ended June 30,
				2020			2019			2021			2020
Realized gains (losses) before impairments:	Realized gains (losses) before impairments:						Realized gains (losses) before impairments:
Disposals	Disposals	$	29		$	5	Disposals	$	2		$	4
Change in the fair value of equity securities	Change in the fair value of equity securities	(333)			226		Change in the fair value of equity securities	119			(211)
Change in the fair value of derivatives	Change in the fair value of derivatives	7			12		Change in the fair value of derivatives	(2)			1
Adjustments to annuity deferred policy acquisition costs and related items		(5)			1
		(302)			244
Change in allowance for impairments:
Securities		(60)			(6)
Adjustments to annuity deferred policy acquisition costs and related items		15			2
		(45)			(4)			119			(206)

Change in allowance for impairments on securities							Change in allowance for impairments on securities	1			(14)
Realized gains (losses) on securities	Realized gains (losses) on securities	$	(347)		$	240	Realized gains (losses) on securities	$	120		$	(220)

The ~~$333~~$119 million net realized gain from the change in the fair value of equity securities in the first six months of 2021 includes gains of $31 million on investments in energy and natural gas companies, $24 million on investments in healthcare companies, $19 million on investments in banks and financing companies and $19 million on investments in media companies. The $211 million net realized loss from the change in the fair value of equity securities in the first six months of 2020 includes losses of ~~$76~~$58 million on investments in banks and financing companies, ~~$76~~$44 million onfrom investments in media companies, ~~$62~~$26 million on investments in natural gas companies, ~~$36~~$21 million on real estate investment trusts, $14 million on investments in energy companies and $29 million on real estate investment trusts. The $226 million net realized gain from the change in the fair value of equity securities in the first six months of 2019 includes gains of $70 million on investments in banks and financing companies, $35 million from investments in media companies, $23 million on investments in asset management companies and $17$10 million on insurance companies.

~~The $60~~Realized Gain on Subsidiary

In the second quarter of 2021, AFG recognized a pretax gain on sale of subsidiary of $4 million ~~of impairment allowance expense in the first six months of 2020 include $38 million in charges~~ related to ~~structured securities and $22 million in charges related~~contingent consideration received on the sale of Neon. See “Results of Operations — General” for the discussion of the December 2019 decision to ~~corporate bonds and other fixed maturities.~~exit the Lloyd’s of London insurance market.

Consolidated Income Taxes on Continuing Operations

AFG’s consolidated provision (credit) for income taxes on continuing operations was a provision of $116 million for the first six months of 2021 compared to a credit of ~~$33~~$4 million for the first six months of 2020, ~~compared to a provision of $137 million for the first six months of 2019,~~ a change of ~~$170~~$120 million ~~(124%~~(3,000%). See Note LK — “Income Taxes” to the financial statements for an analysis of items affecting AFG’s effective tax ~~rate.~~

~~Consolidated Noncontrolling Interests~~

AFG’s consolidated net earnings (loss) attributable to noncontrolling interests was a net loss of $13 million for the first six months of 2020 compared to $4 million for the first six months of 2019, an increase of $9 million (225%). Both periods reflect losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer.

~~RECENTLY ADOPTED ACCOUNTING STANDARDS~~

~~See~~ ~~Note A — “Accounting Policies — Credit Losses~~rate on ~~Financial Instruments”~~ to the financial statements for a discussion of accounting guidance adopted on January 1, 2020, which provides a new credit loss model for determining credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures.

continuing operations.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~ACCOUNTING STANDARDS TO BE ADOPTED~~

Consolidated Noncontrolling Interests in Continuing Operations

AFG’s consolidated net earnings (loss) attributable to noncontrolling interests was a net loss $13 million for the first six months of 2020 reflecting losses at Neon, which was sold in December 2020.

~~In August 2018,~~

Real Estate Entities Acquired from the ~~FASB issued ASU 2018-12,~~ ~~Financial Services – Insurance: Targeted Improvements~~Annuity Operations

Beginning with the first quarter of 2021, the results of the annuity businesses to be sold are reported as discontinued operations, in accordance with GAAP, which included adjusting prior period results to reflect these operations as discontinued. Prior to the ~~Accounting~~completion of the sale, AFG’s property and casualty insurance operations acquired approximately $480 million in real-estate related partnerships and AFG parent acquired approximately $100 million of directly owned real estate from those operations. GAAP pretax earnings from continuing operations includes the earnings from these entities and certain other expenses that will be retained from the annuity operations.

The retained real estate entities contributed $51 million in GAAP pretax earnings in the first six months of 2021 compared to $19 million in the first six months of 2020, an increase of $32 million (168%). This increase reflects higher earnings from the real-estate related partnerships in the first six months of 2021 compared to the first six months of 2020.

Discontinued Annuity Operations

AFG’s discontinued annuity operations contributed $324 million in GAAP pretax earnings (excluding the gain on the sale of the annuity operations) in the first six months of 2021 compared to a pretax net loss of $125 million in the first six months of 2020, a change of $449 million (359%) reflecting the following:

•net realized gains on securities in the first six months of 2021 compared to net realized losses in the first six months of 2020,

•significantly higher earnings from partnerships and similar investments,

•the negative impact from the run-off of higher yielding investments and lower short-term interest rates,

•the positive impact of strong stock market performance in the first six months of 2021 compared to the unfavorable impact of the decline in stock market performance in the first six months of 2020,

•the negative impact of lower than expected interest rates in both the first six months of 2021 and the first six months of 2020 on the accounting for ~~Long-Duration Contracts~~fixed indexed annuities (“FIAs”), and

•~~, which changes~~ the assumptions used to measure the liability for future policy benefits for traditional and limited pay contracts (e.g. life, accident and health benefits) from being locked in at inception to being updated at least annually and standardizes the liability discount rate to be used and updated each reporting period, requires the measurementnegative impact of ~~market risk benefits associated with deposit contracts (e.g. annuities) to be recorded at fair value, simplifies~~ the amortization of the deferred ~~policy acquisition costs~~loss related to ~~a constant level basis over~~ the ~~expected life~~annuity block reinsurance transaction entered into in the fourth quarter of 2020 and other reinsurance impacts in the related contracts and requires enhanced disclosures. AFG will be required to adopt this guidance effective January 1, 2022. In July 2020, the Financial Accounting Standards Board voted to expose a proposal to delay the effective date for public companies by one year. AFG cannot estimate the impact that the updated guidance will have on its resultsfirst six months of ~~operations, financial position or liquidity until the updated guidance is closer to adoption.~~2021.

The following table details AFG’s earnings (loss) before and after income taxes and the gain on the sale from its discontinued annuity operations for the six months ended June 30, 2021 and 2020 (dollars in millions):


	Six months ended June 30,
	2021 (*)		2020		% Change
Pretax annuity earnings historically reported as core operating earnings:
Pretax annuity earnings before items below	$	106	$	166	(36	%)
Earnings on partnerships and similar investments	139		(64)		(317	%)
Total pretax annuity earnings historically reported as core operating earnings	245		102		140	%

Pretax amounts previously reported outside of annuity core earnings:
Impact of reinsurance, derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs	(33)		(97)		(66	%)
Realized gains (losses) on securities	112		(127)		(188	%)
Run-off life and long-term care	—		(3)		(100	%)
Total pretax amounts previously reported outside of annuity core earnings	79		(227)		(135	%)
GAAP pretax earnings (loss) from discontinued annuity operations, excluding the gain on the sale of the discontinued annuity operations	324		(125)		(359	%)
Provision (credit) for income taxes	66		(29)		(328	%)
GAAP net earnings (loss) from discontinued annuity operations, excluding the sale of the discontinued annuity operations	258		(96)		(369	%)
Gain on sale of discontinued annuity operations, net of tax	656		—		—	%
GAAP net earnings (loss) from discontinued annuity operations	$	914	$	(96)	(1,052	%)

(*)Results through the May 31, 2021 effective date of the sale.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

As of June 30, ~~2020,~~2021, there were no material changes to the information provided in Item 7A — Quantitative and Qualitative Disclosures about Market Risk of AFG’s ~~2019~~2020 Form 10-K.

ITEM 4. Controls and Procedures

AFG’s management, with participation of its Co-Chief Executive Officers and its ~~Interim Principal~~Chief Financial Officer, has evaluated AFG’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based on that evaluation, AFG’s Co-CEOs and ~~interim principal financial and accounting officer~~CFO concluded that the controls and procedures are effective. There have been no changes in AFG’s internal control over financial reporting during the second fiscal quarter of ~~2020~~2021 that materially affected, or are reasonably likely to materially affect, AFG’s internal control over financial reporting.

In the ordinary course of business, AFG and its subsidiaries routinely enhance their information systems by either upgrading current systems or implementing new systems. There has been no change in AFG’s business processes and procedures during the second fiscal quarter of ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, AFG’s internal control over financial reporting.

PART II

OTHER INFORMATION

~~ITEM 1A. Risk Factors~~

~~For a discussion of AFG’s potential risks or uncertainties, please see “Part I — Item 1A — Risk Factors” and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in AFG’s 2019 Annual Report on Form 10-K filed with the SEC, and~~ ~~“Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations~~” in this Quarterly Report on Form 10-Q, in each case as updated by AFG’s periodic filings with the SEC. Other than as described below, there have been no material changes to the risk factors disclosed in ~~Part I — Item 1A~~ ~~of the Company’s 2019 Annual Report on Form 10-K.~~

~~The impact of COVID-19 and related risks could materially affect AFG’s results of operations, financial position and liquidity.~~

The global COVID-19 pandemic has resulted in, and is expected to continue to result in, significant disruptions in economic activity and financial markets. COVID-19 has directly and indirectly adversely affected AFG and will likely continue to do so for an uncertain period of time. The cumulative effects of COVID-19 on AFG cannot be predicted at this time, but could include (or continue to include), without limitation:

•Continued volatility and further disruption in financial markets which could result in additional significant declines in the fair value of AFG’s investments and could lead to investment losses due to creditor defaults and bankruptcies;

•~~Continued low or declining interest rates which could reduce future investment results;~~

•~~Continued negative impact on premium volumes and annuity sales due to the impact of COVID-19 on general economic activity;~~

•~~Negative impact on the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumption and overall economic output;~~

•~~Reduced cash flows from policyholders delaying premium payments and increased surrenders and annuitizations of in-force annuities;~~

•~~Increased claims, including annuity and life insurance death claims, losses, litigation and related expenses;~~

•Legislative, regulatory, and judicial actions in response to COVID-19, including, but not limited to: actions prohibiting AFG from canceling insurance policies in accordance with policy terms; requiring AFG to cover losses when its policies specifically excluded coverage or did not provide coverage; ordering AFG to provide premium refunds; granting extended grace periods for payment of premiums; and providing for extended periods of time to pay past due premiums; and

•~~Policyholder losses from COVID-19-related claims could be greater than AFG’s reserves for those losses.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~AFG’s results of operations could be adversely impacted by catastrophes, both natural and man-made, pandemics or severe weather conditions or climate change.~~

Catastrophes can be caused by unpredictable natural events such as hurricanes, windstorms, severe storms, tornadoes, floods, hailstorms, severe winter weather, earthquakes, explosions and fire, and by other events, such as terrorist attacks, as well as pandemics and other similar outbreaks in many parts of the world, including the recent outbreak of COVID-19. These events may have a material adverse effect on AFG’s workforce and business operations as well as the workforce and operations of AFG’s customers and independent agents. Some of the assets in AFG’s investment portfolio may be adversely affected by declines in the financial markets, changes in interest rates, reduced liquidity and economic activity caused by large-scale catastrophes, pandemics, terrorist attacks or similar events which could have a material adverse effect on AFG’s revenue, liquidity and operating results.

While not considered a catastrophe by insurance industry standards, droughts can have a significant adverse impact on AFG’s crop insurance results. In addition, extreme weather events that are linked to rising temperatures, changing global weather patterns and fluctuating rain, snow and sea levels (climate change) could result in increased occurrence and severity of catastrophes. The extent of gross losses for AFG’s insurance operations from a catastrophe event is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event, potentially mitigated by any reinsurance coverage purchased by AFG’s insurance subsidiaries. In addition, certain catastrophes could result in both property and non-property claims from the same event. A severe catastrophe or a series of catastrophes could result in losses exceeding AFG’s reinsurance protection and may have a material adverse impact on its results of operations or financial condition.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities AFG repurchased shares of its Common Stock during ~~2020~~2021 as follows:


		Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (*)		Total Number of Shares Purchased	Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (b)
First quarter	First quarter	826,283	$	74.28	826,283	4,173,717	First quarter	1,757,702	$	108.98		1,757,702	3,710,904

Second quarter:	Second quarter:						Second quarter:
April	April	—	—		—	4,173,717	April	94,273	$	115.07		94,273	3,616,631
May	May	85,000	$	62.77	85,000	4,088,717	May	447,048	128.39			447,048	8,169,583
June	June	1,109,236	63.78		1,109,236	2,979,481	June	375,199	121.99			375,199	7,794,384

Total	Total	2,020,519	$	68.04	2,020,519		Total	2,674,222	$	114.26	(a)	2,674,222

~~(*)~~(a)In June 2021, AFG paid a special dividend of $14.00 per share of its Common Stock. The average price paid per share adjusted for the special dividend was $102.23 for the six months ended June 2021.

(b)Represents the remaining shares that may be repurchased until December 31, 2025 under the Plans authorized by AFG’s Board of Directors in ~~February 2016~~October 2020 and ~~February 2019.~~May 2021. In May 2021, AFG’s Board of Directors authorized the repurchase of five million additional shares.

In addition, AFG acquired ~~95,854~~76,984 shares of its Common Stock (at an average of ~~$110.80~~$106.58 per share) in the first quarter of ~~2020, 421~~2021, 274 shares of its Common Stock (at $114.09 per share) in April 2021, 13,418 shares (at an average of ~~$62.22~~$132.45 per share) in May ~~2020~~2021 and ~~119~~688 shares (at ~~$62.38~~$123.18 per share) in June ~~2020~~2021 in connection with its stock incentive plans.

9979

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 6. Exhibits


Number						Exhibit Description
31(a)						Certification of Co-Chief Executive Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
31(b)						Certification of Co-Chief Executive Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
31(c)						Certification o f i ~~nter~~im p ~~rincipal~~ f ~~inancial~~ ~~and accounting~~o ~~fficer~~of Chief Financial Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
32						Certification of Co-Chief Executive Officers a nd i ~~nterim~~ p ~~rincipal~~ f ~~inancial~~ and ~~accounting~~ o ~~ffic~~er Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH						Inline XBRL Taxonomy Extension Schema Document.
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

American Financial Group, Inc.

August 6, ~~2020~~2021

By:

/s/ Brian S. Hertzman

Brian S. Hertzman

Senior Vice President and ~~Controller~~Chief Financial Officer

~~(interim principal financial and accounting officer)~~

~~100~~80



			Page
Part I — Financial Information
Item 1 — Financial Statements:
Consolidated Balance Sheet			2
Consolidated Statement of Earnings			3
Consolidated Statement of Comprehensive Income			4
Consolidated Statement of Changes in Equity			5
Consolidated Statement of Cash Flows			7
Notes to Consolidated Financial Statements			8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			3635
Item 3 — Quantitative and Qualitative Disclosure about Market Risk			9879
Item 4 — Controls and Procedures			9879

Part II — Other Information
~~Item 1A— Risk Factors~~			98
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			9979
Item 6 — Exhibits			~~100~~80
Signature			~~100~~80


	P&C		Annuity and Other
	Deferred		Deferred		Sales										Consolidated
	Costs		Costs		Inducements		PVFP		Subtotal		Unrealized (*)		Total		Total
Balance at March 31, 2020	$	310	$	1,264	$	73	$	34	$	1,371	$	(108)	$	1,263	$	1,573
Additions	148		30		—		—		30		—		30		178
Amortization:
Periodic amortization	(160)		50		(1)		(1)		48		—		48		(112)

Included in realized gains	—		(2)		1		—		(1)		—		(1)		(1)
Foreign currency translation	(2)		—		—		—		—		—		—		(2)
Change in unrealized	—		—		—		—		—		(818)		(818)		(818)
Balance at June 30, 2020	$	296	$	1,342	$	73	$	33	$	1,448	$	(926)	$	522	$	818

Balance at March 31, 2019	$	312	$	1,336	$	84	$	40	$	1,460	$	(325)	$	1,135	$	1,447
Additions	194		56		—		—		56		—		56		250
Amortization:
Periodic amortization	(175)		(19)		(4)		(2)		(25)		—		(25)		(200)

Included in realized gains	—		—		1		—		1		—		1		1
Foreign currency translation	(1)		—		—		—		—		—		—		(1)
Change in unrealized	—		—		—		—		—		(294)		(294)		(294)
Balance at June 30, 2019	$	330	$	1,373	$	81	$	38	$	1,492	$	(619)	$	873	$	1,203

Balance at December 31, 2019	$	322	$	1,303	$	75	$	36	$	1,414	$	(699)	$	715	$	1,037
Additions	306		79		1		—		80		—		80		386
Amortization:
Periodic amortization	(330)		(48)		(4)		(3)		(55)		—		(55)		(385)

Included in realized gains	—		8		1		—		9		—		9		9
Foreign currency translation	(2)		—		—		—		—		—		—		(2)
Change in unrealized	—		—		—		—		—		(227)		(227)		(227)
Balance at June 30, 2020	$	296	$	1,342	$	73	$	33	$	1,448	$	(926)	$	522	$	818

Balance at December 31, 2018	$	299	$	1,285	$	86	$	42	$	1,413	$	(30)	$	1,383	$	1,682
Additions	381		120		1		—		121		—		121		502
Amortization:
Periodic amortization	(350)		(34)		(7)		(4)		(45)		—		(45)		(395)

Included in realized gains	—		2		1		—		3		—		3		3
Foreign currency translation	—		—		—		—		—		—		—		—
Change in unrealized	—		—		—		—		—		(589)		(589)		(589)
Balance at June 30, 2019	$	330	$	1,373	$	81	$	38	$	1,492	$	(619)	$	873	$	1,203


	Six months ended June 30, 2020	Year ended December 31, 2019
Ratio of core earnings to fixed charges excluding annuity benefits	9.56	12.78
Impact of non-core items	(11.03)	1.83
Ratio of earnings to fixed charges excluding annuity benefits	*	14.61
Impact of including interest on annuities as a fixed charge	(2.32)	(12.76)
Ratio of earnings to fixed charges including annuity benefits	*	1.85


	% of Reserves
	June 30,	December 31,
GMIR	2020	2019	2018
1 — 1.99%	85%	84%	81%
2 — 2.99%	3%	3%	4%
3 — 3.99%	6%	7%	8%
4.00% and above	6%	6%	7%

Annuity benefits accumulated (in millions)		$41,392	$40,406	$36,616


	Amortized Cost, net (*)		Fair Value		Fair Value as % of Cost		Unrealized Gain (Loss)		% Rated Investment Grade
Collateral type
Residential:
Agency-backed	$	437	$	445	102	%	$	8	100	%
Non-agency prime	1,330		1,435		108	%	105		60	%
Alt-A	843		929		110	%	86		36	%
Subprime	386		414		107	%	28		36	%
Commercial	852		889		104	%	37		94	%
	$	3,848	$	4,112	107	%	$	264	64	%