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 ~~September 30, 2020~~March 31, 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 ~~November~~May 1, ~~2020,~~2021, there were ~~86,844,220~~85,099,638 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)


		September 30, 2020		December 31, 2019			March 31, 2021		December 31, 2020
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	3,747	$	2,314	Cash and cash equivalents	$	1,691	$	1,665
Investments:	Investments:					Investments:
Fixed maturities, available for sale at fair value (amortized cost — $45,297 and $44,524; allowance for expected credit losses of $54 at September 30, 2020)		48,193		46,505
Fixed maturities, available for sale at fair value (amortized cost — $9,059 and $8,812; allowance for expected credit losses of $10 and $12)						Fixed maturities, available for sale at fair value (amortized cost — $9,059 and $8,812; allowance for expected credit losses of $10 and $12)	9,289		9,084
Fixed maturities, trading at fair value	Fixed maturities, trading at fair value	92		113		Fixed maturities, trading at fair value	26		24
Equity securities, at fair value	Equity securities, at fair value	1,606		1,937		Equity securities, at fair value	944		889
Investments accounted for using the equity method	Investments accounted for using the equity method	1,841		1,688		Investments accounted for using the equity method	1,324		1,235
Mortgage loans	Mortgage loans	1,482		1,329		Mortgage loans	408		377
Policy loans		154		164
Equity index call options		697		924
Real estate and other investments	Real estate and other investments	275		278		Real estate and other investments	218		220
Total cash and investments	Total cash and investments	58,087		55,252		Total cash and investments	13,900		13,494
Recoverables from reinsurers	Recoverables from reinsurers	3,819		3,415		Recoverables from reinsurers	3,231		3,288
Prepaid reinsurance premiums	Prepaid reinsurance premiums	862		678		Prepaid reinsurance premiums	755		768
Agents’ balances and premiums receivable	Agents’ balances and premiums receivable	1,384		1,335		Agents’ balances and premiums receivable	1,209		1,229
Deferred policy acquisition costs	Deferred policy acquisition costs	497		1,037		Deferred policy acquisition costs	244		244
Assets of managed investment entities	Assets of managed investment entities	4,717		4,736		Assets of managed investment entities	5,102		4,971
Other receivables	Other receivables	1,185		975		Other receivables	576		678
Variable annuity assets (separate accounts)		603		628
Other assets	Other assets	1,749		1,867		Other assets	865		977
Goodwill	Goodwill	207		207		Goodwill	176		176
Assets of discontinued annuity operations						Assets of discontinued annuity operations	48,139		47,885
Total assets	Total assets	$	73,110	$	70,130	Total assets	$	74,197	$	73,710

Liabilities and Equity:	Liabilities and Equity:					Liabilities and Equity:
Unpaid losses and loss adjustment expenses	Unpaid losses and loss adjustment expenses	$	10,754	$	10,232	Unpaid losses and loss adjustment expenses	$	10,384	$	10,392
Unearned premiums	Unearned premiums	3,015		2,830		Unearned premiums	2,821		2,803
Annuity benefits accumulated		41,932		40,406
Life, accident and health reserves		609		612
Payable to reinsurers	Payable to reinsurers	977		814		Payable to reinsurers	753		807
Liabilities of managed investment entities	Liabilities of managed investment entities	4,541		4,571		Liabilities of managed investment entities	5,045		4,914
Long-term debt	Long-term debt	2,108		1,473		Long-term debt	1,963		1,963
Variable annuity liabilities (separate accounts)		603		628
Other liabilities	Other liabilities	2,231		2,295		Other liabilities	1,653		1,584
Liabilities of discontinued annuity operations						Liabilities of discontinued annuity operations	44,893		44,458
Total liabilities	Total liabilities	66,770		63,861		Total liabilities	67,512		66,921

Redeemable noncontrolling interests		0		0

Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Common Stock, 0 par value — 200,000,000 shares authorized — 87,266,582 and 90,303,686 shares outstanding		87		90
Common Stock, 0 par value — 200,000,000 shares authorized — 85,126,062 and 86,345,246 shares outstanding						Common Stock, 0 par value — 200,000,000 shares authorized — 85,126,062 and 86,345,246 shares outstanding	85		86
Capital surplus	Capital surplus	1,283		1,307		Capital surplus	1,279		1,281
Retained earnings	Retained earnings	3,737		4,009		Retained earnings	4,354		4,149
Accumulated other comprehensive income, net of tax	Accumulated other comprehensive income, net of tax	1,233		863		Accumulated other comprehensive income, net of tax	967		1,273
Total shareholders’ equity	Total shareholders’ equity	6,340		6,269		Total shareholders’ equity	6,685		6,789
Noncontrolling interests	Noncontrolling interests	0		0		Noncontrolling interests	0		0
Total equity	Total equity	6,340		6,269		Total equity	6,685		6,789
Total liabilities and equity	Total liabilities and equity	$	73,110	$	70,130	Total liabilities and equity	$	74,197	$	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 September 30,				Nine months ended September 30,					Three months ended March 31,
		2020		2019		2020		2019				2021		2020
Revenues:	Revenues:									Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,381	$	1,442	$	3,774	$	3,815	Property and casualty insurance net earned premiums		$	1,173	$	1,209
Net investment income	Net investment income	572		588		1,584		1,710		Net investment income		188		104
Realized gains (losses) on:
Securities		45		(18)		(302)		222
Subsidiaries		(30)		0		(30)		0

Realized gains (losses) on securities										Realized gains (losses) on securities		77		(328)

Income of managed investment entities:	Income of managed investment entities:									Income of managed investment entities:
Investment income	Investment income	46		67		154		206		Investment income		46		59
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	1		(14)		(47)		(16)		Gain (loss) on change in fair value of assets/liabilities		2		(13)
Other income	Other income	45		58		153		170		Other income		23		24
Total revenues	Total revenues	2,060		2,123		5,286		6,107		Total revenues		1,509		1,055

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	963		944		2,441		2,359		Losses and loss adjustment expenses		667		707
Commissions and other underwriting expenses	Commissions and other underwriting expenses	406		450		1,235		1,275		Commissions and other underwriting expenses		380		420
Annuity benefits		203		250		905		900
Annuity and supplemental insurance acquisition expenses		172		120		250		181
Interest charges on borrowed money	Interest charges on borrowed money	24		17		64		50		Interest charges on borrowed money		24		17
Expenses of managed investment entities	Expenses of managed investment entities	31		54		117		168		Expenses of managed investment entities		39		53
Other expenses	Other expenses	127		111		310		325		Other expenses		64		43
Total costs and expenses	Total costs and expenses	1,926		1,946		5,322		5,258		Total costs and expenses		1,174		1,240
Earnings (loss) before income taxes		134		177		(36)		849
Earnings (loss) from continuing operations before income taxes										Earnings (loss) from continuing operations before income taxes		335		(185)
Provision (credit) for income taxes	Provision (credit) for income taxes	(30)		34		(63)		171		Provision (credit) for income taxes		68		(41)
Net earnings, including noncontrolling interests		164		143		27		678
Less: Net earnings (loss) attributable to noncontrolling interests		0		(4)		(13)		(8)
Net Earnings Attributable to Shareholders		$	164	$	147	$	40	$	686
Net earnings (loss) from continuing operations, including noncontrolling interests										Net earnings (loss) from continuing operations, including noncontrolling interests		267		(144)
Net earnings (loss) from discontinued operations										Net earnings (loss) from discontinued operations		152		(160)
Net earnings (loss), including noncontrolling interests										Net earnings (loss), including noncontrolling interests		419		(304)
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests										Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests		0		(3)
Net Earnings (Loss) Attributable to Shareholders										Net Earnings (Loss) Attributable to Shareholders		$	419	$	(301)

Earnings Attributable to Shareholders per Common Share:
Basic		$	1.86	$	1.64	$	0.45	$	7.65
Diluted		$	1.86	$	1.62	$	0.45	$	7.55
Earnings (Losses) Attributable to Shareholders per Basic Common Share from:										Earnings (Losses) Attributable to Shareholders per Basic Common Share from:
Continuing operations										Continuing operations		$	3.11	$	(1.57)
Discontinued operations										Discontinued operations		1.77		(1.77)
Total basic earnings (losses) attributable to shareholders										Total basic earnings (losses) attributable to shareholders		$	4.88	$	(3.34)
Earnings (Losses) Attributable to Shareholders per Diluted Common Share:										Earnings (Losses) Attributable to Shareholders per Diluted Common Share:
Continuing operations										Continuing operations		$	3.08	$	(1.57)
Discontinued operations										Discontinued operations		1.76		(1.77)
Total diluted earnings (losses) attributable to shareholders										Total diluted earnings (losses) attributable to shareholders		$	4.84	$	(3.34)
Average number of Common Shares:	Average number of Common Shares:									Average number of Common Shares:
Basic	Basic	88.2		90.0		89.4		89.7		Basic		85.9		90.3
Diluted	Diluted	88.5		91.1		89.9		90.9		Diluted		86.6		90.3

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 September 30, Nine months ended September 30,
2020 2019 2020 2019
Net earnings, including noncontrolling interests $ 164 $ 143 $ 27 $ 678
Other comprehensive income (loss), net of tax:
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period 194 107 350 847
Reclassification adjustment for realized (gains) losses included in net earnings (12) 1 0 (10)
Total net unrealized gains on securities 182 108 350 837
Net unrealized gains (losses) on cash flow hedges (6) 7 24 36
Foreign currency translation adjustments 0 (7) (6) (3)
Pension and other postretirement plans adjustments 0 1 0 1
Other comprehensive income, net of tax 176 109 368 871
Total comprehensive income, net of tax 340 252 395 1,549
Less: Comprehensive income (loss) attributable to noncontrolling interests 0 (3) (11) (6)
Comprehensive income attributable to shareholders $ 340 $ 255 $ 406 $ 1,555


	Three months ended March 31,
		2021		2020
Net earnings (loss), including noncontrolling interests		$	419	$	(304)
Other comprehensive income (loss), net of tax:
Net unrealized losses on securities:
Unrealized holding losses on securities arising during the period		(281)		(865)
Reclassification adjustment for realized (gains) losses included in net earnings		(11)		19

Total net unrealized losses on securities		(292)		(846)
Net unrealized gains (losses) on cash flow hedges		(14)		27
Foreign currency translation adjustments		0		(10)

Other comprehensive loss, net of tax		(306)		(829)
Total comprehensive income (loss), net of tax		113		(1,133)
Less: Comprehensive income (loss) attributable to noncontrolling interests		0		(1)
Comprehensive income (loss) attributable to shareholders		$	113	$	(1,132)

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				Shareholders’ Equity												Redeemable
		Common	Common Stock and Capital		Retained		Accumulated Other Comp.				Noncon- trolling		Total		Noncon- trolling			Common	Common Stock and Capital		Retained		Accumulated Other Comp.				Noncon- trolling		Total		Noncon- trolling
		Shares	Surplus		Earnings		Income		Total		Interests		Equity		Interests			Shares	Surplus		Earnings		Income		Total		Interests		Equity		Interests
Balance at June 30, 2020		88,659,407	$	1,388	$	3,685	$	1,053	$	6,126	$	0	$	6,126	$	0
Balance at December 31, 2020																	Balance at December 31, 2020	86,345,246	$	1,367	$	4,149	$	1,273	$	6,789	$	0	$	6,789

Net earnings	Net earnings	—	—		164		—		164		0		164		0		Net earnings	—	—		419		—		419		0		419
Other comprehensive income		—	—		—		176		176		—		176		0
Other comprehensive loss																	Other comprehensive loss	—	—		—		(306)		(306)		—		(306)
Dividends ($0.50 per share)																	Dividends ($0.50 per share)	—	—		(43)		—		(43)		—		(43)
Shares issued:																	Shares issued:
Exercise of stock options																	Exercise of stock options	403,012	19		—		—		19		—		19
Restricted stock awards																	Restricted stock awards	207,020	—		—		—		—		—		—
Other benefit plans																	Other benefit plans	15,632	2		—		—		2		—		2
Dividend reinvestment plan																	Dividend reinvestment plan	2,306	0		—		—		0		—		0
Stock-based compensation expense																	Stock-based compensation expense	—	5		—		—		5		—		5
Shares acquired and retired																	Shares acquired and retired	(1,757,702)	(28)		(164)		—		(192)		—		(192)
Shares exchanged — benefit plans																	Shares exchanged — benefit plans	(76,984)	(1)		(7)		—		(8)		—		(8)
Forfeitures of restricted stock																	Forfeitures of restricted stock	(12,468)	—		—		—		—		—		—

Balance at March 31, 2021																	Balance at March 31, 2021	85,126,062	$	1,364	$	4,354	$	967	$	6,685	$	0	$	6,685

Balance at December 31, 2019																	Balance at December 31, 2019	90,303,686	$	1,397	$	4,009	$	863	$	6,269	$	0	$	6,269	$	0
Cumulative effect of accounting change																	Cumulative effect of accounting change	—	—		7		—		7		—		7		—
Net loss																	Net loss	—	—		(301)		—		(301)		0		(301)		(3)
Other comprehensive income (loss)																	Other comprehensive income (loss)	—	—		—		(831)		(831)		—		(831)		2
Dividends ($0.45 per share)	Dividends ($0.45 per share)	—	—		(39)		—		(39)		—		(39)		—		Dividends ($0.45 per share)	—	—		(40)		—		(40)		—		(40)		—
Shares issued:	Shares issued:																Shares issued:
Exercise of stock options	Exercise of stock options	19,865	1		—		—		1		—		1		—		Exercise of stock options	204,093	9		—		—		9		—		9		—
Restricted stock awards	Restricted stock awards	0	—		—		—		—		—		—		—		Restricted stock awards	227,867	—		—		—		—		—		—		—
Other benefit plans	Other benefit plans	38,822	2		—		—		2		—		2		—		Other benefit plans	14,541	1		—		—		1		—		1		—
Dividend reinvestment plan	Dividend reinvestment plan	2,901	1		—		—		1		—		1		—		Dividend reinvestment plan	1,617	—		—		—		—		—		—		—
Stock-based compensation expense	Stock-based compensation expense	—	5		—		—		5		—		5		—		Stock-based compensation expense	—	6		—		—		6		—		6		—
Shares acquired and retired	Shares acquired and retired	(1,447,588)	(23)		(73)		—		(96)		—		(96)		—		Shares acquired and retired	(826,283)	(12)		(49)		—		(61)		—		(61)		—
Shares exchanged — benefit plans	Shares exchanged — benefit plans	(1,337)	0		0		—		0		—		0		—		Shares exchanged — benefit plans	(95,854)	(2)		(9)		—		(11)		—		(11)		—
Forfeitures of restricted stock	Forfeitures of restricted stock	(5,488)	—		—		—		—		—		—		—		Forfeitures of restricted stock	(2,331)	—		—		—		—		—		—		—
Other	Other	—	(4)		0		4		—		0		0		0		Other	—	—		(1)		—		(1)		0		(1)		1
Balance at September 30, 2020		87,266,582	$	1,370	$	3,737	$	1,233	$	6,340	$	0	$	6,340	$	0

Balance at June 30, 2019		89,917,601	$	1,367	$	3,914	$	809	$	6,090	$	0	$	6,090	$	0
Net earnings (loss)		—	—		147		—		147		0		147		(4)
Other comprehensive income		—	—		—		108		108		—		108		1
Dividends ($0.40 per share)		—	—		(36)		—		(36)		—		(36)		—
Shares issued:
Exercise of stock options		191,227	8		—		—		8		—		8		—
Restricted stock awards		70	—		—		—		—		—		—		—
Other benefit plans		17,345	2		—		—		2		—		2		—
Dividend reinvestment plan		1,570	0		—		—		0		—		0		—
Stock-based compensation expense		—	5		—		—		5		—		5		—

Shares exchanged — benefit plans		(80)	0		0		—		0		—		0		—
Forfeitures of restricted stock		(310)	—		—		—		—		—		—		—
Other		—	—		(3)		—		(3)		0		(3)		3
Balance at September 30, 2019		90,127,423	$	1,382	$	4,022	$	917	$	6,321	$	0	$	6,321	$	0
Balance at March 31, 2020																	Balance at March 31, 2020	89,827,336	$	1,399	$	3,616	$	32	$	5,047	$	0	$	5,047	$	0

~~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 Income Total Interests Equity Interests
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 earnings (loss) — — 40 — 40 0 40 (13)
Other comprehensive income — — — 366 366 — 366 2
Dividends ($1.35 per share) — — (120) — (120) — (120) —
Shares issued:
Exercise of stock options 229,208 10 — — 10 — 10 —
Restricted stock awards 227,867 — — — — — — —
Other benefit plans 105,318 7 — — 7 — 7 —
Dividend reinvestment plan 7,251 1 — — 1 — 1 —
Stock-based compensation expense — 15 — — 15 — 15 —
Shares acquired and retired (3,468,107) (54) (179) — (233) — (233) —
Shares exchanged — benefit plans (97,731) (2) (9) — (11) — (11) —
Forfeitures of restricted stock (40,910) — — — — — — —
Other — (4) (11) 4 (11) 0 (11) 11
Balance at September 30, 2020 87,266,582 $ 1,370 $ 3,737 $ 1,233 $ 6,340 $ 0 $ 6,340 $ 0
Balance at December 31, 2018 89,291,724 $ 1,334 $ 3,588 $ 48 $ 4,970 $ 2 $ 4,972 $ 0
Net earnings (loss) — — 686 — 686 0 686 (8)
Other comprehensive income — — — 869 869 — 869 2
Dividends ($2.70 per share) — — (242) — (242) — (242) —
Shares issued:
Exercise of stock options 591,233 25 — — 25 — 25 —
Restricted stock awards 232,635 — — — — — — —
Other benefit plans 58,488 6 — — 6 — 6 —
Dividend reinvestment plan 11,059 1 — — 1 — 1 —
Stock-based compensation expense — 17 — — 17 — 17 —
Shares exchanged — benefit plans (47,069) (1) (4) — (5) — (5) —
Forfeitures of restricted stock (10,647) — — — — — — —
Other — — (6) — (6) (2) (8) 6
Balance at September 30, 2019 90,127,423 $ 1,382 $ 4,022 $ 917 $ 6,321 $ 0 $ 6,321 $ 0

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(In Millions)


		Nine months ended September 30,					Three months ended March 31,
		2020		2019			2021		2020
Operating Activities:	Operating Activities:					Operating Activities:
Net earnings, including noncontrolling interests		$	27	$	678
Net earnings (loss), including noncontrolling interests						Net earnings (loss), including noncontrolling interests	$	419	$	(304)
Adjustments:	Adjustments:					Adjustments:

Depreciation and amortization	Depreciation and amortization	248		195		Depreciation and amortization	99		113
Annuity benefits	Annuity benefits	905		900		Annuity benefits	161		276
Realized (gains) losses on investing activities	Realized (gains) losses on investing activities	332		(223)		Realized (gains) losses on investing activities	(158)		550
Net (purchases) sales of trading securities	Net (purchases) sales of trading securities	18		(2)		Net (purchases) sales of trading securities	(3)		8
Deferred annuity and life policy acquisition costs	Deferred annuity and life policy acquisition costs	(112)		(163)		Deferred annuity and life policy acquisition costs	(49)		(49)
Change in:	Change in:					Change in:
Reinsurance and other receivables	Reinsurance and other receivables	(597)		(330)		Reinsurance and other receivables	275		161
Other assets	Other assets	120		(281)		Other assets	164		410
Insurance claims and reserves	Insurance claims and reserves	702		475		Insurance claims and reserves	5		(152)
Payable to reinsurers	Payable to reinsurers	163		115		Payable to reinsurers	(54)		(35)
Other liabilities	Other liabilities	(220)		417		Other liabilities	(25)		(543)
Managed investment entities’ assets/liabilities	Managed investment entities’ assets/liabilities	99		(2)		Managed investment entities’ assets/liabilities	(38)		89
Other operating activities, net	Other operating activities, net	11		(88)		Other operating activities, net	(169)		8

Net cash provided by operating activities	Net cash provided by operating activities	1,696		1,691		Net cash provided by operating activities	627		532

Investing Activities:	Investing Activities:					Investing Activities:
Purchases of:	Purchases of:					Purchases of:
Fixed maturities	Fixed maturities	(7,817)		(5,533)		Fixed maturities	(3,443)		(4,140)
Equity securities	Equity securities	(354)		(161)		Equity securities	(41)		(232)
Mortgage loans	Mortgage loans	(197)		(181)		Mortgage loans	(35)		(21)
Equity index options and other investments	Equity index options and other investments	(699)		(658)		Equity index options and other investments	(164)		(245)
Real estate, property and equipment	Real estate, property and equipment	(41)		(33)		Real estate, property and equipment	(13)		(9)

Proceeds from:	Proceeds from:					Proceeds from:
Maturities and redemptions of fixed maturities	Maturities and redemptions of fixed maturities	4,114		3,411		Maturities and redemptions of fixed maturities	1,947		1,220
Repayments of mortgage loans	Repayments of mortgage loans	48		76		Repayments of mortgage loans	12		4
Sales of fixed maturities	Sales of fixed maturities	3,123		569		Sales of fixed maturities	147		1,483
Sales of equity securities	Sales of equity securities	421		223		Sales of equity securities	350		80
Sales and settlements of equity index options and other investments	Sales and settlements of equity index options and other investments	673		486		Sales and settlements of equity index options and other investments	269		248
Sales of real estate, property and equipment	Sales of real estate, property and equipment	7		3		Sales of real estate, property and equipment	0		1

Managed investment entities:	Managed investment entities:					Managed investment entities:
Purchases of investments	Purchases of investments	(878)		(1,062)		Purchases of investments	(527)		(414)
Proceeds from sales and redemptions of investments	Proceeds from sales and redemptions of investments	818		1,081		Proceeds from sales and redemptions of investments	557		370
Other investing activities, net	Other investing activities, net	10		1		Other investing activities, net	3		2

Net cash used in investing activities	Net cash used in investing activities	(772)		(1,778)		Net cash used in investing activities	(938)		(1,653)

Financing Activities:	Financing Activities:					Financing Activities:
Annuity receipts	Annuity receipts	2,968		3,821		Annuity receipts	1,179		1,410
Ceded annuity receipts						Ceded annuity receipts	(207)		0
Annuity surrenders, benefits and withdrawals	Annuity surrenders, benefits and withdrawals	(2,506)		(2,502)		Annuity surrenders, benefits and withdrawals	(1,148)		(813)
Ceded annuity receipts		(246)		0
Ceded annuity surrenders, benefits and withdrawals						Ceded annuity surrenders, benefits and withdrawals	167		0
Net transfers from variable annuity assets	Net transfers from variable annuity assets	44		45		Net transfers from variable annuity assets	25		15
Additional long-term borrowings		635		121

Issuances of managed investment entities’ liabilities	Issuances of managed investment entities’ liabilities	30		0		Issuances of managed investment entities’ liabilities	752		0
Retirements of managed investment entities’ liabilities	Retirements of managed investment entities’ liabilities	(79)		(8)		Retirements of managed investment entities’ liabilities	(725)		(41)
Issuances of Common Stock	Issuances of Common Stock	15		29		Issuances of Common Stock	20		10
Repurchases of Common Stock	Repurchases of Common Stock	(233)		0		Repurchases of Common Stock	(192)		(61)
Cash dividends paid on Common Stock	Cash dividends paid on Common Stock	(119)		(241)		Cash dividends paid on Common Stock	(43)		(40)

Net cash provided by financing activities		509		1,265

Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(172)		480
Net Change in Cash and Cash Equivalents	Net Change in Cash and Cash Equivalents	1,433		1,178		Net Change in Cash and Cash Equivalents	(483)		(641)
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	$	3,747	$	2,693	Cash and cash equivalents at end of period	2,327		1,673
Less: cash and cash equivalents at end of period from discontinued operations						Less: cash and cash equivalents at end of period from discontinued operations	636		368
Cash and cash equivalents at end of period from continuing operations						Cash and cash equivalents at end of period from continuing operations	$	1,691	$	1,305

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO NOTES

Accounting Policies

Managed Investment Entities

Discontinued Operations

Goodwill and Other Intangibles

B.C.

~~Acquisitions and Sale~~Sales of Businesses

Long-Term Debt

C.D.

Segments of Operations

Shareholders’ Equity

D.E.

Fair Value Measurements

Income Taxes

E.F.

Investments

Contingencies

F.G.

Derivatives

Insurance

~~Deferred Policy Acquisition Costs~~

~~Subsequent Events~~

~~Managed Investment Entities~~

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 to be sold 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 ~~September 30, 2020,~~March 31, 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. ~~Other than recording an estimated loss on the pending sale of Neon, its United Kingdom-based Lloyd’s insurer (see~~ ~~Note B — “Acquisitions and Sale of Businesses”),~~ AFG did not have any material nonrecurring fair value measurements in the first ~~nine~~three 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

Table of Contents

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).

~~Table of Contents~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

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 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 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” (including those that are reported as assets of discontinued annuity operations) 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 liabilities of discontinued annuity ~~benefits accumulated)~~operations) and related equity index options (included in assets of discontinued annuity operations) 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.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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~~owned by AFG’s ~~portfolio of fixed maturity securities.~~discontinued annuity operations.

~~Table of Contents~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

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 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 under contracts to fund ceded losses as they become due. AFG’s property and casualty insurance subsidiaries also assume reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

An AFG discontinued annuity 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 discontinued 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 (reinsurance recoverable) is adjusted as amounts are paid or received under the underlying contracts. AFG’s reinsurance partner posts collateral in excess of amounts due to AFG under these contracts. Under reinsurance accounting guidance on transactions involving annuities, the gain or loss is deferred and recognized over the expected life of the underlying annuity contracts (using methods similar to those used to amortize DPAC).

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. For AFG’s discontinued annuity operations, 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 (included in assets of discontinued annuity operations) 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.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

DPAC related to traditional life and health insurance (included in assets of discontinued annuity operations) 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”) (included in assets of discontinued annuity operations). 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.

~~Table of Contents~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

DPAC and certain other balance sheet amounts related to the discontinued 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 H — “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.

At September 30, 2020, assets and liabilities of managed investment entities included $140 million in assets and $130 million in liabilities of a temporary warehousing entity that was established in connection with the formation of a new CLO that is expected to close in November 2020. At closing, all warehoused assets will be transferred to the new CLO and the liabilities will be repaid.

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 (included in liabilities of discontinued annuity operations) 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.~~net earnings (losses) before income taxes from discontinued operations. For traditional fixed annuities, the liability for annuity

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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

~~Table of Contents~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

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.

~~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)~~liabilities of discontinued annuity operations) and recognized in net earnings ~~(included in other income)~~(loss) before income taxes from discontinued operations 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 (included in liabilities of discontinued annuity operations) 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 (included in assets and liabilities of discontinued annuity operations) 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.~~

At ~~September 30, 2020~~March 31, 2021 AFG has a ~~$175~~$153 million lease liability included in other liabilities and a lease right-of-use asset of ~~$154~~$133 million included in other assets compared to ~~$180~~$159 million and ~~$158~~$139 million, respectively, at December 31, ~~2019.~~2020.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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~~

~~Table of Contents~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

~~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 traditional life, accident and health products, premiums are recognized as revenue (included in net earnings (loss) from discontinued operations) 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: ~~third quarter~~first three months of 2021 and 2020 ~~and 2019~~ — ~~0.3~~0.7 million and ~~1.1 million; first nine months of 2020 and 2019 — 0.5 million and 1.2 million,~~NaN, respectively.

There were 0 anti-dilutive potential common shares for the ~~third quarter or~~first three months of 2021 and 0.8 million anti-dilutive potential common shares for the first ~~nine~~three months of 2020 ~~or 2019.~~due to AFG’s net loss 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.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

B. ~~Acquisitions and Sale of Businesses~~Discontinued Operations

~~Paratransit Book of~~Annuity Business ~~Effective in June 2019, National Interstate, a property and casualty insurance subsidiary of~~On January 27, 2021, AFG announced that it entered into ana definitive agreement ~~with Atlas Financial Holdings, Inc.~~to sell its Annuity business to Massachusetts Mutual Life Insurance Company (“~~AFH”~~MassMutual”) to become the exclusive underwriter of AFH’s paratransit book of business. National Interstate estimated that the majority of AFH’s $110 million paratransit business was eligible for quotation under this arrangement following inception of the agreement.. Under the terms of the agreement, ~~(as extended~~which is expected to close in ~~2020), AFH~~the second quarter of 2021. MassMutual will ~~act~~acquire 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 include AFG’s run-off life and long-term care operations. Prior to the sale, AFG will acquire approximately $460 million in investments accounted for using the equity method and approximately $100 million of directly owned real estate from GALIC (based on March 31, 2021 values). Beginning with the first quarter of 2021, the results of the Annuity business to be sold are reported as ~~an underwriting manager for National Interstate until at~~discontinued operations in accordance with generally accepted accounting principles, which included adjusting prior period results to reflect these operations as discontinued.

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


	March 31, 2021		December 31, 2020
Assets of businesses to be sold:
Cash and cash equivalents	$	636	$	1,145
Fixed maturities, available for sale	34,754		34,123
Fixed maturities, trading at fair value	40		42
Equity securities	624		774
Investments accounted for using the equity method	671		646
Mortgage loans	1,244		1,251
Policy loans	148		151
Equity index call options	813		825
Other investments	180		199
Total cash and investments	39,110		39,156
Recoverables from reinsurers	6,797		6,804
Agents’ balances and premiums receivable	3		2
Deferred policy acquisition costs	531		302
Variable annuity assets (separate accounts)	666		664
Other assets	1,032		957
Total assets of discontinued annuity operations	48,139		47,885
Liabilities of businesses to be sold:
Annuity benefits accumulated	42,880		42,573
Life, accident and health reserves	601		607
Variable annuity liabilities (separate accounts)	666		664
Other liabilities	746		614
Total liabilities of discontinued annuity operations	44,893		44,458
Receivable from AFG for real estate-related investments	567		537
Reclassify AOCI	(801)		(1,071)
Net investment in annuity businesses to be sold, excluding AOCI	$	3,012	$	2,893

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

~~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~~Details of the ~~renewal rights~~results of operations for the ~~business~~discontinued annuity operations were (in millions):


	Three months ended March 31,
	2021		2020
Net investment income	$	447	$	415
Realized gains (losses) on securities	81		(223)
Other income	32		33
Total revenues	560		225
Annuity benefits	161		276
Annuity and supplemental insurance acquisition expenses	112		113
Other expenses	46		39
Total costs and expenses	319		428
Earnings (loss) before income taxes from discontinued operations	241		(203)
Provision (credit) for income taxes on operations	48		(43)
Tax liabilities triggered by pending sale	41		0
Net earnings (loss) from discontinued operations	$	152	$	(160)

Net investment income in the table above excludes $29 million in first three months of 2021 and $12 million in first three months of 2020, respectively, related to the real estate-related entities that AFG will acquire from ~~AFH for a purchase price equal~~the discontinued annuity operations prior to ~~15%~~the completion of the ~~in force gross written premiums at that date. The majority of the purchase price ultimately paid~~sale.

Summarized cash flows for the ~~renewal rights will be recorded as an intangible renewal rights asset and will be amortized over~~discontinued annuity operations were (in millions):


	Three months ended March 31,
	2021		2020
Net cash provided by operating activities	$	209	$	265
Net cash used in investing activities	(734)		(1,244)
Net cash provided by financing activities	16		612

C. Sales of Businesses

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

NeonIn 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 run-off. Neon and its predecessor, Marketform, failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008.

~~On June 30,~~ In December 2020, AFG ~~acquired 100%~~completed the sale of the indirect noncontrolling interest in Neon 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.

~~On September 28, 2020, AFG announced that it has reached a definitive agreement to sell~~ GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited for ~~estimated~~ proceeds of $6 million. The sale ~~is subject to customary conditions, including receipt of regulatory approval, is expected to close in the fourth quarter of 2020, and will complete~~completed AFG’s exit from the Lloyd’s of London insurance market.

Based on the status of the sale transaction at the end of the third quarter, management determined that the pending sale of Neon met the GAAP “held for sale” criteria as of September 30, 2020. Accordingly, AFG recorded a loss in the third quarter of 2020 to establish a liability (included in other liabilities in AFG’s Balance Sheet) equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. The loss may be adjusted at the closing date based on the final proceeds and the final net assets disposed. At September 30, 2020, the carrying value of the assets and liabilities to be disposed represented approximately 1% of both AFG’s assets and liabilities and are detailed in the table below.

Under GAAP accounting guidance, only 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. Because 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 pending sale of Neon has not been reported as a discontinued operation.~~

~~The impact of Neon exited lines on AFG’s net earnings for the three months ended September 30, 2020 is shown below (in millions):~~


~~Underwriting gain (loss)~~	$	~~(38)~~
~~Net investment income~~	1
~~Other income and expenses, net~~	~~(3)~~
~~Pretax loss from operations~~	~~(40)~~
~~Estimated loss on sale of subsidiaries~~	~~(30)~~
~~Total pretax loss from Neon exited lines~~	~~(70)~~
~~Tax benefit related to sale of subsidiaries~~	73
~~Net earnings from Neon exited lines~~	$	3

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

~~The estimated loss~~impact on AFG’s ongoing results of operations, the ~~pending~~ sale of Neon ~~which~~ was ~~recorded in AFG’s financial statements~~not reported as ~~of September 30, 2020, is shown below~~a discontinued operation. Revenues, costs and expenses, and earnings before income taxes for the subsidiaries sold were (in millions):

Three months ended March 31, 2020

~~Estimated sale proceeds, net of expenses~~Net earned premiums

4 71

Loss and loss adjustment expenses

Commissions and other underwriting expenses

Underwriting loss

(1)

~~Assets of businesses to be sold:~~

~~Cash and investments~~

~~461~~ Net investment income

~~Recoverables from reinsurers~~

~~198~~

~~Prepaid reinsurance premiums~~

~~Agents’ balances and premiums receivable~~

~~Other assets~~

~~Total assets~~

~~810~~

~~Liabilities of businesses to be sold:~~

~~Unpaid losses and loss adjustment expenses~~

~~598~~

~~Unearned premiums~~

~~Payable to reinsurers~~

39 (6)

Other ~~liabilities~~

47 income and expenses, net

~~Total liabilities~~

~~767~~ (3)

~~Reclassify accumulated other comprehensive~~Loss before income

~~(9)~~ taxes and noncontrolling interests

~~Net assets of businesses to be sold~~

~~Pretax loss on subsidiaries recorded in the third quarter of 2020~~

~~(30)~~(10)

~~Revenues, costs and expenses, and earnings before income taxes for the subsidiaries to be sold were (in millions):~~

Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Net earned premiums $ 42 $ 97 $ 174 $ 274
Loss and loss adjustment expenses 60 66 166 172
Commissions and other underwriting expenses 20 50 90 135
Underwriting loss (38) (19) (82) (33)
Net investment income 1 2 (5) 5
Other income and expenses, net (3) (3) (5) (8)
Loss before income taxes and noncontrolling interests $ (40) $ (20) $ (92) $ (36)

~~As discussed in~~ ~~Note L — “Income Taxes,”~~ ~~the pending sale of Neon allowed AFG to recognize a $73 million tax benefit.~~

C.D. Segments of Operations

Subsequent to the agreement to sell 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 reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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.

~~As discussed in~~ ~~Note B — “Acquisitions and Sale of Businesses,”~~ 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 in December 2019. Beginning prospectively with the first quarter of 2020, the results for AFG’s Specialty casualty sub-segment exclude the run-off operations of Neon (“Neon exited lines”).

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


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2020		2019		2020		2019				2021		2020
Revenues	Revenues									Revenues
Property and casualty insurance:	Property and casualty insurance:									Property and casualty insurance:
Premiums earned:	Premiums earned:									Premiums earned:
Specialty	Specialty									Specialty
Property and transportation	Property and transportation	$	574	$	583	$	1,350	$	1,323	Property and transportation		$	394	$	386
Specialty casualty	Specialty casualty	560		658		1,663		1,921		Specialty casualty		571		556
Specialty financial	Specialty financial	155		161		455		458		Specialty financial		157		156
Other specialty	Other specialty	50		40		132		113		Other specialty		51		40
Other lines (a)	Other lines (a)	42		0		174		0		Other lines (a)		0		71
Total premiums earned	Total premiums earned	1,381		1,442		3,774		3,815		Total premiums earned		1,173		1,209
Net investment income (b)	Net investment income (b)	112		124		277		352		Net investment income (b)		159		93
Other income	Other income	0		5		8		10		Other income		4		5
Total property and casualty insurance	Total property and casualty insurance	1,493		1,571		4,059		4,177		Total property and casualty insurance		1,336		1,307
Annuity:
Net investment income		464		448		1,270		1,334
Other income		30		32		95		90
Total annuity		494		480		1,365		1,424
Other		58		90		194		284
Other (c)										Other (c)		96		76
Total revenues before realized gains (losses)	Total revenues before realized gains (losses)	2,045		2,141		5,618		5,885		Total revenues before realized gains (losses)		1,432		1,383
Realized gains (losses) on securities	Realized gains (losses) on securities	45		(18)		(302)		222		Realized gains (losses) on securities		77		(328)
Realized losses on subsidiaries		(30)		0		(30)		0

Total revenues	Total revenues	$	2,060	$	2,123	$	5,286	$	6,107	Total revenues		$	1,509	$	1,055

(a)Represents premiums earned in the Neon exited lines (which were sold in December 2020) during the ~~third quarter and~~ first ~~nine~~three months of 2020. ~~Neon’s $97 million and $274 million in earned premiums during the third quarter and first nine months of 2019, respectively, are included in the Specialty casualty sub-segment.~~

(b)Includes ~~income of $1 million for the third quarter of 2020 and~~ a loss of $5$6 million in the Neon exited lines in the first ~~nine~~three months of 2020 (primarily from the change in fair value of equity securities).

~~Table~~(c)Includes $29 million in the first three months of ~~Contents~~2021 and $12 million in the first three months of 2020 in investment income from real estate-related entities to be acquired from the discontinued annuity operations prior to closing of the sale.

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2020		2019		2020		2019				2021		2020
Earnings (Loss) Before Income Taxes	Earnings (Loss) Before Income Taxes									Earnings (Loss) Before Income Taxes
Property and casualty insurance:	Property and casualty insurance:									Property and casualty insurance:
Underwriting:	Underwriting:									Underwriting:
Specialty	Specialty									Specialty
Property and transportation	Property and transportation	$	47	$	38	$	107	$	81	Property and transportation		$	56	$	27
Specialty casualty	Specialty casualty	53		23		132		106		Specialty casualty		56		52
Specialty financial	Specialty financial	13		26		30		60		Specialty financial		25		17
Other specialty	Other specialty	(9)		1		(22)		(11)		Other specialty		(3)		(7)
Other lines (a)	Other lines (a)	(86)		(34)		(133)		(36)		Other lines (a)		0		(2)
Total underwriting	Total underwriting	18		54		114		200		Total underwriting		134		87
Investment and other income, net (b)	Investment and other income, net (b)	100		118		249		328		Investment and other income, net (b)		154		84
Total property and casualty insurance	Total property and casualty insurance	118		172		363		528		Total property and casualty insurance		288		171
Annuity		78		73		90		234
Other (c)	Other (c)	(77)		(50)		(157)		(135)		Other (c)		(30)		(28)
Total earnings before realized gains (losses) and income taxes	Total earnings before realized gains (losses) and income taxes	119		195		296		627		Total earnings before realized gains (losses) and income taxes		258		143
Realized gains (losses) on securities	Realized gains (losses) on securities	45		(18)		(302)		222		Realized gains (losses) on securities		77		(328)
Realized losses on subsidiaries		(30)		0		(30)		0

Total earnings (loss) before income taxes	Total earnings (loss) before income taxes	$	134	$	177	$	(36)	$	849	Total earnings (loss) before income taxes		$	335	$	(185)

(a)Includes an underwriting loss of ~~$38 million in the third quarter of 2020 and $82~~$1 million in the first ~~nine~~three months of 2020 in the Neon exited lines. Neon’s $19 million and $33 million underwriting losses in the third quarter and first nine months of 2019, respectively, are included in the Specialty casualty sub-segment. Also includes special charges of $47 million and $18 million in the third quarter of 2020 and 2019, respectively, to increase asbestos and environmental (“A&E”) reserves.

(b)Includes ~~$2 million and $10~~$9 million in the ~~third quarter and~~ first ~~nine~~three months of 2020 ~~respectively,~~ in net expenses from the Neon exited lines, before noncontrolling interest.

(c)Includes holding company interest and expenses ~~including special charges of $21 million~~ and ~~$11~~$29 million in the ~~third quarter~~first three months of 2021 and $6 million (net of DAC) in the first three months of 2020 ~~and 2019, respectively,~~of earnings from the real estate-related entities to ~~increase A&E reserves related~~be acquired from the discontinued annuity operations prior to ~~AFG’s former railroad and manufacturing operations. Also includes~~closing of the ~~results of AFG’s run-off life and long-term care businesses, including a $4 million loss recognition charge recorded in the run-off long-term care business in September 2020.~~sale.

1716

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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 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.

1817

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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
September 30, 2020
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies $ 182 $ 27 $ 15 $ 224
States, municipalities and political subdivisions 0 6,616 106 6,722
Foreign government 0 195 0 195
Residential MBS 0 2,959 178 3,137
Commercial MBS 0 846 10 856
Collateralized loan obligations 0 4,395 212 4,607
Other asset-backed securities 0 6,075 1,344 7,419
Corporate and other 24 23,528 1,481 25,033
Total AFS fixed maturities 206 44,641 3,346 48,193
Trading fixed maturities 0 92 0 92
Equity securities 1,090 72 444 1,606
Equity index call options 0 697 0 697
Assets of managed investment entities (“MIE”) 148 4,554 15 4,717
Variable annuity assets (separate accounts) (*) 0 603 0 603
Other assets — derivatives 0 114 0 114
Total assets accounted for at fair value $ 1,444 $ 50,773 $ 3,805 $ 56,022
Liabilities:
Liabilities of managed investment entities $ 142 $ 4,384 $ 15 $ 4,541
Derivatives in annuity benefits accumulated 0 0 3,657 3,657
Other liabilities — derivatives 0 9 0 9
Total liabilities accounted for at fair value $ 142 $ 4,393 $ 3,672 $ 8,207
December 31, 2019
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies $ 151 $ 43 $ 15 $ 209
States, municipalities and political subdivisions 0 6,858 105 6,963
Foreign government 0 172 0 172
Residential MBS 0 2,987 173 3,160
Commercial MBS 0 892 35 927
Collateralized loan obligations 0 4,265 15 4,280
Other asset-backed securities 0 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 0 113
Equity securities 1,433 67 437 1,937
Equity index call options 0 924 0 924
Assets of managed investment entities 213 4,506 17 4,736
Variable annuity assets (separate accounts) (*) 0 628 0 628
Other assets — derivatives 0 50 0 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 0 0 3,730 3,730
Other liabilities — derivatives 0 10 0 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
March 31, 2021
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	212	$	3	$	0	$	215
States, municipalities and political subdivisions	0		2,128		39		2,167
Foreign government	0		190		0		190
Residential MBS	0		820		27		847
Commercial MBS	0		109		0		109
Collateralized loan obligations	0		1,125		6		1,131
Other asset-backed securities	0		1,862		326		2,188
Corporate and other	4		2,234		204		2,442
Total AFS fixed maturities	216		8,471		602		9,289
Trading fixed maturities	0		26		0		26
Equity securities	670		47		227		944
Assets of managed investment entities (“MIE”)	288		4,800		14		5,102

Total assets of continuing operations accounted for at fair value	$	1,174	$	13,344	$	843	$	15,361
Liabilities:
Liabilities of managed investment entities	$	285	$	4,746	$	14	$	5,045

Total liabilities of continuing operations accounted for at fair value	$	285	$	4,746	$	14	$	5,045

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 ~~September 30, 2020,~~March 31, 2021, were Level 3 assets. Approximately ~~38%~~22% ($~~1.46 billion)~~185 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 $78 million (9%) 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 ~~$1.74 billion~~$488 million (58%) of the total fair value of Level 3 assets at ~~September 30, 2020. Of this amount, approximately $730 million relates to~~March 31, 2021. These 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 43comparable securities ~~the average spread used was 397 basis points over the reference treasury yield~~ and ~~the spreads ranged from 100 basis points to 1,253 basis points (approximately 80%~~other security specific features (such as optional early redemption). Internally developed prices for equity

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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~~comparable companies. Since internally developed Level 3 asset fair values ~~would have been higher. Management believes that~~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 ~~resulted in~~ a material ~~change in~~impact on AFG’s financial position.

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


	Level 1		Level 2		Level 3		Total
March 31, 2021
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	6	$	21	$	15	$	42
States, municipalities and political subdivisions	0		3,156		60		3,216
Foreign government	0		34		0		34
Residential MBS	0		2,431		82		2,513
Commercial MBS	0		635		1		636
Collateralized loan obligations	0		3,762		26		3,788
Other asset-backed securities	0		4,277		927		5,204
Corporate and other	30		17,914		1,377		19,321
Total AFS fixed maturities	36		32,230		2,488		34,754
Trading fixed maturities	0		40		0		40
Equity securities	258		48		318		624
Equity index call options	0		813		0		813
Variable annuity assets (separate accounts) (*)	0		666		0		666
Other assets — derivatives	0		69		0		69
Total assets of discontinued annuity operations accounted for at fair value	$	294	$	33,866	$	2,806	$	36,966
Liabilities:
Derivatives in annuity benefits accumulated	$	0	$	0	$	3,954	$	3,954
Other liabilities — derivatives	0		10		0		10
Total liabilities of discontinued annuity operations accounted for at fair value	$	0	$	10	$	3,954	$	3,964

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

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED


	Level 1		Level 2		Level 3		Total
December 31, 2020
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	6	$	23	$	15	$	44
States, municipalities and political subdivisions	0		3,357		64		3,421
Foreign government	0		35		0		35
Residential MBS	0		2,013		127		2,140
Commercial MBS	0		687		11		698
Collateralized loan obligations	0		3,443		48		3,491
Other asset-backed securities	0		4,108		1,068		5,176
Corporate and other	40		17,733		1,345		19,118
Total AFS fixed maturities	46		31,399		2,678		34,123
Trading fixed maturities	0		42		0		42
Equity securities	431		50		293		774
Equity index call options	0		825		0		825
Variable annuity assets (separate accounts) (*)	0		664		0		664
Other assets — derivatives	0		102		0		102
Total assets of discontinued annuity operations accounted for at fair value	$	477	$	33,082	$	2,971	$	36,530
Liabilities:
Derivatives in annuity benefits accumulated	$	0	$	0	$	3,933	$	3,933
Other liabilities — derivatives	0		10		0		10
Total liabilities of discontinued annuity operations accounted for at fair value	$	0	$	10	$	3,933	$	3,943

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

The derivatives embedded in AFG’s fixed-indexed and variable-indexed annuity liabilities (included in liabilities of discontinued annuity operations) are measured using a discounted cash flow approach and had a fair value of ~~$3.66~~$3.95 billion at ~~September 30, 2020.~~March 31, 2021. The following table presents information about the unobservable inputs used by management in determining fair value of these Level 3 liabilities. See Note FG — “Derivatives.”

Unobservable Input

Range

Adjustment for insurance subsidiary’s credit risk

~~0.2%~~0% – ~~2.9%~~2.1% over the risk-free rate

Risk margin for uncertainty in cash flows

0.99% reduction in the discount rate

Surrenders

4%7% – ~~23%~~22% of indexed account value

Partial surrenders

2% – 11% of indexed account value

Annuitizations

0.1% – 1% of indexed account value

Deaths

~~1.8%~~2.0% – ~~13.2%~~13.6% of indexed account value

Budgeted option costs

2.2% – ~~2.8%~~2.9% 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 8% to 11% in the majority of future calendar years ~~(4%~~(7% to ~~23%~~22% 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.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the ~~third quarter and~~ first ~~nine~~three 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 June 30, 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 September 30, 2020			Balance at December 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 March 31, 2021
AFS fixed maturities:	AFS fixed maturities:																	AFS fixed maturities:
U.S. government agency	U.S. government agency	$	15	$	1	$	(1)	$	0	$	0	$	0	$	0	$	15	U.S. government agency	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
State and municipal	State and municipal	107		0		0		0		(1)		0		0		106		State and municipal	39		0		0		0		0		0		0		39
Residential MBS	Residential MBS	156		(4)		1		0		(6)		49		(18)		178		Residential MBS	38		(3)		0		6		0		3		(17)		27
Commercial MBS	Commercial MBS	33		(1)		0		0		0		0		(22)		10		Commercial MBS	2		0		0		0		0		0		(2)		0
Collateralized loan obligations	Collateralized loan obligations	207		(1)		6		0		0		0		0		212		Collateralized loan obligations	16		1		(1)		0		(1)		0		(9)		6
Other asset-backed securities	Other asset-backed securities	1,328		(2)		13		39		(75)		77		(36)		1,344		Other asset-backed securities	305		0		0		52		(23)		14		(22)		326
Corporate and other	Corporate and other	1,525		6		4		53		(77)		121		(151)		1,481		Corporate and other	138		1		(1)		84		(18)		2		(2)		204
Total AFS fixed maturities	Total AFS fixed maturities	3,371		(1)		23		92		(159)		247		(227)		3,346		Total AFS fixed maturities	538		(1)		(2)		142		(42)		19		(52)		602
Equity securities	Equity securities	452		(10)		0		12		0		0		(10)		444		Equity securities	176		53		0		12		(14)		0		0		227
Assets of MIE	Assets of MIE	17		(2)		0		0		0		0		0		15		Assets of MIE	21		4		0		1		0		0		(12)		14
Assets of discontinued annuity operations																		Assets of discontinued annuity operations	2,971		70		(43)		196		(191)		32		(229)		2,806
Total Level 3 assets	Total Level 3 assets	$	3,840	$	(13)	$	23	$	104	$	(159)	$	247	$	(237)	$	3,805	Total Level 3 assets	$	3,706	$	126	$	(45)	$	351	$	(247)	$	51	$	(293)	$	3,649

Embedded derivatives (a)		$	(3,675)	$	(5)	$	0	$	(56)	$	79	$	0	$	0	$	(3,657)
Total Level 3 liabilities (b)		$	(3,675)	$	(5)	$	0	$	(56)	$	79	$	0	$	0	$	(3,657)
Liabilities of discontinued annuity operations																		Liabilities of discontinued annuity operations	$	(3,933)	$	(40)	$	0	$	(74)	$	93	$	0	$	0	$	(3,954)
Total Level 3 liabilities (*)																		Total Level 3 liabilities (*)	$	(3,933)	$	(40)	$	0	$	(74)	$	93	$	0	$	0	$	(3,954)


				Total realized/unrealized gains (losses) included in																	Total realized/unrealized gains (losses) included in
		Balance at June 30, 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 September 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 March 31, 2020
AFS fixed maturities:	AFS fixed maturities:																	AFS fixed maturities:
U.S. government agency	U.S. government agency	$	8	$	0	$	0	$	0	$	0	$	0	$	0	$	8	U.S. government agency	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
State and municipal	State and municipal	82		0		2		0		0		18		0		102		State and municipal	40		0		1		0		0		0		0		41
Residential MBS	Residential MBS	139		1		(1)		0		(4)		22		(1)		156		Residential MBS	45		1		(2)		0		(1)		1		0		44
Commercial MBS	Commercial MBS	50		1		0		0		0		4		0		55		Commercial MBS	6		0		0		0		0		0		0		6
Collateralized loan obligations	Collateralized loan obligations	50		(2)		1		8		0		0		0		57		Collateralized loan obligations	1		0		0		0		0		43		0		44
Other asset-backed securities	Other asset-backed securities	367		0		1		49		(3)		0		0		414		Other asset-backed securities	256		(6)		0		22		(41)		7		0		238
Corporate and other	Corporate and other	2,014		0		20		324		(81)		10		(1)		2,286		Corporate and other	223		(1)		(3)		24		(7)		2		(66)		172
Total AFS fixed maturities	Total AFS fixed maturities	2,710		0		23		381		(88)		54		(2)		3,078		Total AFS fixed maturities	571		(6)		(4)		46		(49)		53		(66)		545
Equity securities	Equity securities	377		(7)		0		18		(2)		34		0		420		Equity securities	161		(18)		0		3		0		9		0		155
Assets of MIE	Assets of MIE	19		(1)		0		0		0		0		0		18		Assets of MIE	17		(1)		0		0		0		0		0		16
Assets of discontinued annuity operations																		Assets of discontinued annuity operations	3,092		(18)		(44)		153		(174)		133		(345)		2,797
Total Level 3 assets	Total Level 3 assets	$	3,106	$	(8)	$	23	$	399	$	(90)	$	88	$	(2)	$	3,516	Total Level 3 assets	$	3,841	$	(43)	$	(48)	$	202	$	(223)	$	195	$	(411)	$	3,513

Embedded derivatives (a)		$	(3,541)	$	70	$	0	$	(63)	$	65	$	0	$	0	$	(3,469)
Total Level 3 liabilities (b)		$	(3,541)	$	70	$	0	$	(63)	$	65	$	0	$	0	$	(3,469)
Liabilities of discontinued annuity operations																		Liabilities of discontinued annuity operations	$	(3,730)	$	647	$	0	$	(78)	$	62	$	0	$	0	$	(3,099)
Total Level 3 liabilities (*)																		Total Level 3 liabilities (*)	$	(3,730)	$	647	$	0	$	(78)	$	62	$	0	$	0	$	(3,099)

~~(a)~~Total realized/unrealized gains (losses) included in net earnings for the embedded derivatives reflects a favorable adjustment related to the unlocking of actuarial assumptions of $240 million in the third quarter of 2020 compared to $181 million in the third quarter of 2019.

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

~~Table of Contents~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

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 September 30, 2020
AFS fixed maturities:
U.S. government agency $ 15 $ 3 $ (3) $ 0 $ 0 $ 0 $ 0 $ 15
State and municipal 105 0 6 0 (3) 0 (2) 106
Residential MBS 173 1 (7) 0 (15) 51 (25) 178
Commercial MBS 35 0 0 0 (3) 0 (22) 10
Collateralized loan obligations 15 (11) 21 0 0 187 0 212
Other asset-backed securities 1,286 (16) 6 314 (278) 211 (179) 1,344
Corporate and other 1,758 4 24 220 (133) 130 (522) 1,481
Total AFS fixed maturities 3,387 (19) 47 534 (432) 579 (750) 3,346
Equity securities 437 (35) 0 35 0 17 (10) 444
Assets of MIE 17 (4) 0 0 0 2 0 15
Total Level 3 assets $ 3,841 $ (58) $ 47 $ 569 $ (432) $ 598 $ (760) $ 3,805
Embedded derivatives (a) $ (3,730) $ 41 $ 0 $ (180) $ 212 $ 0 $ 0 $ (3,657)
Total Level 3 liabilities (b) $ (3,730) $ 41 $ 0 $ (180) $ 212 $ 0 $ 0 $ (3,657)

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 September 30, 2019
AFS fixed maturities:
U.S. government agency $ 9 $ 0 $ 0 $ 0 $ (1) $ 0 $ 0 $ 8
State and municipal 59 — 9 0 (2) 36 0 102
Residential MBS 197 10 (6) 0 (14) 24 (55) 156
Commercial MBS 56 3 0 0 (3) 4 (5) 55
Collateralized loan obligations 116 (5) 7 8 0 13 (82) 57
Other asset-backed securities 731 0 6 141 (135) 0 (329) 414
Corporate and other 1,996 2 71 985 (330) 12 (450) 2,286
Total AFS fixed maturities 3,164 10 87 1,134 (485) 89 (921) 3,078
Equity securities 336 (7) 0 38 (3) 56 0 420
Assets of MIE 21 (3) 0 0 0 0 0 18
Total Level 3 assets $ 3,521 $ 0 $ 87 $ 1,172 $ (488) $ 145 $ (921) $ 3,516
Embedded derivatives (a) $ (2,720) $ (643) $ 0 $ (276) $ 170 $ 0 $ 0 $ (3,469)
Total Level 3 liabilities (b) $ (2,720) $ (643) $ 0 $ (276) $ 170 $ 0 $ 0 $ (3,469)

~~(a)~~Total realized/unrealized gains (losses) included in net earnings for the embedded derivatives reflects a favorable adjustment related to the unlocking of actuarial assumptions of $240 million in the first nine months of 2020 compared to $181 million in the first nine months of 2019.

~~(b)~~(*)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.

2221

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
September 30, 2020
March 31, 2021												March 31, 2021
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	3,747	$	3,747	$	3,747	$	0	$	0	Cash and cash equivalents	$	1,691	$	1,691	$	1,691	$	0	$	0
Mortgage loans	Mortgage loans	1,482		1,507		0		0		1,507		Mortgage loans	408		411		0		0		411
Policy loans		154		154		0		0		154
Total financial assets not accounted for at fair value	Total financial assets not accounted for at fair value	$	5,383	$	5,408	$	3,747	$	0	$	1,661	Total financial assets not accounted for at fair value	$	2,099	$	2,102	$	1,691	$	0	$	411
Financial liabilities:
Annuity benefits accumulated (*)		$	41,082	$	42,938	$	0	$	0	$	42,938

Long-term debt	Long-term debt	2,108		2,397		0		2,394		3		Long-term debt	$	1,963	$	2,218	$	0	$	2,215	$	3
Total financial liabilities not accounted for at fair value	Total financial liabilities not accounted for at fair value	$	43,190	$	45,335	$	0	$	2,394	$	42,941	Total financial liabilities not accounted for at fair value	$	1,963	$	2,218	$	0	$	2,215	$	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	$	0	$	0	Cash and cash equivalents	$	1,665	$	1,665	$	1,665	$	0	$	0
Mortgage loans	Mortgage loans	1,329		1,346		0		0		1,346		Mortgage loans	377		382		0		0		382
Policy loans		164		164		0		0		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	$	0	$	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	$	0	$	0	$	40,182

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

The carrying value and fair value of financial instruments of the discontinued annuity operations that are not carried at fair value in the financial statements are summarized below (in millions):


	Carrying		Fair Value
	Value		Total		Level 1		Level 2		Level 3
March 31, 2021
Financial assets:
Cash and cash equivalents	$	636	$	636	$	636	$	0	$	0
Mortgage loans	1,244		1,262		0		0		1,262
Policy loans	148		148		0		0		148
Total financial assets not accounted for at fair value	$	2,028	$	2,046	$	636	$	0	$	1,410

Annuity benefits accumulated (*)	$	41,760	$	42,360	$	0	$	0	$	42,360
Total financial liabilities not accounted for at fair value	$	41,760	$	42,360	$	0	$	0	$	42,360

December 31, 2020
Financial assets:
Cash and cash equivalents	$	1,145	$	1,145	$	1,145	$	0	$	0
Mortgage loans	1,251		1,270		0		0		1,270
Policy loans	151		151		0		0		151
Total financial assets not accounted for at fair value	$	2,547	$	2,566	$	1,145	$	0	$	1,421

Annuity benefits accumulated (*)	$	41,460	$	43,081	$	0	$	0	$	43,081
Total financial liabilities not accounted for at fair value	$	41,460	$	43,081	$	0	$	0	$	43,081

(*)Excludes ~~$850 million~~$1.12 billion and ~~$247 million~~$1.11 billion of life contingent annuities in the payout phase at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

2322

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

E.F. Investments

Available for sale fixed maturities held by AFG’s continuing operations at ~~September 30, 2020~~March 31, 2021 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											Gains		Losses
September 30, 2020
March 31, 2021														March 31, 2021
Fixed maturities:	Fixed maturities:													Fixed maturities:
U.S. Government and government agencies	U.S. Government and government agencies	$	211	$	0	$	13	$	0	$	13	$	224	U.S. Government and government agencies	$	212	$	0	$	4	$	(1)	$	3	$	215
States, municipalities and political subdivisions	States, municipalities and political subdivisions	6,150		0		575		(3)		572		6,722		States, municipalities and political subdivisions	2,076		0		91		0		91		2,167
Foreign government	Foreign government	187		0		8		0		8		195		Foreign government	188		0		2		0		2		190
Residential MBS	Residential MBS	2,882		3		264		(6)		258		3,137		Residential MBS	796		0		53		(2)		51		847
Commercial MBS	Commercial MBS	814		0		44		(2)		42		856		Commercial MBS	106		0		3		0		3		109
Collateralized loan obligations	Collateralized loan obligations	4,643		20		25		(41)		(16)		4,607		Collateralized loan obligations	1,131		1		4		(3)		1		1,131
Other asset-backed securities	Other asset-backed securities	7,405		16		154		(124)		30		7,419		Other asset-backed securities	2,178		8		24		(6)		18		2,188
Corporate and other	Corporate and other	23,005		15		2,121		(78)		2,043		25,033		Corporate and other	2,372		1		75		(4)		71		2,442
Total fixed maturities	Total fixed maturities	$	45,297	$	54	$	3,204	$	(254)	$	2,950	$	48,193	Total fixed maturities	$	9,059	$	10	$	256	$	(16)	$	240	$	9,289

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	$	199	$	0	$	10	$	0	$	10	$	209	U.S. Government and government agencies	$	192	$	0	$	6	$	0	$	6	$	198
States, municipalities and political subdivisions	States, municipalities and political subdivisions	6,604		0		363		(4)		359		6,963		States, municipalities and political subdivisions	2,196		0		116		0		116		2,312
Foreign government	Foreign government	170		0		3		(1)		2		172		Foreign government	172		0		4		0		4		176
Residential MBS	Residential MBS	2,900		0		265		(5)		260		3,160		Residential MBS	859		0		57		(1)		56		915
Commercial MBS	Commercial MBS	896		0		31		0		31		927		Commercial MBS	89		0		3		0		3		92
Collateralized loan obligations	Collateralized loan obligations	4,307		0		10		(37)		(27)		4,280		Collateralized loan obligations	1,065		3		4		(4)		0		1,062
Other asset-backed securities	Other asset-backed securities	6,992		0		156		(20)		136		7,128		Other asset-backed securities	2,040		7		27		(13)		14		2,047
Corporate and other	Corporate and other	22,456		0		1,231		(21)		1,210		23,666		Corporate and other	2,199		2		88		(3)		85		2,282
Total fixed maturities	Total fixed maturities	$	44,524	$	0	$	2,069	$	(88)	$	1,981	$	46,505	Total fixed maturities	$	8,812	$	12	$	305	$	(21)	$	284	$	9,084

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Available for sale fixed maturities that are included in assets of discontinued annuity operations at March 31, 2021 and December 31, 2020, consisted of the following (in millions):


	Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized				Net Unrealized		Fair Value
					Gains		Losses
March 31, 2021
Fixed maturities:
U.S. Government and government agencies	$	38	$	0	$	4	$	0	$	4	$	42
States, municipalities and political subdivisions	2,951		0		269		(4)		265		3,216
Foreign government	31		0		3		0		3		34
Residential MBS	2,342		3		180		(6)		174		2,513
Commercial MBS	603		0		33		0		33		636
Collateralized loan obligations	3,778		4		23		(9)		14		3,788
Other asset-backed securities	5,095		10		144		(25)		119		5,204
Corporate and other	18,015		1		1,367		(60)		1,307		19,321
Total fixed maturities	$	32,853	$	18	$	2,023	$	(104)	$	1,919	$	34,754

December 31, 2020
Fixed maturities:
U.S. Government and government agencies	$	39	$	0	$	5	$	0	$	5	$	44
States, municipalities and political subdivisions	3,053		0		370		(2)		368		3,421
Foreign government	31		0		4		0		4		35
Residential MBS	1,953		3		194		(4)		190		2,140
Commercial MBS	659		0		40		(1)		39		698
Collateralized loan obligations	3,491		10		23		(13)		10		3,491
Other asset-backed securities	5,098		11		142		(53)		89		5,176
Corporate and other	17,272		4		1,874		(24)		1,850		19,118
Total fixed maturities	$	31,596	$	28	$	2,652	$	(97)	$	2,555	$	34,123

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 ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (in millions):


		September 30, 2020												December 31, 2019												March 31, 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								Fair Value				Cost								Fair Value				Cost
Common stocks	Common stocks			$	1,145			$	874			$	(271)			$	1,164			$	1,283			$	119		Common stocks	$	467			$	536			$	69			$	516			$	510			$	(6)
Perpetual preferred stocks	Perpetual preferred stocks	724				732				8				640				654				14		Perpetual preferred stocks		371				408				37				369				379				10
Total equity securities carried at fair value	Total equity securities carried at fair value	$	1,869			$	1,606			$	(263)			$	1,804			$	1,937			$	133	Total equity securities carried at fair value		$	838			$	944			$	106			$	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
	March 31, 2021		December 31, 2020		Three months ended March 31,
					2021		2020
Real estate-related investments (*)	$	985	$	915	$	54	$	26
Private equity	284		266		21		(5)
Private debt	55		54		3		2
Total investments accounted for using the equity method	$	1,324	$	1,235	$	78	$	23

(*)Includes 88% invested in multi-family properties, 2% in single family properties and 10% in other property types as of March 31, 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 valuation of these investments is 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

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

corroborate the reasonableness of the 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 $260 million and $290 million as of March 31, 2021 and December 31, 2020, respectively.

Assets of discontinued annuity operations includes investments accounted for under the equity method of $671 million and $646 million as of March 31, 2021 and December 31, 2020, respectively.

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
September 30, 2020
March 31, 2021														March 31, 2021
Fixed maturities:	Fixed maturities:													Fixed maturities:
U.S. Government and government agencies	U.S. Government and government agencies	$	0	$	19	100	%	$	0	$	0	0	%	U.S. Government and government agencies	$	(1)	$	105	99	%	$	0	$	0	0	%
States, municipalities and political subdivisions	States, municipalities and political subdivisions	(3)		120		98	%	0		15		100	%	States, municipalities and political subdivisions	0		29		100	%	0		18		100	%
Foreign government	Foreign government	0		5		100	%	0		0		0	%	Foreign government	0		35		100	%	0		0		0	%
Residential MBS	Residential MBS	(4)		144		97	%	(2)		35		95	%	Residential MBS	(1)		86		99	%	(1)		11		92	%
Commercial MBS	Commercial MBS	(2)		47		96	%	0		0		0	%	Commercial MBS	0		14		100	%	0		5		100	%
Collateralized loan obligations	Collateralized loan obligations	(11)		1,248		99	%	(30)		1,393		98	%	Collateralized loan obligations	(1)		113		99	%	(2)		354		99	%
Other asset-backed securities	Other asset-backed securities	(107)		2,164		95	%	(17)		245		94	%	Other asset-backed securities	(3)		382		99	%	(3)		187		98	%
Corporate and other	Corporate and other	(67)		1,791		96	%	(11)		196		95	%	Corporate and other	(3)		255		99	%	(1)		55		98	%
Total fixed maturities	Total fixed maturities	$	(194)	$	5,538	97	%	$	(60)	$	1,884	97	%	Total fixed maturities	$	(9)	$	1,019	99	%	$	(7)	$	630	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	$	0	$	16	100	%	$	0	$	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	%	0		0		0	%	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	0		17		100	%	0		0		0	%	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 ~~September 30, 2020,~~March 31, 2021, the gross unrealized losses on fixed maturities of ~~$254~~$16 million relate to ~~759~~434 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately ~~77%~~75% of the gross unrealized loss and ~~84%~~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 ~~September 30, 2020.~~March 31, 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 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 June 30		$	39	$	22	$	61

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	0		0		0		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		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		(4)		(3)		Additions (reductions) to previously recognized expected credit losses	(1)		0		(1)
Reductions due to sales or redemptions	Reductions due to sales or redemptions	(1)		(3)		(4)		Reductions due to sales or redemptions	0		(1)		(1)
Balance at September 30		$	39	$	15	$	54
Balance at March 31, 2021								Balance at March 31, 2021	$	9	$	1	$	10

Balance at January 1		$	0	$	0	$	0
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	0		0		0		Impact of adoption of new accounting policy	0		0		0
Initial allowance for purchased securities with credit deterioration		1		0		1

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	11		3		14
Additions (reductions) to previously recognized expected credit losses		0		(10)		(10)

Reductions due to sales or redemptions	Reductions due to sales or redemptions	(1)		(3)		(4)		Reductions due to sales or redemptions	0		0		0
Balance at September 30		$	39	$	15	$	54
Balance at March 31, 2020								Balance at March 31, 2020	$	11	$	3	$	14

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

In the first ~~nine~~three months of 2021 and 2020, AFG ~~purchased 2 residential mortgage-backed~~did not purchase any securities with expected credit losses. In aggregate at the time of purchase, the par value was $8 million, the purchase price was $6 million and the allowance for credit losses and the discount were each $1 million. No such securities were purchased during the third quarter of 2020.

The table below sets forth the scheduled maturities of available for sale fixed maturities held by AFG’s continuing operations as of ~~September 30, 2020~~March 31, 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	$	2,218	$	2,250	5	%	One year or less	$	974	$	986	11	%
After one year through five years	After one year through five years	11,434		12,224		25	%	After one year through five years	2,456		2,553		27	%
After five years through ten years	After five years through ten years	12,737		14,199		30	%	After five years through ten years	1,126		1,174		13	%
After ten years	After ten years	3,149		3,501		7	%	After ten years	291		301		3	%
		29,538		32,174		67	%		4,847		5,014		54	%
Collateralized loan obligations and other ABS (average life of approximately 4 years)		12,012		12,026		25	%
MBS (average life of approximately 3-1/2 years)		3,693		3,993		8	%
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)	3,300		3,319		36	%
MBS (average life of approximately 3 years)								MBS (average life of approximately 3 years)	902		956		10	%
Total	Total	$	45,243	$	48,193	100	%	Total	$	9,049	$	9,289	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.

~~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 ~~September 30, 2020~~March 31, 2021 or December 31, ~~2019.~~2020.

Net Unrealized Gain on ~~Marketable~~Fixed Maturity Securities In addition to adjusting fixed maturity securities classified as “available for sale” to fair value, GAAP requires that deferred policy acquisition costs and certain other balance sheet amounts related to AFG’s discontinued annuity, long-term care and life businesses be adjusted to the extent that

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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
September 30, 2020
Net unrealized gain on:
Fixed maturities — annuity segment (*) $ 2,473 $ (519) $ 1,954
Fixed maturities — all other 477 (100) 377
Total fixed maturities 2,950 (619) 2,331
Deferred policy acquisition costs — annuity segment (1,049) 220 (829)
Annuity benefits accumulated (377) 79 (298)
Life, accident and health reserves (3) 1 (2)
Unearned revenue 13 (3) 10
Total net unrealized gain on marketable securities $ 1,534 $ (322) $ 1,212
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) 0 (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.~~


	Pretax		Deferred Tax		Net
March 31, 2021
Net unrealized gain on fixed maturities held by continuing operations	$	240	$	(51)	$	189

Discontinued operations:
Net unrealized gain on fixed maturities	$	1,919	$	(403)	$	1,516
Deferred policy acquisition costs — annuity segment	(661)		139		(522)
Annuity benefits accumulated	(283)		59		(224)
Life, accident and health reserves	(3)		1		(2)
Unearned revenue	8		(2)		6
Total net unrealized gain from discontinued operations	980		(206)		774
Total net unrealized gain on fixed maturity securities	$	1,220	$	(257)	$	963

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

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 September 30,				Nine months ended September 30,					Three months ended March 31,
		2020		2019		2020		2019				2021		2020
Investment income:	Investment income:									Investment income:
Fixed maturities	Fixed maturities	$	473	$	475	$	1,449	$	1,422	Fixed maturities		$	72	$	82
Equity securities:	Equity securities:									Equity securities:
Dividends	Dividends	16		22		49		66		Dividends		8		10
Change in fair value (a) (b)	Change in fair value (a) (b)	(3)		17		(6)		35		Change in fair value (a) (b)		26		(17)
Equity in earnings of partnerships and similar investments	Equity in earnings of partnerships and similar investments	66		43		37		109		Equity in earnings of partnerships and similar investments		78		23
Other	Other	26		36		72		95		Other		6		8
Gross investment income	Gross investment income	578		593		1,601		1,727		Gross investment income		190		106
Investment expenses	Investment expenses	(6)		(5)		(17)		(17)		Investment expenses		(2)		(2)
Net investment income (b)	Net investment income (b)	$	572	$	588	$	1,584	$	1,710	Net investment income (b)		$	188	$	104

(a)Although the change in the fair value of the majority of AFG’s equity securities is recorded in realized gains (losses) on securities, AFG records holding gains and losses in net investment income on equity securities classified as “trading” under previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.

(b)Net investment income in the first three months of 2020 includes losses of $6 million on investments held by the companies that comprise the Neon exited lines due primarily to the $7 million loss recorded on equity securities that are carried at fair value through net investment income.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

~~“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 included in net earnings (loss) from discontinued operations was $447 million and $415 million in the ~~third quarter and~~ first ~~nine~~three months of 2021 and 2020, includes income of $1 million and losses of $5 million, respectively, on investments held by the companies that comprise the Neon exited lines due primarily to the $7 million loss recorded in first quarter of 2020 on equity securities that are carried at fair value through net investment income.respectively.

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


		Three months ended September 30, 2020								Three months ended September 30, 2019									Three months ended March 31, 2021								Three months ended March 31, 2020
		Realized gains (losses)								Realized gains (losses)									Realized gains (losses)								Realized gains (losses)
		Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairments		Total		Change in Unrealized			Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairments		Total		Change in Unrealized
Fixed maturities	Fixed maturities	$	14	$	3	$	17	$	513	$	9	$	(14)	$	(5)	$	367	Fixed maturities	$	(1)	$	1	$	0	$	(44)	$	3	$	(14)	$	(11)	$	(277)
Equity securities	Equity securities	30		0		30		0		(16)		0		(16)		0		Equity securities	77		0		77		0		(318)		0		(318)		0
Mortgage loans and other investments	Mortgage loans and other investments	0		0		0		0		0		0		0		0		Mortgage loans and other investments	0		0		0		0		1		0		1		0
Other (*)		(1)		(1)		(2)		(283)		(2)		5		3		(230)
Total pretax	Total pretax	43		2		45		230		(9)		(9)		(18)		137		Total pretax	76		1		77		(44)		(314)		(14)		(328)		(277)
Tax effects	Tax effects	(9)		(1)		(10)		(48)		2		2		4		(29)		Tax effects	(16)		0		(16)		9		66		3		69		58
Net of tax	Net of tax	$	34	$	1	$	35	$	182	$	(7)	$	(7)	$	(14)	$	108	Net of tax	$	60	$	1	$	61	$	(35)	$	(248)	$	(11)	$	(259)	$	(219)

		Nine months ended September 30, 2020								Nine months ended September 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		$	46	$	(57)	$	(11)	$	969	$	23	$	(20)	$	3	$	2,009
Equity securities		(303)		0		(303)		0		210		0		210		0
Mortgage loans and other investments		4		0		4		0		3		0		3		0
Other (*)		(6)		14		8		(526)		(1)		7		6		(949)
Total pretax		(259)		(43)		(302)		443		235		(13)		222		1,060
Tax effects		54		9		63		(93)		(49)		3		(46)		(223)
Net of tax		$	(205)	$	(34)	$	(239)	$	350	$	186	$	(10)	$	176	$	837

~~(*)~~
~~Primarily adjustments to deferred policy acquisition costs~~

Realized gains (losses) included in net earnings (loss) from discontinued operations were gains of $81 million and ~~reserves related to~~losses of $223 million in the ~~annuity business.~~first three months of 2021 and 2020, respectively.

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 ~~third~~first quarter and first ~~nine~~three months of ~~2020~~2021 and ~~2019~~2020 on securities that were still owned at ~~September 30,~~March 31, 2021 and March 31, 2020 ~~and September 30, 2019~~ as follows (in millions):


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2020		2019		2020		2019				2021		2020
Included in realized gains (losses)	Included in realized gains (losses)	$	23	$	(24)	$	(300)	$	146	Included in realized gains (losses)		$	67	$	(321)
Included in net investment income	Included in net investment income	(4)		17		1		34		Included in net investment income		26		(10)
		$	19	$	(7)	$	(299)	$	180			$	93	$	(331)

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


		Nine months ended September 30,					Three months ended March 31,
		2020		2019			2021		2020
Gross gains	Gross gains	$	77	$	20	Gross gains	$	2	$	3
Gross losses	Gross losses	(33)		(12)		Gross losses	(1)		(1)

Gross gains and losses from discontinued operations were gross gains of $18 million and $26 million in the first three months of 2021 and 2020, respectively, and gross losses of $2 million and $3 million in the first three months of 2021 and 2020, respectively.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

F.G. Derivatives

As discussed under “Derivatives” in Note A — “Accounting Policies,” AFG uses derivatives in certain areas of its operations.

Derivatives That Do Not Qualify for Hedge Accounting The following derivatives that do not qualify for hedge accounting under GAAP are included in AFG’s Balance Sheet at fair value (in millions):


			September 30, 2020				December 31, 2019						March 31, 2021				December 31, 2020
Derivative	Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability		Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	MBS with embedded derivatives	Fixed maturities	$	172	$	—	$	102	$	—	MBS with embedded derivatives	Fixed maturities	$	67	$	—	$	37	$	—
Public company warrants		Equity securities	—		—		—		—
Discontinued Annuity Operations:											Discontinued Annuity Operations:
MBS with embedded derivatives											MBS with embedded derivatives	Assets of discontinued annuity operations	152		—		137		—

Fixed-indexed and variable-indexed annuities (embedded derivative)	Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		3,657		—		3,730		Fixed-indexed and variable-indexed annuities (embedded derivative)	Liabilities of discontinued annuity operations	—		3,954		—		3,933
Equity index call options	Equity index call options	Equity index call options	697		—		924		—		Equity index call options	Assets of discontinued annuity operations	813		—		825		—
Equity index put options	Equity index put options	Other liabilities	0		4		—		1		Equity index put options	Liabilities of discontinued annuity operations	—		6		—		5
Reinsurance contracts (embedded derivative)		Other liabilities	—		4		—		4
Reinsurance contract (embedded derivative)											Reinsurance contract (embedded derivative)	Liabilities of discontinued annuity operations	—		4		—		5
			$	869	$	3,665	$	1,026	$	3,735			$	1,032	$	3,964	$	999	$	3,943

The MBS with embedded derivatives consist of primarily interest-only and principal-only MBS. AFG records the entire change in the fair value of these securities in earnings. These investments are part of AFG’s overall investment strategy and represent a small component of AFG’s overall investment portfolio.

Warrants to purchase shares of publicly traded companies, which represent a small component of AFG’s overall investment portfolio, are considered to be derivatives that are required to be carried at fair value through earnings.

AFG’s fixed-indexed and variable-indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG receives collateral from certain counterparties to support its purchased call option assets (net of collateral required under put option contracts with the same counterparties). This collateral ($~~342~~363 million at ~~September 30, 2020~~March 31, 2021 and ~~$577~~$351 million at December 31, ~~2019)~~2020) is included in ~~other~~ assets of discontinued annuity operations in AFG’s Balance Sheet with an offsetting liability to return the collateral, which is included in ~~other liabilities.~~liabilities of discontinued annuity operations. 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 life business reinsurance contract that is considered to contain an embedded derivative.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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 ~~third quarter and~~ first ~~nine~~three months of ~~2020~~2021 and ~~2019~~2020 (in millions):

Three months ended September 30, Nine months ended September 30,
Derivative Statement of Earnings Line 2020 2019 2020 2019
MBS with embedded derivatives Realized gains (losses) on securities $ (5) $ 3 $ 2 $ 15
Public company warrants Realized gains (losses) on securities 0 (1) 0 (1)
Fixed-indexed and variable-indexed annuities (embedded derivative) (*) Annuity benefits (5) 70 41 (643)
Equity index call options Annuity benefits 203 30 (42) 544
Equity index put options Annuity benefits 2 0 1 1
Reinsurance contract (embedded derivative) Net investment income 1 0 0 (2)
$ 196 $ 102 $ 2 $ (86)

~~(*)~~The change in fair value of the embedded derivative includes a favorable adjustment related to the unlocking of actuarial assumptions of $240 million in the third quarter of 2020 and $181 million in the third quarter of 2019.


		Three months ended March 31,
Derivative	Statement of Earnings Line		2021		2020
MBS with embedded derivatives	Realized gains (losses) on securities		$	(2)	$	1
Discontinued Annuity Operations:
MBS with embedded derivatives - discontinued operations	Net earnings (loss) from discontinued operations		0		3

Fixed-indexed and variable-indexed annuities (embedded derivative)	Net earnings (loss) from discontinued operations		(40)		647
Equity index call options	Net earnings (loss) from discontinued operations		114		(628)
Equity index put options	Net earnings (loss) from discontinued operations		2		(6)
Reinsurance contract (embedded derivative)	Net earnings (loss) from discontinued operations		1		2
			$	75	$	19

Derivatives Designated and Qualifying as Cash Flow Hedges As of ~~September 30, 2020, AFG~~March 31, 2021, Great American Life Insurance Company (“GALIC”) 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~~GALIC’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of ~~AFG’s~~GALIC’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~~GALIC 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~~GALIC’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR. The total outstanding notional amount of ~~AFG’s~~GALIC’s interest rate swaps was ~~$1.65~~$1.60 billion at ~~September 30, 2020~~March 31, 2021 compared to ~~$1.98~~$1.63 billion at December 31, ~~2019,~~2020, 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.above. The fair value of the interest rate swaps in an asset position and included in ~~other~~ assets of discontinued annuity operations was ~~$114~~$69 million at ~~September 30, 2020~~March 31, 2021 and ~~$50~~$102 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 September 30, 2020 and $5 million at December 31, 2019.~~2020. 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~~earnings (loss) from discontinued operations were income of ~~$8 million in the third quarter of 2020 and losses of less than $1 million in the third quarter of 2019 and income of $31~~$9 million and ~~losses of $1~~$12 million for the first ~~nine~~three months of 2021 and 2020, ~~and 2019,~~ respectively. ~~AFG had a $7 million liability to return~~A collateral ~~related to~~receivable supporting these swaps ~~(included in other liabilities)~~of $10 million at ~~September 30, 2020~~March 31, 2021 and ~~a $20~~$2 million ~~receivable for collateral posted related to these swaps (included in other assets)~~ at December 31, ~~2019.~~2020 is included in assets of discontinued annuity operations in AFG’s Balance Sheet.

~~Table of Contents~~

~~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 June 30, 2020 $ 296 $ 1,342 $ 73 $ 33 $ 1,448 $ (926) $ 522 $ 818
Additions 142 33 0 — 33 — 33 175
Amortization:
Periodic amortization (170) (39) (2) (1) (42) — (42) (212)
Annuity unlocking — (118) 4 0 (114) — (114) (114)
Included in realized gains — (2) 0 — (2) — (2) (2)
Foreign currency translation 1 — — — — — — 1
Change in unrealized — — — — 0 (169) (169) (169)
Balance at September 30, 2020 $ 269 $ 1,216 $ 75 $ 32 $ 1,323 $ (1,095) $ 228 $ 497
Balance at June 30, 2019 $ 330 $ 1,373 $ 81 $ 38 $ 1,492 $ (619) $ 873 $ 1,203
Additions 188 43 1 — 44 — 44 232
Amortization:
Periodic amortization (194) (29) (3) (1) (33) — (33) (227)
Annuity unlocking — (76) (1) 0 (77) — (77) (77)
Included in realized gains — 3 0 — 3 — 3 3
Foreign currency translation (1) — — — — — — (1)
Change in unrealized — — — — 0 (169) (169) (169)
Balance at September 30, 2019 $ 323 $ 1,314 $ 78 $ 37 $ 1,429 $ (788) $ 641 $ 964
Balance at December 31, 2019 $ 322 $ 1,303 $ 75 $ 36 $ 1,414 $ (699) $ 715 $ 1,037
Additions 448 112 1 — 113 — 113 561
Amortization:
Periodic amortization (500) (87) (6) (4) (97) — (97) (597)
Annuity unlocking — (118) 4 0 (114) — (114) (114)
Included in realized gains — 6 1 — 7 — 7 7
Foreign currency translation (1) — — — — — — (1)
Change in unrealized — — — — 0 (396) (396) (396)
Balance at September 30, 2020 $ 269 $ 1,216 $ 75 $ 32 $ 1,323 $ (1,095) $ 228 $ 497
Balance at December 31, 2018 $ 299 $ 1,285 $ 86 $ 42 $ 1,413 $ (30) $ 1,383 $ 1,682
Additions 569 163 2 — 165 — 165 734
Amortization:
Periodic amortization (544) (63) (10) (5) (78) — (78) (622)
Annuity unlocking — (76) (1) 0 (77) — (77) (77)
Included in realized gains — 5 1 — 6 — 6 6
Foreign currency translation (1) — — — — — — (1)
Change in unrealized — — — — 0 (758) (758) (758)
Balance at September 30, 2019 $ 323 $ 1,314 $ 78 $ 37 $ 1,429 $ (788) $ 641 $ 964

~~(*)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 $158 million and $154 million of accumulated amortization at September 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% to 100.0% (4.5% to 46.8% for AFG’s continuing operations) 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 ~~$176~~$181 million (including ~~$89~~$121 million invested in the most subordinate tranches) at ~~September 30, 2020,~~March 31, 2021, and ~~$165~~$200 million at December 31, ~~2019.~~2020.

During the first ~~nine~~three months of 2020, AFG subsidiaries purchased $57 million face amount of senior and subordinate tranches of existing CLOs for $39 million. During ~~both~~ the first ~~nine~~three months of ~~2020~~2021 and ~~2019,~~2020, AFG subsidiaries received $29 million and less than $1 million, respectively, in sale and redemption proceeds from its CLO investments.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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 September 30,				Nine months ended September 30,					Three months ended March 31,
		2020		2019		2020		2019				2021		2020
Investment in CLO tranches at end of period		$	176	$	179	$	176	$	179
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	$	40
Held by discontinued annuity operations										Held by discontinued annuity operations		124		121
Total										Total		$	181	$	161
Gains (losses) on change in fair value of assets/liabilities (a):	Gains (losses) on change in fair value of assets/liabilities (a):									Gains (losses) on change in fair value of assets/liabilities (a):
Assets	Assets	132		(18)		(184)		69		Assets		$	46	$	(679)
Liabilities	Liabilities	(131)		4		137		(85)		Liabilities		(44)		666
Management fees paid to AFG	Management fees paid to AFG	3		4		11		11		Management fees paid to AFG		4		4
CLO earnings (losses) attributable to AFG shareholders (b)		13		(5)		(21)		11
CLO earnings (losses) attributable to AFG shareholders:										CLO earnings (losses) attributable to AFG shareholders:
From continuing operations										From continuing operations		$	5	$	(11)
From discontinued annuity operations										From discontinued annuity operations		13		(25)
Total										Total		$	18	$	(36)

(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 ~~$276~~$100 million and ~~$146~~$150 million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by ~~$248~~$104 million and ~~$129~~$141 million at those dates. The CLO assets include loans with an aggregate fair value of ~~$26~~$27 million at ~~September 30, 2020~~March 31, 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 ~~$55~~$47 million at ~~September 30, 2020~~March 31, 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 ~~$4.61~~$1.13 billion at ~~September 30, 2020~~March 31, 2021 and ~~$4.28~~$1.06 billion at December 31, ~~2019.~~2020.

I. Goodwill and Other Intangibles

There were 0 changes in the goodwill balance from AFG’s continuing operations of ~~$207~~$176 million or AFG’s discontinued annuity operations of $31 million during the first ~~nine~~three months of ~~2020.~~ 2021.

Included in other assets in AFG’s Balance Sheet is ~~$34~~$31 million at ~~September 30, 2020~~March 31, 2021 and ~~$43~~$34 million at December 31, ~~2019~~2020 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of ~~$59~~$64 million and ~~$50~~$62 million, respectively. Amortization of intangibles was $3 million in both the ~~third quarters of 2020 and 2019, and $9 million in both the~~ first ~~nine~~three months of ~~2020~~2021 and ~~2019.~~2020.

3231

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

J. Long-Term Debt

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


		September 30, 2020						December 31, 2019							March 31, 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		0		0		0		5.25% Senior Notes due April 2030	300		(6)		294		300		(6)		294
Other	Other	3		0		3		3		0		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		(4)		196		0		0		0		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		0		0		0		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
		825		(23)		802		475		(15)		460			675		(19)		656		675		(19)		656
		$	2,143	$	(35)	$	2,108	$	1,493	$	(20)	$	1,473		$	1,993	$	(30)	$	1,963	$	1,993	$	(30)	$	1,963

In September 2020, AFG issued $200 million in 4.50% Subordinated Debentures due in September 2060. The net proceeds of this offering will be used for general corporate purposes, including the redemption of AFG’s 6% Subordinated Debentures due in November 2055 at par value on November 15, 2020.

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.

~~Other than the announced redemption of AFG’s 6% Subordinated Debentures in November 2020 mentioned above, 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. 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.

3332

Table of Contents

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)
AOCI
Beginning
Balance Pretax Tax Net
of
tax Attributable to
noncontrolling
interests Attributable to
shareholders Other AOCI
Ending
Balance
Quarter ended September 30, 2020
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period $ 245 $ (51) $ 194 $ 0 $ 194
Reclassification adjustment for realized (gains) losses included in net earnings (*) (15) 3 (12) 0 (12)
Total net unrealized gains (losses) on securities $ 1,030 230 (48) 182 0 182 $ — $ 1,212
Net unrealized gains (losses) on cash flow hedges 47 (7) 1 (6) 0 (6) — 41
Foreign currency translation adjustments (17) 0 0 0 0 0 4 (13)
Pension and other postretirement plans adjustments (7) 0 0 0 0 0 — (7)
Total $ 1,053 $ 223 $ (47) $ 176 $ 0 $ 176 $ 4 $ 1,233
Quarter ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period $ 136 $ (29) $ 107 $ 0 $ 107
Reclassification adjustment for realized (gains) losses included in net earnings (*) 1 0 1 0 1
Total net unrealized gains (losses) on securities $ 812 137 (29) 108 0 108 $ — $ 920
Net unrealized gains on cash flow hedges 18 9 (2) 7 0 7 — 25
Foreign currency translation adjustments (13) (6) (1) (7) (1) (8) — (21)
Pension and other postretirement plans adjustments (8) 1 0 1 0 1 — (7)
Total $ 809 $ 141 $ (32) $ 109 $ (1) $ 108 $ — $ 917
Nine months ended September 30, 2020
Net unrealized gains (losses) on securities:
Unrealized holding gains on securities arising during the period $ 443 $ (93) $ 350 $ 0 $ 350
Reclassification adjustment for realized (gains) losses included in net earnings (*) 0 0 0 0 0
Total net unrealized gains (losses) on securities $ 862 443 (93) 350 0 350 $ — $ 1,212
Net unrealized gains on cash flow hedges 17 31 (7) 24 0 24 — 41
Foreign currency translation adjustments (9) (6) 0 (6) (2) (8) 4 (13)
Pension and other postretirement plans adjustments (7) 0 0 0 0 0 — (7)
Total $ 863 $ 468 $ (100) $ 368 $ (2) $ 366 $ 4 $ 1,233
Nine months ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period $ 1,073 $ (226) $ 847 $ 0 $ 847
Reclassification adjustment for realized (gains) losses included in net earnings (*) (13) 3 (10) 0 (10)
Total net unrealized gains (losses) on securities $ 83 1,060 (223) 837 0 837 $ — $ 920
Net unrealized gains (losses) on cash flow hedges (11) 46 (10) 36 0 36 — 25
Foreign currency translation adjustments (16) (3) 0 (3) (2) (5) — (21)
Pension and other postretirement plans adjustments (8) 1 0 1 0 1 — (7)
Total $ 48 $ 1,104 $ (233) $ 871 $ (2) $ 869 $ — $ 917

~~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




















Three months ended March 31, 2021
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period			$	(355)	$	74	$	(281)	$	0	$	(281)
Reclassification adjustment for realized (gains) losses included in net earnings (*)			(14)		3		(11)		0		(11)
Total net unrealized gains (losses) on securities	$	1,255	(369)		77		(292)		0		(292)		$	963
Net unrealized gains (losses) on cash flow hedges	41		(17)		3		(14)		0		(14)		27
Foreign currency translation adjustments	(16)		0		0		0		0		0		(16)
Pension and other postretirement plans adjustments	(7)		0		0		0		0		0		(7)
Total	$	1,273	$	(386)	$	80	$	(306)	$	0	$	(306)	$	967

Three months ended March 31, 2020
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period			$	(1,095)	$	230	$	(865)	$	0	$	(865)
Reclassification adjustment for realized (gains) losses included in net earnings (*)			24		(5)		19		0		19
Total net unrealized gains (losses) on securities	$	862	(1,071)		225		(846)		0		(846)		$	16
Net unrealized gains on cash flow hedges	17		34		(7)		27		0		27		44
Foreign currency translation adjustments	(9)		(10)		0		(10)		(2)		(12)		(21)
Pension and other postretirement plans adjustments	(7)		0		0		0		0		0		(7)
Total	$	863	$	(1,047)	$	218	$	(829)	$	(2)	$	(831)	$	32

(*)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

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 ~~nine~~three 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 $5 million in both the ~~third quarters of 2020 and 2019, and $15 million and $17 million in the~~ first ~~nine~~three months of ~~2020~~2021 and ~~2019, respectively.~~2020.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

L. 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 September 30, Nine months ended September 30,
2020 2019 2020 2019
Amount % of EBT Amount % of EBT Amount % of EBT Amount % of EBT
Earnings (loss) before income taxes (“EBT”) $ 134 $ 177 $ (36) $ 849
Income taxes at statutory rate $ 28 21 % $ 37 21 % $ (8) 21 % $ 178 21 %
Effect of:
Pending sale of Neon (73) (54 %) 0 0 % (73) 203 % 0 0 %
Tax exempt interest (3) (2 %) (4) (2 %) (9) 25 % (11) (1 %)
Stock-based compensation 0 0 % (2) (1 %) (4) 11 % (6) (1 %)
Dividends received deduction (1) (1 %) (1) (1 %) (2) 6 % (3) 0 %
Adjustment to prior year taxes (1) (1 %) (3) (2 %) (1) 3 % (3) 0 %
Employee Stock Ownership Plan dividends paid deduction (1) (1 %) 0 0 % (1) 3 % (1) 0 %
Change in valuation allowance 20 15 % 4 2 % 31 (86 %) 7 1 %
Nondeductible expenses 2 1 % 2 1 % 4 (11 %) 6 1 %
Foreign operations (4) (3 %) 0 0 % (3) 8 % 0 0 %
Other 3 3 % 1 1 % 3 (8 %) 4 (1 %)
Provision (credit) for income taxes as shown in the statement of earnings $ (30) (22 %) $ 34 19 % $ (63) 175 % $ 171 20 %

~~In September 2020, AFG reached a definitive agreement to sell the legal entities that own Neon (see~~ ~~Note B —~~ “~~Acquisitions and Sale of Businesses”~~, which will result in a loss on sale for U.S. tax purposes. In accordance with accounting guidance for transactions that meet the GAAP “held for sale” criteria, AFG recorded a $73 million tax benefit associated with this loss in the third quarter of 2020. 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.


	Three months ended March 31,
		2021	2020
			Amount		% of EBT		Amount		% of EBT
Earnings (loss) from continuing operations before income taxes (“EBT”)			$	335			$	(185)

Income taxes at statutory rate			$	70	21	%	$	(39)	21	%
Effect of:

Tax exempt interest			(2)		(1	%)	(2)		1	%
Stock-based compensation			(2)		(1	%)	(3)		2	%
Dividends received deduction			0		0	%	(1)		1	%


Foreign operations			(1)		0	%	1		(1	%)
Nondeductible expenses			2		1	%	1		(1	%)
Change in valuation allowance			0		0	%	2		(1	%)

Other			1		0	%	0		0	%
Provision (credit) for income taxes as shown in the statement of earnings			$	68	20	%	$	(41)	22	%

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. 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

~~Table of Contents~~

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

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

~~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 former subsidiary railroad and manufacturing operations.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

N. 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 ~~nine~~three months of ~~2020~~2021 and ~~2019~~2020 (in millions):


		Nine months ended September 30,					Three months ended March 31,
		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	2,560		2,457		Provision for losses and LAE occurring in the current period	726		749
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges		47		18
Other		(166)		(116)

Net decrease in the provision for claims of prior years						Net decrease in the provision for claims of prior years	(59)		(42)
Total losses and LAE incurred	Total losses and LAE incurred	2,441		2,359		Total losses and LAE incurred	667		707
Payments for losses and LAE of:	Payments for losses and LAE of:					Payments for losses and LAE of:
Current year	Current year	(592)		(731)		Current year	(52)		(75)
Prior years	Prior years	(1,406)		(1,408)		Prior years	(622)		(676)
Total payments	Total payments	(1,998)		(2,139)		Total payments	(674)		(751)

Foreign currency translation and other	Foreign currency translation and other	(11)		(5)		Foreign currency translation and other	0		(22)
Net liability at end of period	Net liability at end of period	7,640		7,014		Net liability at end of period	7,268		7,142
Add back reinsurance recoverables, net of allowance	Add back reinsurance recoverables, net of allowance	3,114		2,833		Add back reinsurance recoverables, net of allowance	3,116		2,964
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	$	10,754	$	9,847	Gross unpaid losses and LAE included in the balance sheet at end of period	$	10,384	$	10,106

The net decrease in the provision for claims of prior years during the first ~~nine~~three months of ~~2020~~2021 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, lower than expected losses in the crop business and lower than expected claim frequency in the aviation business (within the Property and transportation sub-segment), (ii) lower than anticipated claim 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 and severity in the ~~trade credit~~financial institutions business and lower than anticipated claim frequency ~~and severity~~ in the ~~financial institutions, fidelity and~~ surety ~~businesses~~business (within the Specialty financial sub-segment). This favorable development was partially offset by (i) ~~the $47 million special charge to increase asbestos and environmental reserves and (ii) higher than expected claim frequency in general liability contractor claims and~~ 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 targeted markets, professional liability and excess ~~and surplus~~liability businesses (within the Specialty casualty sub-segment).

The net decrease in the provision for claims of prior years during the first ~~nine~~three months of ~~2019~~2020 reflects (i) ~~lower than expected claim frequency and severity in the transportation businesses and~~ lower than expected losses in the crop business ~~(all within~~and lower than anticipated claim frequency and severity at National Interstate (within the Property and transportation sub-segment), and (ii) lower than anticipated claim severity in the workers’ compensation businesses ~~(within the Specialty casualty sub-segment),~~ and ~~(iii)~~ lower than ~~expected~~anticipated claim frequency and severity in the ~~surety and financial institutions businesses and lower than anticipated claim severity in the fidelity~~executive liability business ~~(all within~~(within the Specialty ~~financial~~casualty sub-segment). This favorable development was partially offset by (i) higher than expected claim severity in the ~~$18 million special charge to increase asbestos~~property and ~~environmental reserves,~~inland marine business (within the Property and transportation sub-segment), (ii) higher than expected claim frequency and severity in the excess and surplus lines businesses and higher than expected claim ~~frequency~~severity in ~~general liability contractor claims (all within~~public sector business (within the Specialty casualty sub-segment), and (iii) ~~net adverse reserve development related to business outside the Specialty group that AFG no longer writes.~~higher than expected losses at Neon.

~~Table of Contents~~

~~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 June 30 $ 13 $ 10
Provision for expected credit losses 1 1
Write-offs charged against the allowance 0 0
Balance at September 30 $ 14 $ 11
Balance at January 1 $ 18 $ 13
Impact of adoption of new accounting policy (6) (3)
Provision for expected credit losses 2 1
Write-offs charged against the allowance 0 0
Balance at September 30 $ 14 $ 11

~~O. Subsequent Events~~

~~On October 13, 2020, AFG called its $150 million of 6% Subordinated Debentures due in November 2055 for redemption on November 15, 2020.~~

On October 19, 2020, AFG entered into a reinsurance agreement with Commonwealth Annuity and Life Insurance Company (“Commonwealth”), a subsidiary of Global Atlantic Financial Group Limited. The agreement has an effective date of October 1, 2020 and will be reported in AFG’s fourth quarter financial statements. Under the terms of the agreement, AFG’s Annuity subsidiary, Great American Life Insurance Company (“GALIC”), ceded approximately $6 billion of inforce traditional fixed and indexed annuities, representing approximately 15% of its inforce business, and transferred a similar amount of investments to Commonwealth. The assets transferred were primarily available for sale fixed maturity securities, the disposal of which will result in the recognition (through net income) of the approximately $275 million to $300 million (net of DAC and tax) in net unrealized gains included in AOCI immediately prior to the transaction. Under the reinsurance accounting guidance, the reinsurance transaction will be accounted for using the deposit method and the loss on the transaction will be deferred and recognized over the expected life of the ceded reserves (7-10 years).


	Recoverables from Reinsurers				Premiums Receivable
	2021		2020		2021		2020






Balance at January 1	$	6	$	18	$	10	$	13
Impact of adoption of new accounting policy	—		(11)		—		(3)
Provision (credit) for expected credit losses	1		0		1		(1)
Write-offs charged against the allowance	0		0		0		0
Balance at March 31	$	7	$	7	$	11	$	9

3735

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

									INDEX TO MD&A
		Page		Page		Page		Page
Forward-Looking Statements	Forward-Looking Statements	38	Results of Operations — Third Quarter	54	Forward-Looking Statements	36	Managed Investment Entities	44
Overview	Overview	39	Segmented Statement of Earnings	54	Overview	37	Results of Operations	47
Critical Accounting Policies	Critical Accounting Policies	40	Property and Casualty Insurance	56	Critical Accounting Policies	38	General	47
Liquidity and Capital Resources	Liquidity and Capital Resources	40	Annuity	68	Liquidity and Capital Resources	38	Segmented Statement of Earnings	49
Ratios	Ratios	40	Holding Company, Other and Unallocated	78	Ratios	38	Property and Casualty Insurance	50
Condensed Consolidated Cash Flows	Condensed Consolidated Cash Flows	41	Results of Operations — First Nine Months	82	Condensed Consolidated Cash Flows	39	Holding Company, Other and Unallocated	60
Parent and Subsidiary Liquidity	Parent and Subsidiary Liquidity	42	Segmented Statement of Earnings	82	Parent and Subsidiary Liquidity	40	Real Estate Entities to be Acquired from the Annuity Operations	62
Investments	Investments	44	Property and Casualty Insurance	84	Investments	41	Discontinued Annuity Operations	62
Uncertainties	Uncertainties	47	Annuity	94	Uncertainties	43
Managed Investment Entities		48	Holding Company, Other and Unallocated	103
Results of Operations		52	Recent and Pending Accounting Standards	106
General		52

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:

•that AFG may be unable to complete the sale of its annuity business because, among other reasons, conditions to the closing of the proposed transaction may not be satisfied or waived, uncertainty as to the timing of completion of the proposed transaction, or failure to realize the anticipated benefits from the proposed transaction;

•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;

•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

3836

~~Table~~T able of Contents

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.

Pending Sale of the Annuity Business

On January 27, 2021, AFG announced that it entered into a definitive agreement to sell its annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”) for $3.5 billion in cash, subject to final closing adjustments to the extent that generally accepted accounting principles (“GAAP”) shareholders’ equity excluding accumulated other comprehensive income (“AOCI”) of the entities sold varies from $2.8 billion. GAAP shareholders’ equity (excluding AOCI) of the entities to be sold was $3.01 billion at March 31, 2021. Under the terms of the agreement, MassMutual will acquire Great American Life Insurance Company (“GALIC”) and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. The sale is expected to close in the second quarter of 2021. At March 31, 2021, GALIC and its subsidiaries had approximately $42.88 billion of traditional fixed and indexed annuity reserves (included in liabilities of discontinued annuity operations). AFG recorded $41 million in tax liabilities triggered by the pending sale of the annuity operations in the first quarter of 2021 (included in net earnings from discontinued operations). AFG expects to recognize an after-tax gain on the sale of $680 million to $700 million ($7.85 to $8.10 per AFG share) upon closing. Prior to completion of the transaction, AFG’s property and casualty insurance operations will acquire approximately $460 million in real estate-related partnerships from GALIC and AFG’s parent holding company will acquire approximately $100 million in directly owned real estate from GALIC. 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.

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~~businesses. As discussed above, AFG’s annuity operations, which are engaged in the sale of traditional fixed and indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor ~~markets.~~markets, are reported as discontinued operations.

AFG reported net earnings from continuing operations attributable to shareholders of ~~$164~~$267 million ($~~1.86~~3.08 per share, diluted) for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$147~~a net loss of $141 million ($~~1.62~~1.57 per share loss, diluted) for the ~~third quarter~~first three months of ~~2019.~~2020. AFG’s results reflect:

•net realized gains on securities in the ~~third quarter~~first three months of ~~2020~~2021 compared to net realized losses in the ~~third quarter~~first three months of ~~2019,~~2020,

•higher ~~special A&E charges,~~

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

•~~lower~~higher net investment income in the property and casualty insurance segment,

•higher ~~earnings in the annuity segment, and~~

•~~higher interest charges on borrowed money.~~

AFG reported net earnings attributable to shareholders of $40 million ($0.45 per share, diluted) for the first nine months of 2020 compared to $686 million ($7.55 per share, diluted) for the first nine 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 $3.72 billion of investments that are accounted for using the equity method or carried at fair value through net earnings. AFG’s results reflect:

•~~net realized losses on securities in the first nine months of 2020 compared to net realized gains in the first nine months of 2019,~~

•~~higher special A&E charges,~~

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

•~~lower net investment income in the property and casualty insurance segment,~~

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

•~~higher~~ interest charges on borrowed money, and

•~~lower~~higher 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

T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

with management’s expectation that the impacts of the pandemic will continue ~~into~~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.

~~Table of Contents~~

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

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

The widespread economic impacts of the pandemic, including a significant decrease in both equity and credit markets, adversely affected AFG’s investment returns during the first nine months of 2020. Management expects there to be continued volatility in the financial markets 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 has and may continue to lead to lower frequency in certain lines while there has and may continue to be COVID-19 related increases in claim frequency in other lines of business.

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. ~~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):


		September 30, 2020						December 31,							March 31, 2021						December 31,
		Actual			Adjusted (*)			2019			2018				Actual			Adjusted (*)			2020			2019
Principal amount of long-term debt	Principal amount of long-term debt	$	2,143		$	1,993		$	1,493		$	1,318		Principal amount of long-term debt	$	1,993		$	1,993		$	1,993		$	1,493
Total capital	Total capital	7,230			7,080			6,883			6,218			Total capital	7,688			8,378			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	29.6		%	28.1		%	21.7		%	21.2		%	Including subordinated debt	25.9		%	23.8		%	26.6		%	21.7		%
Excluding subordinated debt	Excluding subordinated debt	18.2		%	18.6		%	14.8		%	16.4		%	Excluding subordinated debt	17.1		%	15.7		%	17.6		%	14.8		%

(*)~~Reflects~~The adjusted information above is shown “as if” the ~~retirement~~transaction to sell AFG’s annuity business to MassMutual closed on March 31, 2021 and assumes an after-tax gain on the sale of ~~AFG’s $150~~the annuity business of $690 million (midpoint of ~~6% Subordinated Debentures due in November 2055, which have been called for redemption on November 15, 2020.~~the estimated range).

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).

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

4038

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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:

Nine months ended September 30, 2020 Year ended December 31, 2019
Ratio of core earnings to fixed charges excluding annuity benefits 9.62 12.78
Impact of non-core items (8.94) 1.83
Ratio of earnings to fixed charges excluding annuity benefits (*) 0.68 14.61
Impact of including interest on annuities as a fixed charge 0.30 (12.76)
Ratio of earnings to fixed charges including annuity benefits (*) 0.98 1.85

~~(*)Earnings for the nine months ended September 30, 2020 were insufficient to cover fixed charges by $23 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):


		Nine months ended September 30,					Three months ended March 31,
		2020		2019			2021		2020
Net cash provided by operating activities	Net cash provided by operating activities	$	1,696	$	1,691	Net cash provided by operating activities	$	627	$	532
Net cash used in investing activities	Net cash used in investing activities	(772)		(1,778)		Net cash used in investing activities	(938)		(1,653)
Net cash provided by financing activities		509		1,265
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(172)		480
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	1,433	$	1,178	Net change in cash and cash equivalents	$	(483)	$	(641)

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 (included in liabilities of discontinued annuity operations) 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) 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 $38 million during the first three months of 2021 and increased cash flows from operating activities by ~~$99 million during the first nine months of 2020 and reduced cash flows from operating activities by $2~~$89 million in the first ~~nine~~three months of ~~2019,~~2020, accounting for a ~~$101~~$127 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 ~~$1.60 billion~~$665 million in the first ~~nine~~three months of 2021 compared to $443 million in the first three months of 2020, ~~compared to $1.69 billion in the first nine months~~an increase of ~~2019, a decrease of $96~~$222 million.

Net Cash 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.~~operations. Net cash used in investing activities was ~~$772~~$938 million for the first ~~nine~~three months of ~~2020~~2021 compared to ~~$1.78~~$1.65 billion in the first ~~nine~~three months of ~~2019,~~2020, a decrease of ~~$1.01 billion.~~$715 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

~~Table of Contents~~

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

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

policyholders of ~~$260~~$16 million in the first ~~nine~~three months of 2021 compared to $612 million in the first three months of 2020. In the first three months of 2020, ~~and $1.36 billion~~AFG opportunistically invested a large portion of its cash on hand when credit spreads widened in ~~the first nine months of 2019.~~March 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 ~~$60~~$30 million source of cash in the first three months of 2021 compared to a $44 million use of cash in the ~~first nine months of~~ 2020 ~~compared to a $19 million source of cash in the 2019~~ period, accounting for a ~~$79~~$74 million ~~increase~~decrease in net cash used in investing activities in the first ~~nine~~three months of ~~2020~~2021 compared to the same ~~2019~~2020 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note H — “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 used in financing activities was $172 million for the first three months of 2021 compared to net cash provided by financing activities ~~was $509~~of $480 million ~~for~~in the first ~~nine~~three months of 2020, ~~compared to $1.27 billion in the first nine months of 2019,~~ a decrease in net cash provided by financing activities of ~~$756~~$652 million. Net annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by ~~$260~~$16 million in the first ~~nine~~three months of 2021 compared to $612 million in the first three months of 2020, ~~compared to $1.36 billion in the first nine months of 2019,~~ accounting for a ~~$1.10 billion~~$596 million decrease in net cash provided by financing activities in the ~~2020~~2021 period compared to the ~~2019~~2020 period. In the first nine months of 2020, AFG issued $150 million of 5.625% Subordinated Debentures due in 2060, $300 million of 5.25% Senior Notes due in 2030 and $200 million 4.50% Subordinated Debentures due in 2060. The net proceeds of these offerings contributed $635 million to net cash provided by financing activities in the first nine 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 nine months of 2019. During the first ~~nine~~three months of ~~2020,~~2021, AFG repurchased ~~$233~~$192 million of its Common Stock compared to no share repurchases in the 2019 period. In addition to its regular quarterly cash dividends, AFG paid a special cash dividend of $1.50 per share in May 2019 totaling $135 million, which resulted in total cash dividends of $241$61 million in the ~~first nine months of 2019 compared to $119 million in the first nine months of 2020.~~2020 period. Financing activities also include issuances and retirements of managed

T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

investment entity liabilities, which are nonrecourse to AFG and presented separately in AFG’s Balance Sheet. ~~Retirements~~Issuances of managed investment entity liabilities exceeded ~~issuances~~retirements by ~~$49~~$27 million in the first ~~nine~~three months of ~~2020~~2021 compared to $8retirements exceeding issuances by $41 million in the first ~~nine~~three months of ~~2019,~~2020, accounting for a ~~$41~~$68 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 H — “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 or to generate cash through borrowings, sales of other assets, or similar transactions.

As discussed above, in January 2021, AFG reached a definitive agreement to sell its annuity business to MassMutual for $3.5 billion in cash, subject to final closing adjustments. AFG’s capital and liquidity will be significantly enhanced as a result of the transaction. Management will continue to evaluate opportunities for deploying AFG’s 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.

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 ~~nine~~three months of ~~2020.~~

~~In October 2020, AFG called its $150 million of 6% Subordinated Debentures due in November 2055 for redemption at par value on November 15, 2020.~~2021.

During the first ~~nine~~three months of 2021, AFG repurchased 1,757,702 shares of its Common Stock for $192 million. 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 ~~current~~ economic environment. The net proceeds offrom the offerings ~~will be~~were used for general corporate purposes, which ~~includes~~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.~~

~~During the first nine months of 2020, AFG repurchased 3,468,107 shares of its Common Stock for $233 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 2054,2055 at par ~~value, with the remainder used for general corporate purposes.~~

~~Table of Contents~~

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

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

~~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.~~

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.value.

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 September 30, 2020, GALIC had $1.26 billion in outstanding advances from the FHLB (included in annuity benefits accumulated), bearing interest at rates ranging from 0.32% to 1.35% (average rate of 0.50% at September 30, 2020). While these advances must be repaid between 2020 and 2025 ($325 million in 2020, $731 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 September 30, 2020, GALIC estimated that it had additional borrowing capacity of approximately $650 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 and expenses, payments of dividends and taxes to AFG and contributions of capital to their subsidiaries. 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 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 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 and annuity liabilities, the duration 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 September 30, 2020, AFG could reduce the average crediting rate on approximately $26 billion of traditional fixed, fixed-indexed and variable-indexed annuities without guaranteed withdrawal benefits (excludes reserves ceded to Commonwealth in October 2020, see ~~Note O — “Subsequent Events”~~ to the financial statements) by approximately 108 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.

% of Reserves
September 30, December 31,
GMIR 2020 (*) 2019 2018
1 — 1.99% 85% 84% 81%
2 — 2.99% 3% 3% 4%
3 — 3.99% 7% 7% 8%
4.00% and above 5% 6% 7%
Annuity benefits accumulated (in millions) $41,932 $40,406 $36,616

~~(*)The breakdown of annuity reserves by GMIR excludes reserves ceded to Commonwealth in October 2020, see~~ ~~Note O — “Subsequent Events”~~ ~~to the financial statements.~~

~~Table of Contents~~

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

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

AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating 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 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.

T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Investments

AFG’s investment portfolio held by its continuing operations at ~~September 30, 2020,~~March 31, 2021, contained ~~$48.19~~$9.29 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 ~~$92~~$26 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG’s investment portfolio held by its continuing operations includes ~~$1.25 billion~~$703 million in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and ~~$358~~$241 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 held by its continuing operations, approximately ~~89%~~85% was priced using pricing services at ~~September 30, 2020~~March 31, 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 ~~September 30, 2020~~March 31, 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 (including those owned by the discontinued annuity operations)	$	~~48,285~~44,110
Percentage impact on fair value of 100 bps increase in interest rates	(4.0		%)
Pretax impact on fair value of fixed maturity portfolio	$	~~(1,931)~~(1,764)
Offsetting adjustments to ~~deferred policy acquisition costs~~assets and ~~other balance sheet amounts~~liabilities of discontinued annuity operations	~~900~~700
Estimated pretax impact on accumulated other comprehensive income	~~(1,031)~~(1,064)
Deferred income tax	~~217~~223
Estimated after-tax impact on accumulated other comprehensive income	$	~~(814)~~(841)

~~Table~~At March 31, 2021 the fair value of ~~Contents~~

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

~~Management’s Discussion~~the fixed maturity portfolio in AFG’s property and ~~Analysis~~casualty group was $9.32 billion. The pretax impact on the fair value upon a 100 basis point increase in interest rates would have been a decline of ~~Financial Condition and Results of Operations — Continued~~

$279 million in fair value ($220 million after tax) at March 31, 2021.

Approximately ~~90%~~87% of the fixed maturities held by ~~AFG~~AFG’s continuing operations at ~~September 30, 2020,~~March 31, 2021, were rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating ~~agencies.~~agencies, 4% were rated “non-investment grade” and 9% 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.

Summarized information for AFG’s MBS (including those classified as trading) at September 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 $ 485 $ 492 101 % $ 7 100 %
Non-agency prime 1,301 1,412 109 % 111 61 %
Alt-A 811 920 113 % 109 37 %
Subprime 283 314 111 % 31 18 %
Commercial 814 856 105 % 42 93 %
$ 3,694 $ 3,994 108 % $ 300 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 September 30, 2020, 97% (based on statutory carrying value of $3.65 billion) of AFG’s MBS had an NAIC designation of 1.

Municipal bonds represented approximately ~~14%~~24% of AFG’s fixed maturity portfolio held by continuing operations at ~~September 30, 2020.~~March 31, 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 September 30, 2020, approximately 78% of the municipal bond portfolio was held in revenue bonds, with the remaining 22% held in general obligation bonds.

4541

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

date. The portfolio is well diversified across the states of issuance and individual issuers. At March 31, 2021, approximately 90% of the municipal bond portfolio was held in revenue bonds, with the remaining 10% held in general obligation bonds.

Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at ~~September 30, 2020,~~March 31, 2021, is shown in the following table (dollars in millions). Approximately ~~$1.77 billion~~$818 million of available for sale fixed maturity securities had no unrealized gains or losses at ~~September 30, 2020.~~March 31, 2021.


		Securities With Unrealized Gains			Securities With Unrealized Losses				Securities With Unrealized Gains			Securities With Unrealized Losses
Available for Sale Fixed Maturities	Available for Sale Fixed Maturities							Available for Sale Fixed Maturities
Fair value of securities	Fair value of securities	$	39,000		$	7,422		Fair value of securities	$	6,822		$	1,649
Amortized cost of securities, net of allowance for expected credit losses	Amortized cost of securities, net of allowance for expected credit losses	$	35,796		$	7,676		Amortized cost of securities, net of allowance for expected credit losses	$	6,566		$	1,665
Gross unrealized gain (loss)	Gross unrealized gain (loss)	$	3,204		$	(254)		Gross unrealized gain (loss)	$	256		$	(16)
Fair value as % of amortized cost	Fair value as % of amortized cost	109		%	97		%	Fair value as % of amortized cost	104		%	99		%
Number of security positions	Number of security positions	4,429			759			Number of security positions	1,775			434
Number individually exceeding $2 million gain or loss	Number individually exceeding $2 million gain or loss	387			22			Number individually exceeding $2 million gain or loss	3			—
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):	Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):							Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):
States and municipalities	States and municipalities	$	575		$	(3)		States and municipalities	$	91		$	—
Banks, savings and credit institutions		438			(9)

Mortgage-backed securities	Mortgage-backed securities	308			(8)			Mortgage-backed securities	56			(2)
Insurance		241			—
Technology		188			(1)

Other asset-backed securities	Other asset-backed securities	154			(124)			Other asset-backed securities	24			(6)
Energy		120			(17)
U.S. Government and government agencies								U.S. Government and government agencies	4			(1)

Collateralized loan obligations	Collateralized loan obligations	25			(41)			Collateralized loan obligations	4			(3)
Aviation		2			(16)

Percentage rated investment grade	Percentage rated investment grade	94		%	84		%	Percentage rated investment grade	93		%	91		%

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturity securities (held by continuing operations) at ~~September 30, 2020,~~March 31, 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	29	%	11	%	After one year through five years	32	%	19	%
After five years through ten years	After five years through ten years	34	%	9	%	After five years through ten years	14	%	9	%
After ten years	After ten years	8	%	5	%	After ten years	4	%	2	%
		75	%	29	%		60	%	30	%
Collateralized loan obligations and other asset-backed securities (average life of approximately 4 years)		16	%	68	%
Mortgage-backed securities (average life of approximately 3-1/2 years)		9	%	3	%
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)	29	%	63	%
Mortgage-backed securities (average life of approximately 3 years)						Mortgage-backed securities (average life of approximately 3 years)	11	%	7	%
		100	%	100	%		100	%	100	%

4642

~~Table~~T able 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 September 30, 2020
Securities with unrealized gains:
Exceeding $500,000 (1,764 securities) $ 26,329 $ 2,786 112 %
$500,000 or less (2,665 securities) 12,671 418 103 %
$ 39,000 $ 3,204 109 %
Securities with unrealized losses:
Exceeding $500,000 (145 securities) $ 2,436 $ (187) 93 %
$500,000 or less (614 securities) 4,986 (67) 99 %
$ 7,422 $ (254) 97 %


	Aggregate Fair Value		Aggregate Unrealized Gain (Loss)		Fair Value as % of Cost
Fixed Maturities at March 31, 2021
Securities with unrealized gains:
Exceeding $500,000 (112 securities)	$	1,365	$	101	108	%
$500,000 or less (1,663 securities)	5,457		155		103	%
	$	6,822	$	256	104	%
Securities with unrealized losses:
Exceeding $500,000 (2 securities)	$	14	$	(1)	93	%
$500,000 or less (432 securities)	1,635		(15)		99	%
	$	1,649	$	(16)	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 September 30, 2020
Investment grade fixed maturities with losses for:
Less than one year (347 securities) $ 4,545 $ (148) 97 %
One year or longer (127 securities) 1,718 (49) 97 %
$ 6,263 $ (197) 97 %
Non-investment grade fixed maturities with losses for:
Less than one year (246 securities) $ 993 $ (46) 96 %
One year or longer (39 securities) 166 (11) 94 %
$ 1,159 $ (57) 95 %


	Aggregate Fair Value		Aggregate Unrealized Loss		Fair Value as % of Cost
Securities with Unrealized Losses at March 31, 2021
Investment grade fixed maturities with losses for:
Less than one year (151 securities)	$	942	$	(7)	99	%
One year or longer (134 securities)	566		(5)		99	%
	$	1,508	$	(12)	99	%
Non-investment grade fixed maturities with losses for:
Less than one year (69 securities)	$	77	$	(2)	97	%
One year or longer (80 securities)	64		(2)		97	%
	$	141	$	(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.”

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 ~~September 30, 2020.~~March 31, 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, increases in the allowance for 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, see “Results of Operations — ~~Consolidated~~ Realized Gains (Losses) on ~~Securities.~~Securities (Continuing Operations).”

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 “~~Special asbestos and environmental reserve charges” under “Results of Operations — Property and Casualty Insurance Segment — Net prior year reserve development”~~ ~~for the quarters ended September 30, 2020 and 2019 and~~ Management’s Discussion and Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves” in AFG’s 2020 Form 10–K.

4743

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

~~Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves” in AFG’s 2019 Form 10–K.~~

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 H — “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.

4844

~~Table~~T able of Contents

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
September 30, 2020
March 31, 2021											March 31, 2021
Assets:	Assets:										Assets:
Cash and investments	Cash and investments	$	58,262	$	—	$	(175)	(a)	$	58,087	Cash and investments	$	13,957	$	—	$	(57)	(a)	$	13,900
Assets of managed investment entities	Assets of managed investment entities	—		4,717		—			4,717		Assets of managed investment entities	—		5,102		—			5,102
Other assets	Other assets	10,307		—		(1)		(a)	10,306		Other assets	7,056		—		—		(a)	7,056
Assets of discontinued annuity operations											Assets of discontinued annuity operations	48,139		—		—			48,139
Total assets	Total assets	$	68,569	$	4,717	$	(176)		$	73,110	Total assets	$	69,152	$	5,102	$	(57)		$	74,197
Liabilities:	Liabilities:										Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	Unpaid losses and loss adjustment expenses and unearned premiums	$	13,769	$	—	$	—		$	13,769	Unpaid losses and loss adjustment expenses and unearned premiums	$	13,205	$	—	$	—		$	13,205
Annuity, life, accident and health benefits and reserves		42,541		—		—			42,541
Liabilities of managed investment entities	Liabilities of managed investment entities	—		4,707		(166)		(a)	4,541		Liabilities of managed investment entities	—		5,102		(57)		(a)	5,045
Long-term debt and other liabilities	Long-term debt and other liabilities	5,919		—		—			5,919		Long-term debt and other liabilities	4,369		—		—			4,369
Liabilities of discontinued annuity operations											Liabilities of discontinued annuity operations	44,893		—		—			44,893
Total liabilities	Total liabilities	62,229		4,707		(166)			66,770		Total liabilities	62,467		5,102		(57)			67,512

Redeemable noncontrolling interests		—		—		—			—

Shareholders’ equity:	Shareholders’ equity:										Shareholders’ equity:
Common Stock and Capital surplus	Common Stock and Capital surplus	1,370		10		(10)			1,370		Common Stock and Capital surplus	1,364		—		—			1,364
Retained earnings	Retained earnings	3,737		—		—			3,737		Retained earnings	4,354		—		—			4,354
Accumulated other comprehensive income, net of tax	Accumulated other comprehensive income, net of tax	1,233		—		—			1,233		Accumulated other comprehensive income, net of tax	967		—		—			967
Total shareholders’ equity	Total shareholders’ equity	6,340		10		(10)			6,340		Total shareholders’ equity	6,685		—		—			6,685
Noncontrolling interests	Noncontrolling interests	—		—		—			—		Noncontrolling interests	—		—		—			—
Total equity	Total equity	6,340		10		(10)			6,340		Total equity	6,685		—		—			6,685
Total liabilities and equity	Total liabilities and equity	$	68,569	$	4,717	$	(176)		$	73,110	Total liabilities and equity	$	69,152	$	5,102	$	(57)		$	74,197

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)	(a)	$	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)		(a)	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)		(a)	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.

4945

~~Table~~T able 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
Three months ended September 30, 2020
Three months ended March 31, 2021											Three months ended March 31, 2021
Revenues:	Revenues:										Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,381	$	—	$	—		$	1,381	Property and casualty insurance net earned premiums	$	1,173	$	—	$	—		$	1,173
Net investment income	Net investment income	585		—		(13)		(b)	572		Net investment income	193		—		(5)		(b)	188
Realized gains (losses) on:
Securities		45		—		—			45
Subsidiaries		(30)		—		—			(30)
Realized gains (losses) on securities											Realized gains (losses) on securities	77		—		—			77

Income (loss) of managed investment entities:	Income (loss) of managed investment entities:										Income (loss) of managed investment entities:
Investment income	Investment income	—		46		—			46		Investment income	—		46		—			46
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		(8)		9		(b)	1		Gain (loss) on change in fair value of assets/liabilities	—		(1)		3		(b)	2
Other income	Other income	48		—		(3)		(c)	45		Other income	27		—		(4)		(c)	23
Total revenues	Total revenues	2,029		38		(7)			2,060		Total revenues	1,470		45		(6)			1,509
Costs and Expenses:	Costs and Expenses:										Costs and Expenses:
Insurance benefits and expenses	Insurance benefits and expenses	1,744		—		—			1,744		Insurance benefits and expenses	1,047		—		—			1,047
Expenses of managed investment entities	Expenses of managed investment entities	—		38		(7)		(b)(c)	31		Expenses of managed investment entities	—		45		(6)		(b)(c)	39
Interest charges on borrowed money and other expenses	Interest charges on borrowed money and other expenses	151		—		—			151		Interest charges on borrowed money and other expenses	88		—		—			88
Total costs and expenses	Total costs and expenses	1,895		38		(7)			1,926		Total costs and expenses	1,135		45		(6)			1,174
Earnings (loss) before income taxes		134		—		—			134
Earnings (loss) from continuing operations before income taxes											Earnings (loss) from continuing operations before income taxes	335		—		—			335
Provision (credit) for income taxes	Provision (credit) for income taxes	(30)		—		—			(30)		Provision (credit) for income taxes	68		—		—			68
Net earnings (loss), including noncontrolling interests		164		—		—			164
Less: Net earnings (loss) attributable to noncontrolling interests		—		—		—			—
Net earnings (loss) from continuing operations, including noncontrolling interests											Net earnings (loss) from continuing operations, including noncontrolling interests	267		—		—			267
Net earnings (loss) from discontinued operations											Net earnings (loss) from discontinued operations	152		—		—			152
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	$	164	$	—	$	—		$	164	Net earnings (loss) attributable to shareholders	$	419	$	—	$	—		$	419

Three months ended September 30, 2019
Three months ended March 31, 2020											Three months ended March 31, 2020
Revenues:	Revenues:										Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,442	$	—	$	—		$	1,442	Property and casualty insurance net earned premiums	$	1,209	$	—	$	—		$	1,209
Net investment income	Net investment income	583		—		5		(b)	588		Net investment income	93		—		11		(b)	104
Realized gains (losses) on securities	Realized gains (losses) on securities	(18)		—		—			(18)		Realized gains (losses) on securities	(328)		—		—			(328)
Income (loss) of managed investment entities:	Income (loss) of managed investment entities:										Income (loss) of managed investment entities:
Investment income	Investment income	—		67		—			67		Investment income	—		59		—			59
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		(1)		(13)		(b)	(14)		Gain (loss) on change in fair value of assets/liabilities	—		—		(13)		(b)	(13)
Other income	Other income	62		—		(4)		(c)	58		Other income	28		—		(4)		(c)	24
Total revenues	Total revenues	2,069		66		(12)			2,123		Total revenues	1,002		59		(6)			1,055
Costs and Expenses:	Costs and Expenses:										Costs and Expenses:
Insurance benefits and expenses	Insurance benefits and expenses	1,764		—		—			1,764		Insurance benefits and expenses	1,127		—		—			1,127
Expenses of managed investment entities	Expenses of managed investment entities	—		66		(12)		(b)(c)	54		Expenses of managed investment entities	—		59		(6)		(b)(c)	53
Interest charges on borrowed money and other expenses	Interest charges on borrowed money and other expenses	128		—		—			128		Interest charges on borrowed money and other expenses	60		—		—			60
Total costs and expenses	Total costs and expenses	1,892		66		(12)			1,946		Total costs and expenses	1,187		59		(6)			1,240
Earnings (loss) before income taxes		177		—		—			177
Earnings (loss) from continuing operations before income taxes											Earnings (loss) from continuing operations before income taxes	(185)		—		—			(185)
Provision (credit) for income taxes	Provision (credit) for income taxes	34		—		—			34		Provision (credit) for income taxes	(41)		—		—			(41)
Net earnings (loss), including noncontrolling interests		143		—		—			143
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	(144)		—		—			(144)
Net earnings (loss) from discontinued operations											Net earnings (loss) from discontinued operations	(160)		—		—			(160)
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests											Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	(3)		—		—			(3)
Net earnings (loss) attributable to shareholders	Net earnings (loss) attributable to shareholders	$	147	$	—	$	—		$	147	Net earnings (loss) attributable to shareholders	$	(301)	$	—	$	—		$	(301)

(a)Includes income of ~~$13 million in the third quarter of 2020 and a loss of~~ $5 million in the ~~third quarter~~first three months of ~~2019,~~2021 and losses of $11 million in the first three months of 2020, representing the change in fair value of AFG’s CLO investments plus ~~$3 million and~~ $4 million in both the ~~third quarter~~first three months of ~~2020~~2021 and ~~2019, respectively,~~2020, in CLO management fees earned.

(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including ~~$4 million and $8~~$2 million in both the ~~third quarter~~first three months of ~~2020~~2021 and ~~2019, respectively,~~2020, in distributions recorded as interest expense by the CLOs.

(c)Elimination of management fees earned by AFG.

~~Table~~T able 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
Nine months ended September 30, 2020
Revenues:
Property and casualty insurance net earned premiums $ 3,774 $ — $ — $ 3,774
Net investment income 1,563 — 21 (b) 1,584
Realized gains (losses) on:
Securities (302) — — (302)
Subsidiaries (30) — — (30)
Income (loss) of managed investment entities:
Investment income — 154 — 154
Gain (loss) on change in fair value of assets/liabilities — (10) (37) (b) (47)
Other income 164 — (11) (c) 153
Total revenues 5,169 144 (27) 5,286
Costs and Expenses:
Insurance benefits and expenses 4,831 — — 4,831
Expenses of managed investment entities — 144 (27) (b)(c) 117
Interest charges on borrowed money and other expenses 374 — — 374
Total costs and expenses 5,205 144 (27) 5,322
Earnings (loss) before income taxes (36) — — (36)
Provision (credit) for income taxes (63) — — (63)
Net earnings (loss), including noncontrolling interests 27 — — 27
Less: Net earnings (loss) attributable to noncontrolling interests (13) — — (13)
Net earnings (loss) attributable to shareholders $ 40 $ — $ — $ 40
Nine months ended September 30, 2019
Revenues:
Property and casualty insurance net earned premiums $ 3,815 $ — $ — $ 3,815
Net investment income 1,721 — (11) (b) 1,710
Realized gains (losses) on securities 222 — — 222
Income (loss) of managed investment entities:
Investment income — 206 — 206
Gain (loss) on change in fair value of assets/liabilities — (7) (9) (b) (16)
Other income 181 — (11) (c) 170
Total revenues 5,939 199 (31) 6,107
Costs and Expenses:
Insurance benefits and expenses 4,715 — — 4,715
Expenses of managed investment entities — 199 (31) (b)(c) 168
Interest charges on borrowed money and other expenses 375 — — 375
Total costs and expenses 5,090 199 (31) 5,258
Earnings (loss) before income taxes 849 — — 849
Provision (credit) for income taxes 171 — — 171
Net earnings (loss), including noncontrolling interests 678 — — 678
Less: Net earnings (loss) attributable to noncontrolling interests (8) — — (8)
Net earnings (loss) attributable to shareholders $ 686 $ — $ — $ 686

~~(a)~~Includes a loss of $21 million in the first nine months of 2020 and income of $11 million in the first nine months of 2019, representing the change in fair value of AFG’s CLO investments plus $11 million in both the first nine months of 2020 and 2019 in CLO management fees earned.

~~(b)~~Elimination of the change in fair value of AFG’s investments in the CLOs, including $16 million and $20 million in the first nine months of 2020 and 2019, respectively, in distributions recorded as interest expense by the CLOs.

~~(c)Elimination of management fees earned by AFG.~~

~~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

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 second quarter of 2019, AFG’s core net operating earnings for its annuity segment excludes unlocking, 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 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~~2021, the results of its annuity segment and the run-off life and long-term care operations (reported in the Holding Company, Other and Unallocated segment) are reported as discontinued operations, in accordance with GAAP, which included adjusting prior ~~periods were not adjusted, so~~period results to reflect these operations as discontinued.

AFG recorded $152 million in non-core net earnings from its discontinued annuity operations in the first quarter of 2021, which includes $41 million in tax liabilities triggered by the pending sale, compared to non-core losses of $160 million in the first quarter of 2020. See “Discontinued Annuity Operations” below for details of the ~~nine months ended September 30, 2020 are not directly comparable to the nine months ended September 30, 2019. The~~ impact of the ~~items now considered~~discontinued annuity ~~non-core earnings (losses)~~operations on ~~prior periods is highlighted in the discussion following the reconciliation of~~AFG’s net earnings (loss) attributable to shareholders ~~to core net operating earnings.~~for the first quarter 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 ~~the third quarter of~~December 2020, AFG ~~reached a definitive agreement to sell~~sold GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. ~~The transaction is expected to close in the fourth quarter of 2020, subject to customary conditions, including receipt of required regulatory approvals.~~

AFG recorded ~~$70~~$7 million in non-core net losses related to the ~~runoff~~run-off of the Neon business in the ~~third~~first quarter of 2020, which, in accordance with generally accepted accounting principles, included an estimated $30 million expected loss on the sale of the business. In conjunction with the sale, AFG recognized a tax benefit of $73 million, resulting in a net favorable $3 million non-core, after-tax impact from the Neon exited lines in the third quarter of 2020.

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.

T able of Contents

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 March 31,
	2021		2020
Components of net earnings (loss) attributable to shareholders:
Core operating earnings before income taxes	$	258	$	153
Pretax non-core items:
Realized gains (losses) on securities	77		(328)
Neon exited lines (*)	—		(10)


Earnings (loss) before income taxes	335		(185)
Provision (credit) for income taxes:
Core operating earnings	52		28
Non-core items:
Realized gains (losses) on securities	16		(69)
Neon exited lines (*)	—		—


Total provision (credit) for income taxes	68		(41)
Net earnings (loss) from continuing operations, including noncontrolling interests	267		(144)
Net earnings (loss) from discontinued operations	152		(160)
Less net earnings (loss) from continuing operations attributable to noncontrolling interests:

Neon exited lines (*)	—		(3)
Net earnings (loss) attributable to shareholders	$	419	$	(301)

Net earnings (loss):
Core net operating earnings	$	206	$	125
Realized gains (losses) on securities	61		(259)
Neon exited lines (*)	—		(7)


Net earnings (loss) from continuing operations	267		(141)
Discontinued annuity operations	152		(160)
Net earnings (loss) attributable to shareholders	$	419	$	(301)

Diluted per share amounts:
Core net operating earnings	$	2.38	$	1.36
Realized gains (losses) on securities	0.70		(2.86)
Neon exited lines (*)	—		(0.07)


Diluted per share amounts, continuing operations	3.08		(1.57)
Discontinued annuity operations	1.76		(1.77)
Net earnings (loss) attributable to shareholders	$	4.84	$	(3.34)

(*)As discussed above, the Neon run-off operations through its sale in December 2020 are considered property and casualty insurance non-core earnings (losses).

Net earnings (loss) attributable to shareholders was earnings of $419 million in the first three months of 2021 compared to a loss of $301 million in the first three months of 2020 reflecting higher core net operating earnings, net realized gains on securities in the first three months of 2021 compared to net realized losses in the first three months of 2020 and net earnings from the discontinued annuity operations in the first three months of 2021 compared to a net loss in the first three months of 2020. Core net operating earnings for the first three months of 2021 increased $81 million compared to the first three months of 2020 reflecting higher core net operating earnings in the property and casualty insurance segment, partially offset by higher interest charges on borrowed money and higher holding company expenses. Realized gains (losses) on securities in the first three months of 2021 and 2020 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Components of net earnings (loss) attributable to shareholders:
Core operating earnings before income taxes $ 274 $ 251 $ 600 $ 716
Pretax non-core items:
Realized gains (losses) on securities 45 (18) (302) 222
Annuity non-core earnings (losses) (a) (43) (27) (140) (60)
Neon exited lines (b) (70) — (122) —
Special A&E charges (68) (29) (68) (29)
Other (4) — (4) —
Earnings (loss) before income taxes 134 177 (36) 849
Provision (credit) for income taxes:
Core operating earnings 57 50 117 143
Non-core items:
Realized gains (losses) on securities 10 (4) (63) 46
Annuity non-core earnings (losses) (a) (9) (6) (29) (12)
Neon exited lines (b) (73) — (73) —
Special A&E charges (14) (6) (14) (6)
Other (1) — (1) —
Total provision (credit) for income taxes (30) 34 (63) 171
Net earnings (loss), including noncontrolling interests 164 143 27 678
Less net earnings (loss) attributable to noncontrolling interests:
Core operating earnings (loss) — (4) — (8)
Neon exited lines (b) — — (13) —
Total net earnings (loss) attributable to noncontrolling interests — (4) (13) (8)
Net earnings (loss) attributable to shareholders $ 164 $ 147 $ 40 $ 686
Net earnings (loss):
Core net operating earnings $ 217 $ 205 $ 483 $ 581
Realized gains (losses) on securities 35 (14) (239) 176
Annuity non-core earnings (losses) (a) (34) (21) (111) (48)
Neon exited lines (b) 3 — (36) —
Special A&E charges (54) (23) (54) (23)
Other (3) — (3) —
Net earnings (loss) attributable to shareholders $ 164 $ 147 $ 40 $ 686
Diluted per share amounts:
Core net operating earnings $ 2.45 $ 2.25 $ 5.37 $ 6.39
Realized gains (losses) on securities 0.40 (0.15) (2.64) 1.93
Annuity non-core earnings (losses) (a) (0.38) (0.23) (1.23) (0.52)
Neon exited lines (b) 0.03 — (0.41) —
Special A&E charges (0.61) (0.25) (0.61) (0.25)
Other (0.03) — (0.03) —
Net earnings (loss) attributable to shareholders $ 1.86 $ 1.62 $ 0.45 $ 7.55

~~(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).~~

~~Table of Contents~~

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

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

Net earnings attributable to shareholders was $164 million in the third quarter of 2020 compared to $147 million in the third quarter of 2019 reflecting higher core net operating earnings, net realized gains on securities in the third quarter of 2020 compared to net realized losses in the third quarter of 2019, higher special A&E charges, and higher losses from annuity unlocking. Core net operating earnings for the third quarter of 2020 increased $12 million compared to the third quarter of 2019 reflecting higher core net operating earnings in the annuity and property and casualty insurance segments, partially offset by higher interest charges on borrowed money. Realized gains (losses) on securities in the third quarter of 2020 and 2019 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

Net earnings attributable to shareholders was $40 million for the first nine months of 2020 compared to $686 million for the first nine 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, higher special A&E charges and non-core losses from the Neon exited lines. In addition, net earnings attributable to shareholders includes after-tax losses of $111 million in the first nine months of 2020 and $57 million in the first nine months of 2019 ($9 million in the first quarter, $27 million in the second quarter and $21 million in the third quarter) from annuity 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. As discussed above, unlocking and 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, core net operating earnings for the first nine months of 2020 decreased $107 million compared to the first nine months of 2019 reflecting the negative impact of the COVID-19 pandemic on partnerships and similar investments and AFG-managed CLOs in both the property and casualty insurance and annuity segments and higher interest charges on borrowed money, partially offset by lower holding company expenses. Realized gains (losses) on securities in the first nine months of 2020 and 2019 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 ~~SEPTEMBER 30,~~MARCH 31, 2021 AND 2020 ~~AND 2019~~

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”).

~~Table of Contents~~

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

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

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 ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ 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 September 30, 2020
Three months ended March 31, 2021																		Three months ended March 31, 2021
Revenues:	Revenues:																	Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,339	$	—	$	—	$	—	$	1,339	$	—	$	42	$	1,381	Property and casualty insurance net earned premiums	$	1,173	$	—	$	—	$	—	$	1,173	$	—	$	1,173
Net investment income	Net investment income	111		464		(13)		9		571		—		1		572		Net investment income	159		29		(5)		5		188		—		188
Realized gains (losses) on:
Securities		—		—		—		—		—		45		—		45
Subsidiaries		—		—		—		—		—		—		(30)		(30)
Realized gains (losses) on securities																		Realized gains (losses) on securities	—		—		—		—		—		77		77

Income (loss) of MIEs:	Income (loss) of MIEs:																	Income (loss) of MIEs:
Investment income	Investment income	—		—		46		—		46		—		—		46		Investment income	—		—		46		—		46		—		46
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		—		1		—		1		—		—		1		Gain (loss) on change in fair value of assets/liabilities	—		—		2		—		2		—		2
Other income	Other income	—		35		(3)		18		50		(5)		—		45		Other income	4		—		(4)		23		23		—		23
Total revenues	Total revenues	1,450		499		31		27		2,007		40		13		2,060		Total revenues	1,336		29		39		28		1,432		77		1,509

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	856		—		—		—		856		47		60		963		Losses and loss adjustment expenses	667		—		—		—		667		—		667
Commissions and other underwriting expenses	Commissions and other underwriting expenses	380		—		—		6		386		—		20		406		Commissions and other underwriting expenses	372		—		—		8		380		—		380
Annuity benefits		—		282		—		(10)		272		(69)		—		203
Annuity and supplemental insurance acquisition expenses		—		64		—		1		65		107		—		172
Interest charges on borrowed money	Interest charges on borrowed money	—		—		—		24		24		—		—		24		Interest charges on borrowed money	—		—		—		24		24		—		24
Expenses of MIEs	Expenses of MIEs	—		—		31		—		31		—		—		31		Expenses of MIEs	—		—		39		—		39		—		39
Other expenses	Other expenses	9		32		—		58		99		25		3		127		Other expenses	9		1		—		54		64		—		64
Total costs and expenses	Total costs and expenses	1,245		378		31		79		1,733		110		83		1,926		Total costs and expenses	1,048		1		39		86		1,174		—		1,174
Earnings (loss) before income taxes		205		121		—		(52)		274		(70)		(70)		134
Earnings (loss) from continuing operations before income taxes																		Earnings (loss) from continuing operations before income taxes	288		28		—		(58)		258		77		335
Provision (credit) for income taxes	Provision (credit) for income taxes	46		24		—		(13)		57		(14)		(73)		(30)		Provision (credit) for income taxes	56		6		—		(10)		52		16		68
Net earnings (loss), including noncontrolling interests		159		97		—		(39)		217		(56)		3		164
Less: Net earnings (loss) attributable to noncontrolling interests		—		—		—		—		—		—		—		—
Net earnings (loss) from continuing operations, including noncontrolling interests																		Net earnings (loss) from continuing operations, including noncontrolling interests	232		22		—		(48)		206		61		267
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)	159		97		—		(39)		217								Core Net Operating Earnings (Loss)	232		22		—		(48)		206
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	—		—		—		35		35		(35)		—		—		Realized gains (losses) on securities, net of tax	—		—		—		61		61		(61)		—
Annuity non-core earnings (losses), net of tax (b)		—		(34)		—		—		(34)		34		—		—
Neon exited lines (c)		3		—		—		—		3		—		(3)		—
Special A&E charges, net of tax		(37)		—		—		(17)		(54)		54		—		—
Other, net of tax		—		—		—		(3)		(3)		3		—		—
Discontinued operations, net of tax																		Discontinued operations, net of tax	—		152		—		—		152		—		152

Net Earnings (Loss) Attributable to Shareholders	Net Earnings (Loss) Attributable to Shareholders	$	125	$	63	$	—	$	(24)	$	164	$	—	$	—	$	164	Net Earnings (Loss) Attributable to Shareholders	$	232	$	174	$	—	$	13	$	419	$	—	$	419

5549

~~Table~~T able of Contents

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 September 30, 2019
Three months ended March 31, 2020																Three months ended March 31, 2020
Revenues:	Revenues:															Revenues:
Property and casualty insurance net earned premiums	Property and casualty insurance net earned premiums	$	1,442	$	—	$	—	$	—	$	1,442	$	—	$	1,442	Property and casualty insurance net earned premiums	$	1,138	$	—	$	—	$	—	$	1,138	$	—	$	71	$	1,209
Net investment income	Net investment income	124		448		5		11		588		—		588		Net investment income	99		12		11		(12)		110		—		(6)		104
Realized gains (losses) on securities	Realized gains (losses) on securities	—		—		—		—		—		(18)		(18)		Realized gains (losses) on securities	—		—		—		—		—		(328)		—		(328)
Income (loss) of MIEs:	Income (loss) of MIEs:															Income (loss) of MIEs:
Investment income	Investment income	—		—		67		—		67		—		67		Investment income	—		—		59		—		59		—		—		59
Gain (loss) on change in fair value of assets/liabilities	Gain (loss) on change in fair value of assets/liabilities	—		—		(14)		—		(14)		—		(14)		Gain (loss) on change in fair value of assets/liabilities	—		—		(13)		—		(13)		—		—		(13)
Other income	Other income	5		31		(4)		25		57		1		58		Other income	5		1		(4)		22		24		—		—		24
Total revenues	Total revenues	1,571		479		54		36		2,140		(17)		2,123		Total revenues	1,242		13		53		10		1,318		(328)		65		1,055

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	926		—		—		—		926		18		944		Losses and loss adjustment expenses	667		—		—		—		667		—		40		707
Commissions and other underwriting expenses	Commissions and other underwriting expenses	444		—		��		6		450		—		450		Commissions and other underwriting expenses	383		—		—		5		388		—		32		420
Annuity benefits		—		280		—		(4)		276		(26)		250
Annuity and supplemental insurance acquisition expenses		—		64		—		2		66		54		120
Interest charges on borrowed money	Interest charges on borrowed money	—		—		—		17		17		—		17		Interest charges on borrowed money	—		—		—		17		17		—		—		17
Expenses of MIEs	Expenses of MIEs	—		—		54		—		54		—		54		Expenses of MIEs	—		—		53		—		53		—		—		53
Other expenses	Other expenses	11		35		—		54		100		11		111		Other expenses	11		7		—		22		40		—		3		43
Total costs and expenses	Total costs and expenses	1,381		379		54		75		1,889		57		1,946		Total costs and expenses	1,061		7		53		44		1,165		—		75		1,240
Earnings (loss) before income taxes		190		100		—		(39)		251		(74)		177
Earnings (loss) from continuing operations before income taxes																Earnings (loss) from continuing operations before income taxes	181		6		—		(34)		153		(328)		(10)		(185)
Provision (credit) for income taxes	Provision (credit) for income taxes	39		20		—		(9)		50		(16)		34		Provision (credit) for income taxes	38		1		—		(11)		28		(69)		—		(41)
Net earnings (loss), including noncontrolling interests		151		80		—		(30)		201		(58)		143
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	143		5		—		(23)		125		(259)		(10)		(144)
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests																Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		—		—		—		—		—		(3)		(3)
Core Net Operating Earnings (Loss)	Core Net Operating Earnings (Loss)	155		80		—		(30)		205						Core Net Operating Earnings (Loss)	143		5		—		(23)		125
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	—		—		—		(14)		(14)		14		—		Realized gains (losses) on securities, net of tax	—		—		—		(259)		(259)		259		—		—
Annuity non-core earnings (losses), net of tax (b)		—		(21)		—		—		(21)		21		—
Special A&E charges, net of tax		(14)		—		—		(9)		(23)		23		—
Discontinued operations, net of tax																Discontinued operations, net of tax	—		(158)		—		(2)		(160)		—		—		(160)
Neon exited lines (b)																Neon exited lines (b)	(7)		—		—		—		(7)		—		7		—

Net Earnings (Loss) Attributable to Shareholders	Net Earnings (Loss) Attributable to Shareholders	$	141	$	59	$	—	$	(53)	$	147	$	—	$	147	Net Earnings (Loss) Attributable to Shareholders	$	136	$	(153)	$	—	$	(284)	$	(301)	$	—	$	—	$	(301)

(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 through its sale in December 2020 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 ~~$88~~$288 million in GAAP pretax earnings in the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$172~~$171 million in the ~~third quarter~~first three months of ~~2019, a decrease~~2020, an increase of ~~$84~~$117 million ~~(49%~~(68%). Property and casualty core pretax earnings were ~~$205~~$288 million in the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$190~~$181 million in the ~~third quarter~~first three months of ~~2019,~~2020, an increase of ~~$15~~$107 million ~~(8%~~(59%). The ~~decrease~~increase in GAAP pretax earnings reflects ~~lower net investment income,~~ higher ~~special A&E charges~~core pretax earnings and the impact of losses in the Neon exited lines ~~(including~~in the ~~estimated loss on sale),~~first three months of 2020. The increase in core pretax earnings reflects higher core underwriting profit in the first three months of 2021 compared to the first three months of 2020 and significantly higher net investment income. Improved results from alternative investments (partnerships and similar investments and AFG-managed CLOs) were partially offset by ~~higher core underwriting results.~~lower other net investment income, due primarily to lower short-term interest rates.

5650

~~Table~~T able of Contents

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 ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (dollars in millions):


		Three months ended September 30,								Three months ended March 31,
		2020		2019		% Change				2021			2020			% Change
Gross written premiums	Gross written premiums	$	2,223	$	2,351	(5		%)	Gross written premiums	$	1,616		$	1,526		6		%
Reinsurance premiums ceded	Reinsurance premiums ceded	(735)		(733)		—		%	Reinsurance premiums ceded	(411)			(361)			14		%
Net written premiums	Net written premiums	1,488		1,618		(8		%)	Net written premiums	1,205			1,165			3		%
Change in unearned premiums	Change in unearned premiums	(149)		(176)		(15		%)	Change in unearned premiums	(32)			(27)			19		%
Net earned premiums	Net earned premiums	1,339		1,442		(7		%)	Net earned premiums	1,173			1,138			3		%
Loss and loss adjustment expenses ~~(a)~~	Loss and loss adjustment expenses ~~(a)~~	856		926		(8		%)	Loss and loss adjustment expenses ~~(a)~~	667			667			—		%
Commissions and other underwriting expenses	Commissions and other underwriting expenses	380		444		(14		%)	Commissions and other underwriting expenses	372			383			(3		%)
Core underwriting gain	Core underwriting gain	103		72		43		%	Core underwriting gain	134			88			52		%

Net investment income	Net investment income	111		124		(10		%)	Net investment income	159			99			61		%
Other income and expenses, net	Other income and expenses, net	(9)		(6)		50		%	Other income and expenses, net	(5)			(6)			(17		%)
Core earnings before income taxes	Core earnings before income taxes	205		190		8		%	Core earnings before income taxes	288			181			59		%
Pretax non-core special A&E charges		(47)		(18)		161		%
Pretax non-core Neon exited lines (b)		(70)		—		—		%

Pretax non-core Neon exited lines (*)									Pretax non-core Neon exited lines (*)	—			(10)			(100		%)
GAAP earnings before income taxes and noncontrolling interests	GAAP earnings before income taxes and noncontrolling interests	$	88	$	172	(49		%)	GAAP earnings before income taxes and noncontrolling interests	$	288		$	171		68		%
(a) Excludes pretax non-core special A&E charges of $47 million and $18 million in the third quarter of 2020 and 2019, respectively. (b) 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 September 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 through its sale in December 2020 are being 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 March 31, 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 through its sale in December 2020 are being 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 March 31, 2020 (in millions):

		Three months ended September 30, 2020								Three months ended March 31, 2020
		Excluding Neon exited lines		Neon exited lines		Total				Excluding Neon exited lines			Neon exited lines			Total
Gross written premiums	Gross written premiums	$	2,223	$	8	$	2,231		Gross written premiums	$	1,526		$	56		$	1,582
Reinsurance premiums ceded	Reinsurance premiums ceded	(735)		(7)		(742)			Reinsurance premiums ceded	(361)			(57)			(418)
Net written premiums	Net written premiums	1,488		1		1,489			Net written premiums	1,165			(1)			1,164
Change in unearned premiums	Change in unearned premiums	(149)		41		(108)			Change in unearned premiums	(27)			72			45
Net earned premiums	Net earned premiums	1,339		42		1,381			Net earned premiums	1,138			71			1,209
Loss and loss adjustment expenses	Loss and loss adjustment expenses	856		60		916			Loss and loss adjustment expenses	667			40			707
Commissions and other underwriting expenses	Commissions and other underwriting expenses	380		20		400			Commissions and other underwriting expenses	383			32			415
Underwriting gain (loss)	Underwriting gain (loss)	103		(38)		65			Underwriting gain (loss)	88			(1)			87

Net investment income	Net investment income	111		1		112			Net investment income	99			(6)			93
Loss on sale of subsidiaries		—		(30)		(30)

Other income and expenses, net	Other income and expenses, net	(9)		(3)		(12)			Other income and expenses, net	(6)			(3)			(9)
Earnings (loss) before income taxes and noncontrolling interests	Earnings (loss) before income taxes and noncontrolling interests	205		(70)		135			Earnings (loss) before income taxes and noncontrolling interests	$	181		$	(10)		$	171
Pretax non-core special A&E charges		(47)		—		(47)
GAAP earnings (loss) before income taxes and noncontrolling interests		$	158	$	(70)	$	88

										Three months ended March 31,
										2021			2020			Change
Combined Ratios:									Combined Ratios:
Specialty lines									Specialty lines
Loss and LAE ratio									Loss and LAE ratio	56.8		%	58.5		%	(1.7		%)
Underwriting expense ratio									Underwriting expense ratio	31.7		%	33.7		%	(2.0		%)
Combined ratio									Combined ratio	88.5		%	92.2		%	(3.7		%)

Aggregate — including exited lines									Aggregate — including exited lines
Loss and LAE ratio									Loss and LAE ratio	56.9		%	58.5		%	(1.6		%)
Underwriting expense ratio									Underwriting expense ratio	31.7		%	34.3		%	(2.6		%)
Combined ratio									Combined ratio	88.6		%	92.8		%	(4.2		%)

5751

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Three months ended September 30,
2020 2019 Change
Combined Ratios:
Specialty lines
Loss and LAE ratio 63.8 % 63.1 % 0.7 %
Underwriting expense ratio 28.3 % 30.9 % (2.6 %)
Combined ratio 92.1 % 94.0 % (1.9 %)
Aggregate — including exited lines
Loss and LAE ratio 69.8 % 65.4 % 4.4 %
Underwriting expense ratio 29.0 % 30.9 % (1.9 %)
Combined ratio 98.8 % 96.3 % 2.5 %

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 ~~$2.23~~$1.62 billion for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$2.35~~$1.58 billion for the ~~third quarter~~first three months of ~~2019, a decrease~~2020, an increase of ~~$120~~$34 million ~~(5%~~(2%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):


		Three months ended September 30,											Three months ended March 31,
		2020				2019							2021				2020
		GWP		%		GWP		%		% Change			GWP		%		GWP		%		% Change
Property and transportation	Property and transportation	$	1,061	48	%	$	1,113	47	%	(5	%)	Property and transportation	$	520	32	%	$	494	31	%	5	%
Specialty casualty	Specialty casualty	978		44	%	1,031		44	%	(5	%)	Specialty casualty	904		56	%	849		54	%	6	%
Specialty financial	Specialty financial	184		8	%	207		9	%	(11	%)	Specialty financial	192		12	%	183		11	%	5	%
Total specialty	Total specialty	2,223		100	%	2,351		100	%	(5	%)	Total specialty	1,616		100	%	1,526		96	%	6	%
Neon exited lines	Neon exited lines	8		—	%	—		—	%	—	%	Neon exited lines	—		—	%	56		4	%	(100	%)
Aggregate	Aggregate	$	2,231	100	%	$	2,351	100	%	(5	%)	Aggregate	$	1,616	100	%	$	1,582	100	%	2	%

Reinsurance Premiums Ceded

Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 25% of gross written premiums for the first three months of 2021 compared to 26% of gross written premiums for the first three months of 2020, a decrease of 1 percentage point. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):


	Three months ended March 31,
	2021				2020				Change in
	Ceded		% of GWP		Ceded		% of GWP		% of GWP
Property and transportation	$	(117)	23	%	$	(108)	22	%	1	%
Specialty casualty	(316)		35	%	(263)		31	%	4	%
Specialty financial	(31)		16	%	(34)		19	%	(3	%)
Other specialty	53				44
Total specialty	(411)		25	%	(361)		24	%	1	%
Neon exited lines	—		—	%	(57)		102	%	(102	%)
Aggregate	$	(411)	25	%	$	(418)	26	%	(1	%)

5852

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

~~Reinsurance Premiums Ceded~~

Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 33% of gross written premiums for the third quarter of 2020 compared to 31% of gross written premiums for the third quarter of 2019, an increase of 2 percentage points. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):

Three months ended September 30,
2020 2019 Change in
Ceded % of GWP Ceded % of GWP % of GWP
Property and transportation $ (426) 40 % $ (452) 41 % (1 %)
Specialty casualty (336) 34 % (287) 28 % 6 %
Specialty financial (31) 17 % (40) 19 % (2 %)
Other specialty 58 46
Total specialty (735) 33 % (733) 31 % 2 %
Neon exited lines (7) 88 % — — % 88 %
Aggregate $ (742) 33 % $ (733) 31 % 2 %

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were ~~$1.49~~$1.21 billion for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$1.62~~$1.16 billion for the ~~third quarter~~first three months of ~~2019, a decrease~~2020, an increase of ~~$129~~$41 million ~~(8%~~(4%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):


		Three months ended September 30,											Three months ended March 31,
		2020				2019							2021				2020
		NWP		%		NWP		%		% Change			NWP		%		NWP		%		% Change
Property and transportation	Property and transportation	$	635	43	%	$	661	41	%	(4	%)	Property and transportation	$	403	33	%	$	386	33	%	4	%
Specialty casualty	Specialty casualty	642		43	%	744		46	%	(14	%)	Specialty casualty	588		49	%	586		50	%	—	%
Specialty financial	Specialty financial	153		10	%	167		10	%	(8	%)	Specialty financial	161		13	%	149		13	%	8	%
Other specialty	Other specialty	58		4	%	46		3	%	26	%	Other specialty	53		5	%	44		4	%	20	%
Total specialty	Total specialty	1,488		100	%	1,618		100	%	(8	%)	Total specialty	1,205		100	%	1,165		100	%	3	%
Neon exited lines	Neon exited lines	1		—	%	—		—	%	—	%	Neon exited lines	—		—	%	(1)		—	%	(100	%)
Aggregate	Aggregate	$	1,489	100	%	$	1,618	100	%	(8	%)	Aggregate	$	1,205	100	%	$	1,164	100	%	4	%

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were ~~$1.38~~$1.17 billion for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$1.44~~$1.21 billion for the ~~third quarter~~first three months of ~~2019,~~2020, a decrease of ~~$61~~$36 million ~~(4%~~(3%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):


		Three months ended September 30,											Three months ended March 31,
		2020				2019							2021				2020
		NEP		%		NEP		%		% Change			NEP		%		NEP		%		% Change
Property and transportation	Property and transportation	$	574	42	%	$	583	40	%	(2	%)	Property and transportation	$	394	34	%	$	386	32	%	2	%
Specialty casualty	Specialty casualty	560		41	%	658		46	%	(15	%)	Specialty casualty	571		49	%	556		46	%	3	%
Specialty financial	Specialty financial	155		11	%	161		11	%	(4	%)	Specialty financial	157		13	%	156		13	%	1	%
Other specialty	Other specialty	50		3	%	40		3	%	25	%	Other specialty	51		4	%	40		3	%	28	%
Total specialty	Total specialty	1,339		97	%	1,442		100	%	(7	%)	Total specialty	1,173		100	%	1,138		94	%	3	%
Neon exited lines	Neon exited lines	42		3	%	—		—	%	—	%	Neon exited lines	—		—	%	71		6	%	(100	%)
Aggregate	Aggregate	$	1,381	100	%	$	1,442	100	%	(4	%)	Aggregate	$	1,173	100	%	$	1,209	100	%	(3	%)

Gross written premiums for the ~~third quarter~~first three months of ~~2020 decreased $120~~2021 increased $34 million ~~(5%~~(2%) compared to the ~~third quarter~~first three months of ~~2019~~2020 reflecting ~~a decrease~~an increase in ~~the~~ each of the Specialty property and casualty ~~financial~~insurance sub-segments. Overall average renewal rates increased approximately ~~13%~~12% in the ~~third quarter~~first three months of ~~2020.~~2021. Excluding rate decreases in the workers’ compensation business, renewal pricing increased approximately 16%.

~~Table of Contents~~

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

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

Property and transportation Gross written premiums ~~decreased $52~~increased $26 million (5%) in the ~~third quarter~~first three months of ~~2020 when~~2021 compared to the third quarter of 2019. This decrease was largely the result of lower year-over-year crop premiums resulting from delayed premium reporting in 2019 due to late planting of corn and soybean crops. Excluding crop insurance, gross written premiums for the third quarterfirst three months of 2020 ~~increased by 1% in this group when compared~~due primarily to ~~the 2019 third quarter. Lower~~higher premiums in the ~~transportation business due primarily to the return of premiums and reduced exposures as a result of the COVID-19 pandemic were tempered by growth and new business opportunities in the~~agricultural, property and inland marine and ~~ocean marine businesses.~~aviation businesses, primarily as a result of higher renewal rates. Average renewal rates increased approximately 6%7% for this group in the ~~third quarter~~first three months of ~~2020.~~2021. Reinsurance premiums ceded as a percentage of gross written premiums ~~decreased~~increased 1 percentage point in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 reflecting the ~~decrease~~impact of reinstatement premiums in the ~~crop business, which cedes a larger percentage~~first three months of ~~premiums than the other businesses~~2021 related to winter storms in ~~the Specialty property and transportation sub-segment.~~Texas.

Specialty casualty Gross written premiums ~~decreased $53~~increased $55 million ~~(5%~~(6%) in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 due primarily to the run-off of Neon. Excluding the impact of $111 million in gross written premiums from the Neon exited lines in the third quarter of 2019, gross written premiums increased 6% in the third quarter of 2020 compared to the third quarter of 2019. This increase reflects significant renewal rate increases ~~coupled with new business opportunities~~and strong renewal retention in the excess ~~and surplus, excess~~liability businesses. The executive liability and ~~executive liability~~mergers and acquisitions businesses also contributed meaningfully to the year-over-year growth. These increases 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 ~~17%~~15% for this group in the ~~third quarter~~first three months of ~~2020.~~2021. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 25%. Reinsurance premiums ceded as a percentage of gross written premiums increased 64 percentage points in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 reflecting growth in the excess liability, mergers and ~~surplus~~acquisitions and ~~public sector~~environmental businesses, which cede a larger percentage of premiums than the ~~other businesses in the~~overall Specialty casualty sub-segment.

T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Specialty financial Gross written premiums ~~decreased $23~~increased $9 million ~~(11%~~(5%) in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 due primarily to lower premiums from the impact of various state regulations regarding policy cancellations and the placement of forced coverage in the financial institutions business, heightened risk selection that has reduced new business ~~in the trade credit business and COVID-related economic impacts in the surety business. These decreases were partially offset by year-over-year~~opportunities, coupled with growth in accounts within the ~~fidelity business.~~lender services businesses with higher retentions. Average renewal rates increased approximately 7%8% for this group in the ~~third quarter~~first three months of ~~2020.~~2021. Reinsurance premiums ceded as a percentage of gross written premiums decreased 23 percentage points in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 reflecting lower cessions in the financial institutions business due to reduced gross written premiums in certain lines of businesses that are 100% reinsured and ~~a change~~lower cessions in the ~~mix of~~innovative markets business in the ~~fidelity business.~~first three months of 2021.

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 ~~$12~~$9 million ~~(26%~~(20%) in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months 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 March 31,						Three months ended March 31,
	2021		2020		Change		2021		2020
Property and transportation
Loss and LAE ratio	56.0	%	61.4	%	(5.4	%)
Underwriting expense ratio	29.6	%	31.5	%	(1.9	%)
Combined ratio	85.6	%	92.9	%	(7.3	%)
Underwriting profit							$	56	$	27

Specialty casualty
Loss and LAE ratio	63.1	%	61.1	%	2.0	%
Underwriting expense ratio	27.1	%	29.6	%	(2.5	%)
Combined ratio	90.2	%	90.7	%	(0.5	%)
Underwriting profit							$	56	$	52

Specialty financial
Loss and LAE ratio	33.8	%	38.0	%	(4.2	%)
Underwriting expense ratio	50.3	%	51.1	%	(0.8	%)
Combined ratio	84.1	%	89.1	%	(5.0	%)
Underwriting profit							$	25	$	17

Total Specialty
Loss and LAE ratio	56.8	%	58.5	%	(1.7	%)
Underwriting expense ratio	31.7	%	33.7	%	(2.0	%)
Combined ratio	88.5	%	92.2	%	(3.7	%)
Underwriting profit							$	134	$	89

Aggregate — including exited lines
Loss and LAE ratio	56.9	%	58.5	%	(1.6	%)
Underwriting expense ratio	31.7	%	34.3	%	(2.6	%)
Combined ratio	88.6	%	92.8	%	(4.2	%)
Underwriting profit							$	134	$	87

The Specialty property and casualty insurance operations generated an underwriting profit of $134 million in the first three months of 2021 compared to $89 million in the first three months of 2020, an increase of $45 million (51%). The higher underwriting profit in the first three months of 2021 reflects higher underwriting profits in each of the Specialty property and casualty insurance sub-segments. Overall catastrophe losses were $20 million (1.7 points on the combined ratio) and related net reinstatement premiums were $11 million in the first three months of 2021 compared to catastrophe losses of $9 million (0.8 points) in the first three months of 2020.

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

~~Combined Ratio~~

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

Three months ended September 30, Three months ended September 30,
2020 2019 Change 2020 2019
Property and transportation
Loss and LAE ratio 70.1 % 72.1 % (2.0 %)
Underwriting expense ratio 21.8 % 21.4 % 0.4 %
Combined ratio 91.9 % 93.5 % (1.6 %)
Underwriting profit $ 47 $ 38
Specialty casualty
Loss and LAE ratio 62.9 % 63.1 % (0.2 %)
Underwriting expense ratio 27.8 % 33.4 % (5.6 %)
Combined ratio 90.7 % 96.5 % (5.8 %)
Underwriting profit $ 53 $ 23
Specialty financial
Loss and LAE ratio 39.9 % 29.7 % 10.2 %
Underwriting expense ratio 51.7 % 54.0 % (2.3 %)
Combined ratio 91.6 % 83.7 % 7.9 %
Underwriting profit (loss) $ 13 $ 26
Total Specialty
Loss and LAE ratio 63.8 % 63.1 % 0.7 %
Underwriting expense ratio 28.3 % 30.9 % (2.6 %)
Combined ratio 92.1 % 94.0 % (1.9 %)
Underwriting profit $ 104 $ 88
Aggregate — including exited lines
Loss and LAE ratio 69.8 % 65.4 % 4.4 %
Underwriting expense ratio 29.0 % 30.9 % (1.9 %)
Combined ratio 98.8 % 96.3 % 2.5 %
Underwriting profit $ 18 $ 54

The Specialty property and casualty insurance operations generated an underwriting profit of $104 million in the third quarter of 2020 compared to $88 million in the third quarter of 2019, an increase of $16 million (18%). The higher underwriting profit in the third quarter of 2020 reflects higher underwriting profits in the Specialty casualty and Property and transportation sub-segments, partially offset by lower underwriting profit in the Specialty financial sub-segment. The Specialty property and casualty insurance operations did not record any additional reserve charges for COVID-19 in the third quarter of 2020. Catastrophe losses were $36 million (2.7 points on the combined ratio) and related net reinstatement premiums were $5 million in the third quarter of 2020 compared to $22 million (1.6 points) in the third quarter of 2019.

Property and transportation Underwriting profit for this group was ~~$47~~$56 million for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$38~~$27 million for the ~~third quarter~~first three months of ~~2019,~~2020, an increase of $9$29 million ~~(24%~~(107%). This increase reflects higher ~~year-over-year~~ underwriting ~~profitability~~profit in the ~~non-crop agricultural and ocean marine businesses and improved results in the aviation business and Singapore branch, partially offset by lower year-over-year underwriting profitability in the~~ transportation, ~~and~~ property and inland marine and crop businesses. Catastrophe losses were ~~$18~~$14 million ~~(3.1~~(3.6 points on the combined ratio), primarily the result of winter storms in Texas, and related net reinstatement premiums were $8 million in the ~~third quarter~~first three months of ~~2020~~2021 compared to catastrophe losses of $8 million ~~(1.4~~(2.2 points) in the ~~third quarter~~first three months of ~~2019.~~2020.

Specialty casualty Underwriting profit for this group was ~~$53~~$56 million for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$23~~$52 million for the ~~third quarter~~first three months of ~~2019,~~2020, an increase of ~~$30~~$4 million ~~(130%~~(8%). This increase reflects higher ~~year-over-year~~ underwriting profitability in the excess and surplus lines and excess liability businesses, ~~and the impact of $19 million of underwriting losses at Neon in the third quarter of 2019,~~ partially offset by ~~higher adverse~~lower favorable prior year reserve development in the ~~general~~workers’ compensation and executive liability ~~business and lower year-over-year underwriting profits~~businesses in the ~~targeted markets and workers’ compensation businesses.~~

~~Table~~first three months of ~~Contents~~

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

~~Management’s Discussion and Analysis~~2021 compared to the first three months of ~~Financial Condition and Results of Operations — Continued~~

2020. Catastrophe losses were $3$1 million ~~(0.8~~(0.3 points on the combined ratio) and related net reinstatement premiums were $5$1 million in the ~~third quarter~~first three months of ~~2020~~2021 compared to catastrophe losses of ~~$10~~less than $1 million ~~(1.6 points)~~ in the ~~third quarter~~first three months of ~~2019.~~2020.

Specialty financial Underwriting profit for this group was ~~$13~~$25 million for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$26~~$17 million in the ~~third quarter~~first three months of ~~2019, a decrease~~2020, an increase of ~~$13~~$8 million ~~(50%~~(47%). This ~~decrease~~increase reflects higher ~~catastrophe losses~~year-over-year underwriting profitability in the financial institutions business. Catastrophe losses were ~~$13~~$4 million ~~(8.6~~(2.1 points on the combined ratio) and related net reinstatement premiums were $2 million in the ~~third quarter~~first three months of ~~2020~~2021 compared to $3catastrophe losses of $1 million ~~(2.0~~(0.6 points) in the ~~third quarter~~first three months of ~~2019.~~2020.

Other specialty This group reported an underwriting loss of $9$3 million in the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~an underwriting profit of $1~~$7 million in the ~~third quarter~~first three months of ~~2019, reflecting higher~~2020, a decrease of $4 million (57%). 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 ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019.~~2020.

~~Aggregate~~ ~~As discussed below under “Net prior year reserve development,”~~ AFG recorded special charges to increase property and casualty A&E reserves by $47 million and $18 million in the third quarter of 2020 and the third quarter of 2019, respectively. Aggregate underwriting results for AFG’s property and casualty insurance segment also include an underwriting loss of $38 million at Neon in the third quarter of 2020, due primarily to catastrophe losses and several large claims. AFG also recorded adverse prior year reserve development of $1 million and $16 million in the third quarter of 2020 and 2019, respectively, related to business outside of the Specialty group that AFG no longer writes.

6255

~~Table~~T able of Contents

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 ~~69.8%~~56.9% for the ~~third quarter~~first three months of 2021 compared to 58.5% for the first three months of 2020, ~~compared to 65.4% for the third quarter~~a decrease of ~~2019, an increase of 4.4~~1.6 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 September 30,											Three months ended March 31,
		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	$	410	$	430	71.4	%	73.5	%	(2.1	%)	Current year, excluding COVID-19 related and catastrophe losses	$	250	$	250	63.4	%	64.7	%	(1.3	%)
Prior accident years development	Prior accident years development	(26)		(17)		(4.5	%)	(2.8	%)	(1.7	%)	Prior accident years development	(43)		(24)		(11.1	%)	(6.1	%)	(5.0	%)
COVID-19 related losses	COVID-19 related losses	1		—		0.1	%	—	%	0.1	%	COVID-19 related losses	—		3		0.1	%	0.6	%	(0.5	%)
Current year catastrophe losses	Current year catastrophe losses	18		8		3.1	%	1.4	%	1.7	%	Current year catastrophe losses	14		8		3.6	%	2.2	%	1.4	%
Property and transportation losses and LAE and ratio	Property and transportation losses and LAE and ratio	$	403	$	421	70.1	%	72.1	%	(2.0	%)	Property and transportation losses and LAE and ratio	$	221	$	237	56.0	%	61.4	%	(5.4	%)

Specialty casualty	Specialty casualty											Specialty casualty
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	366	$	425	65.1	%	64.4	%	0.7	%	Current year, excluding COVID-19 related and catastrophe losses	$	362	$	357	63.3	%	64.0	%	(0.7	%)
Prior accident years development	Prior accident years development	(16)		(19)		(2.9	%)	(2.9	%)	—	%	Prior accident years development	(9)		(24)		(1.7	%)	(4.2	%)	2.5	%
COVID-19 related losses	COVID-19 related losses	(1)		—		(0.1	%)	—	%	(0.1	%)	COVID-19 related losses	7		7		1.2	%	1.3	%	(0.1	%)
Current year catastrophe losses	Current year catastrophe losses	3		10		0.8	%	1.6	%	(0.8	%)	Current year catastrophe losses	1		—		0.3	%	—	%	0.3	%
Specialty casualty losses and LAE and ratio	Specialty casualty losses and LAE and ratio	$	352	$	416	62.9	%	63.1	%	(0.2	%)	Specialty casualty losses and LAE and ratio	$	361	$	340	63.1	%	61.1	%	2.0	%

Specialty financial	Specialty financial											Specialty financial
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	59	$	53	37.8	%	33.2	%	4.6	%	Current year, excluding COVID-19 related and catastrophe losses	$	55	$	60	35.6	%	38.4	%	(2.8	%)
Prior accident years development	Prior accident years development	(9)		(9)		(5.7	%)	(5.5	%)	(0.2	%)	Prior accident years development	(8)		(2)		(5.4	%)	(1.1	%)	(4.3	%)
COVID-19 related losses	COVID-19 related losses	(1)		—		(0.8	%)	—	%	(0.8	%)	COVID-19 related losses	2		—		1.5	%	0.1	%	1.4	%
Current year catastrophe losses	Current year catastrophe losses	13		3		8.6	%	2.0	%	6.6	%	Current year catastrophe losses	4		1		2.1	%	0.6	%	1.5	%
Specialty financial losses and LAE and ratio	Specialty financial losses and LAE and ratio	$	62	$	47	39.9	%	29.7	%	10.2	%	Specialty financial losses and LAE and ratio	$	53	$	59	33.8	%	38.0	%	(4.2	%)

Total Specialty	Total Specialty											Total Specialty
Current year, excluding COVID-19 related and catastrophe losses	Current year, excluding COVID-19 related and catastrophe losses	$	867	$	934	64.8	%	64.6	%	0.2	%	Current year, excluding COVID-19 related and catastrophe losses	$	697	$	695	59.5	%	61.0	%	(1.5	%)
Prior accident years development	Prior accident years development	(48)		(46)		(3.7	%)	(3.1	%)	(0.6	%)	Prior accident years development	(59)		(48)		(5.2	%)	(4.2	%)	(1.0	%)
COVID-19 related losses	COVID-19 related losses	—		—		—	%	—	%	—	%	COVID-19 related losses	9		10		0.8	%	0.9	%	(0.1	%)
Current year catastrophe losses	Current year catastrophe losses	36		22		2.7	%	1.6	%	1.1	%	Current year catastrophe losses	20		9		1.7	%	0.8	%	0.9	%
Total Specialty losses and LAE and ratio	Total Specialty losses and LAE and ratio	$	855	$	910	63.8	%	63.1	%	0.7	%	Total Specialty losses and LAE and ratio	$	667	$	666	56.8	%	58.5	%	(1.7	%)

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	$	911	$	934	66.0	%	64.6	%	1.4	%	Current year, excluding COVID-19 related and catastrophe losses	$	697	$	730	59.5	%	60.3	%	(0.8	%)
Prior accident years development	Prior accident years development	—		(12)		—	%	(0.8	%)	0.8	%	Prior accident years development	(59)		(42)		(5.1	%)	(3.4	%)	(1.7	%)
COVID-19 related losses	COVID-19 related losses	—		—		—	%	—	%	—	%	COVID-19 related losses	9		10		0.8	%	0.8	%	—	%
Current year catastrophe losses	Current year catastrophe losses	52		22		3.8	%	1.6	%	2.2	%	Current year catastrophe losses	20		9		1.7	%	0.8	%	0.9	%
Aggregate losses and LAE and ratio	Aggregate losses and LAE and ratio	$	963	$	944	69.8	%	65.4	%	4.4	%	Aggregate losses and LAE and ratio	$	667	$	707	56.9	%	58.5	%	(1.6	%)

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 ~~64.8%~~59.5% for the ~~third quarter~~first three months of 2021 compared to 61.0% for the first three months of 2020, ~~compared to 64.6% for the third quarter~~a decrease of ~~2019, an increase of 0.2~~1.5 percentage points.

Property and transportation The ~~2.1~~1.3 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 in the aviation and commercial automobile businesses due primarily to renewal rate increases and lower claim frequency in the in the first three months of 2021 compared to the first three months of 2020 and a decrease in the loss and LAE ratio in the ocean marine business due primarily to the earned impact of rate increases obtained in 2020 and the first three months of 2021.

T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Specialty casualty The 0.7 percentage point 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 in the executive liability, excess liability and public sector businesses due primarily to the earned impact of rate increases obtained in 2020 and the first three months of 2021.

Specialty financial The 2.8 percentage point 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 ratio in the ocean marine business, due primarily to rate increases and lower claim frequency in the third quarter of 2020, and lower loss and LAE ratios in the non-crop agricultural businesses in the third quarter of 2020 compared to the third quarter of 2019.

~~Specialty casualty~~ The 0.7 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 third quarter of 2019, which

~~Table of Contents~~

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

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

has 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 decreased 0.5 percentage points in the third quarter of 2020 compared to the third quarter of 2019.

~~Specialty financial~~ ~~The 4.6 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 ~~fidelity and surety businesses.~~business.

Net prior year reserve development

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $59 million in the first three months of 2021 compared to $48 million in the ~~third quarter~~first three months of 2020, ~~compared to $46 million in the third quarter of 2019,~~ an increase of $2$11 million ~~(4%~~(23%).

Property and transportation Net favorable reserve development of ~~$26~~$43 million in the ~~third quarter~~first three months of ~~2020~~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 frequency in the aviation business, partially offset by higher than expected claim frequency and severity in the ~~non-crop agricultural businesses.~~equine business. Net favorable reserve development of ~~$17~~$24 million in the ~~third quarter~~first three months of ~~2019~~2020 reflects lower than expected losses in the crop business and lower than anticipated claim frequency and severity at National Interstate, partially offset by higher than expected claim severity in the ~~transportation~~property and inland marine business.

Specialty casualty Net favorable reserve development of ~~$16~~$9 million in the ~~third quarter~~first three months of ~~2020~~2021 reflects lower than anticipated claim severity in the workers’ compensation businesses, partially offset by higher than ~~expected~~anticipated claim ~~frequency~~severity in ~~general~~the targeted markets, professional liability ~~contractor claims.~~and excess liability businesses. Net favorable reserve development of ~~$19~~$24 million in the ~~third quarter~~first three months of ~~2019~~2020 reflects lower than anticipated claim severity in the workers’ compensation businesses and ~~targeted markets businesses,~~lower than anticipated claim frequency and severity in the executive liability business, partially offset by higher than expected claim frequency and severity in the excess and surplus lines businesses and higher than expected claim ~~frequency~~severity in ~~general liability contractor claims.~~the public sector business.

Specialty financial Net favorable reserve development of $9$8 million in the ~~third quarter~~first three months of ~~2020~~2021 reflects lower than anticipated claim frequency and severity in the ~~fidelity and surety businesses~~financial institutions business and lower than ~~expected~~anticipated claim frequency in the ~~financial institutions~~surety business. Net favorable reserve development ~~of $9~~was $2 million in the ~~third quarter~~first three months of ~~2019 reflects lower than expected claim frequency and severity in the surety business and lower than anticipated severity in the financial institutions business.~~2020.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of ~~$3 million in the third quarter of 2020 and net favorable reserve development of~~ $1 million in the ~~third quarter~~first three months of ~~2019, which includes adverse development of $4~~2021 and $2 million in the ~~third quarter~~first three months of 2020, reflecting net adverse reserve development 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.

~~Special asbestos and environmental reserve charges~~ During the third quarter of 2020, AFG completed a comprehensive external study of its asbestos and environmental exposures relating to the run-off operations of its property and casualty insurance segment and its exposures related to former railroad and manufacturing operations and sites. In addition to its ongoing internal monitoring of asbestos and environmental exposures, AFG has periodically conducted comprehensive external studies of its asbestos and environmental reserves with the aid of specialty actuarial, engineering and consulting firms and outside counsel, with an in-depth internal review during the intervening years.

As a result of the 2020 external study, AFG’s property and casualty insurance segment recorded a $47 million pretax special charge to increase its asbestos reserves by $26 million (net of reinsurance) and its environmental reserves by $21 million (net of reinsurance). Over the past few years, the focus of AFG’s asbestos claims litigation has shifted to smaller companies and companies with ancillary exposures. AFG’s insureds with these exposures have been the driver of the property and casualty segment’s asbestos reserve increases in recent years. AFG is seeing modestly increasing estimates for indemnity and defense compared to prior studies on certain specific open claims.

The increase in property and casualty environmental reserves was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and its estimate of future, but as yet unreported, claims. AFG has updated its view of legal defense costs on open environmental claims as well as a number of claims and sites where the estimated investigation and remediation costs have increased. As in past years, there were no new or emerging broad industry trends that were identified in this review.

~~Table of Contents~~

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

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

At September 30, 2020, the property and casualty insurance segment’s insurance reserves include A&E reserves of $428 million, net of reinsurance recoverables. At September 30, 2020, the property and casualty insurance segment’s three-year survival ratios compare favorably with industry survival ratios published by A.M. Best (as of December 31, 2019, and adjusted for several large portfolio transfers) as detailed in the following table:

Property and Casualty Insurance Reserves
Three-Year Survival Ratio (Times Paid Losses)
Asbestos Environmental Total A&E
AFG (9/30/2020) 21.3 19.6 20.5
Industry (12/31/2019) 7.9 8.5 8.1

In addition, the 2020 external study encompassed reserves for asbestos and environmental exposures of AFG’s former railroad and manufacturing operations. For a discussion of the $21 million pretax special charge recorded for those operations, see “~~Results of Operations — Holding Company, Other and Unallocated,” for the quarters ended September 30, 2020 and 2019.~~

An in-depth internal review of AFG’s A&E reserves was completed in the third quarter of 2019. As a result of the 2019 review, AFG recorded an $18 million (net of reinsurance) pretax special charge to increase its property and casualty insurance segment’s asbestos reserves by $3 million (net of reinsurance) and its environmental reserves by $15 million (net of reinsurance). AFG also recorded an $11 million pretax special charge to increase the reserves of its former railroad and manufacturing operations. See ~~Management’s Discussion and Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves” and~~ ~~Management’s Discussion and Analysis — “Results of Operations — Holding Company, Other and Unallocated”~~ ~~in AFG’s 2019 Form 10-K.~~

Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes ~~the special A&E charges mentioned above,~~ net adverse reserve development of $1$6 million in the ~~third quarter~~first three months of 2020 reflecting net adverse reserve development of $5 million from the Neon exited lines and net adverse reserve development of ~~$16~~$1 million ~~in the third quarter of 2019~~ related to ~~other~~ business outside of the Specialty group that AFG no longer writes.

COVID-19 related losses

AFG’s Specialty property and casualty insurance operations recorded $9 million in reserve charges related to COVID-19 in the first quarter of 2021 primarily related to the workers’ compensation businesses, and released approximately $6 million of accident year 2020 reserves based on loss experience. Underwriting results for the first quarter of 2020 include $10 million of reserve charges related to COVID-19. Given the uncertainties surrounding the ultimate number and scope of claims relating to the pandemic, approximately 69% of the $98 million in COVID-19 related reserves are held as incurred but not reported at March 31, 2021.

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

T able of Contents

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 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~~$100 million in the vast majority of circumstances. In certain unlikely events, AFG’s ultimate loss under this coverage could be as high as $24 million. ~~Neon’s excess of loss catastrophe~~In addition to traditional reinsurance, ~~limits the maximum retained loss per event~~AFG expects to $15 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 further maintain supplemental fully collateralized reinsurance coverage up to 95% of $200 million for catastrophe losses in excess of $109 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 thereplace its recently expired catastrophe bond ~~apply before calculating losses recoverable from this catastrophe excess~~by the end of ~~loss reinsurance.~~the second quarter of 2021.

Catastrophe losses of ~~$52~~$20 million in the ~~third quarter~~first three months of 2021 resulted primarily from winter storms in Texas. Catastrophe losses of $9 million in the first three months of 2020 resulted primarily from ~~Hurricanes Hanna, Laura and Sally, Tropical Storm Isaias,~~ storms and tornadoes in multiple regions of the United ~~States, and multiple wildfires in west coast states. Catastrophe losses of $22 million in the third quarter of 2019 resulted primarily from Hurricane Dorian and Tropical Storm Imelda.~~States.

~~Table of Contents~~

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

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

Commissions and Other Underwriting Expenses

AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were ~~$400~~$372 million in the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$444~~$415 million for the ~~third quarter~~first three months of ~~2019,~~2020, a decrease of ~~$44~~$43 million (10%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was ~~29.0%~~31.7% for the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~30.9%~~34.3% for the ~~third quarter~~first three months of ~~2019,~~2020, a decrease of ~~1.9~~2.6 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 September 30,											Three months ended March 31,
		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	$	124	21.8	%	$	124	21.4	%	0.4	%	Property and transportation	$	117	29.6	%	$	122	31.5	%	(1.9	%)
Specialty casualty	Specialty casualty	155		27.8	%	219		33.4	%	(5.6	%)	Specialty casualty	154		27.1	%	164		29.6	%	(2.5	%)
Specialty financial	Specialty financial	80		51.7	%	88		54.0	%	(2.3	%)	Specialty financial	79		50.3	%	80		51.1	%	(0.8	%)
Other specialty	Other specialty	21		37.0	%	13		34.5	%	2.5	%	Other specialty	22		42.3	%	17		43.8	%	(1.5	%)
Total specialty	Total specialty	380		28.3	%	444		30.9	%	(2.6	%)	Total specialty	372		31.7	%	383		33.7	%	(2.0	%)
Neon exited lines	Neon exited lines	20				—						Neon exited lines	—				32
Aggregate	Aggregate	$	400	29.0	%	$	444	30.9	%	(1.9	%)	Aggregate	$	372	31.7	%	$	415	34.3	%	(2.6	%)

Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums ~~increased 0.4~~decreased 1.9 percentage points in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 reflecting higher profitability-based ceding commissions received from reinsurers in the crop business and the impact of ~~lower~~higher premiums on the ratio in the ~~transportation businesses~~aviation business in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019, partially offset by lower expenses associated with certain retirement benefits and lower travel expenses.~~2020.

Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums decreased 5.6 percentage points in the third quarter of 2020 compared to the third quarter of 2019 due to the runoff of Neon. Neon has a higher expense ratio than many of the other businesses in the Specialty casualty sub-segment. Excluding Neon exited lines, the underwriting expense ratio decreased 2.5 percentage points in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 reflecting higher ceding commissions received from reinsurers as a result of growth in the excess liability and ~~surplus~~mergers and ~~excess liability businesses, lower expenses associated with certain retirement benefits and lower travel expenses.~~acquisition businesses.

Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums decreased ~~2.3~~0.8 percentage points in the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 reflecting the impact of higher premiums on the ratio in the ~~fidelity and equipment leasing businesses,~~innovative markets business due to lower ~~expenses associated with certain retirement benefits and lower travel expenses.~~cessions in the first three months of 2021 compared to the first three months of 2020.

T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Property and Casualty Net Investment Income

~~Excluding the Neon exited lines, net~~Net investment income in AFG’s property and casualty insurance operations was ~~$111~~$159 million in the ~~third quarter~~first three months of 2021 compared to $99 million (excluding the Neon exited lines) in the first three months of 2020, ~~compared to $124~~an increase of $60 million ~~in the third quarter of 2019, a decrease of $13 million (10%~~(61%). 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 September 30,												Three months ended March 31,
		2020			2019			Change			% Change			2021			2020			Change			% Change
Net investment income:	Net investment income:												Net investment income:
Net investment income excluding alternative investments	Net investment income excluding alternative investments	$	83		$	99		$	(16)		(16	%)	Net investment income excluding alternative investments	$	82		$	96		$	(14)		(15	%)
Alternative investments	Alternative investments	28			25			3			12	%	Alternative investments	77			3			74			2,467	%
Total net investment income	Total net investment income	$	111		$	124		$	(13)		(10	%)	Total net investment income	$	159		$	99		$	60		61	%

Average invested assets (at amortized cost)	Average invested assets (at amortized cost)	$	11,764		$	11,387		$	377		3	%	Average invested assets (at amortized cost)	$	12,573		$	11,457		$	1,116		10	%

Yield (net investment income as a % of average invested assets)	Yield (net investment income as a % of average invested assets)	3.77		%	4.36		%	(0.59		%)			Yield (net investment income as a % of average invested assets)	5.06		%	3.46		%	1.60		%

Tax equivalent yield (*)	Tax equivalent yield (*)	3.92		%	4.51		%	(0.59		%)			Tax equivalent yield (*)	5.20		%	3.58		%	1.62		%

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

~~Table of Contents~~

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

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

The property and casualty insurance segment’s ~~decrease~~increase in net investment income for the ~~third quarter~~first three months of ~~2020~~2021 compared to the ~~third quarter~~first three months of ~~2019~~2020 reflects significantly higher earnings from alternative investments (partnerships and similar investments and AFG-managed CLOs), partially offset by the effect of lower fixed maturity yields, lower short-term interest rates and lower dividend ~~income, partially offset by the impact of growth in the property and casualty insurance segment.~~income. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was ~~3.77%~~5.06% for the ~~third quarter~~first three months of 2021 compared to 3.46% for the first three months of 2020, ~~compared to 4.36% for the third quarter~~an increase of ~~2019, a decrease of 0.59~~1.60 percentage points. The annualized yield earned on alternative investments ~~(partnerships and similar investments and AFG-managed CLOs)~~ was ~~12.3%~~29.8% in the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~13.7%~~1.4% 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 net investment income ~~of $1 million~~ in the ~~third quarter~~first three months of ~~2020.~~2020, 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 $9$5 million for ~~both~~ the ~~third quarter~~first three months of 2021 compared to $6 million for the first three months of 2020, ~~and the third quarter~~a decrease of ~~2019.~~$1 million (17%). 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 September 30,					Three months ended March 31,
		2020		2019			2021		2020

Other income	Other income	$	—	$	5	Other income	$	4	$	5
Other expenses	Other expenses					Other expenses
Amortization of intangibles	Amortization of intangibles	3		3		Amortization of intangibles	3		3
Other	Other	6		8		Other	6		8
Total other expenses	Total other expenses	9		11		Total other expenses	9		11
Other income and expenses, net	Other income and expenses, net	$	(9)	$	(6)	Other income and expenses, net	$	(5)	$	(6)

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 $3 million in other income and expenses, net during the ~~third quarter~~first three months of 2020.

6759

~~Table of Contents~~T

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

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

~~Annuity Segment — Results of Operations~~

AFG’s annuity operations contributed $78 million in GAAP pretax earnings in the third quarter of 2020 compared to $73 million in the third quarter of 2019, an increase of $5 million (7%) due primarily to the positive impact of strong stock market performance in the 2020 quarter, less of a negative impact from lower than expected interest rates on the accounting for FIAs in the 2020 quarter compared to the 2019 quarter and growth in the annuity business, partially offset by higher unlocking charges in the 2020 quarter. AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions annually in the third quarter. If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter. AFG’s unlocking of the actuarial assumptions underlying its annuity operations resulted in a net charge of $46 million in the third quarter of 2020 compared to $1 million in the third quarter of 2019.

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

Three months ended September 30,
2020 2019 % Change
Revenues:
Net investment income $ 464 $ 448 4 %
Other income:
Guaranteed withdrawal benefit fees 18 17 6 %
Policy charges and other miscellaneous income (a) 17 14 21 %
Total revenues 499 479 4 %
Costs and Expenses:
Annuity benefits (a)(b) 282 280 1 %
Acquisition expenses (a) 64 64 — %
Other expenses 32 35 (9 %)
Total costs and expenses 378 379 — %
Core earnings before income taxes 121 100 21 %
Pretax non-core earnings (losses) (a) (43) (27) 59 %
GAAP earnings (loss) before income taxes $ 78 $ 73 7 %

~~(a)As discussed under~~ ~~“Results of Operations — General,”~~ 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). The impact of these items are shown aggregated as non-core annuity earnings (losses) and excluded from the income statement line items in the table above for the third quarter of 2020 and 2019, respectively:

•~~Policy charges and other miscellaneous income — $5 million unfavorable impact in 2020 and $1 million favorable in 2019.~~

•~~Annuity benefits — favorable impact of $69 million in 2020 and $26 million in 2019.~~

•~~Acquisition expenses — unfavorable impact on the amortization of deferred policy acquisition costs of $107 million in 2020 and $54 million in 2019.~~

~~(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 $121 million in the third quarter of 2020 compared to $100 million in the third quarter of 2019, an increase of $21 million (21%), reflecting higher earnings from limited partnerships and similar investments and AFG-managed CLOs as well as growth in the business, higher investment income from the early redemption of certain fixed maturities, lower other expenses and a reduction in the cost of funds as a percentage of annuity benefits accumulated due to renewal actions taken by AFG. These favorable items, some of which may not recur, were offset by the impact of lower interest rates on investment income. The table below highlights the impact of unlocking, 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 September 30,
2020 2019 % Change
Core earnings before income taxes — before the impact of unlocking, derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs $ 121 $ 100 21 %
Unlocking (46) (1) 4,500 %
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 (40) (81) (51 %)
Accretion of guaranteed minimum FIA benefits (107) (104) 3 %
Other annuity benefits (9) (12) (25 %)
Less cost of equity options 148 149 (1 %)
Related impact on the amortization of deferred policy acquisition costs 11 22 (50 %)
GAAP earnings before income taxes $ 78 $ 73 7 %

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

Three months ended September 30,
2020 2019 Total
Core Non-core Total Core Non-core Total % Change
Interest credited — fixed $ 101 $ — $ 101 $ 101 $ — $ 101 — %
Accretion of guaranteed minimum FIA benefits — 107 107 — 104 104 3 %
Interest credited — fixed component of variable annuities 1 — 1 1 — 1 — %
Cost of equity options 148 (148) — 149 (149) — — %
Other annuity benefits:
Amortization of sales inducements 2 — 2 3 — 3 (33 %)
Change in guaranteed withdrawal benefit reserve:
Impact of change in the stock market and interest rates — (9) (9) — — — — %
Accretion of benefits and other 26 — 26 21 — 21 24 %
Change in expected death and annuitization reserves and other 4 — 4 5 — 5 (20 %)
Change in other benefit reserves — impact of changes in interest rates and the stock market — 18 18 — 12 12 50 %
Unlocking — (77) (77) — (74) (74) 4 %
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market — 245 245 — 111 111 121 %
Equity option mark-to-market — (205) (205) — (30) (30) 583 %
Impact of derivatives related to FIAs — 40 40 — 81 81 (51 %)
Total annuity benefits $ 282 $ (69) $ 213 $ 280 $ (26) $ 254 (16 %)

~~Table of Contents~~

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

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

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 September 30,
2020 2019
Interest credited — fixed $ 101 $ 101
Include cost of equity options 148 149
Cost of funds 249 250
Interest credited — fixed component of variable annuities 1 1
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs 32 29
282 280
Unlocking, changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates over or under option costs:
Unlocking (77) (74)
Impact of derivatives related to FIAs 40 81
Accretion of guaranteed minimum FIA benefits 107 104
Other annuity benefits — impact of the stock market and interest rates on FIAs 9 12
Less cost of equity options (included in cost of funds) (148) (149)
Total annuity benefits expense $ 213 $ 254

~~See~~ ~~“Annuity Unlocking”~~ ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefits expense in the third quarter of 2020 and the third quarter of 2019.~~

~~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.

~~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) details the components of these spreads for AFG’s fixed annuity operations (including fixed-indexed and variable-indexed annuities):~~

Three months ended September 30,
2020 2019 % Change
Average fixed annuity investments (at amortized cost) $ 40,859 $ 38,650 6 %
Average fixed annuity benefits accumulated 41,158 38,946 6 %
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments) 4.52 % 4.62 %
Cost of funds (2.42 %) (2.57 %)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*) (0.14 %) (0.12 %)
Net interest spread 1.96 % 1.93 %
Policy charges and other miscellaneous income (*) 0.14 % 0.12 %
Acquisition expenses (*) (0.61 %) (0.65 %)
Other expenses (0.30 %) (0.34 %)
Net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs 1.19 % 1.06 %
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs 0.04 % (0.27 %)
Unlocking (0.45 %) (0.01 %)
Net spread earned on fixed annuities 0.78 % 0.78 %

~~(*)~~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 annuity benefits and the related impact on the amortization of deferred policy acquisition costs.

~~Annuity Net Investment Income~~

Net investment income for the third quarter of 2020 was $464 million compared to $448 million for the third quarter of 2019, an increase of $16 million (4%), reflecting higher earnings from partnerships and similar investments and growth in AFG’s annuity business, partially offset by the impact of lower investment yields. 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 0.10 percentage points to 4.52% from 4.62% in the third quarter of 2020 compared to the third quarter of 2019. The decrease in the net investment yield between periods reflects lower short-term interest rates and the impact of the run-off of higher yielding investments, partially offset by the positive impact of higher earnings from partnerships and similar investments and AFG-managed CLOs and higher investment income from the early redemption of certain fixed maturities in the third quarter of 2020. AFG’s annuity segment recorded $46 million in earnings from partnerships and similar investments and AFG-managed CLOs in the third quarter of 2020 compared to $27 million in the

~~Table of Contents~~

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

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

third quarter of 2019, an increase of $19 million (70%). The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was 13.7% in the third quarter of 2020 compared to 9.5% in the prior year period.

~~Annuity Cost of Funds~~

Cost of funds for the third quarter of 2020 was $249 million compared to $250 million for the third quarter of 2019, a decrease of $1 million. This decrease reflects the impact of offering lower renewal crediting (index participation) rates on option costs, partially offset by growth in the annuity business. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, decreased 0.15 percentage points to 2.42% in the third quarter of 2020 from 2.57% in the third quarter of 2019 reflecting the impact of lower option costs as a percentage of fixed annuity benefits accumulated.

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

Three months ended September 30,
2020 2019
Cost of equity options (FIAs) $ 148 $ 149
Interest credited:
Traditional fixed annuities 64 62
Fixed component of fixed-indexed annuities 26 24
Immediate annuities 5 6
Pension risk transfer products 5 2
Federal Home Loan Bank advances 1 7
Total cost of funds $ 249 $ 250

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

Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of unlocking and the stock market and interest rates, for the third quarter of 2020 were $14 million compared to $12 million for the third quarter of 2019, an increase of $2 million (17%). As a percentage of average fixed annuity benefits accumulated, these net expenses increased 0.02% to 0.14% from 0.12% in the third quarter of 2020 compared to the third 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 September 30,
2020 2019
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements $ 2 $ 3
Change in guaranteed withdrawal benefit reserve 26 21
Change in other benefit reserves 4 5
Other annuity benefits 32 29
Offset guaranteed withdrawal benefit fees (18) (17)
Other annuity benefits excluding the impact of the stock market and interest rates, net 14 12
Other annuity benefits — impact of the stock market and interest rates 9 12
Other annuity benefits, net $ 23 $ 24

~~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 $9 million in the third quarter of 2020 compared to an increase of $12 million in the third quarter of 2019. This $3 million (25%) decrease was the primary driver of the $1 million overall change in other annuity benefits, net of guaranteed withdrawal fees in the third quarter of 2020 compared to the third quarter of 2019.

~~See “Annuity Unlocking”~~ ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefits expense in the third quarter of 2020 and 2019.~~

~~Table of Contents~~

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

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

~~Annuity Net Interest Spread~~

AFG’s net interest spread increased 0.03 percentage points to 1.96% from 1.93% in the third quarter of 2020 compared to the same period in 2019 due primarily to the impact of offering lower renewal crediting rates on option costs, partially offset by the impact of lower interest rates on investment income. 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.

~~Annuity Policy Charges and Other Miscellaneous Income~~

Excluding the $5 million unlocking charge in the third quarter of 2020 and the $1 million favorable impact of unlocking in the third quarter of 2019, 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 $17 million for the third quarter of 2020 and $14 million the third quarter of 2019, an increase of $3 million (21%). Excluding the impact of unlocking related to unearned revenue, annuity policy charges and other miscellaneous income as a percentage of average fixed annuity benefits accumulated increased 0.02 percentage points to 0.14% from 0.12% the third quarter of 2020 compared to the third quarter of 2019.

~~See “Annuity Unlocking”~~ ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity policy charges and other miscellaneous income in the third quarter of 2020 and 2019.~~

~~Annuity Acquisition Expenses~~

In addition to the impact of unlocking, 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 September 30,
2020 2019
Annuity acquisition expenses before the impact of unlocking, changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates $ 64 $ 64
Unlocking 118 76
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates (11) (22)
Annuity acquisition expenses $ 171 $ 118

Annuity acquisitions expenses before unlocking and 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 $64 million for both the third quarter of 2020 and the third quarter of 2019.

~~See~~ ~~“Annuity Unlocking”~~ below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity and supplemental insurance acquisition expenses in the third quarter of 2020 and 2019. Unanticipated spread compression, decreases in the stock market, adverse mortality experience, and higher than expected lapse rates could lead to future write-offs of DPAC or present value of future profits on business in force of companies acquired (“PVFP”).

The negative impact of lower than anticipated interest rates in the third quarter of 2020 and 2019 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC. In the third quarter of 2020, this deceleration of the amortization of DPAC was partially offset by the impact of strong stock market performance.

~~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 illustrates the impact of unlocking and 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 September 30,
2020 2019
Before unlocking, 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 % 0.65 %
Unlocking 1.15 % 0.78 %
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates (0.11 %) (0.23 %)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated 1.65 % 1.20 %

~~Annuity Other Expenses~~

Annuity other expenses were $32 million for the third quarter of 2020 compared to $35 million for the third quarter of 2019, a decrease of $3 million (9%). 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 0.30% for the third quarter of 2020 from 0.34% in the third 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~~

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.

~~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 (excluding the impact of unlocking) 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 September 30,
2020 2019 % Change
Change in the fair value of derivatives related to FIAs $ (40) $ (81) (51 %)
Accretion of guaranteed minimum FIA benefits (107) (104) 3 %
Other annuity benefits (9) (12) (25 %)
Less cost of equity options 148 149 (1 %)
Related impact on the amortization of DPAC 11 22 (50 %)
Impact on annuity segment earnings before income taxes $ 3 $ (26) (112 %)

During the third quarter of 2020, the positive impact of strong stock market performance, partially offset by the impact of lower than anticipated interest rates increased earnings before income taxes for the annuity segment by $3 million compared to the $26 million negative impact of significantly lower than anticipated interest rates on annuity earnings before income taxes for the third quarter of 2019, a change of $29 million (112%). 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

~~Table of Contents~~

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

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

options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense reduction of 0.04% in the third quarter of 2020 compared to a net expense of 0.27% in the third 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 (excluding the impact of unlocking) 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 September 30,
2020 2019 % Change
Changes in the stock market, including volatility $ 19 $ 4 375 %
Changes in interest rates higher (lower) than expected (17) (30) (43 %)
Other 1 — — %
Impact on annuity segment earnings before income taxes $ 3 $ (26) (112 %)

~~See “Annuity Unlocking”~~ below for a discussion of the impact that the unlocking of actuarial assumptions had on the change in the fair value of the embedded derivative and other annuity liabilities in the third quarter of 2020 and the third quarter of 2019.

~~Annuity Net Spread Earned on Fixed Annuities~~

AFG’s net spread earned on fixed annuities excluding the impact of unlocking, 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 increased 0.13 percentage points to 1.19% in the third quarter of 2020 from 1.06% in the third quarter of 2019 reflecting a 0.03 percentage points increase in AFG’s net interest spread discussed above and growth in the annuity business. AFG’s overall net spread earned on fixed annuities was 0.78% in both the third quarter of 2020 and the third quarter of 2019 reflecting the increase in AFG’s net interest spread in the third quarter of 2020 compared to the third quarter of 2019 and the impact of growth in the annuity business, higher other income, lower other expenses and 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 offset by the impact of unlocking discussed below under “~~Annuity Unlocking~~.”

~~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.

~~Table of Contents~~

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

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

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 September 30, 2020 and 2019 (in millions):

Three months ended September 30,
2020 2019
Beginning fixed annuity reserves $ 40,942 $ 38,680
Fixed annuity premiums (receipts) 868 1,072
Federal Home Loan Bank advances and repayments — —
Surrenders, benefits and other withdrawals (844) (808)
Interest and other annuity benefit expenses:
Cost of funds 249 250
Embedded derivative mark-to-market 245 111
Change in other benefit reserves (13) (18)
Unlocking (73) (75)
Ending fixed annuity reserves $ 41,374 $ 39,212
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above) $ 41,374 $ 39,212
Impact of unrealized investment related gains 394 269
Fixed component of variable annuities 164 170
Annuity benefits accumulated per balance sheet $ 41,932 $ 39,651

Annuity benefits accumulated includes a liability of $801 million at September 30, 2020 and $611 million at September 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 $871 million in the third quarter of 2020 compared to $1.08 billion in the third quarter of 2019, a decrease of $206 million (19%). The following table summarizes AFG’s annuity sales (dollars in millions):

Three months ended September 30,
2020 2019 % Change
Financial institutions single premium annuities — indexed $ 332 $ 325 2 %
Financial institutions single premium annuities — fixed 141 302 (53 %)
Retail single premium annuities — indexed 134 198 (32 %)
Retail single premium annuities — fixed 17 30 (43 %)
Broker dealer single premium annuities — indexed 109 134 (19 %)
Broker dealer single premium annuities — fixed 3 9 (67 %)
Pension risk transfer 99 39 154 %
Education market — fixed and indexed annuities 33 35 (6 %)
Total fixed annuity premiums 868 1,072 (19 %)
Variable annuities 3 5 (40 %)
Total gross fixed annuity premiums 871 1,077 (19 %)
Ceded premiums (168) — — %
Total net annuity premiums $ 703 $ 1,077 (35 %)

Management attributes the 19% decrease in total gross fixed annuity premiums in the third quarter of 2020 compared to the third 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

~~Table of Contents~~

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

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

~~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 Unlocking~~

AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions annually. Beginning with the third quarter of 2019, AFG moved its unlocking from the fourth quarter to the third quarter and expects to continue to conduct the annual review in the third quarter of each year (consistent with many of its peers). If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim period.

The unlocking of the major actuarial assumptions underlying AFG’s annuity operations resulted in net charges related to its annuity business of $46 million and $1 million in the third quarter of 2020 and 2019, respectively, which impacted AFG’s financial statements as follows (in millions):

Three months ended September 30,
2020 2019
Policy charges and other miscellaneous income:
Unearned revenue $ (5) $ 1
Total revenues (5) 1
Annuity benefits:
Fixed-indexed annuities embedded derivative (240) (181)
Guaranteed withdrawal benefit reserve 107 102
Other reserves 60 4
Sales inducements asset (4) 1
Total annuity benefits (77) (74)
Annuity and supplemental insurance acquisition expenses:
Deferred policy acquisition costs 118 76
Total costs and expenses 41 2
Net charge $ (46) $ (1)

The net charge from unlocking annuity assumptions in the third quarter of 2020 is due primarily to the unfavorable impact related to lower expected future investment income resulting from a decrease to the long-term interest rate assumptions and the unfavorable impact related to changes in assumed persistency outside the surrender period on policies without guaranteed withdrawal benefits, partially offset by the favorable impact of lowering projected FIA option costs, including anticipated renewal rate actions. For the 2020 unlocking, reinvestment rate assumptions are based primarily on the expectation that the 7-year U.S. Treasury rate will increase to 2.45% and the 10-year U.S. Treasury rate will increase to 2.75% over time. For the unlocking in the third quarter of 2020, AFG assumed a net reinvestment rate (net of default and expense assumptions) of 3.08% in 2021, grading up ratably to an ultimate net reinvestment rate of 4.58% in 2031 and beyond.

The net charge from unlocking annuity assumptions in 2019 is due primarily to the unfavorable impacts of a decrease in projected net interest spreads on in-force business (due primarily to lower than previously anticipated reinvestment rates and the impact of lower than previously anticipated interest rates on floating rate investments) and higher assumed persistency in certain blocks of business, offset by lowering projected FIA option costs, including anticipated renewal rate actions.

~~Table of Contents~~

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

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

~~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 September 30, 2020 and 2019 (in millions):~~

Three months ended September 30,
2020 2019
Earnings on fixed annuity benefits accumulated $ 79 $ 76
Earnings impact of investments in excess of fixed annuity benefits accumulated (*) (3) (3)
Variable annuity earnings 2 —
Earnings before income taxes $ 78 $ 73

~~(*)~~Net investment income (as a % of investments) of 4.52% and 4.62% for the three months ended September 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 GAAP pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $77 million in the third quarter of 2020 compared to $50 million in the third quarter of 2019, an increase of $27 million (54%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $52 million in the third quarter of 2020 compared to $39 million in the third quarter of 2019, an increase of $13 million (33%).

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 for the three months ended September 30, 2020 and 2019 (dollars in millions):

Three months ended September 30,
2020 2019 % Change
Revenues:
Life, accident and health net earned premiums $ 5 $ 6 (17 %)
Net investment income 9 11 (18 %)
Other income — P&C fees 17 17 — %
Reclassify annuity segment option gains (10) (4) 150 %
Other income 6 6 — %
Total revenues 27 36 (25 %)
Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses 6 6 — %
Annuity — annuity benefits (10) (4) 150 %
Life, accident and health benefits (a) 11 9 22 %
Life, accident and health acquisition expenses 1 2 (50 %)
Other expense — expenses associated with P&C fees 11 11 — %
Other expenses (b) 36 34 6 %
Costs and expenses, excluding interest charges on borrowed money 55 58 (5 %)
Core loss before income taxes, excluding realized gains and losses and interest charges on borrowed money (28) (22) 27 %
Interest charges on borrowed money 24 17 41 %
Core loss before income taxes, excluding realized gains and losses (52) (39) 33 %
Pretax non-core special A&E charges (21) (11) 91 %
Pretax non-core long-term care loss recognition charge (4) — — %
GAAP loss before income taxes, excluding realized gains and losses $ (77) $ (50) 54 %

~~(a)Excludes pretax non-core long-term care loss recognition charge of $4 million in the third quarter of 2020.~~

~~(b)Excludes pretax non-core special A&E charges of $21 million and $11 million in the third quarter of 2020 and 2019, respectively.~~

~~Table~~able 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 ~~Other~~Unallocated — ~~Life, Accident and Health Premiums, Benefits and Acquisition Expenses~~Results of Operations

AFG’s ~~run-off long-term care~~net pretax loss outside of its property and ~~life~~casualty insurance ~~operations recorded net earned premiums of $5 million~~segment (excluding realized gains and ~~related benefits and acquisition expenses of $12~~losses) totaled $58 million in the ~~third quarter~~first three months of ~~2020 (excluding the loss recognition charge discussed below)~~2021 compared to ~~net earned premiums of $6 million and related benefits and acquisition expenses of $11~~$34 million in the ~~third quarter~~first three months of ~~2019.~~2020, an increase of $24 million (71%).

The following table details AFG’s loss before income taxes from operations outside of its property and casualty insurance segment for the three months ended March 31, 2021 and 2020 (dollars in millions):


	Three months ended March 31,
	2021		2020		% Change
Revenues:
Net investment income	$	5	$	(12)	(142	%)
Other income — P&C fees	19		17		12	%
Other income	4		5		(20	%)
Total revenues	28		10		180	%

Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses	8		5		60	%
Other expense — expenses associated with P&C fees	11		12		(8	%)
Other expenses	43		10		330	%
Costs and expenses, excluding interest charges on borrowed money	62		27		130	%
Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(34)		(17)		100	%
Interest charges on borrowed money	24		17		41	%



Loss from continuing operations before income taxes, excluding realized gains and losses	$	(58)	$	(34)	71	%

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 $9$5 million in the ~~third quarter~~first three months of ~~2020~~2021 compared to ~~$11~~a net investment loss of $12 million in the ~~third quarter~~first three months of ~~2019,~~2020, a ~~decrease~~change of $2$17 million ~~(18%~~(142%). 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 ~~$2 million in the third quarter of 2020 compared to an increase in value of~~ $3 million in the ~~third quarter~~first three months of ~~2019.~~

~~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 third quarter of 2020 and the third quarter of 2019, AFG collected $17 million in fees for these services. Management views this fee income, net of the $11 million in both the third quarter of 2020 and the third 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 as2021 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 third quarter of 2020 and 2019, AFG had $10 million and $4 million, respectively, in such option gains.

~~Holding Company and Other — Other Income~~

Other income in the table above includes $3 million in the third quarter of 2020 and $4 million in the third quarter of 2019, 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 of $3 million and $2 million in third quarter of 2020 and the third quarter of 2019, respectively.

~~Holding Company and Other — Other Expenses~~

Excluding the non-core special A&E charges discussed below, AFG’s holding companies and other operations outside of its property and casualty insurance and annuity segments recorded other expenses of $36 million in the third quarter of 2020 compared to $34 million in the third quarter of 2019, an increase of $2 million (6%), reflecting higher charitable contributions in the third quarter of 2020 compared to the 2019 quarter.

~~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 — 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 $24 million in the third quarter of 2020 compared to $17 million in the third quarter of 2019, an increase of $7 million (41%), reflecting higher average indebtedness. The following table details the principal amount of AFG’s long-term debt balances as of September 30, 2020 compared to September 30, 2019 (dollars in millions):

September 30,
2020 September 30,
2019
Direct obligations of AFG:
4.50% Senior Notes due June 2047 $ 590 $ 590
3.50% Senior Notes due August 2026 425 425
5.25% Senior Notes due April 2030 300 —
5.125% Subordinated Debentures due December 2059 200 —
4.50% Subordinated Debentures due September 2060 200 —
6% Subordinated Debentures due November 2055 150 150
5.625% Subordinated Debentures due June 2060 150 —
5.875% Subordinated Debentures due March 2059 125 125
6-1/4% Subordinated Debentures due September 2054 — 150
Other 3 3
Total principal amount of Holding Company Debt $ 2,143 $ 1,443
Weighted Average Interest Rate 4.7 % 4.7 %

The increase in interest expense for the third quarter of 2020 as compared to the third quarter of 2019 reflects the following financial transactions completed by AFG between June 30, 2019 and September 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~~

•~~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~~

~~Holding Company and Other — Special A&E Charges~~

~~As a result of the 2020 comprehensive external study and the 2019 in-depth internal review of A&E exposures discussed under “Special asbestos and environmental reserve charges” under “Results of Operations — Property and Casualty Insurance Segment — Net prior year reserve development~~,” AFG’s holding companies and other operations outside of its property and casualty insurance operations recorded pretax special charges of $21 million in the third quarter of 2020 and $11 million in the third quarter of 2019 to increase liabilities related to the A&E exposures of AFG’s former railroad and manufacturing operations. The charges in both periods were due primarily to relatively small movements across several sites that primarily reflect changes in the scope and costs of investigation and an increase in estimated ongoing operation and maintenance costs. In the third quarter of 2019, AFG also increased its reserve for asbestos and toxic substance exposures arising out of these operations.

~~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 — Long-Term Care Loss Recognition Charge~~

~~The $4 million pretax loss recognition charge in the third quarter of 2020 was due primarily to the unfavorable impact related to lower expected future investment income resulting from~~ a decrease in ~~the long-term interest rate assumptions.~~

~~Consolidated Realized Gains (Losses) on Securities~~

AFG’s consolidated realized gains (losses) on securities, which are not allocated to segments, were net gains of $45 million in the third quarter of 2020 compared to net losses of $18 million in the third quarter of 2019, a change of $63 million (350%). Realized gains (losses) on securities consisted of the following (in millions):

Three months ended September 30,
2020 2019
Realized gains (losses) before impairments:
Disposals $ 19 $ 6
Change in the fair value of equity securities 30 (15)
Change in the fair value of derivatives (5) 2
Adjustments to annuity deferred policy acquisition costs and related items (1) (2)
43 (9)
Change in allowance for impairments:
Securities 3 (14)
Adjustments to annuity deferred policy acquisition costs and related items (1) 5
2 (9)
Realized gains (losses) on securities $ 45 $ (18)

~~The $30 million net realized gain from the change in the fair~~ value of equity securities in the third quarter of 2020 includes gains of $16 million on investments in media companies, $11 million on investments in banks and financing companies, and $3 million on real estate investment trusts. These gains were partially offset by losses of $10 million on investments in natural gas companies and $6 million on investments in energy companies. The $15 million net realized loss from the change in the fair value of equity securities in the third quarter of 2019 includes losses of $20 million on investments in energy companies and losses of $13 million on investments in media companies. These losses were partially offset by gains of $10 million on investments in banks and financing companies and $9 million on investments in real estate investment trusts.

The $3 million reduction of previously recognized expected credit losses in the third quarter of 2020 includes $4 million in income related to corporate bonds and other fixed maturities and $1 million in expense related to structured securities. The $14 million impairment charge in the third quarter of 2019 include $13 million in charges on third-party collateralized loan obligations.

~~Consolidated Realized Gains (Losses) on Subsidiaries~~

On September 28, 2020, AFG announced that it has reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. AFG recorded a $30 million loss in the third quarter of 2020 to establish a liability equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. See ~~Note B — “Acquisitions and Sale of Businesses”~~ ~~to the financial statements.~~

~~Consolidated Income Taxes~~

AFG’s consolidated provision (credit) for income taxes was a credit of $30 million for the third quarter of 2020 compared to a provision of $34 million for the third quarter of 2019, a change of $64 million (188%). See ~~NoteL — “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 $4 million for the third quarter of 2019, reflecting 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 — NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 30, 2020 and 2019 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):

~~Table of Contents~~

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

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

Other
P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass Neon exited lines (c) GAAP Total
Nine months ended September 30, 2020
Revenues:
Property and casualty insurance net earned premiums $ 3,600 $ — $ — $ — $ 3,600 $ — $ 174 $ 3,774
Net investment income 282 1,270 21 16 1,589 — (5) 1,584
Realized gains (losses) on:
Securities — — — — — (302) — (302)
Subsidiaries — — — — — — (30) (30)
Income (loss) of MIEs:
Investment income — — 154 — 154 — — 154
Gain (loss) on change in fair value of assets/liabilities — — (47) — (47) — — (47)
Other income 8 100 (11) 61 158 (5) — 153
Total revenues 3,890 1,370 117 77 5,454 (307) 139 5,286
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 2,228 — — — 2,228 47 166 2,441
Commissions and other underwriting expenses 1,129 — — 16 1,145 — 90 1,235
Annuity benefits — 843 — (23) 820 85 — 905
Annuity and supplemental insurance acquisition expenses — 197 — 3 200 50 — 250
Interest charges on borrowed money — — — 64 64 — — 64
Expenses of MIEs — — 117 — 117 — — 117
Other expenses 31 100 — 149 280 25 5 310
Total costs and expenses 3,388 1,140 117 209 4,854 207 261 5,322
Earnings (loss) before income taxes 502 230 — (132) 600 (514) (122) (36)
Provision (credit) for income taxes 106 44 — (33) 117 (107) (73) (63)
Net earnings (loss), including noncontrolling interests 396 186 — (99) 483 (407) (49) 27
Less: Net earnings (loss) attributable to noncontrolling interests — — — — — — (13) (13)
Core Net Operating Earnings (Loss) 396 186 — (99) 483
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax — — — (239) (239) 239 — —
Annuity non-core earnings (losses), net of tax (b) — (111) — — (111) 111 — —
Neon exited lines (c) (36) — — — (36) — 36 —
Special A&E charges, net of tax (37) — — (17) (54) 54 — —
Other, net of tax — — — (3) (3) 3 — —
Net Earnings (Loss) Attributable to Shareholders $ 323 $ 75 $ — $ (358) $ 40 $ — $ — $ 40

~~Table of Contents~~

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

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

Other
P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Nine months ended September 30, 2019
Revenues:
Property and casualty insurance net earned premiums $ 3,815 $ — $ — $ — $ 3,815 $ — $ 3,815
Net investment income 352 1,334 (11) 35 1,710 — 1,710
Realized gains (losses) on securities — — — — — 222 222
Income (loss) of MIEs:
Investment income — — 206 — 206 — 206
Gain (loss) on change in fair value of assets/liabilities — — (16) — (16) — (16)
Other income 10 89 (11) 81 169 1 170
Total revenues 4,177 1,423 168 116 5,884 223 6,107
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 2,341 — — — 2,341 18 2,359
Commissions and other underwriting expenses 1,256 — — 19 1,275 — 1,275
Annuity benefits — 867 — (8) 859 41 900
Annuity and supplemental insurance acquisition expenses — 157 — 4 161 20 181
Interest charges on borrowed money — — — 50 50 — 50
Expenses of MIEs — — 168 — 168 — 168
Other expenses 34 105 — 175 314 11 325
Total costs and expenses 3,631 1,129 168 240 5,168 90 5,258
Earnings (loss) before income taxes 546 294 — (124) 716 133 849
Provision (credit) for income taxes 111 59 — (27) 143 28 171
Net earnings (loss), including noncontrolling interests 435 235 — (97) 573 105 678
Less: Net earnings (loss) attributable to noncontrolling interests (8) — — — (8) — (8)
Core Net Operating Earnings (Loss) 443 235 — (97) 581
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax — — — 176 176 (176) —
Annuity non-core earnings (losses), net of tax (b) — (48) — — (48) 48 —
Special A&E charges, net of tax (14) — — (9) (23) 23 —
Net Earnings (Loss) Attributable to Shareholders $ 429 $ 187 $ — $ 70 $ 686 $ — $ 686

~~(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 $333 million in GAAP pretax earnings in the first nine months of 2020 compared to $528~~ million in the first ~~nine~~three months of 2019, a decrease of $195 million (37%). Property and casualty core pretax earnings were $502 million in the first nine months of 2020 compared to $546 million in the first nine months of 2019, a decrease of $44 million (8%). The decrease in GAAP and core pretax earnings reflects lower net investment income in the first nine months of 2020 compared to the same period in 2019 due primarily to the impact of financial market disruption on earnings (losses) from partnerships and similar investments and AFG-managed CLOs. The decrease in GAAP pretax earnings also reflects pretax non-core special A&E charges of $47 million in the first nine months of 2020 compared $18 million in the first nine months of 2019.

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

Nine months ended September 30,
2020 2019 % Change
Gross written premiums $ 5,288 $ 5,550 (5 %)
Reinsurance premiums ceded (1,512) (1,521) (1 %)
Net written premiums 3,776 4,029 (6 %)
Change in unearned premiums (176) (214) (18 %)
Net earned premiums 3,600 3,815 (6 %)
Loss and loss adjustment expenses (a) 2,228 2,341 (5 %)
Commissions and other underwriting expenses 1,129 1,256 (10 %)
Core underwriting gain 243 218 11 %
Net investment income 282 352 (20 %)
Other income and expenses, net (23) (24) (4 %)
Core earnings before income taxes 502 546 (8 %)
Pretax non-core special A&E charges (47) (18) 161 %
Pretax non-core Neon exited lines (b) (122) — — %
GAAP earnings before income taxes and noncontrolling interests $ 333 $ 528 (37 %)
(a) Excludes pretax non-core special A&E charges of $47 million and $18 million in the third quarter of 2020 and 2019, respectively.
(b) 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 nine months ended September 30, 2020 (in millions):
Nine months ended September 30, 2020
Excluding Neon
exited lines
Neon
exited lines
Total
Gross written premiums $ 5,288 $ 78 $ 5,366
Reinsurance premiums ceded (1,512) (70) (1,582)
Net written premiums 3,776 8 3,784
Change in unearned premiums (176) 166 (10)
Net earned premiums 3,600 174 3,774
Loss and loss adjustment expenses 2,228 166 2,394
Commissions and other underwriting expenses 1,129 90 1,219
Underwriting gain (loss) 243 (82) 161
Net investment income 282 (5) 277
Loss on sale of subsidiaries — (30) (30)
Other income and expenses, net (23) (5) (28)
Earnings (loss) before income taxes and noncontrolling interests 502 (122) 380
Pretax non-core special A&E charges (47) — (47)
GAAP earnings (loss) before income taxes and noncontrolling interests $ 455 $ (122) $ 333

~~Table of Contents~~

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

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

Nine months ended September 30,
2020 2019 Change
Combined Ratios:
Specialty lines
Loss and LAE ratio 61.8 % 60.9 % 0.9 %
Underwriting expense ratio 31.4 % 32.9 % (1.5 %)
Combined ratio 93.2 % 93.8 % (0.6 %)
Aggregate — including exited lines
Loss and LAE ratio 64.7 % 61.8 % 2.9 %
Underwriting expense ratio 32.3 % 32.9 % (0.6 %)
Combined ratio 97.0 % 94.7 % 2.3 %

~~Gross Written Premiums~~

Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $5.37 billion for the first nine months of 2020 compared to $5.55 billion for the first nine months of 2019, a decrease of $184 million (3%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):

Nine months ended September 30,
2020 2019
GWP % GWP % % Change
Property and transportation $ 2,166 40 % $ 2,131 38 % 2 %
Specialty casualty 2,579 48 % 2,839 51 % (9 %)
Specialty financial 543 11 % 580 11 % (6 %)
Total specialty 5,288 99 % 5,550 100 % (5 %)
Neon exited lines 78 1 % — — % — %
Aggregate $ 5,366 100 % $ 5,550 100 % (3 %)

~~Reinsurance Premiums Ceded~~

Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 29% of gross written premiums for the first nine months of 2020 compared to 27% of gross written premiums for the first nine months of 2019, an increase of 2 percentage points. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):

Nine months ended September 30,
2020 2019 Change in
Ceded % of GWP Ceded % of GWP % of GWP
Property and transportation $ (719) 33 % $ (704) 33 % — %
Specialty casualty (840) 33 % (807) 28 % 5 %
Specialty financial (102) 19 % (119) 21 % (2 %)
Other specialty 149 109
Total specialty (1,512) 29 % (1,521) 27 % 2 %
Neon exited lines (70) 90 % — — % 90 %
Aggregate $ (1,582) 29 % $ (1,521) 27 % 2 %

~~Table of Contents~~

~~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 $3.78 billion for the first nine months of 2020 compared to $4.03 billion for the first nine months of 2019, a decrease of $245 million (6%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):

Nine months ended September 30,
2020 2019
NWP % NWP % % Change
Property and transportation $ 1,447 38 % $ 1,427 35 % 1 %
Specialty casualty 1,739 46 % 2,032 50 % (14 %)
Specialty financial 441 12 % 461 11 % (4 %)
Other specialty 149 4 % 109 4 % 37 %
Total specialty 3,776 100 % 4,029 100 % (6 %)
Neon exited lines 8 — % — — % — %
Aggregate $ 3,784 100 % $ 4,029 100 % (6 %)

~~Net Earned Premiums~~

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $3.77 billion for the first nine months of 2020 compared to $3.82 billion for the first nine months of 2019, a decrease of $41 million (1%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):

Nine months ended September 30,
2020 2019
NEP % NEP % % Change
Property and transportation $ 1,350 36 % $ 1,323 35 % 2 %
Specialty casualty 1,663 44 % 1,921 50 % (13 %)
Specialty financial 455 12 % 458 12 % (1 %)
Other specialty 132 3 % 113 3 % 17 %
Total specialty 3,600 95 % 3,815 100 % (6 %)
Neon exited lines 174 5 % — — % — %
Aggregate $ 3,774 100 % $ 3,815 100 % (1 %)

The $184 million (3%) decrease in gross written premiums for the first nine months of 2020 compared to the first nine months of 2019 reflects a decrease in the Specialty casualty and Specialty financial sub-segments, partially offset by an increase in the Specialty property and transportation sub-segment. Overall average renewal rates increased approximately 11% in the first nine months of 2020. ~~Excluding the workers’ compensation business, renewal pricing increased approximately 14%.~~

~~Property and transportation~~Gross written premiums increased $35 million (2%) in the first nine months of 2020 when compared to the first nine months of 2019, due primarily to growth and new business opportunities in the property and inland marine and ocean marine businesses, partially offset by the return of premiums and reduced exposures as a result of the COVID-19 pandemic in the transportation businesses. Average renewal rates increased approximately 6% for this group in the first nine months of 2020. Reinsurance premiums ceded as a percentage of gross written premiums were comparable in the first nine months of 2020 and the first nine months of 2019.

~~Specialty casualty~~ Gross written premiums decreased $260 million (9%) in the first nine months of 2020 compared to the first nine months of 2019 due primarily to the run-off of Neon. Excluding the $429 million in gross written premiums from the Neon exited lines in the first nine months of 2019, gross written premiums increased 7% in the first nine months of 2020 compared to the first nine months of 2019. This increase reflects growth in the excess and surplus, excess liability targeted markets and executive liability businesses, primarily the result of significant renewal rate increases, new business opportunities and higher retentions on renewal business. This growth was partially offset by lower premiums due to reduced exposures in the workers’ compensation businesses as a result of the COVID-19 pandemic. Average renewal rates increased approximately 13% for this group in the first nine months of 2020. Excluding rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 22%. Reinsurance premiums ceded as a percentage of gross written premiums increased 5 percentage points in the first nine months of 2020 compared to the first nine months of 2019, reflecting growth in the excess and surplus and public sector businesses, which cede a larger percentage of premiums than the other businesses in the Specialty casualty sub-segment.

~~Table of Contents~~

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

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

~~Specialty financial~~ Gross written premiums decreased $37 million (6%) in the first nine months of 2020 compared to the first nine months of 2019 due primarily to lower premiums from the impact of various state regulations regarding policy cancellations and the placement of forced coverage in the financial institutions business, partially offset by higher premiums in the fidelity business. Average renewal rates for this group increased approximately 7% in the first nine months of 2020. Reinsurance premiums ceded as a percentage of gross written premiums decreased 2 percentage points for the first nine months of 2020 compared to the first nine months of 2019, reflecting lower cessions in the financial institutions 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 $40 million (37%) in the first nine months of 2020 compared to the first nine 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 for AFG’s property and casualty insurance segment:~~

Nine months ended September 30, Nine months ended September 30,
2020 2019 Change 2020 2019
Property and transportation
Loss and LAE ratio 65.1 % 68.3 % (3.2 %)
Underwriting expense ratio 27.0 % 25.5 % 1.5 %
Combined ratio 92.1 % 93.8 % (1.7 %)
Underwriting profit $ 107 $ 81
Specialty casualty
Loss and LAE ratio 63.7 % 61.6 % 2.1 %
Underwriting expense ratio 28.4 % 32.9 % (4.5 %)
Combined ratio 92.1 % 94.5 % (2.4 %)
Underwriting profit $ 132 $ 106
Specialty financial
Loss and LAE ratio 40.8 % 33.3 % 7.5 %
Underwriting expense ratio 52.7 % 53.5 % (0.8 %)
Combined ratio 93.5 % 86.8 % 6.7 %
Underwriting profit $ 30 $ 60
Total Specialty
Loss and LAE ratio 61.8 % 60.9 % 0.9 %
Underwriting expense ratio 31.4 % 32.9 % (1.5 %)
Combined ratio 93.2 % 93.8 % (0.6 %)
Underwriting profit $ 247 $ 236
Aggregate — including exited lines
Loss and LAE ratio 64.7 % 61.8 % 2.9 %
Underwriting expense ratio 32.3 % 32.9 % (0.6 %)
Combined ratio 97.0 % 94.7 % 2.3 %
Underwriting profit $ 114 $ 200

The Specialty property and casualty insurance operations generated an underwriting profit of $247 million for the first nine months of 2020 compared to $236 million for the first nine months of 2019, an increase of $11 million (5%). The higher underwriting profit in the first nine months of 2020 reflects higher underwriting profits in the Property and transportation and Specialty casualty sub-segments, partially offset by lower underwriting profit in the Specialty financial sub-segment. Underwriting results for the Specialty property and casualty insurance operations include $95 million in COVID-19 related losses (2.6 points on the combined ratio) in the first nine months of 2020. Catastrophe losses were $71 million (2.0 points

~~Table of Contents~~

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

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

~~on the combined ratio) and related net reinstatement premiums were $5 million in the first nine months of 2020 compared to $46 million (1.2 points) in the first nine months of 2019.~~

~~Property and transportation~~Underwriting profit for this group was $107 million for the first nine months of 2020 compared to $81 million for the first nine months of 2019, an increase of $26 million (32%). This increase reflects higher favorable prior year reserve development in the transportation businesses and higher underwriting profitability in the non-crop agricultural businesses and Singapore branch, partially offset by lower underwriting profit in the crop business. COVID-19 related losses for this group were $7 million (0.5 points on the combined ratio) in the first nine months of 2020. Catastrophe losses were $41 million (3.0 points on the combined ratio) in the first nine months of 2020 compared to $25 million (1.9 points) in the first nine months of 2019.

~~Specialty casualty~~ Underwriting profit for this group was $132 million for the first nine months of 2020 compared to $106 million for the first nine months of 2019, an increase of $26 million (25%). This increase reflects higher year-over-year underwriting profitability in the excess surplus and excess liability businesses and the impact of $33 million of underwriting losses at Neon in the first nine months of 2019, partially offset by higher adverse reserve development in the general liability business and lower year-over-year underwriting profits in the targeted markets and workers’ compensation businesses. COVID-19 related losses were $58 million (3.5 points on the combined ratio) in the first nine months of 2020, primarily in the workers’ compensation and executive liability businesses. Catastrophe losses were $9 million (0.6 points on the combined ratio) and related reinstatement premiums were $5 million in the first nine months of 2020 compared to catastrophe losses of $12 million (0.6 points) in the first nine months of 2019.

~~Specialty financial~~ Underwriting profit for this group was $30 million for the first nine months of 2020 compared to $60 million for the first nine months of 2019, a decrease of $30 million (50%). This decrease reflects lower underwriting profitability in the trade credit, surety and innovative markets businesses. COVID-19 related losses were $29 million (6.4 points on the combined ratio) in the first nine months of 2020 primarily related to trade credit insurance. Catastrophe losses were $19 million (4.3 points on the combined ratio) in the first nine months of 2020 compared to $8 million (1.8 points) in the first nine months of 2019.

~~Other specialty~~ This group reported an underwriting loss of $22 million for the first nine months of 2020 compared to $11 million in the first nine months of 2019, an increase of $11 million (100%). This increase reflects higher 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 nine months of 2020 compared to the first nine months of 2019.

~~Aggregate~~ ~~See “Special asbestos and environmental reserve charges” under “Results of Operations — Property and Casualty Insurance Segment — Net prior year reserve development”~~ for the quarters ended September 30, 2020 and 2019 for a discussion of the $47 million and $18 million pretax non-core special A&E charges recorded in the third quarter of 2020 and 2019, respectively. Aggregate underwriting results for AFG’s property and casualty insurance segment also include an underwriting loss of $82 million at Neon in the first nine months of 2020, due primarily to losses related to the COVID-19 pandemic, catastrophe losses and several large claims. AFG also recorded adverse prior year reserve development of $4 million and $18 million in the first nine months of 2020 and 2019, respectively, related to business outside of the Specialty group that AFG no longer writes.

~~Table of Contents~~

~~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 64.7% for the first nine months of 2020 compared to 61.8% for the first nine months of 2019, an increase of 2.9 percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions):

Nine months ended September 30,
Amount Ratio Change in
2020 2019 2020 2019 Ratio
Property and transportation
Current year, excluding COVID-19 related and catastrophe losses $ 909 $ 929 67.4 % 70.1 % (2.7 %)
Prior accident years development (78) (49) (5.8 %) (3.7 %) (2.1 %)
COVID-19 related losses 7 — 0.5 % — % 0.5 %
Current year catastrophe losses 41 25 3.0 % 1.9 % 1.1 %
Property and transportation losses and LAE and ratio $ 879 $ 905 65.1 % 68.3 % (3.2 %)
Specialty casualty
Current year, excluding COVID-19 related and catastrophe losses $ 1,083 $ 1,235 65.1 % 64.2 % 0.9 %
Prior accident years development (91) (63) (5.5 %) (3.2 %) (2.3 %)
COVID-19 related losses 58 — 3.5 % — % 3.5 %
Current year catastrophe losses 9 12 0.6 % 0.6 % — %
Specialty casualty losses and LAE and ratio $ 1,059 $ 1,184 63.7 % 61.6 % 2.1 %
Specialty financial
Current year, excluding COVID-19 related and catastrophe losses $ 160 $ 168 34.9 % 36.8 % (1.9 %)
Prior accident years development (22) (24) (4.8 %) (5.3 %) 0.5 %
COVID-19 related losses 29 — 6.4 % — % 6.4 %
Current year catastrophe losses 19 8 4.3 % 1.8 % 2.5 %
Specialty financial losses and LAE and ratio $ 186 $ 152 40.8 % 33.3 % 7.5 %
Total Specialty
Current year, excluding COVID-19 related and catastrophe losses $ 2,239 $ 2,411 62.2 % 63.2 % (1.0 %)
Prior accident years development (181) (134) (5.0 %) (3.5 %) (1.5 %)
COVID-19 related losses 95 — 2.6 % — % 2.6 %
Current year catastrophe losses 71 46 2.0 % 1.2 % 0.8 %
Total Specialty losses and LAE and ratio $ 2,224 $ 2,323 61.8 % 60.9 % 0.9 %
Aggregate — including exited lines
Current year, excluding COVID-19 related and catastrophe losses $ 2,358 $ 2,411 62.5 % 63.2 % (0.7 %)
Prior accident years development (119) (98) (3.1 %) (2.6 %) (0.5 %)
COVID-19 related losses 115 — 3.0 % — % 3.0 %
Current year catastrophe losses 87 46 2.3 % 1.2 % 1.1 %
Aggregate losses and LAE and ratio $ 2,441 $ 2,359 64.7 % 61.8 % 2.9 %

~~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 62.2% for the first nine months of 2020 compared to 63.2% for the first nine months of 2019, an improvement of 1.0 percentage points.

~~Property and transportation~~The 2.7 percentage point improvement 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 ratio in the transportation businesses, due primarily to rate increases and lower claim frequency in the first nine months of 2020, and lower loss and LAE ratios in non-crop agricultural businesses and the Singapore branch in the first nine months of 2020 compared to the first nine months of 2019.

~~Specialty casualty~~ The 0.9 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 first nine months of 2019, which has a lower loss and LAE ratio than many of the other businesses in the Specialty casualty group. Excluding the

~~Table of Contents~~

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

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

impact of the Neon exited lines, the loss and LAE ratio for the current year, excluding catastrophe losses decreased 0.3 percentage points in the first nine months of 2020 compared to the first nine months of 2019.

~~Specialty financial~~The 1.9 percentage point improvement 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 ratio of the financial institutions business in the first nine months of 2020 compared to the first nine months of 2019, partially offset by an increase in the loss and LAE ratio of the fidelity business in the first nine months of 2020 compared to the first nine months of 2019.

~~Net prior year reserve development~~

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $181 million in the first nine months of 2020 compared to $134 million in the first nine months of 2019, an increase of $47 million (35%).

~~Property and transportation~~ Net favorable reserve development of $78 million in the first nine 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. Net favorable reserve development of $49 million in the first nine months of 2019 reflects lower than expected claim frequency and severity in the transportation businesses and lower than expected losses in the crop business.

~~Specialty casualty~~ Net favorable reserve development of $91 million in the first nine months of 2020 reflects lower than anticipated claim 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 in general liability contractor claims and higher than expected claim frequency and severity in the excess and surplus businesses. Net favorable reserve development of $63 million in the first nine 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 claim frequency in general liability contractor claims.

~~Specialty financial~~Net favorable reserve development of $22 million in the first nine months of 2020 reflects lower than anticipated claim frequency in the trade credit business and lower than anticipated claim frequency and severity in the financial institutions, fidelity and surety businesses. Net favorable reserve development of $24 million in the first nine months of 2019 reflects lower than expected claim frequency and severity in the surety and financial institutions businesses and lower than anticipated 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 $10 million in the first nine months of 2020 and $2 million in the first nine months of 2019, which includes adverse development of $14 million and $6 million in the first nine months of 2020 and the first nine months of 2019, respectively, associated with AFG’s internal reinsurance program. Both periods include the amortization of the deferred gain on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001.

~~Special asbestos and environmental reserve charges~~ ~~See “Special asbestos and environmental reserve charges” under “Results of Operations — Property and Casualty Insurance Segment — Net prior year reserve development”~~ ~~for the quarters ended September 30, 2020 and 2019 for a discussion of the $47 million and $18 million special charges recorded in the third quarter of 2020 and 2019, respectively.~~

~~Aggregate~~ Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes the special A&E charges mentioned above, net adverse reserve development of $11 million from the Neon exited lines in the first nine months of 2020 and net adverse reserve development of $4 million and $18 million in the first nine months of 2020 and the first nine months of 2019, respectively, related to business outside the Specialty group that AFG no longer writes.

~~Covid-19 related losses~~

Underwriting results for AFG’s Specialty property and casualty insurance operations for the first nine months of 2020 included $95 million in COVID-19 related losses. Given the uncertainties surrounding the ultimate number or scope of claims relating to the pandemic, these charges, approximately 80% of which establish reserves for claims that have been incurred but not reported, represent the Company’s current best estimate of losses from the pandemic and related economic disruption incurred through September 30, 2020. Approximately 70% of AFG’s COVID-19 related losses were

~~Table of Contents~~

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

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

~~reported in the workers’ compensation, executive liability and trade credit businesses, with the remainder spread across numerous other businesses.~~

~~In addition, underwriting results for the Neon exited lines includes $19 million of COVID-19 related losses in the first nine months of 2020.~~

~~Catastrophe losses~~

Catastrophe losses of $87 million in the first nine months of 2020 resulted primarily from Hurricanes Hanna, Laura and Sally, Tropical Storm Isaias, storms and tornadoes in multiple regions of the United States, multiple wildfires in west coast states, and $4 million related to civil unrest. Catastrophe losses of $46 million in the first nine months of 2019 resulted primarily from storms and tornadoes in multiple regions of the United States, Hurricane Dorian and Tropical Storm Imelda.

~~Commissions and Other Underwriting Expenses~~

AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $1.22 billion in the first nine months of 2020 compared to $1.26 billion for the first nine months of 2019, a decrease of $37 million (3%). AFG’s underwriting expense ratio was 32.3% for the first nine months of 2020 compared to 32.9% for the first nine months of 2019, a decrease of 0.6 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):

Nine months ended September 30,
2020 2019 Change in
U/W Exp % of NEP U/W Exp % of NEP % of NEP
Property and transportation $ 364 27.0 % $ 337 25.5 % 1.5 %
Specialty casualty 472 28.4 % 631 32.9 % (4.5 %)
Specialty financial 239 52.7 % 246 53.5 % (0.8 %)
Other specialty 54 39.1 % 42 37.5 % 1.6 %
Total Specialty 1,129 31.4 % 1,256 32.9 % (1.5 %)
Neon exited lines 90 —
Aggregate $ 1,219 32.3 % $ 1,256 32.9 % (0.6 %)

~~Property and transportation~~ Commissions and other underwriting expenses as a percentage of net earned premiums increased 1.5 percentage points in the first nine months of 2020 compared to the first nine months of 2019, reflecting lower profitability-based ceding commissions received from reinsurers in the crop business in the first nine months of 2020 compared to the first nine months of 2019, partially offset by lower travel expenses.

~~Specialty casualty~~ Commissions and other underwriting expenses as a percentage of net earned premiums decreased 4.5 percentage points in the first nine months of 2020 compared to the first nine months of 2019, due to the run-off of Neon. Neon has a higher expense ratio than many of the other businesses in the Specialty casualty sub-segment. Excluding the Neon exited lines, the underwriting expense ratio decreased 1.7 percentage points in the first nine months of 2020 compared to the first nine months of 2019 reflecting higher ceding commissions as a result of growth in the excess and surplus business and lower travel expenses.

~~Specialty financial~~ Commissions and other underwriting expenses as a percentage of net earned premiums decreased 0.8 percentage points in the first nine months of 2020 compared to the first nine months of 2019 reflecting lower travel expenses.

~~Table of Contents~~

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

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

~~Property and Casualty Net Investment Income~~

Excluding the Neon exited lines, net investment income in AFG’s property and casualty insurance operations was $282 million in the first nine months of 2020 compared to $352 million in the first nine months of 2019, a decrease of $70 million (20%). 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):

Nine months ended September 30,
2020 2019 Change % Change
Net investment income:
Net investment income excluding alternative investments $ 264 $ 296 $ (32) (11 %)
Alternative investments 18 56 (38) (68 %)
Total net investment income $ 282 $ 352 $ (70) (20 %)
Average invested assets (at amortized cost) $ 11,611 $ 11,192 $ 419 4 %
Yield (net investment income as a % of average invested assets) 3.24 % 4.19 % (0.95 %)
Tax equivalent yield (*) 3.37 % 4.36 % (0.99 %)

~~(*)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 nine months of 2020 compared to the first nine months of 2019 reflects losses from alternative investments (partnerships and similar investments and AFG-managed CLOs) in the first nine months of 2020 as a result of the negative impact of the COVID-19 pandemic on financial markets, lower short-term interest rates and lower dividend income, partially offset by the impact of growth in the property and casualty insurance segment. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 3.24% for the first nine months of 2020 compared to 4.19% for the first nine months of 2019, a decrease of 0.95 percentage points. The annualized yield earned on alternative investments was 2.7% in the first nine months of 2020 compared to 10.8% 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 $5 million loss in the first nine 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 $23 million for the first nine months of 2020 compared to $24 million for the first nine months of 2019, a decrease of $1 million (4%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions):

Nine months ended September 30,
2020 2019
Other income $ 8 $ 10
Other expenses
Amortization of intangibles 9 9
Other 22 25
Total other expense 31 34
Other income and expenses, net $ (23) $ (24)

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 $5 million in other income and expenses, net during the first nine months of 2020.

~~Table of Contents~~

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

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

~~Annuity Segment — Results of Operations~~

AFG’s annuity operations contributed $90 million in GAAP pretax earnings in the first nine months of 2020 compared to $234 million in the first nine months of 2019, a decrease of $144 million (62%) due primarily to losses from partnerships and similar investments and AFG-managed CLOs, a higher unlocking charge in the 2020 period and the impact of strong stock market performance in the 2019 period, partially offset by less of a negative impact from lower than expected interest rates on the accounting for FIAs in the 2020 period compared to the 2019 period. AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions annually in the third quarter. If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter. AFG’s unlocking of the actuarial assumptions underlying its annuity operations resulted in a net charge of $46 million in the third quarter of 2020 compared to $1 million in the third quarter of 2019.

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

Nine months ended September 30,
2020 2019 % Change
Revenues:
Net investment income $ 1,270 $ 1,334 (5 %)
Other income:
Guaranteed withdrawal benefit fees 52 50 4 %
Policy charges and other miscellaneous income (a) 48 39 23 %
Total revenues 1,370 1,423 (4 %)
Costs and Expenses:
Annuity benefits (a)(b) 843 867 (3 %)
Acquisition expenses (a) 197 157 25 %
Other expenses 100 105 (5 %)
Total costs and expenses 1,140 1,129 1 %
Core earnings before income taxes 230 294 (22 %)
Pretax non-core earnings (losses) (a) (140) (60) 133 %
GAAP earnings before income taxes $ 90 $ 234 (62 %)

~~(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). The impact of these items are shown aggregated as non-core annuity earnings (losses) and excluded from the income statement line items in the table above for the first nine months of 2020 and 2019, respectively:

•~~Policy charges and other miscellaneous income — $5 million unfavorable impact in 2020 and $1 million favorable in 2019.~~

•~~Annuity benefits — unfavorable impact of $85 million in 2020 and $41 million in 2019.~~

•~~Acquisition expenses — unfavorable impact on the amortization of deferred policy acquisition costs of $50 million in 2020 and $20 million in 2019.~~

~~(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 $230 million in the first nine months of 2020 compared to $294 million in the first nine months of 2019, a decrease of $64 million (22%). 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 nine months of 2020, the annuity segment’s core earnings before income taxes excludes $140 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 nine 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 nine months of 2020 decreased $75 million compared to the first nine months of 2019 reflecting the losses from partnerships and similar investments and AFG-managed CLOs and the impact of lower short-term interest rates on investment income in the first nine months of 2020, partially offset by growth in the business, higher investment income from the early redemption of certain fixed maturities, higher than expected persistency and a reduction in the cost of funds as a percentage of average annuity benefits accumulated due to renewal actions taken by AFG. 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):

Nine months ended September 30,
2020 2019 % Change
Core earnings before income taxes — before the impact of unlocking, derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs $ 230 $ 305 (25 %)
Unlocking (46) (1) 4,500 %
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 (240) (279) (14 %)
Accretion of guaranteed minimum FIA benefits (318) (305) 4 %
Other annuity benefits (50) (12) 317 %
Less cost of equity options 446 436 2 %
Related impact on the amortization of deferred policy acquisition costs 68 90 (24 %)
GAAP earnings before income taxes $ 90 $ 234 (62 %)

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

~~Table of Contents~~

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

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

Nine months ended September 30,
2020 2019 Total
Core Non-core Total Core Non-core Total % Change
Interest credited — fixed $ 307 $ — $ 307 $ 294 $ — $ 294 4 %
Accretion of guaranteed minimum FIA benefits — 318 318 99 206 305 4 %
Interest credited — fixed component of variable annuities 3 — 3 3 — 3 — %
Cost of equity options 446 (446) — 295 (295) — — %
Other annuity benefits:
Amortization of sales inducements 6 — 6 10 — 10 (40 %)
Change in guaranteed withdrawal benefit reserve:
Impact of change in the stock market and interest rates — 11 11 (12) (4) (16) (169 %)
Accretion of benefits and other 68 — 68 60 — 60 13 %
Change in expected death and annuitization reserves and other 13 — 13 19 — 19 (32 %)
Change in other benefit reserves — impact of changes in interest rates and the stock market — 39 39 4 24 28 39 %
Unlocking — (77) (77) — (74) (74) 4 %
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market — 199 199 462 362 824 (76 %)
Equity option mark-to-market — 41 41 (367) (178) (545) (108 %)
Impact of derivatives related to FIAs — 240 240 95 184 279 (14 %)
Total annuity benefits $ 843 $ 85 $ 928 $ 867 $ 41 $ 908 2 %

Nine months ended September 30,
2020 2019
Interest credited — fixed $ 307 $ 294
Include cost of equity options 446 436
Cost of funds 753 730
Interest credited — fixed component of variable annuities 3 3
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs 87 89
843 822
Unlocking, changes in fair value of derivatives related to FIAs, and other impacts of the stock market and interest rates over or under option costs:
Unlocking (77) (74)
Impact of derivatives related to FIAs 240 279
Accretion of guaranteed minimum FIA benefits 318 305
Other annuity benefits — impact of the stock market and interest rates on FIAs 50 12
Less cost of equity options (included in cost of funds) (446) (436)
Total annuity benefits expense $ 928 $ 908

~~See “Annuity Unlocking”~~ ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefits expense in 2020 and 2019.~~

~~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):~~

Nine months ended September 30,
2020 2019 % Change
Average fixed annuity investments (at amortized cost) $ 40,501 $ 37,849 7 %
Average fixed annuity benefits accumulated 40,633 38,075 7 %
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments) 4.16 % 4.68 %
Cost of funds (2.47 %) (2.56 %)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*) (0.11 %) (0.13 %)
Net interest spread 1.58 % 1.99 %
Policy charges and other miscellaneous income (*) 0.13 % 0.11 %
Acquisition expenses (*) (0.63 %) (0.66 %)
Other expenses (0.32 %) (0.36 %)
Net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on FIAs 0.76 % 1.08 %
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 — % (0.04 %)
Annuity non-core earnings (losses) (0.31 %) (0.21 %)
Unlocking (0.15 %) — %
Net spread earned on fixed annuities 0.30 % 0.83 %

~~Annuity Net Investment Income~~

Net investment income for the first nine months of 2020 was $1.27 billion compared to $1.33 billion for the first nine months of 2019, a decrease of $64 million (5%). 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 0.52 percentage points to 4.16% from 4.68% for the first nine months of 2020 compared to the first nine 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, and the impact of the run-off of higher yielding investments and lower short-term interest rates, partially offset by higher investment income from the early redemption of certain fixed maturities. AFG’s annuity segment recorded $3 million in earnings from partnerships and similar investments and AFG-managed CLOs in the first nine months of 2020 compared to $87 million in the first nine months of 2019, a decrease of $84 million (97%). The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was 0.3% in the first nine months of 2020 compared to 10.5% in the prior year period.

~~Annuity Cost of Funds~~

Cost of funds for the first nine months of 2020 was $753 million compared to $730 million for the first nine months of 2019, an increase of $23 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 0.09 percentage points to 2.47% from 2.56% in the first nine months of 2020 compared to the first nine months of 2019 reflecting the impact of lower option costs as a percentage of fixed annuity benefits accumulated.

~~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):~~

Nine months ended September 30,
2020 2019
Cost of equity options (FIAs) $ 446 $ 436
Interest credited:
Traditional fixed annuities 191 182
Fixed component of fixed-indexed annuities 77 69
Immediate annuities 17 18
Pension risk transfer products 13 4
Federal Home Loan Bank advances 9 21
Total cost of funds $ 753 $ 730

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

Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of unlocking and the stock market and interest rates for the first nine months of 2020 were $35 million compared to $39 million for the first nine months of 2019, a decrease of $4 million (10%). As a percentage of average fixed annuity benefits accumulated, these net expenses decreased 0.02 percentage points to 0.11% from 0.13% in the first nine months of 2020 compared to the first nine 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):

Nine months ended September 30,
2020 2019
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements $ 6 $ 10
Change in guaranteed withdrawal benefit reserve 68 60
Change in other benefit reserves 13 19
Other annuity benefits 87 89
Offset guaranteed withdrawal benefit fees (52) (50)
Other annuity benefits excluding the impact of the stock market and interest rates, net 35 39
Other annuity benefits — impact of the stock market and interest rates 50 12
Other annuity benefits, net $ 85 $ 51

~~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 $50 million in the first nine months of 2020. The $38 million increase compared to the 2019 period was the primary driver of the $34 million (67%) overall increase in other annuity benefits, net of guaranteed withdrawal benefit fees in the first nine months of 2020 compared to the first nine months of 2019.

~~See “Annuity Unlocking”~~ ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefits expense in 2020 and 2019.~~

~~Annuity Net Interest Spread~~

AFG’s net interest spread decreased 0.41 percentage points to 1.58% from 1.99% in the first nine 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 nine 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~~

Excluding the $5 million unlocking charge in 2020 and the $1 million favorable impact of unlocking in 2019, 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 $48 million in the first nine months of 2020 compared to $39 million in the first nine months of 2019, an increase of $9 million (23%), reflecting higher gains on equity index options in excess of policyholder index credits in the first nine months of 2020 compared to the first nine months of 2019. Annuity policy charges and other miscellaneous income as a percentage of average fixed annuity benefits accumulated increased 0.02 percentage points to 0.13% from 0.11% in the first nine months of 2020 compared to the first nine months of 2019, reflecting the higher gains on equity index call options in excess of policyholder index credits.

~~See “Annuity Unlocking”~~ ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity policy charges and other miscellaneous income in 2020 and 2019.~~

~~Annuity Acquisition Expenses~~

Nine months ended September 30,
2020 2019
Annuity acquisition expenses before the impact of unlocking, changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates $ 197 $ 191
Unlocking 118 76
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) (68) (56)
Annuity acquisition expenses $ 247 $ 177

Annuity acquisitions expenses before unlocking and 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 $197 million for the first nine months of 2020 compared to $191 million for the first nine months of 2019, an increase of $6 million (3%).

~~See~~ ~~“Annuity Unlocking”~~ below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity and supplemental insurance acquisition expenses. Unanticipated spread compression, decreases in the stock market, adverse mortality experience, and higher than expected lapse rates could lead to future write-offs of DPAC or present value of future profits on business in force of companies acquired (“PVFP”).

The negative impact of significantly lower than anticipated interest rates in both the first nine months of 2020 and the first nine 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.

Nine months ended September 30,
2020 2019
Before unlocking, the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates 0.63 % 0.66 %
Unlocking 0.39 % 0.27 %
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates (0.22 %) (0.32 %)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated 0.80 % 0.61 %

~~Table of Contents~~

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

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

~~Annuity Other Expenses~~

Annuity other expenses were $100 million for the first nine months of 2020 compared to $105 million for the first nine months of 2019, a decrease of $5 million (5%). 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 0.32% from 0.36% for the first nine months of 2020 compared to the first nine months 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~~

Nine months ended September 30,
2020 2019 % Change
Change in the fair value of derivatives related to FIAs $ (240) $ (279) (14 %)
Accretion of guaranteed minimum FIA benefits (318) (305) 4 %
Other annuity benefits (50) (12) 317 %
Less cost of equity options 446 436 2 %
Related impact on the amortization of DPAC 68 90 (24 %)
Impact on annuity segment earnings before income taxes $ (94) $ (70) 34 %

During the first nine months of 2020, the negative impact of significantly lower than anticipated interest rates reduced the annuity segments’ earnings before income taxes (excluding unlocking) by $94 million compared to the $70 million impact (excluding unlocking) on annuity earnings before income taxes for the first nine months of 2019, an increase of $24 million (34%). In the first nine 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 (excluding unlocking) of 0.31% in the first nine months of 2020 compared to 0.25% in the first nine months of 2019.

~~100~~

~~Table of Contents~~

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

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

Nine months ended September 30,
2020 2019 % Change
Change in the stock market, including volatility $ (7) $ 44 (116 %)
Changes in interest rates higher (lower) than expected (88) (113) (22 %)
Other 1 (1) (200 %)
Impact on annuity segment earnings before income taxes $ (94) $ (70) 34 %

~~See “Annuity Unlocking”~~ ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on the change in the fair value of the embedded derivative and other annuity liabilities in 2020 and 2019.~~

~~Annuity Net Spread Earned on Fixed Annuities~~

AFG’s net spread earned on fixed annuities excluding the impact of unlocking, 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 0.32 percentage points to 0.76% in the first nine months of 2020 from 1.08% in the first nine months of 2019 due primarily to the 0.41 percentage point decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities decreased 0.53 percentage points to 0.30% in the first nine months of 2020 from 0.83% in the first nine 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 and the impact of unlocking discussed below under “~~Annuity Unlocking~~.”

~~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 nine months ended September 30, 2020 and 2019 (in millions):

Nine months ended September 30,
2020 2019
Beginning fixed annuity reserves $ 40,018 $ 36,431
Fixed annuity premiums (receipts) 2,755 3,805
Federal Home Loan Bank advances, net 160 —
Surrenders, benefits and other withdrawals (2,406) (2,431)
Interest and other annuity benefit expenses:
Cost of funds 753 730
Embedded derivative mark-to-market 199 824
Change in other benefit reserves (32) (72)
Unlocking (73) (75)
Ending fixed annuity reserves $ 41,374 $ 39,212
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above) $ 41,374 $ 39,212
Impact of unrealized investment gains 394 269
Fixed component of variable annuities 164 170
Annuity benefits accumulated per balance sheet $ 41,932 $ 39,651

~~101~~

~~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 $2.77 billion in the first nine months of 2020 compared to $3.82 billion in the first nine months of 2019, a decrease of $1.05 billion (28%). The following table summarizes AFG’s annuity sales (dollars in millions):

Nine months ended September 30,
2020 2019 % Change
Financial institutions single premium annuities — indexed $ 1,014 $ 1,178 (14 %)
Financial institutions single premium annuities — fixed 526 959 (45 %)
Retail single premium annuities — indexed 444 773 (43 %)
Retail single premium annuities — fixed 73 95 (23 %)
Broker dealer single premium annuities — indexed 347 550 (37 %)
Broker dealer single premium annuities — fixed 22 23 (4 %)
Pension risk transfer 225 99 127 %
Education market — fixed and indexed annuities 104 128 (19 %)
Total fixed annuity premiums 2,755 3,805 (28 %)
Variable annuities 13 16 (19 %)
Total gross fixed annuity premiums 2,768 3,821 (28 %)
Ceded premiums (246) — — %
Total net annuity premiums $ 2,522 $ 3,821 (34 %)

Management attributes the 28% decrease in gross fixed annuity premiums in the first nine months of 2020 compared to the first nine 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 Unlocking~~

In the third quarter of 2020 and 2019, AFG recorded net charges of $46 million and $1 million, respectively, related to its annuity business as a result of unlocking certain actuarial assumptions underlying its annuity operations, which impacted AFG’s financial statements as follows (in millions):

Nine months ended September 30,
2020 2019
Policy charges and other miscellaneous income:
Unearned revenue $ (5) $ 1
Total revenues (5) 1
Annuity benefits:
Fixed-indexed annuities embedded derivative (240) (181)
Guaranteed withdrawal benefit reserve 107 102
Other reserves 60 4
Sales inducements asset (4) 1
Total annuity benefits (77) (74)
Annuity and supplemental insurance acquisition expenses:
Deferred policy acquisition costs 118 76
Total costs and expenses 41 2
Net charge $ (46) $ (1)

~~See “Annuity Unlocking”~~ ~~under “Annuity Segment — Results of Operations” for the quarters ended September 30, 2020 and 2019 for a discussion of the charges from the unlocking of actuarial assumptions in the third quarter of 2020 and 2019.~~

~~102~~

~~Table of Contents~~

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

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

~~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 nine months ended September 30, 2020 and 2019 (in millions):~~

Nine months ended September 30,
2020 2019
Earnings on fixed annuity benefits accumulated $ 91 $ 238
Earnings impact of investments in excess of fixed annuity benefits accumulated (*) (4) (7)
Variable annuity earnings 3 3
Earnings before income taxes $ 90 $ 234

~~(*)~~Net investment income (as a % of investments) of 4.16% and 4.68% for the nine months ended September 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 GAAP pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $157 million in the first nine months of 2020 compared to $135 million in the first nine months of 2019, an increase of $22 million (16%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $132 million in the first nine months of 2020 compared to $124 million in the first nine months of 2019, an increase of $8 million (6%).

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 for the nine months ended September 30, 2020 and 2019 (dollars in millions):

Nine months ended September 30,
2020 2019 % Change
Revenues:
Life, accident and health net earned premiums $ 15 $ 17 (12 %)
Net investment income 16 35 (54 %)
Other income — P&C fees 50 52 (4 %)
Reclassify annuity segment option gains (23) (8) 188 %
Other income 19 20 (5 %)
Total revenues 77 116 (34 %)
Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses 16 19 (16 %)
Annuity - annuity benefits (23) (8) 188 %
Life, accident and health benefits (a) 30 26 15 %
Life, accident and health acquisition expenses 3 4 (25 %)
Other expense — expenses associated with P&C fees 34 33 3 %
Other expenses (b) 85 116 (27 %)
Costs and expenses, excluding interest charges on borrowed money 145 190 (24 %)
Core loss before income taxes, excluding realized gains and losses and interest charges on borrowed money (68) (74) (8 %)
Interest charges on borrowed money 64 50 28 %
Core loss before income taxes, excluding realized gains and losses (132) (124) 6 %
Pretax non-core special A&E charges (21) (11) 91 %
Pretax non-core long-term care loss recognition charge (4) — — %
GAAP loss before income taxes, excluding realized gains and losses $ (157) $ (135) 16 %

~~(a)Excludes pretax non-core long-term care loss recognition charge of $4 million in the third quarter of 2020.~~

~~(b)Excludes pretax non-core special A&E charges of $21 million and $11 million in the third quarter of 2020 and 2019, respectively.~~

~~103~~

~~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 — 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 $15 million and related benefits and acquisition expenses of $33 million in the first nine months of 2020 (excluding the loss recognition charge described below) compared to net earned premiums of $17 million and related benefits and acquisition expenses of $30 million in the first nine months of 2019. The $4 million (15%) increase in life, accident and health benefits reflects lower policyholder lapses in the run-off life insurance business.

~~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 of $16 million in the first nine months of 2020 compared to $35 million in the first nine months of 2019, a decrease of $19 million (54%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities decreased in value by $4 million in the first nine months of 2020 compared to an increase in value of $12 million in the first nine months of 2019.

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 ~~nine~~three months of ~~2020,~~2021, AFG collected ~~$50~~$19 million ~~in fees~~ for these services compared to ~~$52~~$17 million in the first ~~nine~~three months of ~~2019.~~2020. Management views this fee income, net of the ~~$34~~$11 million in the first ~~nine~~three months of ~~2020~~2021 and ~~$33~~$12 million in the first ~~nine~~three months of ~~2019,~~2020, 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 first nine months of 2020 and 2019, AFG had $23 million and $8 million, respectively, in such option gains.

~~Holding Company and Other —~~ Other Income

Other income in the table above includes ~~$11~~$4 million in both the first ~~nine~~three months of ~~2020~~2021 and ~~2019,~~the first three 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~~“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 $8less than $1 million in the first ~~nine~~three months of ~~2020 compared to $9~~2021 and $1 million in the first ~~nine~~three months of ~~2019.~~2020.

T able 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 — Other Expenses

~~Excluding the non-core special A&E charges discussed below,~~ AFG’s holding companies and other operations outside of its property and casualty insurance ~~and annuity segments~~segment recorded other expenses of ~~$85~~$43 million in the first ~~nine~~three months of 2021 compared to $10 million in the first three months of 2020, ~~compared to $116~~an increase of $33 million ~~the first nine months of 2019, a decrease of $31 million (27%~~(330%)~~. This decrease reflects lower~~, reflecting higher 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 nine months of 2020 compared to the first nine months of 2019.~~performance.

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 ~~$64~~$24 million in the first ~~nine~~three months of ~~2020~~2021 compared to ~~$50~~$17 million in the first ~~nine~~three months of ~~2019,~~2020, an increase of ~~$14~~$7 million ~~(28%~~(41%), reflecting higher average indebtedness. The following table details the principal amount of AFG’s long-term debt balances as of March 31, 2021 compared to March 31, 2020 (dollars in millions):

~~104~~

~~Table of Contents~~

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

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


	March 31, 2021			March 31, 2020
Direct obligations of AFG:
4.50% Senior Notes due June 2047	$	590		$	590
3.50% Senior Notes due August 2026	425			425
5.25% Senior Notes due April 2030	300			—
5.125% Subordinated Debentures due December 2059	200			200
4.50% Subordinated Debentures due September 2060	200			—
6% Subordinated Debentures due November 2055	—			150
5.625% Subordinated Debentures due June 2060	150			—
5.875% Subordinated Debentures due March 2059	125			125
Other	3			3
Total principal amount of Holding Company Debt	$	1,993		$	1,493

Weighted Average Interest Rate	4.6		%	4.6		%

The increase in interest expense for the first ~~nine~~three months of ~~2020~~2021 as compared to the first ~~nine~~three months of ~~2019~~2020 reflects the following financial transactions completed by AFG between January 1, ~~2019~~2020 and ~~September 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~~31, 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

~~Holding Company and Other — Special A&E Charges~~

~~See “~~•~~Holding Company and Other — Special A&E Charges” under “Results~~Redeemed $150 million of ~~Operations — Holding Company, Other and Unallocated”~~ ~~for the quarters ended September 30,~~6% Subordinated Debentures in November 2020 ~~and 2019 for a discussion of the $21 million and $11 million in pretax non-core special A&E charges recorded in the third quarter of 2020 and 2019, respectively.~~

~~Holding Company and Other — Long-term Care Loss Recognition Charge~~

~~See “Holding Company and Other — Long-term Care Loss Recognition Charge” under “Results of Operations — Holding Company, Other and Unallocated”~~ ~~for the quarters ended September 30, 2020 and 2019 for a discussion of the $4 million pretax non-core long-term care loss recognition charge recorded in the third quarter of 2020.~~

~~Consolidated~~ Realized Gains (Losses) on Securities (Continuing Operations)

AFG’s ~~consolidated~~ realized gains (losses) on securities from continuing operations, which are not allocated to segments, were net ~~losses~~gains of ~~$302~~$77 million in the first ~~nine~~three months of ~~2020~~2021 compared to net ~~gains~~losses of ~~$222~~$328 million in the first ~~nine~~three months of ~~2019,~~2020, a change of ~~$524~~$405 million ~~(236%~~(123%). Realized gains (losses) on securities consisted of the following (in millions):


		Nine months ended September 30,					Three months ended March 31,
		2020		2019			2021		2020
Realized gains (losses) before impairments:	Realized gains (losses) before impairments:					Realized gains (losses) before impairments:
Disposals	Disposals	$	48	$	11	Disposals	$	1	$	3
Change in the fair value of equity securities	Change in the fair value of equity securities	(303)		211		Change in the fair value of equity securities	77		(318)
Change in the fair value of derivatives	Change in the fair value of derivatives	2		14		Change in the fair value of derivatives	(2)		1
Adjustments to annuity deferred policy acquisition costs and related items		(6)		(1)
		(259)		235
Change in allowance for impairments:
Securities		(57)		(20)
Adjustments to annuity deferred policy acquisition costs and related items		14		7
							76		(314)

Change in allowance for impairments on securities						Change in allowance for impairments on securities	1		(14)
		(43)		(13)
Realized gains (losses) on securities	Realized gains (losses) on securities	$	(302)	$	222	Realized gains (losses) on securities	$	77	$	(328)

The ~~$303~~$77 million net realized gain from the change in the fair value of equity securities in the first three months of 2021 includes gains of $17 million on investments in healthcare companies, $15 million on investments in energy and natural gas companies, $13 million on investments in media companies and $10 million on investments in banks and financing companies. The $318 million net realized loss from the change in the fair value of equity securities in the first ~~nine~~three months of 2020 includes losses of ~~$72 million on investments in natural gas companies, $65~~$90 million on investments in banks and financing companies, ~~$60~~$62 million on investments in media companies, ~~$42~~$36 million on investments in ~~energy~~natural gas companies, ~~and~~ $26 million on real estate investment trusts. The $211 million net realized gain from the change in the fair value of equity securities in the first nine months of 2019 includes gains of $80 million on investments in banks and financing companies, $22 million from investments in media companies, $21 million on investments in asset management companies and $19 million on insurance companies.

The $57 million of impairment allowance expense in the first nine months of 2020 includes $20 million in charges related to third-party collateralized loan obligations, $19 million in charges related to other structured securities and $18 million in charges related to corporate bonds and other fixed maturities. The $20 million of impairment charges in the first nine months of 2019 include $15 million in charges on third-party collateralized loan obligations.

~~105~~61

~~Table~~T able of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

~~Consolidated Realized Gains (Losses)~~investment trusts, $18 million on ~~Subsidiaries~~

~~On September 28, 2020, AFG announced that it has reached a definitive agreement to sell GAI Holding Bermuda~~investments in energy companies and ~~its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. AFG recorded a $30~~$18 million ~~loss~~on investments in ~~the third quarter of 2020 to establish a liability equal to the excess of the net carrying value of the assets and liabilities to be disposed over the estimated net sale proceeds. See~~ ~~Note B — “Acquisitions and Sale of Businesses”~~ ~~to the financial statements.~~insurance companies.

Consolidated Income Taxes on Continuing Operations

AFG’s consolidated provision (credit) for income taxes on continuing operations was a ~~credit~~provision of ~~$63~~$68 million for the first ~~nine~~three months of ~~2020~~2021 compared to a ~~provision~~credit of ~~$171~~$41 million for the first ~~nine~~three months of ~~2019,~~2020, a change of ~~$234~~$109 million ~~(137%~~(266%). See Note L — “Income Taxes” to the financial statements for an analysis of items affecting AFG’s effective tax ~~rate.~~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 ~~$13~~$3 million for the first ~~nine~~three months of 2020, ~~compared to $8 million for the first nine months of 2019, an increase of $5 million (63%). Both periods reflect~~reflecting losses at Neon, ~~AFG’s United Kingdom-based Lloyd’s insurer.~~which was sold in December 2020.

~~RECENTLY ADOPTED ACCOUNTING STANDARDS~~Real Estate Entities to be 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 casualty insurance operations will acquire approximately $460 million in real-estate related partnerships and AFG parent will acquire 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.

~~See~~ ~~Note A — “Accounting Policies — Credit Losses on Financial Instruments”~~The retained real estate entities contributed $29 million in GAAP pretax earnings in the first three months of 2021 compared to $12 million in the first three months of 2020, an increase of $17 million (142%). This increase reflects higher earnings from the real-estate related partnerships in the first three months of 2021 compared to the ~~financial statements for a discussion~~first three months 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.2020.

~~ACCOUNTING STANDARDS TO BE ADOPTED~~

Discontinued Annuity Operations

AFG’s discontinued annuity operations contributed $241 million in GAAP pretax earnings in the first three months of 2021 compared to a pretax net loss of $203 million in the first three months of 2020, a change of $444 million (219%) reflecting the following:

•net realized gains on securities in the first three months of 2021 compared to net realized losses in the first three months of 2020,

~~In August 2018,~~ •higher earnings from partnerships and similar investments,

•the ~~FASB issued ASU 2018-12,~~ ~~Financial Services – Insurance: Targeted Improvements~~positive impact of strong stock market performance in the first three months of 2021 compared to the ~~Accounting~~unfavorable impact of the decline in stock market performance in the first three months of 2020,

•the positive impact of higher than expected interest rates in the first three months of 2021 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, 2023. AFG cannot estimate the impact that the updated guidance will have on its resultsfirst three months of ~~operations, financial position or liquidity until the updated guidance is closer to adoption.~~2021.

~~106~~62

T able of Contents

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 earnings (loss) before and after income taxes from its discontinued annuity operations for the three months ended March 31, 2021 and 2020 (dollars in millions):


	Three months ended March 31,
	2021		2020		% Change
Pretax annuity earnings historically reported as core operating earnings:
Pretax annuity earnings before items below	$	62	$	79	(22	%)
Earnings on partnerships and similar investments	76		(18)		(522	%)
Total pretax annuity earnings historically reported as core operating earnings	138		61		126	%

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	22		(38)		(158	%)
Realized gains (losses) on securities	81		(223)		(136	%)
Run-off life and long-term care	—		(3)		(100	%)
Total pretax amounts previously reported outside of annuity core earnings	103		(264)		(139	%)
GAAP pretax earnings (loss) from discontinued annuity operations	241		(203)		(219	%)
Provision (credit) for income taxes (*)	89		(43)		(307	%)
GAAP net earnings (loss) from discontinued annuity operations	$	152	$	(160)	(195	%)

(*)The provision for income taxes for the three months ended March 31, 2021 includes $41 million related to deferred tax liabilities triggered by the pending sale of the annuity operations.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

As of ~~September 30, 2020,~~March 31, 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 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 CFO concluded that the controls and procedures are effective. There have been no changes in AFG’s internal control over financial reporting during the ~~third~~first 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 ~~third~~first 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, 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.~~

~~107~~

~~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 (*)
First quarter 826,283 $ 74.28 826,283 4,173,717
Second quarter 1,194,236 63.71 1,194,236 2,979,481
Third quarter:
July 130,900 $ 59.71 130,900 2,848,581
August 516,500 66.80 516,500 2,332,081
September 800,188 66.53 800,188 1,531,893
Total 3,468,107 $ 67.19 3,468,107


	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 (*)
First quarter:
January	—	$	—	—	5,468,606
February	1,127,207	106.18		1,127,207	4,341,399
March	630,495	113.97		630,495	3,710,904





Total	1,757,702	$	108.98	1,757,702

(*)Represents the remaining shares that may be repurchased under the Plans authorized by AFG’s Board of Directors in February ~~2016~~2019 and ~~February 2019. In~~ October ~~2020, AFG’s Board of Directors authorized the repurchase of five million additional shares.~~2020.

In addition, AFG acquired ~~95,854~~8,997 shares of its Common Stock (at an average of ~~$110.80~~$88.22 per share) in ~~the first quarter of 2020, 540~~January 2021, 67,663 shares (at an average of ~~$62.26~~$108.99 per share) in ~~the second quarter of 2020, 1,223~~February 2021 and 324 shares (at an average of ~~$63.60~~$114.02 per share) in ~~July 2020, and 114 shares (at $68.70 per share) in September 2020~~March 2021 in connection with its stock incentive plans.

~~108~~64

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 of Chief F ~~inancial~~ O ~~fficer~~Financial Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
32						Certification of Co-Chief Executive Officers and Chief F ~~inancial~~ O ~~fficer~~ 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.

~~November 5, 2020~~May 7, 2021	By:	/s/ Brian S. Hertzman
		Brian S. Hertzman
		Senior Vice President and Chief Financial Officer

~~109~~65



			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			76
Notes to Consolidated Financial Statements			87
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			3836
Item 3 — Quantitative and Qualitative Disclosure about Market Risk			~~107~~64
Item 4 — Controls and Procedures			~~107~~64

Part II — Other Information
~~Item 1A — Risk Factors~~			~~107~~
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			~~108~~64
Item 6 — Exhibits			~~109~~65
Signature			~~109~~65


			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 September 30, 2019
AFS fixed maturities:
U.S. government agency	$	9	$	0	$	0	$	0	$	(1)	$	0	$	0	$	8
State and municipal	59		—		9		0		(2)		36		0		102
Residential MBS	197		10		(6)		0		(14)		24		(55)		156
Commercial MBS	56		3		0		0		(3)		4		(5)		55
Collateralized loan obligations	116		(5)		7		8		0		13		(82)		57
Other asset-backed securities	731		0		6		141		(135)		0		(329)		414
Corporate and other	1,996		2		71		985		(330)		12		(450)		2,286
Total AFS fixed maturities	3,164		10		87		1,134		(485)		89		(921)		3,078
Equity securities	336		(7)		0		38		(3)		56		0		420
Assets of MIE	21		(3)		0		0		0		0		0		18
Total Level 3 assets	$	3,521	$	0	$	87	$	1,172	$	(488)	$	145	$	(921)	$	3,516

Embedded derivatives (a)	$	(2,720)	$	(643)	$	0	$	(276)	$	170	$	0	$	0	$	(3,469)
Total Level 3 liabilities (b)	$	(2,720)	$	(643)	$	0	$	(276)	$	170	$	0	$	0	$	(3,469)


	P&C		Annuity and Other
	Deferred		Deferred		Sales										Consolidated
	Costs		Costs		Inducements		PVFP		Subtotal		Unrealized (*)		Total		Total
Balance at June 30, 2020	$	296	$	1,342	$	73	$	33	$	1,448	$	(926)	$	522	$	818
Additions	142		33		0		—		33		—		33		175
Amortization:
Periodic amortization	(170)		(39)		(2)		(1)		(42)		—		(42)		(212)
Annuity unlocking	—		(118)		4		0		(114)		—		(114)		(114)
Included in realized gains	—		(2)		0		—		(2)		—		(2)		(2)
Foreign currency translation	1		—		—		—		—		—		—		1
Change in unrealized	—		—		—		—		0		(169)		(169)		(169)
Balance at September 30, 2020	$	269	$	1,216	$	75	$	32	$	1,323	$	(1,095)	$	228	$	497

Balance at June 30, 2019	$	330	$	1,373	$	81	$	38	$	1,492	$	(619)	$	873	$	1,203
Additions	188		43		1		—		44		—		44		232
Amortization:
Periodic amortization	(194)		(29)		(3)		(1)		(33)		—		(33)		(227)
Annuity unlocking	—		(76)		(1)		0		(77)		—		(77)		(77)
Included in realized gains	—		3		0		—		3		—		3		3
Foreign currency translation	(1)		—		—		—		—		—		—		(1)
Change in unrealized	—		—		—		—		0		(169)		(169)		(169)
Balance at September 30, 2019	$	323	$	1,314	$	78	$	37	$	1,429	$	(788)	$	641	$	964

Balance at December 31, 2019	$	322	$	1,303	$	75	$	36	$	1,414	$	(699)	$	715	$	1,037
Additions	448		112		1		—		113		—		113		561
Amortization:
Periodic amortization	(500)		(87)		(6)		(4)		(97)		—		(97)		(597)
Annuity unlocking	—		(118)		4		0		(114)		—		(114)		(114)
Included in realized gains	—		6		1		—		7		—		7		7
Foreign currency translation	(1)		—		—		—		—		—		—		(1)
Change in unrealized	—		—		—		—		0		(396)		(396)		(396)
Balance at September 30, 2020	$	269	$	1,216	$	75	$	32	$	1,323	$	(1,095)	$	228	$	497

Balance at December 31, 2018	$	299	$	1,285	$	86	$	42	$	1,413	$	(30)	$	1,383	$	1,682
Additions	569		163		2		—		165		—		165		734
Amortization:
Periodic amortization	(544)		(63)		(10)		(5)		(78)		—		(78)		(622)
Annuity unlocking	—		(76)		(1)		0		(77)		—		(77)		(77)
Included in realized gains	—		5		1		—		6		—		6		6
Foreign currency translation	(1)		—		—		—		—		—		—		(1)
Change in unrealized	—		—		—		—		0		(758)		(758)		(758)
Balance at September 30, 2019	$	323	$	1,314	$	78	$	37	$	1,429	$	(788)	$	641	$	964


	Nine months ended September 30, 2020	Year ended December 31, 2019
Ratio of core earnings to fixed charges excluding annuity benefits	9.62	12.78
Impact of non-core items	(8.94)	1.83
Ratio of earnings to fixed charges excluding annuity benefits (*)	0.68	14.61
Impact of including interest on annuities as a fixed charge	0.30	(12.76)
Ratio of earnings to fixed charges including annuity benefits (*)	0.98	1.85


	% of Reserves
	September 30,	December 31,
GMIR	2020 (*)	2019	2018
1 — 1.99%	85%	84%	81%
2 — 2.99%	3%	3%	4%
3 — 3.99%	7%	7%	8%
4.00% and above	5%	6%	7%

Annuity benefits accumulated (in millions)	$41,932	$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	$	485	$	492	101	%	$	7	100	%
Non-agency prime	1,301		1,412		109	%	111		61	%
Alt-A	811		920		113	%	109		37	%
Subprime	283		314		111	%	31		18	%
Commercial	814		856		105	%	42		93	%
	$	3,694	$	3,994	108	%	$	300	64	%


	Property and Casualty Insurance Reserves
	Three-Year Survival Ratio (Times Paid Losses)
	Asbestos	Environmental	Total A&E
AFG (9/30/2020)	21.3	19.6	20.5
Industry (12/31/2019)	7.9	8.5	8.1


	September 30, 2020			September 30, 2019
Direct obligations of AFG:
4.50% Senior Notes due June 2047	$	590		$	590
3.50% Senior Notes due August 2026	425			425
5.25% Senior Notes due April 2030	300			—
5.125% Subordinated Debentures due December 2059	200			—
4.50% Subordinated Debentures due September 2060	200			—
6% Subordinated Debentures due November 2055	150			150
5.625% Subordinated Debentures due June 2060	150			—
5.875% Subordinated Debentures due March 2059	125			125
6-1/4% Subordinated Debentures due September 2054	—			150
Other	3			3
Total principal amount of Holding Company Debt	$	2,143		$	1,443

Weighted Average Interest Rate	4.7		%	4.7		%