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.

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. At December 31, 2018, there were 7.0 million shares of AFG Common Stock reserved for issuance under AFG’s stock incentive plans.

The restricted Common Stock that AFG has granted generally vests over a three or four year period. Data relating to grants of restricted stock is presented below:



	Shares		Average Grant Date Fair Value
Outstanding at January 1, 2018	759,035		$	73.40
Granted	200,625		$	112.86
Vested	(86,177	)	$	56.89
Forfeited	(7,553	)	$	87.47
Outstanding at December 31, 2018	865,930		$	84.06

The total fair value of restricted stock that vested during 2018, 2017 and 2016 was $10 million, $14 million and $10 million, respectively.

AFG issued 45,804 shares of Common Stock (fair value of $115.49 per share) in the first quarter of 2018 and 47,826 shares (fair value of $96.13 per share) in the first quarter of 2017 under its Equity Bonus Plan.

AFG did not grant any stock options in 2018, 2017 or 2016. Options granted in years prior to 2016 have an exercise price equal to the market price of AFG Common Stock at the date of grant. Options generally become exercisable at the rate of 20% per year commencing one year after grant and expire ten years after the date of grant.

Data for stock options issued under AFG’s stock incentive plans is presented below:



	Shares		Average Exercise Price		Average Remaining Contractual Term	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2018	3,467,340		$	45.80
Exercised	(778,270	)	$	37.66
Forfeited/Cancelled	(21,628	)	$	42.10
Outstanding at December 31, 2018	2,667,442		$	48.20	4.2 years	$	113

Options exercisable at December 31, 2018	2,253,003		$	45.95	3.9 years	$	100

The total intrinsic value of options exercised during 2018, 2017 and 2016 was $57 million, $65 million and $38 million, respectively. During 2018, 2017 and 2016, AFG received $29 million, $34 million and $32 million, respectively, in cash from the exercise of stock options. The total tax benefit related to the exercises was $9 million, $18 million and $11 million during those years, respectively.

Total compensation expense related to stock incentive plans of AFG and its subsidiaries for 2018, 2017 and 2016 was $23 million, $30 million and $28 million, respectively. AFG’s provision for income tax includes tax benefits of $13 million in 2018, $27 million in 2017 and $19 million in 2016 related to AFG’s stock incentive plans. At December 31, 2018, there was $3 million and $35 million of unrecognized compensation expense related to nonvested stock options and restricted stock awards, respectively. The nonvested stock options and restricted stock awards amounts are expected to be recognized over a weighted average of 1.0 year and 2.5 years, respectively.

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. 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 (c)			AOCI Ending Balance
Year ended December 31, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(689	)	$	145		$	(544	)	$	—		$	(544	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)				10			(2		)	8			—			8
Total net unrealized gains (losses) on securities (b)	$	840		(679		)	143			(536		)	—			(536		)	$	(221	)	$	83
Net unrealized gains (losses) on cash flow hedges	(13		)	2			—			2			—			2			—			(11		)
Foreign currency translation adjustments	(6		)	(9		)	(1		)	(10		)	—			(10		)	—			(16		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			—			(8		)
Total	$	813		$	(686	)	$	142		$	(544	)	$	—		$	(544	)	$	(221	)	$	48

Year ended December 31, 2017
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	456		$	(159	)	$	297		$	—		$	297
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(15		)	5			(10		)	—			(10		)
Total net unrealized gains on securities (b)	$	404		441			(154		)	287			—			287			$	149		$	840
Net unrealized losses on cash flow hedges	(7		)	(6		)	2			(4		)	—			(4		)	(2		)	(13		)
Foreign currency translation adjustments	(15		)	9			3			12			—			12			(3		)	(6		)
Pension and other postretirement plans adjustments	(7		)	1			—			1			—			1			(2		)	(8		)
Total	$	375		$	445		$	(149	)	$	296		$	—		$	296		$	142		$	813

Year ended December 31, 2016
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	124		$	(44	)	$	80		$	(4	)	$	76
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(19		)	7			(12		)	(1		)	(13		)
Total net unrealized gains on securities (b)	$	332		105			(37		)	68			(5		)	63			$	9		$	404
Net unrealized gains (losses) on cash flow hedges	1			(12		)	4			(8		)	—			(8		)	—			(7		)
Foreign currency translation adjustments	(22		)	6			1			7			—			7			—			(15		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—			—			—			(7		)
Total	$	304		$	99		$	(32	)	$	67		$	(5	)	$	62		$	9		$	375

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



	OCI component		Affected line in the statement of earnings
	Pretax		Realized gains (losses) on securities
	Tax		Provision for income taxes
	Attributable to noncontrolling interests		Net earnings attributable to noncontrolling interests


(b)	Includes net unrealized gains of $58 million at December 31, 2018 compared to net unrealized gains of $68 million and $52 million at December 31, 2017 and 2016, related to securities for which only the credit portion of an other-than-temporary impairment has been recorded in earnings.

(c)

On January 1, 2018, AFG adopted new guidance that requires all equity securities other than those accounted for under the equity method to be reported at fair value with holding gains and losses recognized in net earnings. At the date of adoption, the $221 million net unrealized gain on equity securities classified as available for sale (with unrealized holding gains and losses reported in AOCI) under the prior guidance was reclassified from AOCI to retained earnings as the cumulative effect of an accounting change. Other also includes the December 2017 reclassification of $145 million stranded in AOCI from accounting for the Tax Cuts and Jobs Act of 2017 to retained earnings (see Note A — “Accounting Policies — Income Taxes”), the impact on AOCI of the December 2017 sale of redeemable noncontrolling interests in Neon and the November 2016 acquisition of the noncontrolling interest in NATL (see Note B — “Acquisitions and Sale of Businesses”).