Quarterly Operating Results (Unaudited)

The operations of certain AFG business segments are seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, hurricanes, severe storms, tornadoes, etc.) may be seasonal. The profitability of AFG’s crop insurance business is primarily recognized during the second half of the year as crop prices and yields are determined. Quarterly results necessarily rely heavily on estimates. These estimates and certain other factors, such as the discretionary sales of assets, cause the quarterly results not to be necessarily indicative of results for longer periods of time.

The following are quarterly results of consolidated operations for the two years ended December 31, 2018 (in millions, except per share amounts). Quarterly earnings per share do not add to year-to-date amounts due to changes in shares outstanding.



	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter			Total Year
2018
Revenues	$	1,619	$	1,833	$	2,008	$	1,690		$	7,150
Net earnings (losses), including noncontrolling interests	141		208		203		(35		)	517
Net earnings (losses) attributable to shareholders	145		210		204		(29		)	530
Earnings (losses) attributable to shareholders per Common Share:
Basic	$	1.64	$	2.36	$	2.30	$	(0.33	)	$	5.95
Diluted	1.60		2.31		2.26		(0.33		)	5.85
Average number of Common Shares:
Basic	88.6		89.0		89.1		89.3			89.0
Diluted	90.4		90.7		90.7		89.3			90.6
2017
Revenues	$	1,576	$	1,646	$	1,835	$	1,808		$	6,865
Net earnings, including noncontrolling interests	155		145		11		166			477
Net earnings attributable to shareholders	153		145		11		166			475
Earnings attributable to shareholders per Common Share:
Basic	$	1.76	$	1.64	$	0.13	$	1.88		$	5.40
Diluted	1.72		1.61		0.13		1.84			5.28
Average number of Common Shares:
Basic	87.2		87.8		88.1		88.2			87.8
Diluted	89.3		89.8		90.0		90.1			89.8

Pretax realized gains on subsidiaries and securities (including other-than-temporary impairments), favorable (adverse) prior year development of AFG’s liability for losses and loss adjustment expenses (“LAE”) and the impact of derivatives related to fixed-indexed and variable-indexed annuities (“FIAs”) were as follows (in millions):



	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total Year
Realized Gains (Losses) on Securities and Subsidiaries
2018 – change in fair value of equity securities	$	(95	)	$	23		$	33		$	(223	)	$	(262	)
2018 – other realized gains (losses)	2			8			1			(15		)	(4		)
2017	3			8			(12		)	6			5

Prior Year Development Favorable (Adverse)
2018	$	56		$	44		$	31		$	61		$	192
2017	28			22			(52		)	66			64

Impact of Derivatives related to FIAs Favorable (Adverse)
2018	$	13		$	3		$	(2	)	$	(47	)	$	(33	)
2017	(2		)	(16		)	(4		)	(11		)	(33		)

As discussed in Note A — “Accounting Policies — Investments” and Note E — “Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings. Realized gains (losses) on securities for the fourth quarter and full-year 2018 includes net holding losses on equity securities that were still owned at December 31, 2018 of $228 million and $279 million, respectively. Under the prior guidance, these holding losses would have been recorded in AOCI (with the exception of any impairment charge that may have been recorded).

Prior year development in the third quarters of 2018 and 2017 includes pretax special charges of $18 million and $89 million, respectively, to strengthen property and casualty insurance A&E reserves. As a result of the Neon reinsurance to close agreement discussed in Note O — “Insurance,” Neon recorded $42 million in favorable development in the fourth quarter of 2017, of which $24 million related to its ongoing lines of business and $18 million related to its exited lines of business.

FIAs 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 change in the fair value of the call and put options will generally offset the economic change in the liabilities from the index participation. Both the index-based component of the annuities and the related call and put options are considered derivatives that must be marked-to-market through earnings each period. Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products. In the table above, the impact of changes in the fair value of the derivatives related to FIAs is presented net of an estimate of the related acceleration/deceleration of the amortization of deferred policy acquisition costs and deferred sales inducements.

The vast majority of AFG’s FIAs are indexed to the S&P 500, which decreased 14% in the fourth quarter of 2018. This poor stock market performance adversely impacted AFG’s earnings before income taxes from its annuity operations for the fourth quarter of 2018 beyond the impact on derivatives related to FIAs by $30 million, particularly related to FIAs with guaranteed withdrawal benefits.

AFG recorded net charges as a result of updating (unlocking) actuarial assumptions underlying its annuity operations of $27 million in the second quarter of 2018, $4 million in the fourth quarter of 2018 and $3 million in the fourth quarter of 2017.

AFG’s property and casualty operations recorded catastrophe losses totaling $103 million in 2018 (primarily from Hurricanes Florence and Michael and wildfires in California). Catastrophe losses for 2017 totaled $140 million, including $107 million in the third quarter (primarily from Hurricanes Harvey, Irma and Maria and earthquakes in Mexico).

Results include pretax gains (included in other income) of $13 million from the sale of a hotel in the first quarter of 2017.

Results for the third quarter of 2018 and 2017 include pretax special charges of $9 million and $24 million, respectively, to strengthen reserves for A&E exposures related to AFG’s former railroad and manufacturing operations.

In 2017, AFG recorded pretax losses on the retirement of debt of $7 million in the second quarter, $4 million in the third quarter and $40 million in the fourth quarter.

Net earnings in the fourth quarter of 2017 includes $56 million in tax benefits related to the Neon restructuring. See Note L — “Income Taxes.”