10-Q

_____________________________________________________________________________________________________

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, 2019

or

☐ 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
	6-1/4% Subordinated Debentures due September 30, 2054	AFGE	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

As of November 1, 2019, there were 90,176,219 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.

______________________________________________________________________________________________________

AMERICAN FINANCIAL GROUP, INC. 10-Q

TABLE OF CONTENTS

	Page
Part I — Financial Information
Item 1 — Financial Statements:
Consolidated Balance Sheet	2
Consolidated Statement of Earnings	3
Consolidated Statement of Comprehensive Income	4
Consolidated Statement of Changes in Equity	5
Consolidated Statement of Cash Flows	7
Notes to Consolidated Financial Statements	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3 — Quantitative and Qualitative Disclosure about Market Risk	100
Item 4 — Controls and Procedures	100
Part II — Other Information
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	100
Item 6 — Exhibits	100
Signature	101

AMERICAN FINANCIAL GROUP, INC. 10-Q

PART I

ITEM I — FINANCIAL STATEMENTS

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

(Dollars in Millions)

	September 30, 2019		December 31, 2018
Assets:
Cash and cash equivalents	$	2,693	$	1,515
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $43,334 and $41,837)	45,503		41,997
Fixed maturities, trading at fair value	108		105
Equity securities, at fair value	2,004		1,814
Investments accounted for using the equity method	1,535		1,374
Mortgage loans	1,174		1,068
Policy loans	166		174
Equity index call options	750		184
Real estate and other investments	274		267
Total cash and investments	54,207		48,498
Recoverables from reinsurers	3,261		3,349
Prepaid reinsurance premiums	781		610
Agents’ balances and premiums receivable	1,403		1,234
Deferred policy acquisition costs	964		1,682
Assets of managed investment entities	4,702		4,700
Other receivables	1,187		1,090
Variable annuity assets (separate accounts)	601		557
Other assets	1,754		1,529
Goodwill	207		207
Total assets	$	69,067	$	63,456
Liabilities and Equity:
Unpaid losses and loss adjustment expenses	$	9,847	$	9,741
Unearned premiums	2,986		2,595
Annuity benefits accumulated	39,651		36,616
Life, accident and health reserves	613		635
Payable to reinsurers	867		752
Liabilities of managed investment entities	4,523		4,512
Long-term debt	1,423		1,302
Variable annuity liabilities (separate accounts)	601		557
Other liabilities	2,235		1,774
Total liabilities	62,746		58,484
Redeemable noncontrolling interests	—		—
Shareholders’ equity:
Common Stock, no par value        — 200,000,000 shares authorized        — 90,127,423 and 89,291,724 shares outstanding	90		89
Capital surplus	1,292		1,245
Retained earnings	4,022		3,588
Accumulated other comprehensive income, net of tax	917		48
Total shareholders’ equity	6,321		4,970
Noncontrolling interests	—		2
Total equity	6,321		4,972
Total liabilities and equity	$	69,067	$	63,456

2

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,
	2019			2018			2019			2018
Revenues:
Property and casualty insurance net earned premiums	$	1,442		$	1,327		$	3,815		$	3,595
Life, accident and health net earned premiums	6			6			17			18
Net investment income	588			527			1,710			1,552
Realized gains (losses) on securities (*)	(18		)	34			222			(28		)
Income (loss) of managed investment entities:
Investment income	67			65			206			187
Gain (loss) on change in fair value of assets/liabilities	(14		)	(5		)	(16		)	(10		)
Other income	52			54			153			146
Total revenues	2,123			2,008			6,107			5,460
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	944			872			2,359			2,206
Commissions and other underwriting expenses	450			424			1,275			1,205
Annuity benefits	250			222			900			664
Life, accident and health benefits	9			10			26			32
Annuity and supplemental insurance acquisition expenses	120			71			181			203
Interest charges on borrowed money	17			15			50			46
Expenses of managed investment entities	54			52			168			154
Other expenses	102			98			299			272
Total costs and expenses	1,946			1,764			5,258			4,782
Earnings before income taxes	177			244			849			678
Provision for income taxes	34			41			171			126
Net earnings, including noncontrolling interests	143			203			678			552
Less: Net earnings (losses) attributable to noncontrolling interests	(4		)	(1		)	(8		)	(7		)
Net Earnings Attributable to Shareholders	$	147		$	204		$	686		$	559
Earnings Attributable to Shareholders per Common Share:
Basic	$	1.64		$	2.30		$	7.65		$	6.29
Diluted	$	1.62		$	2.26		$	7.55		$	6.17
Average number of Common Shares:
Basic	90.0			89.1			89.7			88.9
Diluted	91.1			90.7			90.9			90.6
________________________________________
(*) Consists of the following:
Realized gains (losses) before impairments	$	(9	)	$	36		$	235		$	(25	)
Losses on securities with impairment	(9		)	(2		)	(13		)	(3		)
Non-credit portion recognized in other comprehensive income (loss)	—			—			—			—
Impairment charges recognized in earnings	(9		)	(2		)	(13		)	(3		)
Total realized gains (losses) on securities	$	(18	)	$	34		$	222		$	(28	)

3

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,
	2019			2018			2019			2018
Net earnings, including noncontrolling interests	$	143		$	203		$	678		$	552
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	107			(96		)	847			(523		)
Reclassification adjustment for realized (gains) losses included in net earnings	1			(2		)	(10		)	(3		)
Total net unrealized gains (losses) on securities	108			(98		)	837			(526		)
Net unrealized gains (losses) on cash flow hedges	7			(5		)	36			(19		)
Foreign currency translation adjustments	(7		)	—			(3		)	(3		)
Pension and other postretirement plans adjustments	1			—			1			—
Other comprehensive income (loss), net of tax	109			(103		)	871			(548		)
Total comprehensive income, net of tax	252			100			1,549			4
Less: Comprehensive income (loss) attributable to noncontrolling interests	(3		)	(1		)	(6		)	(7		)
Comprehensive income attributable to shareholders	$	255		$	101		$	1,555		$	11

4

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(Dollars in Millions)

			Shareholders’ Equity																	Redeemable
	Common Shares		Common Stock and Capital Surplus			Retained Earnings			Accumulated Other Comp. Income (Loss)			Total			Noncon- trolling Interests		Total Equity			Noncon- trolling Interests
Balance at June 30, 2019	89,917,601		$	1,367		$	3,914		$	809		$	6,090		$	—	$	6,090		$	—
Net earnings (losses)	—		—			147			—			147			—		147			(4		)
Other comprehensive income (loss)	—		—			—			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		—			—			—			—			—		—			—
Stock-based compensation expense	—		5			—			—			5			—		5			—
Shares exchanged — benefit plans	(80	)	—			—			—			—			—		—			—
Forfeitures of restricted stock	(310	)	—			—			—			—			—		—			—
Other	—		—			(3		)	—			(3		)	—		(3		)	3
Balance at September 30, 2019	90,127,423		$	1,382		$	4,022		$	917		$	6,321		$	—	$	6,321		$	—
Balance at June 30, 2018	89,072,114		$	1,309		$	3,628		$	147		$	5,084		$	—	$	5,084		$	—
Net earnings (losses)	—		—			204			—			204			—		204			(1		)
Other comprehensive loss	—		—			—			(103		)	(103		)	—		(103		)	—
Dividends ($0.35 per share)	—		—			(31		)	—			(31		)	—		(31		)	—
Shares issued:
Exercise of stock options	103,638		4			—			—			4			—		4			—
Restricted stock awards	—		—			—			—			—			—		—			—
Other benefit plans	12,553		2			—			—			2			—		2			—
Dividend reinvestment plan	3,066		—			—			—			—			—		—			—
Stock-based compensation expense	—		6			—			—			6			—		6			—
Shares exchanged — benefit plans	(2,210	)	(1		)	—			—			(1		)	—		(1		)	—
Forfeitures of restricted stock	(453	)	—			—			—			—			—		—			—
Other	—		—			(1		)	—			(1		)	—		(1		)	1
Balance at September 30, 2018	89,188,708		$	1,320		$	3,800		$	44		$	5,164		$	—	$	5,164		$	—

5

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 Shares		Common Stock and Capital Surplus			Retained Earnings			Accumulated Other Comp. Income (Loss)			Total			Noncon- trolling Interests			Total Equity			Noncon- trolling Interests
Balance at December 31, 2018	89,291,724		$	1,334		$	3,588		$	48		$	4,970		$	2		$	4,972		$	—
Net earnings (losses)	—		—			686			—			686			—			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		$	—		$	6,321		$	—
Balance at December 31, 2017	88,275,460		$	1,269		$	3,248		$	813		$	5,330		$	1		$	5,331		$	3
Cumulative effect of accounting change	—		—			225			(221		)	4			—			4			—
Net earnings (losses)	—		—			559			—			559			(1		)	558			(6		)
Other comprehensive loss	—		—			—			(548		)	(548		)	—			(548		)	—
Dividends ($2.55 per share)	—		—			(227		)	—			(227		)	—			(227		)	—
Shares issued:
Exercise of stock options	635,364		23			—			—			23			—			23			—
Restricted stock awards	200,625		—			—			—			—			—			—			—
Other benefit plans	86,229		10			—			—			10			—			10			—
Dividend reinvestment plan	21,072		2			—			—			2			—			2			—
Stock-based compensation expense	—		17			—			—			17			—			17			—
Shares exchanged — benefit plans	(26,520	)	(1		)	(2		)	—			(3		)	—			(3		)	—
Forfeitures of restricted stock	(3,522	)	—			—			—			—			—			—			—
Other	—		—			(3		)	—			(3		)	—			(3		)	3
Balance at September 30, 2018	89,188,708		$	1,320		$	3,800		$	44		$	5,164		$	—		$	5,164		$	—

6

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,
	2019			2018
Operating Activities:
Net earnings, including noncontrolling interests	$	678		$	552
Adjustments:
Depreciation and amortization	195			163
Annuity benefits	900			664
Realized (gains) losses on investing activities	(223		)	28
Net (purchases) sales of trading securities	(2		)	116
Deferred annuity and life policy acquisition costs	(163		)	(192		)
Change in:
Reinsurance and other receivables	(330		)	(868		)
Other assets	(281		)	(257		)
Insurance claims and reserves	475			507
Payable to reinsurers	115			189
Other liabilities	417			346
Managed investment entities’ assets/liabilities	(2		)	104
Other operating activities, net	(88		)	(75		)
Net cash provided by operating activities	1,691			1,277
Investing Activities:
Purchases of:
Fixed maturities	(5,533		)	(6,700		)
Equity securities	(161		)	(342		)
Mortgage loans	(181		)	(112		)
Equity index options and other investments	(658		)	(695		)
Real estate, property and equipment	(33		)	(60		)
Proceeds from:
Maturities and redemptions of fixed maturities	3,411			3,516
Repayments of mortgage loans	76			87
Sales of fixed maturities	569			275
Sales of equity securities	223			150
Sales and settlements of equity index options and other investments	486			688
Sales of real estate, property and equipment	3			3
Managed investment entities:
Purchases of investments	(1,062		)	(1,674		)
Proceeds from sales and redemptions of investments	1,081			1,485
Other investing activities, net	1			4
Net cash used in investing activities	(1,778		)	(3,375		)
Financing Activities:
Annuity receipts	3,821			3,925
Annuity surrenders, benefits and withdrawals	(2,502		)	(2,101		)
Net transfers from variable annuity assets	45			35
Additional long-term borrowings	121			—
Issuances of managed investment entities’ liabilities	—			1,572
Retirements of managed investment entities’ liabilities	(8		)	(1,463		)
Issuances of Common Stock	29			26
Cash dividends paid on Common Stock	(241		)	(225		)
Net cash provided by financing activities	1,265			1,769
Net Change in Cash and Cash Equivalents	1,178			(329		)
Cash and cash equivalents at beginning of period	1,515			2,338
Cash and cash equivalents at end of period	$	2,693		$	2,009

7

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

INDEX TO NOTES
A.	Accounting Policies	I.	Goodwill and Other Intangibles
B.	Acquisition of Business	J.	Long-Term Debt
C.	Segments of Operations	K.	Leases
D.	Fair Value Measurements	L.	Shareholders’ Equity
E.	Investments	M.	Income Taxes
F.	Derivatives	N.	Contingencies
G.	Deferred Policy Acquisition Costs	O.	Insurance
H.	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. 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, 2019, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

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.

Fair Value Measurements   Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first nine months of 2019.

Investments On January 1, 2018, AFG adopted Accounting Standards Update (“ASU”) 2016-01, which 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 December 31, 2017, AFG had $1.60 billion in equity securities classified as “available for sale” under the prior guidance with holding gains and losses included in accumulated other comprehensive income (“AOCI”) instead of net earnings. At the date of adoption, the $221 million net unrealized gain on equity securities included in AOCI was reclassified to retained earnings as the cumulative effect of an accounting change. The cumulative effect of the accounting change also includes the net unrealized gain on AFG’s small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under the new guidance ($4 million net of tax at the date of adoption).

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

Fixed maturity securities classified as “available for sale” are reported at fair value with unrealized gains and losses included in AOCI 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 and policy loans are carried primarily at the aggregate unpaid balance.

8

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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 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.

Gains or losses on fixed maturity securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment is charged to earnings (included in realized gains (losses) on securities) and the cost basis of that investment is reduced. If management can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment 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 of an other-than-temporary impairment 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 impairment charge. Both components are shown in the statement of earnings. 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 charge to earnings is recorded to reduce the amortized cost of that security to fair value.

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

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

Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI and are reclassified into earnings when the variability of the cash flows from the hedged items impacts earnings. When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item in the statement of earnings as the cash flows from the hedged item. AFG uses interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities.

Goodwill   Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net assets. 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 insurance subsidiaries also assume reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

An AFG subsidiary cedes life insurance policies to a third party on a funds withheld basis whereby the subsidiary retains the assets (securities) associated with the reinsurance contract. Interest is credited to the reinsurer based on the actual investment

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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.

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

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

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

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

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

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

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

AFG manages, and has investments in, collateralized loan obligations (“CLOs”) that are VIEs (see Note 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

Leases   On January 1, 2019, AFG adopted ASU 2016-02, which requires entities that lease assets for terms longer than one year to recognize 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. As permitted under the ASU, AFG adopted the guidance on a modified retrospective basis (comparative periods were not adjusted) and elected the following accounting policies and practical expedients:

• exclude leases with a term of 12 months or less from the calculation of lease assets and liabilities,

• not separate lease and non-lease components except for buildings (office space and storage facilities),

• for contracts existing at the date of adoption – not reassess whether a contract is a lease or contains a lease, how initial direct costs were accounted for or whether the lease is an operating or finance lease, and

• use hindsight to determine the lease term for leases existing at the date of adoption.

Adoption of the new guidance resulted in AFG recognizing a lease liability of $198 million (included in other liabilities) and a corresponding right-of-use asset of $174 million (which is presented net of $24 million in deferred rent and lease incentives) on January 1, 2019. Deferred rent and lease incentives were recognized as liabilities under the previous guidance and result from the straight-line expensing of operating leases. The adoption of the new guidance did not have a material effect on the AFG’s results of operations or liquidity. See Note K — “Leases” for additional disclosures.

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

Premium Recognition   Property and casualty premiums are earned generally over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations. For traditional life, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. For interest-sensitive life and universal life products, premiums are recorded in a policyholder account, which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses.

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

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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. See Note L — “Shareholders’ Equity” for further information.

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 2019 and 2018 — 1.1 million and 1.6 million; first nine months of 2019 and 2018 — 1.2 million and 1.7 million, respectively.

There were no anti-dilutive potential common shares in the third quarter or first nine months of 2019 or 2018.

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.

B.     Acquisition of Business

Effective June 10, 2019, National Interstate, a property and casualty insurance subsidiary of AFG, entered into an agreement with Atlas Financial Holdings, Inc. (“AFH”) to become the exclusive underwriter of AFH’s paratransit book of business. National Interstate estimates that the majority of AFH’s $110 million paratransit business will be eligible for quotation under this arrangement over the first 12 months following inception of the agreement. Under the terms of the agreement, AFH will act as an underwriting manager for National Interstate for at least 12 months, after which time National Interstate is entitled to acquire the renewal rights for the business from AFH for a purchase price equal to 15% of the in force gross written premiums at that date. The majority of the purchase price ultimately paid for the renewal rights will be recorded as an intangible renewal rights asset and will be amortized over the estimated life of the business acquired. In connection with the transaction, AFG was granted a five-year warrant to acquire approximately 2.4 million shares of AFH. The estimated fair value of the warrant was approximately $1 million at the date it was received.

C.    Segments of Operations

AFG manages its business as three 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

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financial, which includes risk management insurance programs for lending and leasing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), fidelity and surety products and trade credit insurance. Premiums and underwriting profit included under Other specialty represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments and amortization of deferred gains on retroactive reinsurance transactions related to the sales of businesses in prior years. AFG’s annuity business sells traditional fixed, fixed-indexed and variable-indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets. AFG’s reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.

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

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019		2018
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	583		$	526	$	1,323	$	1,250
Specialty casualty	658			616		1,921		1,790
Specialty financial	161			149		458		457
Other specialty	40			36		113		98
Total premiums earned	1,442			1,327		3,815		3,595
Net investment income	124			108		352		323
Other income	5			4		10		8
Total property and casualty insurance	1,571			1,439		4,177		3,926
Annuity:
Net investment income	448			413		1,334		1,219
Other income	28			27		82		80
Total annuity	476			440		1,416		1,299
Other	94			95		292		263
Total revenues before realized gains (losses)	2,141			1,974		5,885		5,488
Realized gains (losses) on securities	(18		)	34		222		(28		)
Total revenues	$	2,123		$	2,008	$	6,107	$	5,460

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	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Earnings Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	38		$	—		$	81		$	56
Specialty casualty	23			49			106			119
Specialty financial	26			9			60			46
Other specialty	1			(3		)	(11		)	(1		)
Other lines (a)	(34		)	(17		)	(36		)	(19		)
Total underwriting	54			38			200			201
Investment and other income, net	118			101			328			300
Total property and casualty insurance	172			139			528			501
Annuity	73			117			234			341
Other (b)	(50		)	(46		)	(135		)	(136		)
Total earnings before realized gains (losses) and income taxes	195			210			627			706
Realized gains (losses) on securities	(18		)	34			222			(28		)
Total earnings before income taxes	$	177		$	244		$	849		$	678

(a) Includes special charges of $18 million in both the third quarter of 2019 and 2018, respectively, to increase asbestos and environmental (“A&E”) reserves.

(b) Includes holding company interest and expenses, including special charges of $11 million and $9 million in the third quarter of 2019 and 2018, respectively, to increase A&E reserves related to AFG’s former railroad and manufacturing operations.

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D.    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”), non-affiliated common stocks, equity index options and investments of managed investment entities priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.

Level 3 — Valuations derived from market valuation techniques generally consistent with those used to estimate the fair values of Level 2 financial instruments in which one or more significant inputs are unobservable or when the market for a security exhibits significantly less liquidity relative to markets supporting Level 2 fair value measurements. The unobservable inputs may include management’s own assumptions about the assumptions market participants would use based on the best information available at the valuation date. Financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information are classified as Level 3.

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

AFG’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. AFG’s internal investment professionals are a group of approximately 20 analysts whose primary responsibility is to manage AFG’s investment portfolio. These professionals monitor individual investments as well as overall industries and are active in the financial markets on a daily basis. The group is led by AFG’s chief investment officer, who reports directly to one of AFG’s Co-CEOs. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG’s internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, the Company communicates directly with the pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the service to value specific securities.

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

	Level 1		Level 2		Level 3		Total
September 30, 2019
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	151	$	70	$	8	$	229
States, municipalities and political subdivisions	—		6,862		102		6,964
Foreign government	—		164		—		164
Residential MBS	—		2,406		156		2,562
Commercial MBS	—		911		55		966
Collateralized loan obligations	—		4,257		57		4,314
Other asset-backed securities	—		5,317		414		5,731
Corporate and other	29		22,258		2,286		24,573
Total AFS fixed maturities	180		42,245		3,078		45,503
Trading fixed maturities	2		106		—		108
Equity securities	1,518		66		420		2,004
Equity index call options	—		750		—		750
Assets of managed investment entities (“MIE”)	228		4,456		18		4,702
Variable annuity assets (separate accounts) (*)	—		601		—		601
Other assets — derivatives	—		69		—		69
Total assets accounted for at fair value	$	1,928	$	48,293	$	3,516	$	53,737
Liabilities:
Liabilities of managed investment entities	$	219	$	4,287	$	17	$	4,523
Derivatives in annuity benefits accumulated	—		—		3,469		3,469
Other liabilities — derivatives	—		6		—		6
Total liabilities accounted for at fair value	$	219	$	4,293	$	3,486	$	7,998
December 31, 2018
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	141	$	83	$	9	$	233
States, municipalities and political subdivisions	—		6,880		59		6,939
Foreign government	—		142		—		142
Residential MBS	—		2,547		197		2,744
Commercial MBS	—		864		56		920
Collateralized loan obligations	—		4,162		116		4,278
Other asset-backed securities	—		4,802		731		5,533
Corporate and other	28		19,184		1,996		21,208
Total AFS fixed maturities	169		38,664		3,164		41,997
Trading fixed maturities	9		96		—		105
Equity securities	1,410		68		336		1,814
Equity index call options	—		184		—		184
Assets of managed investment entities	203		4,476		21		4,700
Variable annuity assets (separate accounts) (*)	—		557		—		557
Other assets — derivatives	—		16		—		16
Total assets accounted for at fair value	$	1,791	$	44,061	$	3,521	$	49,373
Liabilities:
Liabilities of managed investment entities	$	195	$	4,297	$	20	$	4,512
Derivatives in annuity benefits accumulated	—		—		2,720		2,720
Other liabilities — derivatives	—		49		—		49
Total liabilities accounted for at fair value	$	195	$	4,346	$	2,740	$	7,281

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

During the third quarter and first nine months of 2019, there were two preferred stocks with an aggregate fair value of $11 million that transferred from Level 2 to Level 1. During the first nine months of 2019, there was one preferred stock with an aggregate fair value of $6 million that transferred from Level 1 to Level 2. During the third quarter of 2018, there were no transfers between Level 1 and Level 2. During the first nine months of 2018, there were two preferred stocks with an aggregate fair value of $6 million that transferred from Level 1 to Level 2.

Approximately 7% of the total assets carried at fair value at September 30, 2019, were Level 3 assets. Approximately 49% ($1.72 billion) of the 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.

Internally developed Level 3 asset fair values represent approximately $1.48 billion at September 30, 2019. Of this amount, approximately $998 million relates to fixed maturity securities that were priced using management’s best estimate of an appropriate credit spread 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 of approximately 175 securities, the average spread used was 568 basis points over the reference treasury yield and the spreads ranged from 100 basis points to 2,966 basis points (approximately 80% of the spreads were between 400 and 700 basis points). Had management used higher spreads, the fair value of this group of securities would have been lower. Conversely, if the spreads used were lower, the fair values would have been higher. For the remainder of the internally developed prices, any justifiable changes in unobservable inputs used to determine fair value would not have resulted in a material change in AFG’s financial position.

The derivatives embedded in AFG’s fixed-indexed and variable-indexed annuity liabilities are measured using a discounted cash flow approach and had a fair value of $3.47 billion at September 30, 2019. The following table presents information about the unobservable inputs used by management in determining fair value of these Level 3 liabilities. See Note F — “Derivatives.”

Unobservable Input	Range
Adjustment for insurance subsidiary’s credit risk	0.2% – 2.6% over the risk-free rate
Risk margin for uncertainty in cash flows	0.80% reduction in the discount rate
Surrenders	3% – 22% of indexed account value
Partial surrenders	2% – 9% of indexed account value
Annuitizations	0.1% – 1% of indexed account value
Deaths	1.7% – 10.6% of indexed account value
Budgeted option costs	2.3% – 3.3% of indexed account value

The range of adjustments for insurance subsidiary’s credit risk is based on the Moody’s corporate A2 bond index and reflects credit spread variations across the yield curve. The range of projected surrender rates reflects the specific surrender charges and other features of AFG’s individual fixed-indexed and variable-indexed annuity products with an expected range of 7% to 10% in the majority of future calendar years (3% to 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.

18

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 months of 2019 and 2018 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs and $29 million of equity securities transferred into Level 3 in the first quarter of 2018 related to a small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under new guidance adopted on January 1, 2018, as discussed in Note A — “Accounting Policies — Investments.” 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
	Balance at June 30, 2019			Net earnings			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	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	82			—			2			—			—			18		—			102
Residential MBS	139			1			(1		)	—			(4		)	22		(1		)	156
Commercial MBS	50			1			—			—			—			4		—			55
Collateralized loan obligations	50			(2		)	1			8			—			—		—			57
Other asset-backed securities	367			—			1			49			(3		)	—		—			414
Corporate and other	2,014			—			20			324			(81		)	10		(1		)	2,286
Total AFS fixed maturities	2,710			—			23			381			(88		)	54		(2		)	3,078
Equity securities	377			(7		)	—			18			(2		)	34		—			420
Assets of MIE	19			(1		)	—			—			—			—		—			18
Total Level 3 assets	$	3,106		$	(8	)	$	23		$	399		$	(90	)	$	88	$	(2	)	$	3,516
Embedded derivatives (a)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at June 30, 2018			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	61			—			—			—			(1		)	—		—			60
Residential MBS	147			(2		)	(2		)	—			(6		)	13		(5		)	145
Commercial MBS	56			2			—			(1		)	—			—		—			57
Collateralized loan obligations	212			—			(2		)	—			—			—		—			210
Other asset-backed securities	792			—			(1		)	13			(23		)	—		—			781
Corporate and other	1,408			—			(3		)	312			(59		)	—		(12		)	1,646
Total AFS fixed maturities	2,684			—			(8		)	324			(89		)	13		(17		)	2,907
Equity securities	230			(5		)	—			81			—			—		(17		)	289
Assets of MIE	23			(1		)	—			—			—			—		—			22
Total Level 3 assets	$	2,937		$	(6	)	$	(8	)	$	405		$	(89	)	$	13	$	(34	)	$	3,218
Embedded derivatives	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)

(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 $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 the MIE assets.

19

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2018			Net earnings			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		$	—		$	—		$	—		$	(1	)	$	—	$	—		$	8
State and municipal	59			—			9			—			(2		)	36		—			102
Residential MBS	197			10			(6		)	—			(14		)	24		(55		)	156
Commercial MBS	56			3			—			—			(3		)	4		(5		)	55
Collateralized loan obligations	116			(5		)	7			8			—			13		(82		)	57
Other asset-backed securities	731			—			6			141			(135		)	—		(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		)	—			38			(3		)	56		—			420
Assets of MIE	21			(3		)	—			—			—			—		—			18
Total Level 3 assets	$	3,521		$	—		$	87		$	1,172		$	(488	)	$	145	$	(921	)	$	3,516
Embedded derivatives (a)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2017			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(2		)	—		(84		)	60
Residential MBS	122			(9		)	(2		)	—			(17		)	70		(19		)	145
Commercial MBS	36			1			—			20			—			—		—			57
Collateralized loan obligations	180			(2		)	(3		)	35			—			—		—			210
Other asset-backed securities	564			—			(3		)	318			(80		)	—		(18		)	781
Corporate and other	1,044			2			(21		)	784			(138		)	—		(25		)	1,646
Total AFS fixed maturities	2,102			(8		)	(31		)	1,157			(237		)	70		(146		)	2,907
Equity securities	165			9			—			106			(4		)	30		(17		)	289
Assets of MIE	23			(6		)	—			5			—			—		—			22
Total Level 3 assets	$	2,290		$	(5	)	$	(31	)	$	1,268		$	(241	)	$	100	$	(163	)	$	3,218
Embedded derivatives (a)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)

(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 $181 million in the first nine months of 2019 compared to a loss of $44 million in the first nine months of 2018.

(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.

20

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 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
September 30, 2019
Financial assets:
Cash and cash equivalents	$	2,693	$	2,693	$	2,693	$	—	$	—
Mortgage loans	1,174		1,195		—		—		1,195
Policy loans	166		166		—		—		166
Total financial assets not accounted for at fair value	$	4,033	$	4,054	$	2,693	$	—	$	1,361
Financial liabilities:
Annuity benefits accumulated (*)	$	39,401	$	39,468	$	—	$	—	$	39,468
Long-term debt	1,423		1,521		—		1,518		3
Total financial liabilities not accounted for at fair value	$	40,824	$	40,989	$	—	$	1,518	$	39,471
December 31, 2018
Financial assets:
Cash and cash equivalents	$	1,515	$	1,515	$	1,515	$	—	$	—
Mortgage loans	1,068		1,056		—		—		1,056
Policy loans	174		174		—		—		174
Total financial assets not accounted for at fair value	$	2,757	$	2,745	$	1,515	$	—	$	1,230
Financial liabilities:
Annuity benefits accumulated (*)	$	36,384	$	34,765	$	—	$	—	$	34,765
Long-term debt	1,302		1,231		—		1,228		3
Total financial liabilities not accounted for at fair value	$	37,686	$	35,996	$	—	$	1,228	$	34,768

(*) Excludes $250 million and $232 million of life contingent annuities in the payout phase at September 30, 2019 and December 31, 2018, respectively.

The carrying amount of cash and cash equivalents approximates fair value. Fair values for mortgage loans are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The fair value of policy loans is estimated to approximate carrying value; policy loans have no defined maturity dates and are inseparable from insurance contracts. The fair value of annuity benefits was estimated based on expected cash flows discounted using forward interest rates adjusted for the Company’s credit risk and includes the impact of maintenance expenses and capital costs. Fair values of long-term debt are based primarily on quoted market prices.

21

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

E.    Investments

Available for sale fixed maturities at September 30, 2019 and December 31, 2018, consisted of the following (in millions):

	September 30, 2019												December 31, 2018
	Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value		Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value
			Gains		Losses										Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	225	$	5	$	(1	)	$	4		$	229	$	235	$	1	$	(3	)	$	(2	)	$	233
States, municipalities and political subdivisions	6,519		446		(1		)	445			6,964		6,825		169		(55		)	114			6,939
Foreign government	160		4		—			4			164		140		2		—			2			142
Residential MBS	2,274		292		(4		)	288			2,562		2,476		277		(9		)	268			2,744
Commercial MBS	928		38		—			38			966		905		17		(2		)	15			920
Collateralized loan obligations	4,319		13		(18		)	(5		)	4,314		4,350		1		(73		)	(72		)	4,278
Other asset-backed securities	5,540		201		(10		)	191			5,731		5,431		129		(27		)	102			5,533
Corporate and other	23,369		1,234		(30		)	1,204			24,573		21,475		167		(434		)	(267		)	21,208
Total fixed maturities	$	43,334	$	2,233	$	(64	)	$	2,169		$	45,503	$	41,837	$	763	$	(603	)	$	160		$	41,997

The non-credit related portion of other-than-temporary impairment charges is included in other comprehensive income. Cumulative non-credit charges taken for securities still owned at September 30, 2019 and December 31, 2018 were $124 million and $140 million, respectively. Gross unrealized gains on such securities at September 30, 2019 and December 31, 2018 were $114 million and $119 million, respectively. Gross unrealized losses on such securities at September 30, 2019 and December 31, 2018 were $3 million and $4 million, respectively. These amounts represent the non-credit other-than-temporary impairment charges recorded in AOCI adjusted for subsequent changes in fair values and relate primarily to residential MBS.

Equity securities, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at September 30, 2019 and December 31, 2018 (in millions):

	September 30, 2019						December 31, 2018
					Fair Value  over (under) Cost						Fair Value over (under) Cost
	Actual Cost						Actual Cost
			Fair Value						Fair Value
Common stocks	$	1,166	$	1,261	$	95	$	1,241	$	1,148	$	(93	)
Perpetual preferred stocks	732		743		11		705		666		(39		)
Total equity securities carried at fair value	$	1,898	$	2,004	$	106	$	1,946	$	1,814	$	(132	)

22

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities 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
	Unrealized Loss			Fair Value		Fair Value as % of Cost		Unrealized Loss			Fair Value		Fair Value as % of Cost
September 30, 2019
Fixed maturities:
U.S. Government and government agencies	$	—		$	—	—	%	$	(1	)	$	49	98	%
States, municipalities and political subdivisions	—			54		100	%	(1		)	74		99	%
Foreign government	—			47		100	%	—			—		—	%
Residential MBS	(3		)	144		98	%	(1		)	69		99	%
Commercial MBS	—			13		100	%	—			—		—	%
Collateralized loan obligations	(6		)	1,063		99	%	(12		)	1,255		99	%
Other asset-backed securities	(4		)	518		99	%	(6		)	83		93	%
Corporate and other	(16		)	1,118		99	%	(14		)	370		96	%
Total fixed maturities	$	(29	)	$	2,957	99	%	$	(35	)	$	1,900	98	%
December 31, 2018
Fixed maturities:
U.S. Government and government agencies	$	—		$	41	100	%	$	(3	)	$	120	98	%
States, municipalities and political subdivisions	(23		)	1,497		98	%	(32		)	902		97	%
Foreign government	—			18		100	%	—			4		100	%
Residential MBS	(4		)	279		99	%	(5		)	139		97	%
Commercial MBS	(1		)	147		99	%	(1		)	30		97	%
Collateralized loan obligations	(61		)	3,540		98	%	(12		)	197		94	%
Asset-backed securities	(16		)	1,866		99	%	(11		)	432		98	%
Corporate and other	(306		)	10,378		97	%	(128		)	2,078		94	%
Total fixed maturities	$	(411	)	$	17,766	98	%	$	(192	)	$	3,902	95	%

At September 30, 2019, the gross unrealized losses on fixed maturities of $64 million relate to 602 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 63% of the gross unrealized loss and 88% of the fair value.

AFG analyzes its MBS securities for other-than-temporary 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. In the first nine months of 2019 and 2018, AFG recorded less than $1 million and $1 million, respectively, in other-than-temporary impairment charges related to its residential MBS.

In the first nine months of 2019, AFG recorded $15 million in other-than-temporary impairment charges on third-party collateralized loan obligations.

In the first nine months of 2019 and 2018, AFG recorded $4 million and $2 million, respectively, in other-than-temporary impairment charges related to corporate bonds.

Management believes AFG will recover its cost basis 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, 2019.

23

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

A progression of the credit portion of other-than-temporary impairments on fixed maturity securities for which the non-credit portion of an impairment has been recognized in other comprehensive income is shown below (in millions):

	2019			2018
Balance at June 30	$	140		$	144
Additional credit impairments on:
Previously impaired securities	—			—
Securities without prior impairments	—			—
Reductions due to sales or redemptions	(3		)	(1		)
Balance at September 30	$	137		$	143
Balance at January 1	$	142		$	145
Additional credit impairments on:
Previously impaired securities	—			—
Securities without prior impairments	—			1
Reductions due to sales or redemptions	(5		)	(3		)
Balance at September 30	$	137		$	143

The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 30, 2019 (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
	Cost		Amount		%
Maturity
One year or less	$	2,223	$	2,249	5	%
After one year through five years	10,338		10,742		24	%
After five years through ten years	13,997		14,927		33	%
After ten years	3,715		4,012		8	%
	30,273		31,930		70	%
Collateralized loan obligations and other ABS (average life of approximately 4.5 years)	9,859		10,045		22	%
MBS (average life of approximately 4.5 years)	3,202		3,528		8	%
Total	$	43,334	$	45,503	100	%

Certain risks are inherent in fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.

There were no investments in individual issuers that exceeded 10% of shareholders’ equity at September 30, 2019 or December 31, 2018.

24

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Net Unrealized Gain on Marketable 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 annuity, long-term care and life businesses be adjusted to the extent that unrealized gains and losses from securities would result in adjustments to those balances had the unrealized gains or losses actually been realized. The following table shows (in millions) the components of the net unrealized gain on securities that is included in AOCI in AFG’s Balance Sheet.

	Pretax			Deferred Tax			Net
September 30, 2019
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	1,777		$	(373	)	$	1,404
Fixed maturities — all other	392			(83		)	309
Total fixed maturities	2,169			(456		)	1,713
Deferred policy acquisition costs — annuity segment	(760		)	160			(600		)
Annuity benefits accumulated	(259		)	54			(205		)
Unearned revenue	15			(3		)	12
Total net unrealized gain on marketable securities	$	1,165		$	(245	)	$	920
December 31, 2018
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	101		$	(21	)	$	80
Fixed maturities — all other	59			(13		)	46
Total fixed maturities	160			(34		)	126
Deferred policy acquisition costs — annuity segment	(42		)	9			(33		)
Annuity benefits accumulated	(14		)	3			(11		)
Unearned revenue	1			—			1
Total net unrealized gain on marketable securities	$	105		$	(22	)	$	83

(*) Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.

Net Investment Income   The following table shows (in millions) investment income earned and investment expenses incurred.

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Investment income:
Fixed maturities	$	475		$	440		$	1,422		$	1,283
Equity securities:
Dividends	22			19			66			59
Change in fair value (*)	17			2			35			16
Equity in earnings of partnerships and similar investments	43			41			109			128
Other	36			31			95			82
Gross investment income	593			533			1,727			1,568
Investment expenses	(5		)	(6		)	(17		)	(16		)
Net investment income	$	588		$	527		$	1,710		$	1,552

(*) 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.

25

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

	Three months ended September 30, 2019												Three months ended September 30, 2018
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	9		$	(14	)	$	(5	)	$	367		$	—		$	(2	)	$	(2	)	$	(213	)
Equity securities	(16		)	—			(16		)	—			33			—			33			—
Mortgage loans and other investments	—			—			—			—			—			—			—			—
Other (*)	(2		)	5			3			(230		)	3			—			3			89
Total pretax	(9		)	(9		)	(18		)	137			36			(2		)	34			(124		)
Tax effects	2			2			4			(29		)	(8		)	1			(7		)	26
Net of tax	$	(7	)	$	(7	)	$	(14	)	$	108		$	28		$	(1	)	$	27		$	(98	)
	Nine months ended September 30, 2019												Nine months ended September 30, 2018
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	23		$	(20	)	$	3		$	2,009		$	3		$	(3	)	$	—		$	(1,150	)
Equity securities	210			—			210			—			(39		)	—			(39		)	—
Mortgage loans and other investments	3			—			3			—			—			—			—			—
Other (*)	(1		)	7			6			(949		)	11			—			11			484
Total pretax	235			(13		)	222			1,060			(25		)	(3		)	(28		)	(666		)
Tax effects	(49		)	3			(46		)	(223		)	5			1			6			140
Net of tax	$	186		$	(10	)	$	176		$	837		$	(20	)	$	(2	)	$	(22	)	$	(526	)

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

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 during the first nine months of 2019 and 2018 on securities that were still owned at September 30, 2019 and September 30, 2018 as follows (in millions):

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019		2018
Included in realized gains (losses)	$	(24	)	$	25	$	146	$	(51	)
Included in net investment income	17			2		34		16
	$	(7	)	$	27	$	180	$	(35	)

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

	Nine months ended September 30,
	2019			2018
Gross gains	$	20		$	19
Gross losses	(12		)	(8		)

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F.    Derivatives

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

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

		September 30, 2019				December 31, 2018
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	118	$	—	$	109	$	—
Public company warrants	Equity securities	—		—		—		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		3,469		—		2,720
Equity index call options	Equity index call options	750		—		184		—
Equity index put options	Other liabilities	—		1		—		1
Reinsurance contracts (embedded derivative)	Other liabilities	—		4		—		2
		$	868	$	3,474	$	293	$	2,723

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

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

AFG’s fixed-indexed and variable-indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG receives collateral from certain counterparties to support its purchased call option assets (net of collateral required under put option contracts with the same counterparties). This collateral ($472 million at September 30, 2019 and $103 million at December 31, 2018) is included in other assets in AFG’s Balance Sheet with an offsetting liability to return the collateral, which is included in other liabilities. AFG’s strategy is designed so that the 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. 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.

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

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AMERICAN FINANCIAL GROUP, INC. 10-Q

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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 months of 2019 and 2018 (in millions): 

		Three months ended September 30,						Nine months ended September 30,
Derivative	Statement of Earnings Line	2019			2018			2019			2018
MBS with embedded derivatives	Realized gains (losses) on securities	$	3		$	(3	)	$	15		$	(8	)
Public company warrants	Realized gains (losses) on securities	(1		)	1			(1		)	—
Fixed-indexed and variable-indexed annuities (embedded derivative) (*)	Annuity benefits	70			(223		)	(643		)	(286		)
Equity index call options	Annuity benefits	30			219			544			271
Equity index put options	Annuity benefits	—			—			1			—
Reinsurance contract (embedded derivative)	Net investment income	—			—			(2		)	2
		$	102		$	(6	)	$	(86	)	$	(21	)

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

Derivatives Designated and Qualifying as Cash Flow Hedges   As of September 30, 2019, AFG has fourteen active interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of AFG’s floating-rate fixed maturity securities to fixed rates by offsetting the variability in cash flows attributable to changes in short-term LIBOR.

Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on short-term LIBOR. The notional amounts of the interest rate swaps generally decline over each swap’s respective life (the swaps expire between April 2020 and June 2030) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR. The total outstanding notional amount of AFG’s interest rate swaps was $2.11 billion at September 30, 2019 compared to $2.35 billion at December 31, 2018, reflecting the scheduled amortization discussed above, the termination of a swap with a notional amount of $138 million (on the settlement date) in the second quarter of 2019 and the expiration of a swap with a notional amount of $78 million (on the expiration date) in the third quarter of 2019. The fair value of the interest rate swaps in an asset position and included in other assets was $69 million at September 30, 2019 and $16 million at December 31, 2018. The fair value of the interest rate swaps in a liability position and included in other liabilities was less than $1 million at September 30, 2019 and $46 million at December 31, 2018. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of DPAC and deferred taxes. Amounts reclassified from AOCI (before DPAC and taxes) to net investment income were losses of less than $1 million in the third quarter of 2019 and $1 million in the third quarter of 2018 and losses of $1 million and $2 million for the first nine months of 2019 and 2018, respectively. A collateral receivable supporting these swaps of $19 million at September 30, 2019 and $135 million at December 31, 2018 is included in other assets in AFG’s Balance Sheet.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

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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, 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		)	—			(77		)	—			(77		)	(77		)
Included in realized gains	—			3			—			—			3			—			3			3
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			(169		)	(169		)	(169		)
Balance at September 30, 2019	$	323		$	1,314		$	78		$	37		$	1,429		$	(788	)	$	641		$	964
Balance at June 30, 2018	$	298		$	1,243		$	94		$	45		$	1,382		$	(98	)	$	1,284		$	1,582
Additions	181			65			1			—			66			—			66			247
Amortization:
Periodic amortization	(171		)	(58		)	(5		)	(2		)	(65		)	—			(65		)	(236		)
Included in realized gains	—			3			—			—			3			—			3			3
Foreign currency translation	—			—			—			—			—			—			—			—
Change in unrealized	—			—			—			—			—			73			73			73
Balance at September 30, 2018	$	308		$	1,253		$	90		$	43		$	1,386		$	(25	)	$	1,361		$	1,669
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		)	—			(77		)	—			(77		)	(77		)
Included in realized gains	—			5			1			—			6			—			6			6
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			(758		)	(758		)	(758		)
Balance at September 30, 2019	$	323		$	1,314		$	78		$	37		$	1,429		$	(788	)	$	641		$	964
Balance at December 31, 2017	$	270		$	1,217		$	102		$	49		$	1,368		$	(422	)	$	946		$	1,216
Additions	524			192			2			—			194			—			194			718
Amortization:
Periodic amortization	(485		)	(193		)	(15		)	(6		)	(214		)	—			(214		)	(699		)
Annuity unlocking	—			28			1			—			29			—			29			29
Included in realized gains	—			9			—			—			9			—			9			9
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			397			397			397
Balance at September 30, 2018	$	308		$	1,253		$	90		$	43		$	1,386		$	(25	)	$	1,361		$	1,669

(*) 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 $153 million and $148 million of accumulated amortization at September 30, 2019 and December 31, 2018, respectively.

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H.    Managed Investment Entities

AFG is the investment manager and its subsidiaries have investments ranging from 15.0% to 60.9% of the most subordinate debt tranche of eleven active collateralized loan obligation entities (“CLOs”), which are considered variable interest entities. AFG’s subsidiaries also own portions of the senior debt tranches of certain of these CLOs. Upon formation between 2012 and 2018, 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 $179 million (including $116 million invested in the most subordinate tranches) at September 30, 2019, and $188 million at December 31, 2018.

In March 2018, AFG formed a new CLO, which issued $463 million face amount of liabilities (including $31 million face amount purchased by subsidiaries of AFG). During the first nine months of 2019 and 2018, AFG subsidiaries received less than $1 million and $45 million, respectively, in sale and redemption proceeds from its CLO investments. During the first nine months of 2018, one AFG CLO was substantially liquidated, as permitted by the CLO indenture.

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,
	2019			2018			2019			2018
Investment in CLO tranches at end of period	$	179		$	191		$	179		$	191
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	(18		)	20			69			5
Liabilities	4			(25		)	(85		)	(15		)
Management fees paid to AFG	4			4			11			12
CLO earnings (losses) attributable to AFG shareholders (b)	(5		)	4			11			11

(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 $165 million and $232 million at September 30, 2019 and December 31, 2018, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by $154 million and $241 million at those dates. The CLO assets include loans with an aggregate fair value of $8 million at September 30, 2019, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of $21 million; none at December 31, 2018).

In addition to the CLOs that it manages, AFG 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 carrying value of $4.31 billion at September 30, 2019 and $4.28 billion at December 31, 2018.

I.    Goodwill and Other Intangibles

There were no changes in the goodwill balance of $207 million during the first nine months of 2019. Included in other assets in AFG’s Balance Sheet is $45 million at September 30, 2019 and $54 million at December 31, 2018 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of $48 million and $39 million, respectively. Amortization of intangibles was $3 million in both the third quarters of 2019 and 2018 and $9 million and $7 million in the first nine months of 2019 and 2018, respectively.

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J.    Long-Term Debt

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

	September 30, 2019							December 31, 2018
	Principal		Discount and Issue Costs			Carrying Value		Principal		Discount and Issue Costs			Carrying Value
Direct Senior Obligations of AFG:
4.50% Senior Notes due June 2047	$	590	$	(2	)	$	588	$	590	$	(2	)	$	588
3.50% Senior Notes due August 2026	425		(4		)	421		425		(4		)	421
Other	3		—			3		3		—			3
	1,018		(6		)	1,012		1,018		(6		)	1,012
Direct Subordinated Obligations of AFG:
6-1/4% Subordinated Debentures due September 2054	150		(5		)	145		150		(5		)	145
6% Subordinated Debentures due November 2055	150		(5		)	145		150		(5		)	145
5.875% Subordinated Debentures due March 2059	125		(4		)	121		—		—			—
	425		(14		)	411		300		(10		)	290
	$	1,443	$	(20	)	$	1,423	$	1,318	$	(16	)	$	1,302

AFG has no scheduled principal payments on its long-term debt for the balance of 2019 or in the subsequent five years.

In March 2019, AFG issued $125 million in 5.875% Subordinated Debentures due in 2059.

AFG can borrow up to $500 million under its revolving credit facility, which expires in June 2021. 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. No amounts were borrowed under this facility at September 30, 2019 or December 31, 2018.

K.    Leases

AFG and its subsidiaries lease real estate that is primarily used for office space and, to a lesser extent, equipment under operating lease arrangements. Most of AFG’s real estate leases include an option to extend or renew the lease term at AFG’s option. The operating lease liability includes lease payments related to options to extend or renew the lease term if AFG is reasonably certain of exercising those options. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, AFG uses an estimate of its incremental secured borrowing rate. AFG did not have any material contracts accounted for as finance leases at September 30, 2019 or January 1, 2019.

At September 30, 2019, AFG’s $162 million operating lease right-of-use asset (presented net of $22 million in deferred rent and lease incentives) and $184 million operating lease liability are included in other assets and other liabilities, respectively, in AFG’s Balance Sheet.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

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The following table details AFG’s lease activity for the quarter and nine months ended September 30, 2019 (in millions):

	Three months ended		Nine months ended
	September 30, 2019		September 30, 2019
Lease expense:
Operating leases	$	12	$	34
Short-term leases	—		1
Total lease expense	$	12	$	35

Other operating lease information for the nine months ended September 30, 2019 (in millions):

Cash paid for lease liabilities reported in operating cash flows	$	37
Right-of-use assets obtained under new leases	15

The following table presents the undiscounted contractual maturities of AFG’s operating lease liability at September 30, 2019 (in millions):

Operating lease payments:
Remainder of 2019	$	12
2020	45
2021	40
2022	31
2023	26
Thereafter	54
Total lease payments	208
Impact of discounting	(24		)
Operating lease liability	$	184

Weighted-average remaining lease term	5.6 years
Weighted-average discount rate	4.1	%

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L.    Shareholders’ Equity

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

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

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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
Quarter ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	136		$	(29	)	$	107		$	—		$	107
Reclassification adjustment for realized (gains) losses included in net earnings (a)				1			—			1			—			1
Total net unrealized gains on securities (b)	$	812		137			(29		)	108			—			108			$	—		$	920
Net unrealized gains on cash flow hedges	18			9			(2		)	7			—			7			—			25
Foreign currency translation adjustments	(13		)	(6		)	(1		)	(7		)	(1		)	(8		)	—			(21		)
Pension and other postretirement plans adjustments	(8		)	1			—			1			—			1			—			(7		)
Total	$	809		$	141		$	(32	)	$	109		$	(1	)	$	108		$	—		$	917
Quarter ended September 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(122	)	$	26		$	(96	)	$	—		$	(96	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(2		)	—			(2		)	—			(2		)
Total net unrealized gains (losses) on securities (b)	$	191		(124		)	26			(98		)	—			(98		)	$	—		$	93
Net unrealized losses on cash flow hedges	(27		)	(6		)	1			(5		)	—			(5		)	—			(32		)
Foreign currency translation adjustments	(9		)	—			—			—			—			—			—			(9		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			—			(8		)
Total	$	147		$	(130	)	$	27		$	(103	)	$	—		$	(103	)	$	—		$	44
Nine months ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	1,073		$	(226	)	$	847		$	—		$	847
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(13		)	3			(10		)	—			(10		)
Total net unrealized gains on securities (b)	$	83		1,060			(223		)	837			—			837			$	—		$	920
Net unrealized gains (losses) on cash flow hedges	(11		)	46			(10		)	36			—			36			—			25
Foreign currency translation adjustments	(16		)	(3		)	—			(3		)	(2		)	(5		)	—			(21		)
Pension and other postretirement plans adjustments	(8		)	1			—			1			—			1			—			(7		)
Total	$	48		$	1,104		$	(233	)	$	871		$	(2	)	$	869		$	—		$	917
Nine months ended September 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(662	)	$	139		$	(523	)	$	—		$	(523	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(4		)	1			(3		)	—			(3		)
Total net unrealized gains (losses) on securities (b)	$	840		(666		)	140			(526		)	—			(526		)	$	(221	)	$	93
Net unrealized losses on cash flow hedges	(13		)	(24		)	5			(19		)	—			(19		)	—			(32		)
Foreign currency translation adjustments	(6		)	(2		)	(1		)	(3		)	—			(3		)	—			(9		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			—			(8		)
Total	$	813		$	(692	)	$	144		$	(548	)	$	—		$	(548	)	$	(221	)	$	44

34

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

(a)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	Realized gains (losses) on securities
Tax	Provision for income taxes

(b) Includes net unrealized gains of $55 million at September 30, 2019 compared to $59 million at June 30, 2019 and $58 million at December 31, 2018 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.

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 months of 2019, AFG issued 232,635 shares of restricted Common Stock (fair value of $99.28 per share) under the Stock Incentive Plan. AFG did not grant any stock options in the first nine months of 2019.

Total compensation expense related to stock incentive plans of AFG and its subsidiaries was $5 million and $6 million in the third quarters of 2019 and 2018, respectively, and $17 million in both the first nine months of 2019 and 2018.

M.    Income Taxes

The following is a reconciliation of income taxes 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,
	2019					2018					2019					2018
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	177				$	244				$	849				$	678
Income taxes at statutory rate	$	37		21	%	$	51		21	%	$	178		21	%	$	142		21	%
Effect of:
Adjustment to prior year taxes	(3		)	(2	%)	(9		)	(4	%)	(3		)	—	%	(9		)	(1	%)
Tax exempt interest	(4		)	(2	%)	(3		)	(1	%)	(11		)	(1	%)	(10		)	(1	%)
Dividends received deduction	(1		)	(1	%)	(1		)	—	%	(3		)	—	%	(3		)	—	%
Employee Stock Ownership Plan dividends paid deduction	—			—	%	(1		)	—	%	(1		)	—	%	(2		)	—	%
Stock-based compensation	(2		)	(1	%)	—			—	%	(6		)	(1	%)	(7		)	(1	%)
Nondeductible expenses	2			1	%	1			—	%	6			1	%	5			1	%
Change in valuation allowance	4			2	%	1			—	%	7			1	%	3			—	%
Foreign operations	—			—	%	—			—	%	—			—	%	3			—	%
Other	1			1	%	2			1	%	4			(1	%)	4			—	%
Provision for income taxes as shown in the statement of earnings	$	34		19	%	$	41		17	%	$	171		20	%	$	126		19	%

Approximately $19 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, 2019. 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.

35

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

N.     Contingencies

There have been no significant changes to the matters discussed and referred to in Note M — “Contingencies” of AFG’s 2018 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, as well as contingencies related to the sale of substantially all of AFG’s run-off long-term care insurance business.

O.    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 months of 2019 and 2018 (in millions):

	Nine months ended September 30,
	2019			2018
Balance at beginning of year	$	9,741		$	9,678
Less reinsurance recoverables, net of allowance	2,942			2,957
Net liability at beginning of year	6,799			6,721
Provision for losses and LAE occurring in the current period	2,457			2,337
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges	18			18
Other	(116		)	(149		)
Total losses and LAE incurred	2,359			2,206
Payments for losses and LAE of:
Current year	(731		)	(569		)
Prior years	(1,408		)	(1,313		)
Total payments	(2,139		)	(1,882		)
Reserves of business disposed (*)	—			(319		)
Foreign currency translation and other	(5		)	(4		)
Net liability at end of period	7,014			6,722
Add back reinsurance recoverables, net of allowance	2,833			2,948
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,847		$	9,670

(*) Reflects the reinsurance to close transaction at Neon discussed below.

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

The net decrease in the provision for claims of prior years during the first nine months of 2018 reflects (i) lower than expected losses in the crop business and lower than expected claim severity in the transportation businesses (within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses, and to a lesser extent, lower than expected claim severity in the executive liability business (within the Specialty casualty sub-segment), and (iii) lower than expected claim frequency and severity in the surety business and lower than expected claim severity in the fidelity business (all within the Specialty financial sub-segment). This favorable development was partially offset by (i) the $18 million special charge to increase asbestos and environmental reserves and (ii) higher than expected claim severity in the Singapore branch and aviation operations (within the Property and transportation sub-segment).

36

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

In December 2017, the Neon Lloyd’s syndicate entered into a reinsurance to close transaction for the 2015 and prior years of account with StarStone Underwriting Limited, a subsidiary of Enstar Group Limited, which was effective as of December 31, 2017 and settled in early 2018. In the Lloyd’s market, a reinsurance to close transaction transfers the responsibility for discharging all of the liabilities that attach to the transferred year of account plus the right to any income due to the closing year of account in return for a premium. This transaction provided Neon with finality on its legacy business.

37

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
Forward-Looking Statements	38	Results of Operations — Third Quarter	53
Overview	39	Segmented Statement of Earnings	53
Critical Accounting Policies	39	Property and Casualty Insurance	54
Liquidity and Capital Resources	40	Annuity	64
Ratios	40	Holding Company, Other and Unallocated	74
Condensed Consolidated Cash Flows	40	Results of Operations — First Nine Months	77
Parent and Subsidiary Liquidity	41	Segmented Statement of Earnings	77
Investments	42	Property and Casualty Insurance	78
Uncertainties	46	Annuity	87
Managed Investment Entities	46	Holding Company, Other and Unallocated	96
Results of Operations	50	Recent and Pending Accounting Standards	98
General	50

FORWARD-LOOKING STATEMENTS

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

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

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

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

• 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 the establishment of capital requirements for and approval of business plans for syndicate participation;

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

• tax law and accounting changes, including the impact of recent changes in U.S. corporate tax law;

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

• 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.

38

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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.

Results of Operations

Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses, and in the sale of traditional fixed, fixed-indexed and variable-indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets.

Net earnings attributable to AFG’s shareholders for the third quarter and first nine months of 2019 were $147 million ($1.62 per share, diluted) and $686 million ($7.55 per share, diluted), respectively, compared to $204 million ($2.26 per share, diluted) and $559 million ($6.17 per share, diluted) reported in the same periods of 2018, reflecting:

• lower earnings in the annuity segment,

• higher underwriting profit in the property and casualty insurance segment in the third quarter of 2019 compared to the third quarter of 2018,

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

• realized losses on securities in the third quarter of 2019 compared to realized gains in the third quarter of 2018, and

• realized gains on securities in the first nine months of 2019 compared to realized losses on securities in the first nine months of 2018. Both the 2019 and 2018 periods reflect the change in the fair value of equity securities that are required to be carried at fair value through net earnings under new accounting guidance adopted on January 1, 2018.

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”) 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 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 recoverability of deferred acquisition costs,

• the measurement of the derivatives embedded in fixed-indexed and variable-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 other-than-temporary impairments.

For a discussion of these policies, see Management’s Discussion and Analysis — “Critical Accounting Policies” in AFG’s 2018 Form 10-K.

39

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

LIQUIDITY AND CAPITAL RESOURCES

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

	September 30, 2019			December 31,
				2018			2017
Principal amount of long-term debt	$	1,443		$	1,318		$	1,318
Total capital	6,819			6,218			6,046
Ratio of debt to total capital:
Including subordinated debt	21.2		%	21.2		%	21.8		%
Excluding subordinated debt	14.9		%	16.4		%	16.8		%

The ratio of debt to total capital is a non-GAAP measure that management believes is useful for investors, analysts and independent 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).

AFG’s ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 1.84 for the nine months ended September 30, 2019 and 1.54 for the year ended December 31, 2018. Excluding annuity benefits, this ratio was 12.97 and 7.86, respectively. The ratio excluding annuity benefits is presented because interest credited to annuity policyholder accounts is not always considered a borrowing cost for an insurance company.

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,
	2019			2018
Net cash provided by operating activities	$	1,691		$	1,277
Net cash used in investing activities	(1,778		)	(3,375		)
Net cash provided by financing activities	1,265			1,769
Net change in cash and cash equivalents	$	1,178		$	(329	)

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 annuity operations typically produce positive net operating cash flows as investment income exceeds acquisition costs and operating expenses. Interest credited on annuity policyholder funds is a non-cash increase in AFG’s annuity benefits accumulated liability and annuity premiums, benefits and withdrawals are considered financing activities due to the deposit-type nature of annuities. Cash flows provided by operating activities also include the activity of AFG’s managed investment entities (collateralized loan obligations) 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 $2 million during the first nine months of 2019 and increased cash flows from operating activities by $104 million in the first nine months of 2018, accounting for a $106 million decline in cash flows from operating activities in the 2019 period compared to the 2018 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 $1.69 billion in the first nine months of 2019 compared to $1.17 billion in the first nine months of 2018, an increase of $520 million.

40

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Net Cash Used in Investing Activities   AFG’s investing activities consist primarily of the investment of funds provided by its property and casualty and annuity businesses. Net cash used in investing activities was $1.78 billion for the first nine months of 2019 compared to $3.38 billion in the first nine months of 2018, a decrease of $1.60 billion. As discussed below (under net cash provided by financing activities), AFG’s annuity group had net cash flows from annuity policyholders of $1.36 billion in the first nine months of 2019 and $1.86 billion in the first nine months of 2018, which is the primary source of AFG’s cash used in investing activities. In addition, AFG’s cash on hand increased by $1.18 billion during the first nine months of 2019 as AFG held more cash due to fewer investment opportunities in the first nine months of 2019 compared to a decrease of cash on hand of $329 million during the first nine months of 2018, as AFG invested a large portion of its cash on hand at December 31, 2017. Net investment activity in the managed investment entities was a $19 million source of cash in the first nine months of 2019 compared to a $189 million use of cash in the 2018 period, accounting for a $208 million decrease in net cash used in investing activities in the first nine months of 2019 compared to the same 2018 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note H — “Managed Investment Entities” to the financial statements.

Net Cash Provided by Financing Activities   AFG’s financing activities consist primarily of transactions with annuity policyholders, issuances and retirements of long-term debt, repurchases of common stock and dividend payments. Net cash provided by financing activities was $1.27 billion for the first nine months of 2019 compared to $1.77 billion in the first nine months of 2018, a decrease of $504 million. Annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $1.36 billion in the first nine months of 2019 compared to $1.86 billion in the first nine months of 2018, accounting for a $495 million decrease in net cash provided by financing activities in the 2019 period compared to the 2018 period. 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. Financing activities also include issuances and retirements of managed investment entity liabilities, which are nonrecourse to AFG and presented separately in AFG’s Balance Sheet. Retirements of managed investment entity liabilities exceeded issuances by $8 million in the first nine months of 2019 compared to issuances of managed investment entity liabilities exceeding retirements by $109 million in the first nine months of 2018, accounting for a $117 million decrease in net cash provided by financing activities in the 2019 period compared to the 2018 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.

AFG can borrow up to $500 million under its revolving credit facility which expires in June 2021. 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. There were no borrowings under this agreement, or under any other parent company short-term borrowing arrangements, during 2018 or the first nine months of 2019.

In November 2019, AFG declared a special cash dividend of $1.80 per share of AFG Common Stock. The dividend is payable on November 25, 2019 to shareholders of record on November 15, 2019. The aggregate amount of this special dividend will be approximately $160 million. In May 2019, AFG paid a special cash dividend of $1.50 per share of AFG Common Stock totaling $135 million.

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 2018, AFG paid special cash dividends of $3.00 per share of AFG Common Stock ($1.50 per share in May and November) totaling approximately $267 million and repurchased 65,589 shares of its Common Stock for $6 million.

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

41

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

member institutions, which provides the annuity operations with an additional source of liquidity. At September 30, 2019, GALIC had $1.1 billion in outstanding advances from the FHLB (included in annuity benefits accumulated), bearing interest at rates ranging from 0.13% to 0.21% over LIBOR (average rate of 2.23% at September 30, 2019). While these advances must be repaid between 2020 and 2021 ($510 million in 2020 and $586 million in 2021), GALIC has the option to prepay all or a portion 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, 2019, GALIC estimated that it had additional borrowing capacity of approximately $350 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.

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”). At September 30, 2019, AFG could reduce the average crediting rate on approximately $30 billion of traditional fixed, fixed-indexed and variable-indexed annuities without guaranteed withdrawal benefits by approximately 120 basis points (on a weighted average basis). Annuity policies are subject to GMIRs at policy issuance. 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	2019	2018	2017
1 — 1.99%	81%	79%	76%
2 — 2.99%	3%	4%	5%
3 — 3.99%	7%	8%	10%
4.00% and above	9%	9%	9%
Annuity benefits accumulated (in millions)	$39,651	$36,616	$33,316

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

Investments   AFG’s investment portfolio at September 30, 2019, contained $45.50 billion in fixed maturity securities classified as available for sale and carried at fair value with unrealized gains and losses included in a separate component of shareholders’ equity on an after-tax basis and $108 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG’s investment portfolio includes $1.74 billion in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and $262 million in equity securities carried at fair value with holding gains and losses included in net investment income.

Fair values for AFG’s portfolio are determined by AFG’s internal investment professionals using data from nationally recognized pricing services as well as non-binding broker quotes. Fair values of equity securities are generally based on published closing prices. For AFG’s fixed maturity portfolio, approximately 91% was priced using pricing services at September 30, 2019 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.

42

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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, 2019 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional.

Fair value of fixed maturity portfolio	$	45,611
Percentage impact on fair value of 100 bps increase in interest rates	(4.5		%)
Pretax impact on fair value of fixed maturity portfolio	$	(2,052	)
Offsetting adjustments to deferred policy acquisition costs and other balance sheet amounts	900
Estimated pretax impact on accumulated other comprehensive income	(1,152		)
Deferred income tax	242
Estimated after-tax impact on accumulated other comprehensive income	$	(910	)

Approximately 91% of the fixed maturities held by AFG at September 30, 2019, were rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies. 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. Although interest rates have been low in recent years, tighter lending standards have resulted in fewer buyers being able to refinance the mortgages underlying much of AFG’s non-agency residential MBS portfolio.

43

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Summarized information for AFG’s MBS (including those classified as trading) at September 30, 2019, 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 4.5 years and 3.5 years, respectively.

	Amortized Cost		Fair Value		Fair Value as % of Cost		Unrealized Gain (Loss)		% Rated Investment Grade
Collateral type
Residential:
Agency-backed	$	148	$	150	101	%	$	2	100	%
Non-agency prime	881		1,006		114	%	125		30	%
Alt-A	933		1,058		113	%	125		37	%
Subprime	314		350		111	%	36		26	%
Commercial	928		966		104	%	38		96	%
	$	3,204	$	3,530	110	%	$	326	53	%

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, 2019, 95% (based on statutory carrying value of $3.14 billion) of AFG’s MBS had an NAIC designation of 1.

Municipal bonds represented approximately 15% of AFG’s fixed maturity portfolio at September 30, 2019. 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, 2019, approximately 78% of the municipal bond portfolio was held in revenue bonds, with the remaining 22% held in general obligation bonds. AFG does not own general obligation bonds issued by Puerto Rico.

Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at September 30, 2019, is shown in the following table (dollars in millions). Approximately $755 million of available for sale fixed maturity securities had no unrealized gains or losses at September 30, 2019. 

	Securities With Unrealized Gains			Securities With Unrealized Losses
Available for Sale Fixed Maturities
Fair value of securities	$	39,891		$	4,857
Amortized cost of securities	$	37,658		$	4,921
Gross unrealized gain (loss)	$	2,233		$	(64	)
Fair value as % of amortized cost	106		%	99		%
Number of security positions	4,787			602
Number individually exceeding $2 million gain or loss	186			2
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):
States and municipalities	$	446		$	(1	)
Mortgage-backed securities	330			(4		)
Banks, savings and credit institutions	278			(2		)
Other asset-backed securities	201			(10		)
Healthcare	79			(5		)
Energy – exploration and production	39			(7		)
Collateralized loan obligations	13			(18		)
Percentage rated investment grade	93		%	88		%

44

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturity securities at September 30, 2019, 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
Maturity
One year or less	4	%	3	%
After one year through five years	25	%	12	%
After five years through ten years	36	%	13	%
After ten years	9	%	7	%
	74	%	35	%
Collateralized loan obligations and other asset-backed securities (average life of approximately 4.5 years)	18	%	60	%
Mortgage-backed securities (average life of approximately 4.5 years)	8	%	5	%
	100	%	100	%

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, 2019
Securities with unrealized gains:
Exceeding $500,000 (1,390 securities)	$	21,980	$	1,715		108	%
$500,000 or less (3,397 securities)	17,911		518			103	%
	$	39,891	$	2,233		106	%
Securities with unrealized losses:
Exceeding $500,000 (25 securities)	$	546	$	(28	)	95	%
$500,000 or less (577 securities)	4,311		(36		)	99	%
	$	4,857	$	(64	)	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, 2019
Investment grade fixed maturities with losses for:
Less than one year (218 securities)	$	2,497	$	(18	)	99	%
One year or longer (215 securities)	1,791		(23		)	99	%
	$	4,288	$	(41	)	99	%
Non-investment grade fixed maturities with losses for:
Less than one year (133 securities)	$	460	$	(11	)	98	%
One year or longer (36 securities)	109		(12		)	90	%
	$	569	$	(23	)	96	%

When a decline in the value of a specific investment is considered to be other-than-temporary, a provision for impairment is charged to earnings (accounted for as a realized loss) and the cost basis of that investment is reduced by the amount of the charge. 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 2018 Form 10-K under Management’s Discussion and Analysis — “Investments.”

45

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Based on its analysis, management believes AFG will recover its cost basis 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, 2019. Although AFG has the ability to continue holding its fixed maturity investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers’ creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG’s ability or intent change regarding a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other-than-temporary impairment could be material to results of operations in future periods. Significant declines in the fair value of AFG’s investment portfolio could have a significant adverse effect on AFG’s liquidity. For information on AFG’s realized gains (losses) on securities, including charges for other-than-temporary impairment, see “Results of Operations — Consolidated Realized Gains (Losses) on Securities.”

Uncertainties   Management believes that the areas posing the greatest risk of material loss are the adequacy of its insurance reserves and contingencies arising out of its former railroad and manufacturing operations. See “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, 2019 and 2018 and Management’s Discussion and Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves” in AFG’s 2018 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.

46

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
September 30, 2019
Assets:
Cash and investments	$	54,385	$	—	$	(178	)	(a)	$	54,207
Assets of managed investment entities	—		4,702		—				4,702
Other assets	10,159		—		(1		)	(a)	10,158
Total assets	$	64,544	$	4,702	$	(179	)		$	69,067
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	12,833	$	—	$	—			$	12,833
Annuity, life, accident and health benefits and reserves	40,264		—		—				40,264
Liabilities of managed investment entities	—		4,702		(179		)	(a)	4,523
Long-term debt and other liabilities	5,126		—		—				5,126
Total liabilities	58,223		4,702		(179		)		62,746
Redeemable noncontrolling interests	—		—		—				—
Shareholders’ equity:
Common Stock and Capital surplus	1,382		—		—				1,382
Retained earnings	4,022		—		—				4,022
Accumulated other comprehensive income, net of tax	917		—		—				917
Total shareholders’ equity	6,321		—		—				6,321
Noncontrolling interests	—		—		—				—
Total equity	6,321		—		—				6,321
Total liabilities and equity	$	64,544	$	4,702	$	(179	)		$	69,067
December 31, 2018
Assets:
Cash and investments	$	48,685	$	—	$	(187	)	(a)	$	48,498
Assets of managed investment entities	—		4,700		—				4,700
Other assets	10,259		—		(1		)	(a)	10,258
Total assets	$	58,944	$	4,700	$	(188	)		$	63,456
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	12,336	$	—	$	—			$	12,336
Annuity, life, accident and health benefits and reserves	37,251		—		—				37,251
Liabilities of managed investment entities	—		4,700		(188		)	(a)	4,512
Long-term debt and other liabilities	4,385		—		—				4,385
Total liabilities	53,972		4,700		(188		)		58,484
Redeemable noncontrolling interests	—		—		—				—
Shareholders’ equity:
Common Stock and Capital surplus	1,334		—		—				1,334
Retained earnings	3,588		—		—				3,588
Accumulated other comprehensive income, net of tax	48		—		—				48
Total shareholders’ equity	4,970		—		—				4,970
Noncontrolling interests	2		—		—				2
Total equity	4,972		—		—				4,972
Total liabilities and equity	$	58,944	$	4,700	$	(188	)		$	63,456

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

47

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
Three months ended September 30, 2019
Revenues:
Insurance net earned premiums	$	1,448		$	—		$	—			$	1,448
Net investment income	583			—			5			(b)	588
Realized losses on securities	(18		)	—			—				(18		)
Income (loss) of managed investment entities:
Investment income	—			67			—				67
Gain (loss) on change in fair value of assets/liabilities	—			(1		)	(13		)	(b)	(14		)
Other income	56			—			(4		)	(c)	52
Total revenues	2,069			66			(12		)		2,123
Costs and Expenses:
Insurance benefits and expenses	1,773			—			—				1,773
Expenses of managed investment entities	—			66			(12		)	(b)(c)	54
Interest charges on borrowed money and other expenses	119			—			—				119
Total costs and expenses	1,892			66			(12		)		1,946
Earnings before income taxes	177			—			—				177
Provision for income taxes	34			—			—				34
Net earnings, including noncontrolling interests	143			—			—				143
Less: Net earnings (losses) attributable to noncontrolling interests	(4		)	—			—				(4		)
Net earnings attributable to shareholders	$	147		$	—		$	—			$	147
Three months ended September 30, 2018
Revenues:
Insurance net earned premiums	$	1,333		$	—		$	—			$	1,333
Net investment income	531			—			(4		)	(b)	527
Realized gains on securities	34			—			—				34
Income (loss) of managed investment entities:
Investment income	—			65			—				65
Gain (loss) on change in fair value of assets/liabilities	—			(5		)	—			(b)	(5		)
Other income	58			—			(4		)	(c)	54
Total revenues	1,956			60			(8		)		2,008
Costs and Expenses:
Insurance benefits and expenses	1,599			—			—				1,599
Expenses of managed investment entities	—			60			(8		)	(b)(c)	52
Interest charges on borrowed money and other expenses	113			—			—				113
Total costs and expenses	1,712			60			(8		)		1,764
Earnings before income taxes	244			—			—				244
Provision for income taxes	41			—			—				41
Net earnings, including noncontrolling interests	203			—			—				203
Less: Net earnings (losses) attributable to noncontrolling interests	(1		)	—			—				(1		)
Net earnings attributable to shareholders	$	204		$	—		$	—			$	204

(a) Includes a loss of $5 million in the third quarter of 2019 and income of $4 million in the third quarter of 2018, representing the change in fair value of AFG’s CLO investments plus $4 million in both the third quarter of 2019 and 2018 in CLO management fees earned.

(b) Elimination of the change in fair value of AFG’s investments in the CLOs, including $8 million and $4 million in the third quarter of 2019 and 2018, respectively, in distributions recorded as interest expense by the CLOs.

(c) Elimination of management fees earned by AFG.

48

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, 2019
Revenues:
Insurance net earned premiums	$	3,832		$	—		$	—			$	3,832
Net investment income	1,721			—			(11		)	(b)	1,710
Realized gains 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	164			—			(11		)	(c)	153
Total revenues	5,939			199			(31		)		6,107
Costs and Expenses:
Insurance benefits and expenses	4,741			—			—				4,741
Expenses of managed investment entities	—			199			(31		)	(b)(c)	168
Interest charges on borrowed money and other expenses	349			—			—				349
Total costs and expenses	5,090			199			(31		)		5,258
Earnings before income taxes	849			—			—				849
Provision for income taxes	171			—			—				171
Net earnings, including noncontrolling interests	678			—			—				678
Less: Net earnings (losses) attributable to noncontrolling interests	(8		)	—			—				(8		)
Net earnings attributable to shareholders	$	686		$	—		$	—			$	686
Nine months ended September 30, 2018
Revenues:
Insurance net earned premiums	$	3,613		$	—		$	—			$	3,613
Net investment income	1,563			—			(11		)	(b)	1,552
Realized losses on securities	(28		)	—			—				(28		)
Income (loss) of managed investment entities:
Investment income	—			187			—				187
Gain (loss) on change in fair value of assets/liabilities	—			(6		)	(4		)	(b)	(10		)
Other income	158			—			(12		)	(c)	146
Total revenues	5,306			181			(27		)		5,460
Costs and Expenses:
Insurance benefits and expenses	4,310			—			—				4,310
Expenses of managed investment entities	—			181			(27		)	(b)(c)	154
Interest charges on borrowed money and other expenses	318			—			—				318
Total costs and expenses	4,628			181			(27		)		4,782
Earnings before income taxes	678			—			—				678
Provision for income taxes	126			—			—				126
Net earnings, including noncontrolling interests	552			—			—				552
Less: Net earnings (losses) attributable to noncontrolling interests	(7		)	—			—				(7		)
Net earnings attributable to shareholders	$	559		$	—		$	—			$	559

(a) Includes income of $11 million in both the first nine months of 2019 and 2018, representing the change in fair value of AFG’s CLO investments plus $11 million and $12 million in the first nine months of 2019 and 2018, respectively, in CLO management fees earned.

(b) Elimination of the change in fair value of AFG’s investments in the CLOs, including $20 million and $15 million in the first nine months of 2019 and 2018, respectively, in distributions recorded as interest expense by the CLOs.

(c) Elimination of management fees earned by AFG.

49

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 attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. For example, 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 for asbestos and environmental exposures, are excluded from core earnings.

Beginning 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. Although core net operating earnings for the annuity segment for the first quarter of 2019 and prior periods were not adjusted, the impact of the items now considered annuity non-core earnings on prior periods is highlighted in the discussion following the reconciliation of net earnings attributable to shareholders to core net operating earnings.

50

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 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 September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Components of net earnings attributable to shareholders:
Core operating earnings before income taxes	$	251		$	237		$	716		$	733
Pretax non-core items:
Realized gains (losses) on securities	(18		)	34			222			(28		)
Annuity non-core earnings (losses) (*)	(27		)	—			(60		)	—
Special A&E charges	(29		)	(27		)	(29		)	(27		)
Earnings before income taxes	177			244			849			678
Provision (credit) for income taxes:
Core operating earnings	50			40			143			138
Non-core items:
Realized gains (losses) on securities	(4		)	7			46			(6		)
Annuity non-core earnings (losses) (*)	(6		)	—			(12		)	—
Special A&E charges	(6		)	(6		)	(6		)	(6		)
Total provision for income taxes	34			41			171			126
Net earnings, including noncontrolling interests	143			203			678			552
Less net earnings (losses) attributable to noncontrolling interests:
Core operating earnings (losses)	(4		)	(1		)	(8		)	(7		)
Net earnings attributable to shareholders	$	147		$	204		$	686		$	559
Net earnings:
Core net operating earnings	$	205		$	198		$	581		$	602
Realized gains (losses) on securities	(14		)	27			176			(22		)
Annuity non-core earnings (losses) (*)	(21		)	—			(48		)	—
Special A&E charges	(23		)	(21		)	(23		)	(21		)
Net earnings attributable to shareholders	$	147		$	204		$	686		$	559
Diluted per share amounts:
Core net operating earnings	$	2.25		$	2.19		$	6.39		$	6.65
Realized gains (losses) on securities	(0.15		)	0.31			1.93			(0.24		)
Annuity non-core earnings (losses) (*)	(0.23		)	—			(0.52		)	—
Special A&E charges	(0.25		)	(0.24		)	(0.25		)	(0.24		)
Net earnings attributable to shareholders	$	1.62		$	2.26		$	7.55		$	6.17

(*) 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 annuity non-core earnings (losses).

Net earnings attributable to shareholders decreased $57 million in the third quarter of 2019 compared to the third quarter of 2018 due to net realized losses on securities in the 2019 period compared to net realized gains in the 2018 period, partially offset by higher core net operating earnings. In addition, net earnings attributable to shareholders includes after-tax losses of $21 million in the third quarter of 2019 and after-tax earnings of $13 million in the third quarter of 2018 from unlocking (in the 2019 quarter), the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs. As discussed above, this impact on the accounting for FIAs is considered non-core earnings (losses) beginning with the second quarter of 2019. Excluding the $13 million after-tax positive impact of these

51

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

items on results for the third quarter of 2018, core net operating earnings for the third quarter of 2019 increased $20 million compared to the third quarter of 2018 reflecting higher earnings in the property and casualty insurance segment. Realized gains (losses) on securities in the third quarters of 2019 and 2018 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 increased $127 million in the first nine months of 2019 compared to the same period in 2018 due primarily to after-tax net realized gains on securities of $176 million in the 2019 period compared to after-tax net realized losses of $22 million in the first nine months of 2018. In addition, net earnings attributable to shareholders includes an after-tax loss of $57 million for 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) compared to after-tax income of $14 million in the first nine months of 2018 from 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, this impact on the accounting for FIAs is considered non-core earnings (losses) prospectively beginning 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 and the $14 million after-tax favorable impact of these items on results for the first nine months of 2018, core net operating earnings for the first nine months of 2019 increased $2 million compared to the first nine months of 2018 reflecting higher net investment income in the property and casualty insurance segment, partially offset by lower earnings in the annuity segment. Realized gains (losses) on securities in the first nine months of 2019 and 2018 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

52

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

RESULTS OF OPERATIONS — THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

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 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, 2019 and 2018 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
	P&C			Annuity			Consol. MIEs			Holding Co., other and unallocated			Total			Non-core reclass			GAAP Total
Three months ended September 30, 2019
Revenues:
Property and casualty insurance net earned premiums	$	1,442		$	—		$	—		$	—		$	1,442		$	—		$	1,442
Life, accident and health net earned premiums	—			—			—			6			6			—			6
Net investment income	124			448			5			11			588			—			588
Realized losses on securities	—			—			—			—			—			(18		)	(18		)
Income (loss) of MIEs:
Investment income	—			—			67			—			67			—			67
Gain (loss) on change in fair value of assets/liabilities	—			—			(14		)	—			(14		)	—			(14		)
Other income	5			27			(4		)	23			51			1			52
Total revenues	1,571			475			54			40			2,140			(17		)	2,123
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	926			—			—			—			926			18			944
Commissions and other underwriting expenses	444			—			—			6			450			—			450
Annuity benefits	—			276			—			—			276			(26		)	250
Life, accident and health benefits	—			—			—			9			9			—			9
Annuity and supplemental insurance acquisition expenses	—			64			—			2			66			54			120
Interest charges on borrowed money	—			—			—			17			17			—			17
Expenses of MIEs	—			—			54			—			54			—			54
Other expenses	11			35			—			45			91			11			102
Total costs and expenses	1,381			375			54			79			1,889			57			1,946
Earnings before income taxes	190			100			—			(39		)	251			(74		)	177
Provision for income taxes	39			20			—			(9		)	50			(16		)	34
Net earnings, including noncontrolling interests	151			80			—			(30		)	201			(58		)	143
Less: Net earnings (losses) attributable to noncontrolling interests	(4		)	—			—			—			(4		)	—			(4		)
Core Net Operating Earnings	155			80			—			(30		)	205
Non-core earnings attributable to shareholders (a):
Realized losses on securities, net of tax	—			—			—			(14		)	(14		)	14			—
Annuity non-core losses, net of tax (b)	—			(21		)	—			—			(21		)	21			—
Special A&E charges, net of tax	(14		)	—			—			(9		)	(23		)	23			—
Net Earnings Attributable to Shareholders	$	141		$	59		$	—		$	(53	)	$	147		$	—		$	147

53

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
Three months ended September 30, 2018
Revenues:
Property and casualty insurance net earned premiums	$	1,327		$	—	$	—		$	—		$	1,327		$	—		$	1,327
Life, accident and health net earned premiums	—			—		—			6			6			—			6
Net investment income	108			413		(4		)	10			527			—			527
Realized gains on securities	—			—		—			—			—			34			34
Income (loss) of MIEs:
Investment income	—			—		65			—			65			—			65
Gain (loss) on change in fair value of assets/liabilities	—			—		(5		)	—			(5		)	—			(5		)
Other income	4			27		(4		)	27			54			—			54
Total revenues	1,439			440		52			43			1,974			34			2,008
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	854			—		—			—			854			18			872
Commissions and other underwriting expenses	417			—		—			7			424			—			424
Annuity benefits	—			222		—			—			222			—			222
Life, accident and health benefits	—			—		—			10			10			—			10
Annuity and supplemental insurance acquisition expenses	—			69		—			2			71			—			71
Interest charges on borrowed money	—			—		—			15			15			—			15
Expenses of MIEs	—			—		52			—			52			—			52
Other expenses	11			32		—			46			89			9			98
Total costs and expenses	1,282			323		52			80			1,737			27			1,764
Earnings before income taxes	157			117		—			(37		)	237			7			244
Provision for income taxes	26			19		—			(5		)	40			1			41
Net earnings, including noncontrolling interests	131			98		—			(32		)	197			6			203
Less: Net earnings (losses) attributable to noncontrolling interests	(1		)	—		—			—			(1		)	—			(1		)
Core Net Operating Earnings	132			98		—			(32		)	198
Non-core earnings attributable to shareholders (a):
Realized gains on securities, net of tax	—			—		—			27			27			(27		)	—
Special A&E charges, net of tax	(14		)	—		—			(7		)	(21		)	21			—
Net Earnings Attributable to Shareholders	$	118		$	98	$	—		$	(12	)	$	204		$	—		$	204

(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).

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 $172 million in GAAP pretax earnings in the third quarter of 2019 compared to $139 million in the third quarter of 2018, an increase of $33 million (24%). Property and casualty core pretax

54

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

earnings were $190 million in the third quarter of 2019 compared to $157 million in the third quarter of 2018, an increase of $33 million (21%). The increase in pretax earnings reflects higher underwriting profit and higher net investment income in the third quarter of 2019 compared to the third quarter of 2018.

The following table details AFG’s earnings before income taxes from its property and casualty insurance operations for the three months ended September 30, 2019 and 2018 (dollars in millions):

	Three months ended September 30,
	2019			2018			% Change
Gross written premiums	$	2,351		$	2,104		12	%
Reinsurance premiums ceded	(733		)	(648		)	13	%
Net written premiums	1,618			1,456			11	%
Change in unearned premiums	(176		)	(129		)	36	%
Net earned premiums	1,442			1,327			9	%
Loss and loss adjustment expenses (*)	926			854			8	%
Commissions and other underwriting expenses	444			417			6	%
Core underwriting gain	72			56			29	%
Net investment income	124			108			15	%
Other income and expenses, net	(6		)	(7		)	(14	%)
Core earnings before income taxes	190			157			21	%
Pretax non-core special A&E charges	(18		)	(18		)	—	%
GAAP earnings before income taxes	$	172		$	139		24	%
(*)   Excludes pretax non-core special A&E charges of $18 million in both the third quarter of 2019 and 2018.
Combined Ratios:
Specialty lines							Change
Loss and LAE ratio	63.1		%	64.3		%	(1.2	%)
Underwriting expense ratio	30.9		%	31.4		%	(0.5	%)
Combined ratio	94.0		%	95.7		%	(1.7	%)
Aggregate — including exited lines
Loss and LAE ratio	65.4		%	65.8		%	(0.4	%)
Underwriting expense ratio	30.9		%	31.4		%	(0.5	%)
Combined ratio	96.3		%	97.2		%	(0.9	%)

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.

55

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Gross Written Premiums

Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $2.35 billion for the third quarter of 2019 compared to $2.10 billion for the third quarter of 2018, an increase of $247 million (12%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):

	Three months ended September 30,
	2019				2018
	GWP		%		GWP		%		% Change
Property and transportation	$	1,113	47	%	$	953	45	%	17	%
Specialty casualty	1,031		44	%	956		46	%	8	%
Specialty financial	207		9	%	195		9	%	6	%
	$	2,351	100	%	$	2,104	100	%	12	%

Reinsurance Premiums Ceded

Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 31% of gross written premiums for both the third quarter of 2019 and 2018. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):

	Three months ended September 30,
	2019					2018					Change in
	Ceded			% of GWP		Ceded			% of GWP		% of GWP
Property and transportation	$	(452	)	41	%	$	(393	)	41	%	—	%
Specialty casualty	(287		)	28	%	(261		)	27	%	1	%
Specialty financial	(40		)	19	%	(42		)	22	%	(3	%)
Other specialty	46					48
	$	(733	)	31	%	$	(648	)	31	%	—	%

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $1.62 billion for the third quarter of 2019 compared to $1.46 billion for the third quarter of 2018, an increase of $162 million (11%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):

	Three months ended September 30,
	2019				2018
	NWP		%		NWP		%		% Change
Property and transportation	$	661	41	%	$	560	38	%	18	%
Specialty casualty	744		46	%	695		48	%	7	%
Specialty financial	167		10	%	153		11	%	9	%
Other specialty	46		3	%	48		3	%	(4	%)
	$	1,618	100	%	$	1,456	100	%	11	%

56

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $1.44 billion for the third quarter of 2019 compared to $1.33 billion for the third quarter of 2018, an increase of $115 million (9%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):

	Three months ended September 30,
	2019				2018
	NEP		%		NEP		%		% Change
Property and transportation	$	583	40	%	$	526	40	%	11	%
Specialty casualty	658		46	%	616		46	%	7	%
Specialty financial	161		11	%	149		11	%	8	%
Other specialty	40		3	%	36		3	%	11	%
	$	1,442	100	%	$	1,327	100	%	9	%

The $247 million increase in gross written premiums for the third quarter of 2019 compared to the third quarter of 2018 reflects growth in each of the Specialty property and casualty sub-segments. Overall average renewal rates increased approximately 3% in the third quarter of 2019. Excluding the workers’ compensation businesses, renewal pricing increased approximately 6%.

Property and transportation Gross written premiums increased $160 million (17%) in the third quarter of 2019 compared to the third quarter of 2018, due primarily to the timing and reporting of crop premiums as a result of delayed acreage reporting from insureds due to excess moisture and late planting of corn and soybean crops and higher year-over-year premiums in the transportation businesses. Gross written premiums excluding crop grew by 13% year-over-year. Average renewal rates increased approximately 4% for this group in the third quarter of 2019. Reinsurance premiums ceded as a percentage of gross written premiums were comparable for the third quarter of 2019 and the third quarter of 2018.

Specialty casualty Gross written premiums increased $75 million (8%) in the third quarter of 2019 compared to the third quarter of 2018 due primarily to the addition of premiums from ABA Insurance Services, as well as growth in the excess and surplus lines and excess liability businesses, primarily the result of new business opportunities, rate increases and higher retentions on renewal business. This growth was partially offset by lower premiums at Neon and in the workers’ compensation businesses. Gross written premiums excluding workers’ compensation grew by 12% year-over-year. Average renewal rates increased approximately 4% for this group in the third quarter of 2019. Excluding rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 9%. Reinsurance premiums ceded as a percentage of gross written premiums increased 1 percentage point for the third quarter of 2019 compared to the third quarter of 2018 reflecting a change in the mix of business.

Specialty financial Gross written premiums increased $12 million (6%) in the third quarter of 2019 compared to the third quarter of 2018 due primarily to higher premiums in the fidelity and equipment leasing businesses. Average renewal rates for this group were flat in the third quarter of 2019. Reinsurance premiums ceded as a percentage of gross written premiums decreased 3 percentage points for the third quarter of 2019 compared to the third quarter of 2018, reflecting the impact of reinstatement premiums in the third quarter of 2018 resulting from a reinsured loss in the fidelity 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 decreased $2 million (4%) in the third quarter of 2019 compared to the third quarter of 2018, reflecting a decrease in premiums retained, primarily from businesses in the Specialty casualty sub-segment.

57

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,
	2019		2018		Change		2019		2018
Property and transportation
Loss and LAE ratio	72.1	%	77.1	%	(5.0	%)
Underwriting expense ratio	21.4	%	22.9	%	(1.5	%)
Combined ratio	93.5	%	100.0	%	(6.5	%)
Underwriting profit (loss)							$	38	$	—
Specialty casualty
Loss and LAE ratio	63.1	%	59.2	%	3.9	%
Underwriting expense ratio	33.4	%	32.9	%	0.5	%
Combined ratio	96.5	%	92.1	%	4.4	%
Underwriting profit							$	23	$	49
Specialty financial
Loss and LAE ratio	29.7	%	40.1	%	(10.4	%)
Underwriting expense ratio	54.0	%	54.3	%	(0.3	%)
Combined ratio	83.7	%	94.4	%	(10.7	%)
Underwriting profit							$	26	$	9
Total Specialty
Loss and LAE ratio	63.1	%	64.3	%	(1.2	%)
Underwriting expense ratio	30.9	%	31.4	%	(0.5	%)
Combined ratio	94.0	%	95.7	%	(1.7	%)
Underwriting profit							$	88	$	55
Aggregate — including exited lines
Loss and LAE ratio	65.4	%	65.8	%	(0.4	%)
Underwriting expense ratio	30.9	%	31.4	%	(0.5	%)
Combined ratio	96.3	%	97.2	%	(0.9	%)
Underwriting profit							$	54	$	38

The Specialty property and casualty insurance operations generated an underwriting profit of $88 million in the third quarter of 2019 compared to $55 million in the third quarter of 2018, an increase of $33 million (60%). The higher underwriting profit in the third quarter of 2019 reflects higher underwriting profits in the Property and transportation and Specialty financial sub-segments, partially offset by lower underwriting profit in the Specialty casualty sub-segment.

Property and transportation Underwriting profit for this group was $38 million for the third quarter of 2019 compared to an underwriting loss of less than $1 million in the third quarter of 2018, an increase of $38 million. This increase reflects higher underwriting profits in the transportation and property and inland marine businesses, partially offset by lower underwriting profit in the crop business.

Specialty casualty Underwriting profit for this group was $23 million for the third quarter of 2019 compared to $49 million for the third quarter of 2018, a decrease of $26 million (53%). This decrease reflects higher underwriting losses at Neon and adverse prior year reserve development in the excess and surplus businesses, partially offset by higher underwriting profit in the workers’ compensation and social services businesses.

Specialty financial Underwriting profit for this group was $26 million for the third quarter of 2019 compared to $9 million in the third quarter of 2018, an increase of $17 million (189%), reflecting higher underwriting profitability in the financial institutions business as catastrophe losses were $3 million in the third quarter of 2019 compared to $12 million in the third quarter of 2018.

58

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Other specialty This group reported underwriting profit of $1 million in the third quarter of 2019 compared to an underwriting loss of $3 million in the third quarter of 2018, reflecting 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 of 2019 compared to the third quarter of 2018.

Aggregate As discussed below in more detail under “Net prior year reserve development,” AFG recorded special charges to increase property and casualty A&E reserves by $18 million in both the third quarter of 2019 and the third quarter of 2018 and net adverse reserve development of $16 million in the third quarter of 2019 related to business outside of the Specialty group that AFG no longer writes.

Losses and Loss Adjustment Expenses

AFG’s overall loss and LAE ratio was 65.4% for the third quarter of 2019 compared to 65.8% for the third quarter of 2018, a decrease of 0.4 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,
	Amount						Ratio				Change in
	2019			2018			2019		2018		Ratio
Property and transportation
Current year, excluding catastrophe losses	$	430		$	398		73.5	%	75.6	%	(2.1	%)
Prior accident years development	(17		)	(4		)	(2.8	%)	(0.8	%)	(2.0	%)
Current year catastrophe losses	8			12			1.4	%	2.3	%	(0.9	%)
Property and transportation losses and LAE and ratio	$	421		$	406		72.1	%	77.1	%	(5.0	%)
Specialty casualty
Current year, excluding catastrophe losses	$	425		$	390		64.4	%	63.5	%	0.9	%
Prior accident years development	(19		)	(37		)	(2.9	%)	(6.0	%)	3.1	%
Current year catastrophe losses	10			11			1.6	%	1.7	%	(0.1	%)
Specialty casualty losses and LAE and ratio	$	416		$	364		63.1	%	59.2	%	3.9	%
Specialty financial
Current year, excluding catastrophe losses	$	53		$	56		33.2	%	37.2	%	(4.0	%)
Prior accident years development	(9		)	(8		)	(5.5	%)	(5.1	%)	(0.4	%)
Current year catastrophe losses	3			12			2.0	%	8.0	%	(6.0	%)
Specialty financial losses and LAE and ratio	$	47		$	60		29.7	%	40.1	%	(10.4	%)
Total Specialty
Current year, excluding catastrophe losses	$	934		$	869		64.6	%	65.4	%	(0.8	%)
Prior accident years development	(46		)	(49		)	(3.1	%)	(3.7	%)	0.6	%
Current year catastrophe losses	22			35			1.6	%	2.6	%	(1.0	%)
Total Specialty losses and LAE and ratio	$	910		$	855		63.1	%	64.3	%	(1.2	%)
Aggregate — including exited lines
Current year, excluding catastrophe losses	$	934		$	868		64.6	%	65.4	%	(0.8	%)
Prior accident years development	(12		)	(31		)	(0.8	%)	(2.2	%)	1.4	%
Current year catastrophe losses	22			35			1.6	%	2.6	%	(1.0	%)
Aggregate losses and LAE and ratio	$	944		$	872		65.4	%	65.8	%	(0.4	%)

Current accident year losses and LAE, excluding catastrophe losses

The current accident year loss and LAE ratio, excluding catastrophe losses for AFG’s Specialty property and casualty insurance operations was 64.6% for the third quarter of 2019 compared to 65.4% for the third quarter of 2018, a decrease of 0.8 percentage points.

59

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Property and transportation   The 2.1 percentage point decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio of the property and inland marine and aviation businesses for the third quarter of 2019 compared to the third quarter of 2018.

Specialty casualty   The 0.9 percentage point increase in the loss and LAE ratio for the current year, excluding catastrophe losses reflects an increase in the loss and LAE ratio in the workers’ compensation businesses.

Specialty financial The 4.0 percentage point decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio of the financial institutions, fidelity and trade credit businesses.

Net prior year reserve development

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $46 million in the third quarter of 2019 compared to $49 million in the third quarter of 2018, a decrease of $3 million (6%).

Property and transportation Net favorable reserve development of $17 million in the third quarter of 2019 reflects lower than expected claim frequency and severity in the transportation businesses. Net favorable reserve development of $4 million in the third quarter of 2018 reflects lower than expected claim severity in the transportation businesses, lower than expected losses in the crop business and lower than expected claim frequency and severity in the property and inland marine business, partially offset by higher than expected losses in the Singapore branch and aviation operations.

Specialty casualty Net favorable reserve development of $19 million in the third quarter of 2019 reflects lower than anticipated claim severity in the workers’ compensation and the targeted markets 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. Net favorable reserve development of $37 million in the third quarter of 2018 reflects lower than anticipated claim severity in the workers’ compensation businesses, and to a lesser extent, lower than expected claim severity in the targeted markets and executive liability businesses. This was partially offset by higher than expected claim frequency and severity in the excess and surplus lines.

Specialty financial Net favorable reserve development of $9 million in the third quarter of 2019 reflects lower than expected claim frequency and severity in the surety business and lower than anticipated severity in the financial institutions business. Net favorable reserve development of $8 million in the third quarter of 2018 reflects lower than expected claim frequency and severity in the surety business 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 favorable reserve development of $1 million in the third quarter of 2019 and $2 million in the third quarter of 2018, reflecting the amortization of the deferred gain on the retroactive insurance transaction entered into in connection with the sale of businesses in 1998 and 2001. In addition, the third quarter of 2018 includes $2 million of net adverse reserve development associated with AFG’s internal reinsurance program.

Special asbestos and environmental reserve charges During the third quarter of 2019, AFG completed an in-depth internal review 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. Although AFG has conducted an external study every two years in recent periods, the most recent external study was in the third quarter of 2017 and AFG is currently evaluating the frequency of future external studies.

As a result of the 2019 internal review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $3 million (net of reinsurance) and its environmental reserves by $15 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.

60

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 newly identified sites. 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.

At September 30, 2019, the property and casualty insurance segment’s insurance reserves include A&E reserves of $389 million, net of reinsurance recoverables. At September 30, 2019, 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, 2018, 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 (9/30/2019)	19.9	12.1	15.6
Industry (12/31/2018)	7.0	8.3	7.3

In addition, the 2019 internal review encompassed reserves for asbestos and environmental exposures of AFG’s former railroad and manufacturing operations. For a discussion of the $11 million pretax special charge recorded for those operations, see “Results of Operations — Holding Company, Other and Unallocated,” for the quarters ended September 30, 2019 and 2018.

An in-depth internal review of AFG’s A&E reserves was also completed in the third quarter of 2018. As a result of the 2018 review, AFG recorded an $18 million (net of reinsurance) pretax special charge to increase its property and casualty insurance segment’s asbestos reserves by $6 million (net of reinsurance) and its environmental reserves by $12 million (net of reinsurance). AFG also recorded a $9 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 2018 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 and net adverse reserve development of $16 million in the third quarter of 2019 related to business outside of the Specialty group that AFG no longer writes.

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, 2018, AFG’s 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:

	Impact of modeled loss on AFG’s
Industry Model	Shareholders’ Equity
100-year event	Less than 1%
250-year event	Less than 3%
500-year event	Approximately 6%

AFG maintains comprehensive catastrophe reinsurance coverage, including a $15 million per occurrence net retention for its U.S.-based property and casualty insurance operations for losses up to $100 million. Neon’s excess of loss catastrophe reinsurance limits the maximum retained loss per event to $15 million for losses up to $250 million. 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 $134 million of traditional catastrophe reinsurance through a catastrophe bond.

Catastrophe losses of $22 million in the third quarter of 2019 resulted primarily from Hurricane Dorian and Tropical Storm Imelda. Catastrophe losses of $35 million in the third quarter of 2018 resulted primarily from Hurricane Florence.

61

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 $444 million in the third quarter of 2019 compared to $417 million for the third quarter of 2018, an increase of $27 million (6%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 30.9% for the third quarter of 2019 compared to 31.4% for the third quarter of 2018, a decrease of 0.5 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,
	2019				2018				Change in
	U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP
Property and transportation	$	124	21.4	%	$	120	22.9	%	(1.5	%)
Specialty casualty	219		33.4	%	203		32.9	%	0.5	%
Specialty financial	88		54.0	%	80		54.3	%	(0.3	%)
Other specialty	13		34.5	%	14		37.5	%	(3.0	%)
	$	444	30.9	%	$	417	31.4	%	(0.5	%)

Property and transportation   Commissions and other underwriting expenses as a percentage of net earned premiums decreased 1.5 percentage points in the third quarter of 2019 compared to the third quarter of 2018 reflecting the impact of higher premiums on the ratio in the trucking, aviation and property and inland marine businesses in the third quarter of 2019 compared to the third quarter of 2018.

Specialty casualty   Commissions and other underwriting expenses as a percentage of net earned premiums increased 0.5 percentage points in the third quarter of 2019 compared to the third quarter of 2018 reflecting a change in the mix of business at Neon.

Specialty financial   Commissions and other underwriting expenses as a percentage of net earned premiums decreased 0.3 percentage points in the third quarter of 2019 compared to the third quarter of 2018 reflecting a change in the mix of business.

Property and Casualty Net Investment Income

Net investment income in AFG’s property and casualty insurance operations was $124 million in the third quarter of 2019 compared to $108 million in the third quarter of 2018, an increase of $16 million (15%). 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,
	2019			2018			Change			% Change
Net investment income	$	124		$	108		$	16		15	%
Average invested assets (at amortized cost)	$	11,387		$	10,388		$	999		10	%
Yield (net investment income as a % of average invested assets)	4.36		%	4.16		%	0.20		%
Tax equivalent yield (*)	4.51		%	4.34		%	0.17		%

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

The property and casualty insurance segment’s increase in net investment income for the third quarter of 2019 compared to the third quarter of 2018 is due primarily to 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 4.36% for the third quarter of 2019 compared to 4.16% for the third quarter of 2018, an increase of 0.20 percentage points. The increase is due primarily to a higher yield on partnerships and similar investments with results that are impacted by changes in fair value in the third quarter of 2019. AFG’s property and casualty insurance operations recorded $25 million in earnings from partnerships and similar investments in the third quarter of 2019 compared to $16 million in the third quarter of 2018, an increase of $9 million (56%). The annualized yield earned on these investments was 13.5% in the third quarter of 2019 compared to 10.8% in the prior year period.

62

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 $6 million for the third quarter of 2019 compared to $7 million for the third quarter of 2018, a decrease of $1 million (14%). 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,
	2019			2018
Other income	$	5		$	4
Other expenses
Amortization of intangibles	3			3
Other	8			8
Total other expenses	11			11
Other income and expenses, net	$	(6	)	$	(7	)

63

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 $73 million in GAAP pretax earnings in the third quarter of 2019 compared to $117 million in the third quarter of 2018, a decrease of $44 million (38%). This decrease in AFG’s GAAP annuity segment results for the third quarter of 2019 as compared to the third quarter of 2018 is due primarily to the unfavorable impact of significantly lower than anticipated interest rates on the fair value of derivatives related to FIAs in the 2019 period compared to the positive impact of strong stock market performance in the 2018 period. AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and has historically conducted detailed reviews (“unlocking”) of its assumptions in the fourth quarter of each year. Beginning with the third quarter of 2019, AFG moved its annual unlocking 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). The unlocking of the actuarial assumptions in the third quarter of 2019 resulted in a net $1 million charge to earnings. 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.

The following table details AFG’s GAAP and core earnings before income taxes from its annuity operations for the three months ended September 30, 2019 and 2018 (dollars in millions):

	Three months ended September 30,
	2019			2018		% Change
Revenues:
Net investment income	$	448		$	413	8	%
Other income:
Guaranteed withdrawal benefit fees	17			16		6	%
Policy charges and other miscellaneous income (a)	10			11		(9	%)
Total revenues	475			440		8	%
Costs and Expenses:
Annuity benefits (a)(b)	276			222		24	%
Acquisition expenses (a)	64			69		(7	%)
Other expenses	35			32		9	%
Total costs and expenses	375			323		16	%
Core earnings before income taxes	100			117		(15	%)
Pretax non-core losses (a)	(27		)	—		—	%
GAAP earnings before income taxes	$	73		$	117	(38	%)

(a) As discussed under “Results of Operations — General,” beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the third quarter of 2019, policy charges and other miscellaneous income and annuity benefits exclude the $1 million and $26 million, respectively, favorable impact of these items and acquisition expenses excludes the related $54 million unfavorable impact on the amortization of deferred policy acquisition costs.

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

64

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 $100 million in the third quarter of 2019 compared to $117 million in the third quarter of 2018, a decrease of $17 million (15%). 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 third quarter of 2019, the annuity segment’s core earnings before income taxes excludes $27 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 third quarter of 2018 includes the $17 million positive impact from these items in that period. Excluding the $17 million positive impact of these items on results for the third quarter of 2018, annuity core net operating earnings was $100 million for both the third quarter of 2019 and 2018 reflecting growth in the business, offset by the impact of lower investment yields. 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,
	2019			2018			% Change
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	$	100		$	100		—	%
Unlocking	(1		)	—			—	%
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	(81		)	(4		)	1,925	%
Accretion of guaranteed minimum FIA benefits	(104		)	(89		)	17	%
Other annuity benefits	(12		)	(13		)	(8	%)
Less cost of equity options	149			132			13	%
Related impact on the amortization of deferred policy acquisition costs	22			(9		)	(344	%)
Earnings before income taxes	$	73		$	117		(38	%)

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

	Three months ended September 30,
	2019								2018								Total
	Core		Non-core			Total			Core			Non-core		Total			% Change
Interest credited — fixed	$	101	$	—		$	101		$	90		$	—	$	90		12	%
Accretion of guaranteed minimum FIA benefits	—		104			104			89			—		89			17	%
Interest credited — fixed component of variable annuities	1		—			1			1			—		1			—	%
Cost of equity options	149		(149		)	—			—			—		—			—	%
Other annuity benefits:
Amortization of sales inducements	3		—			3			4			—		4			(25	%)
Change in guaranteed withdrawal benefit reserve:
Impact of the stock market and interest rates	—		—			—			(4		)	—		(4		)	(100	%)
Accretion of benefits and other	21		—			21			22			—		22			(5	%)
Change in expected death and annuitization reserves and other	1		—			1			(1		)	—		(1		)	(200	%)
Change in other benefit reserves — impact of changes in interest rates and the stock market	—		12			12			17			—		17			(29	%)
Unlocking	—		(74		)	(74		)	—			—		—			—	%
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market	—		111			111			223			—		223			(50	%)
Equity option mark-to-market	—		(30		)	(30		)	(219		)	—		(219		)	(86	%)
Impact of derivatives related to FIAs	—		81			81			4			—		4			1,925	%
Total annuity benefits	$	276	$	(26	)	$	250		$	222		$	—	$	222		13	%

65

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,
	2019			2018
Interest credited — fixed	$	101		$	90
Include cost of equity options	149			132
Cost of funds	250			222
Interest credited — fixed component of variable annuities	1			1
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs	25			25
	276			248
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	(74		)	—
Impact of derivatives related to FIAs	81			4
Accretion of guaranteed minimum FIA benefits	104			89
Other annuity benefits — impact of the stock market and interest rates on FIAs	12			13
Less cost of equity options (included in cost of funds)	(149		)	(132		)
Total annuity benefits expense	$	250		$	222

See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefit expense in 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.

66

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,
	2019			2018			% Change
Average fixed annuity investments (at amortized cost)	$	38,650		$	34,955		11	%
Average fixed annuity benefits accumulated	38,946			35,226			11	%
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments)	4.62		%	4.70		%
Cost of funds	(2.57		%)	(2.52		%)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*)	(0.08		%)	(0.10		%)
Net interest spread	1.97		%	2.08		%
Policy charges and other miscellaneous income (*)	0.08		%	0.09		%
Acquisition expenses (*)	(0.65		%)	(0.65		%)
Other expenses	(0.34		%)	(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	1.06		%	1.16		%
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs	(0.27		%)	0.19		%
Unlocking	(0.01		%)	—		%
Net spread earned on fixed annuities	0.78		%	1.35		%

(*) 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 2019 was $448 million compared to $413 million for the third quarter of 2018, an increase of $35 million (8%). This increase reflects the 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 0.08 percentage points to 4.62% from 4.70% in the third quarter of 2019 compared to the third quarter of 2018. The decrease in the net investment yield between periods reflects the lower yields on investments accounted for under the equity method, equity securities carried at fair value through net investment income and AFG-managed CLOs, as well as the impact of the reinvestment of proceeds from maturity and redemption of higher yielding investments at the lower yields available in the financial markets. For the period from July 1, 2018, through September 30, 2019, $6.1 billion in annuity segment investments with an average yield of approximately 5.0% were redeemed or sold with the proceeds reinvested at an approximately 0.6% lower yield.

67

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Annuity Cost of Funds

Cost of funds for the third quarter of 2019 was $250 million compared to $222 million for the third quarter of 2018, an increase of $28 million (13%). This increase reflects the impact of growth in the annuity business and higher renewal option costs. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, increased 0.05 percentage points to 2.57% in the third quarter of 2019 from 2.52% in the third quarter of 2018 reflecting higher renewal option costs.

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

	Three months ended September 30,
	2019		2018
Cost of equity options (FIAs)	$	149	$	132
Interest credited:
Traditional fixed annuities	62		59
Fixed component of fixed-indexed annuities	24		20
Immediate annuities	6		6
Pension risk transfer products	2		—
Federal Home Loan Bank advances	7		5
Total cost of funds	$	250	$	222

Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees

Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of the stock market and interest rates, for the third quarter of 2019 were $8 million compared to $9 million for the third quarter of 2018, a decrease of $1 million (11%). As a percentage of average fixed annuity benefits accumulated, these net expenses decreased 0.02 percentage points to 0.08% from 0.10% in the third quarter of 2019 compared to the third quarter of 2018. 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,
	2019			2018
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements	$	3		$	4
Change in guaranteed withdrawal benefit reserve	21			22
Change in other benefit reserves	1			(1		)
Other annuity benefits	25			25
Offset guaranteed withdrawal benefit fees	(17		)	(16		)
Other annuity benefits excluding the impact of the stock market and interest rates, net	8			9
Other annuity benefits — impact of the stock market and interest rates	12			13
Other annuity benefits, net	$	20		$	22

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 $12 million in the third quarter of 2019 compared to $13 million in the third quarter of 2018.

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 2019.

68

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 decreased 0.11 percentage points to 1.97% from 2.08% in the third quarter of 2019 compared to the same period in 2018 due primarily to lower investment yields and higher renewal option costs. 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 $1 million favorable impact of unlocking, annuity policy charges and other miscellaneous income, which consist primarily of surrender charges, amortization of deferred upfront policy charges (unearned revenue) and income from sales of real estate were $10 million for the third quarter of 2019 compared to $11 million for the third quarter of 2018, a decrease of $1 million (9%). 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, decreased 0.01 percentage points to 0.08% from 0.09% in the third quarter of 2019 compared to the third quarter of 2018.

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 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,
	2019			2018
Annuity acquisition expenses before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates	$	64		$	60
Unlocking	76			—
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates	(22		)	9
Annuity acquisition expenses	$	118		$	69

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 the third quarter of 2019 compared to $60 million for the third quarter of 2018, an increase of $4 million (7%), reflecting growth in the annuity business.

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 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 the present value of future profits on business in force of companies acquired (“PVFP”).

The negative impact of lower than anticipated interest rates during the third quarter of 2019 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC. In contrast, the favorable impact of strong stock market performance during the third quarter of 2018 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting acceleration of the amortization of DPAC.

69

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,
	2019		2018
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	0.65	%	0.65	%
Unlocking	0.78	%	—	%
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates	(0.23	%)	0.11	%
Annuity acquisition expenses as a % of fixed annuity benefits accumulated	1.20	%	0.76	%

Annuity Other Expenses

Annuity other expenses were $35 million for the third quarter of 2019 compared to $32 million for the third quarter of 2018, an increase of $3 million (9%) reflecting growth in the annuity business. Annuity other expenses represent primarily general and administrative expenses, as well as selling and issuance expenses that are not deferred. As a percentage of average fixed annuity benefits accumulated, these expenses decreased 0.02 percentage points to 0.34% for the third quarter of 2019 from 0.36% in the third quarter of 2018.

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 the 2019 unlocking charge) 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,
	2019			2018			% Change
Change in the fair value of derivatives related to FIAs	$	(81	)	$	(4	)	1,925	%
Accretion of guaranteed minimum FIA benefits	(104		)	(89		)	17	%
Other annuity benefits	(12		)	(13		)	(8	%)
Less cost of equity options	149			132			13	%
Related impact on the amortization of DPAC	22			(9		)	(344	%)
Impact on annuity segment earnings before income taxes	$	(26	)	$	17		(253	%)

During the third quarter of 2019, the negative impact of significantly lower than anticipated interest rates reduced the annuity segments’ earnings before income taxes by $26 million compared to the $17 million favorable impact of the stock market on annuity earnings before income taxes for the third quarter of 2018, a change of $43 million (253%). In the 2018 quarter, the impact of lower than anticipated interest rates on the fair value of derivatives related to FIAs was more than offset by the

70

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

positive impact of strong stock market performance. As a percentage of average fixed annuity benefits accumulated, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense of 0.27% in the third quarter of 2019 compared to a net expense reduction of 0.19% in the third quarter of 2018.

The following table provides analysis of the primary factors impacting the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates (excluding the impact of the 2019 unlocking charge) 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,
	2019			2018			% Change
Changes in the stock market, including volatility	$	4		$	22		(82	%)
Changes in interest rates higher (lower) than expected	(30		)	(2		)	1,400	%
Other	—			(3		)	(100	%)
Impact on annuity segment earnings before income taxes	$	(26	)	$	17		(253	%)

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 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 0.10 percentage points to 1.06% in the third quarter of 2019 from 1.16% in the third quarter of 2018 due primarily to the 0.11 percentage points decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities decreased 0.57 percentage points to 0.78% in the third quarter of 2019 from 1.35% in the third quarter of 2018 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

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.

71

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, 2019 and 2018 (in millions):

	Three months ended September 30,
	2019			2018
Beginning fixed annuity reserves	$	38,680		$	34,678
Fixed annuity premiums (receipts)	1,072			1,372
Surrenders, benefits and other withdrawals	(808		)	(707		)
Interest and other annuity benefit expenses:
Cost of funds	250			222
Embedded derivative mark-to-market	111			223
Change in other benefit reserves	(18		)	(14		)
Unlocking	(75		)	—
Ending fixed annuity reserves	$	39,212		$	35,774
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above)	$	39,212		$	35,774
Impact of unrealized investment related gains	269			8
Fixed component of variable annuities	170			176
Annuity benefits accumulated per balance sheet	$	39,651		$	35,958

Annuity benefits accumulated includes a liability of $611 million at September 30, 2019 and $428 million at September 30, 2018 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 statutory premiums of $1.08 billion in the third quarter of 2019 compared to $1.38 billion in the third quarter of 2018, a decrease of $301 million (22%). The following table summarizes AFG’s annuity sales (dollars in millions):

	Three months ended September 30,
	2019		2018		% Change
Financial institutions single premium annuities — indexed	$	325	$	460	(29	%)
Financial institutions single premium annuities — fixed	302		114		165	%
Retail single premium annuities — indexed	198		354		(44	%)
Retail single premium annuities — fixed	30		17		76	%
Broker dealer single premium annuities — indexed	134		322		(58	%)
Broker dealer single premium annuities — fixed	9		3		200	%
Pension risk transfer	39		56		(30	%)
Education market — fixed and indexed annuities	35		46		(24	%)
Total fixed annuity premiums	1,072		1,372		(22	%)
Variable annuities	5		6		(17	%)
Total annuity premiums	$	1,077	$	1,378	(22	%)

Management attributes the 22% decrease in annuity premiums in the third quarter of 2019 compared to the third quarter of 2018 to the lower market interest rate environment. In response to the continued drop in market interest rates during 2019, AFG lowered crediting rates on several products, which has slowed annuity sales compared to 2018 levels.

72

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 quarter.

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

	Three months ended September 30,
	2019			2018 (*)
Policy charges and other miscellaneous income:
Unearned revenue	$	1		$	—
Total revenues	1			—
Annuity benefits:
Fixed-indexed annuity embedded derivative	(181		)	—
Guaranteed withdrawal benefit reserve	102			—
Other reserves	4			—
Sales inducements asset	1			—
Total annuity benefits	(74		)	—
Annuity and supplemental insurance acquisition expenses:
Deferred policy acquisition costs	76			—
Total costs and expenses	2			—
Net charge	$	(1	)	$	—

(*) The detailed review of the major actuarial assumptions was conducted in the fourth quarter of 2018.

The net charge from unlocking annuity assumptions in the third quarter of 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. Reinvestment rate assumptions are based primarily on 7-year and 10-year corporate bond yields. For the unlocking in the third quarter of 2019, AFG assumed a net reinvestment rate (net of default and expense assumptions) of 3.38% for the remainder of 2019, grading up ratably to an ultimate net reinvestment rate of 5.34% in 2029 and beyond.

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, 2019 and 2018 (in millions):

	Three months ended September 30,
	2019			2018
Earnings on fixed annuity benefits accumulated	$	76		$	119
Earnings impact of investments in excess of fixed annuity benefits accumulated (*)	(3		)	(3		)
Variable annuity earnings	—			1
Earnings before income taxes	$	73		$	117

(*) Net investment income (as a % of investments) of 4.62% and 4.70% for the three months ended September 30, 2019 and 2018, respectively, multiplied by the difference between average fixed annuity investments (at amortized cost) and average fixed annuity benefits accumulated in each period.

73

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Holding Company, Other and Unallocated — Results of Operations   AFG’s net GAAP pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $50 million in the third quarter of 2019 compared to $46 million in the third quarter of 2018, an increase of $4 million (9%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $39 million in the third quarter of 2019 compared to $37 million in the third quarter of 2018, an increase of $2 million (5%).

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, 2019 and 2018 (dollars in millions):

	Three months ended September 30,
	2019			2018			% Change
Revenues:
Life, accident and health net earned premiums	$	6		$	6		—	%
Net investment income	11			10			10	%
Other income — P&C fees	17			18			(6	%)
Other income	6			9			(33	%)
Total revenues	40			43			(7	%)
Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses	6			7			(14	%)
Life, accident and health benefits	9			10			(10	%)
Life, accident and health acquisition expenses	2			2			—	%
Other expense — expenses associated with P&C fees	11			11			—	%
Other expenses (*)	34			35			(3	%)
Costs and expenses, excluding interest charges on borrowed money	62			65			(5	%)
Core loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(22		)	(22		)	—	%
Interest charges on borrowed money	17			15			13	%
Core loss before income taxes, excluding realized gains and losses	(39		)	(37		)	5	%
Pretax non-core special A&E charges	(11		)	(9		)	22	%
GAAP loss before income taxes, excluding realized gains and losses	$	(50	)	$	(46	)	9	%

(*) Excludes pretax non-core special A&E charges of $11 million and $9 million in the third quarter of 2019 and 2018, respectively.

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 $6 million and related benefits and acquisition expenses of $11 million in the third quarter of 2019 compared to net earned premiums of $6 million and related benefits and acquisition expenses of $12 million in the third quarter of 2018. The $1 million (10%) decrease in life, accident and health benefits reflects lower claims in the run-off long-term care insurance businesses.

Holding Company and Other — Net Investment Income

AFG recorded net investment income on investments held outside of its property and casualty insurance and annuity operations of $11 million in the third quarter of 2019 compared to $10 million in the third quarter of 2018, an increase of $1 million (10%). 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 approximately $3 million in both the third quarter of 2019 and the third quarter of 2018.

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 2019, AFG collected $17 million in fees for these services compared to $18 million in the third quarter of 2018. Management views this fee income, net of the $11 million in both the third quarter of 2019 and the third quarter of 2018, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies.

74

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 — Other Income

Other income in the table above includes $4 million in both the third quarter of 2019 and the third quarter of 2018, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under “Results of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance and annuity operations of $2 million in the third quarter of 2019 compared to $5 million in the third quarter of 2018.

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 operations recorded other expenses of $34 million in the third quarter of 2019 compared to $35 million in the third quarter of 2018, a decrease of $1 million (3%).

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 operations recorded interest expense of $17 million in the third quarter of 2019 compared to $15 million in the third quarter of 2018, an increase of $2 million (13%). The following table details the principal amount of AFG’s long-term debt balances as of September 30, 2019 compared to September 30, 2018 (dollars in millions):

	September 30, 2019			September 30, 2018
Direct obligations of AFG:
4.50% Senior Notes due June 2047	$	590		$	590
3.50% Senior Notes due August 2026	425			425
6-1/4% Subordinated Debentures due September 2054	150			150
6% Subordinated Debentures due November 2055	150			150
5.875% Subordinated Debentures due March 2059	125			—
Other	3			3
Total principal amount of Holding Company Debt	$	1,443		$	1,318
Weighted Average Interest Rate	4.7		%	4.6		%

The increase in interest expense and the weighted average interest rate for the third quarter of 2019 as compared to the third quarter of 2018 reflects the issuance of $125 million of 5.875% Subordinated Debentures in March 2019.

Holding Company and Other — Special A&E Charges

As a result of the 2019 and 2018 in-depth internal reviews 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 $11 million in the third quarter of 2019 and $9 million in the third quarter of 2018 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. AFG also increased its reserve for asbestos and toxic substance exposures arising out of these operations.

75

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Consolidated Realized Gains (Losses) on Securities   AFG’s consolidated realized gains (losses) on securities, which are not allocated to segments, were net losses of $18 million in the third quarter of 2019 compared to net gains of $34 million in the third quarter of 2018, a change of $52 million (153%). Realized gains (losses) on securities consisted of the following (in millions):

	Three months ended September 30,
	2019			2018
Realized gains (losses) before impairments:
Disposals	$	6		$	2
Change in the fair value of equity securities (*)	(15		)	33
Change in the fair value of derivatives	2			(2		)
Adjustments to annuity deferred policy acquisition costs and related items	(2		)	3
	(9		)	36
Impairment charges:
Securities	(14		)	(2		)
Adjustments to annuity deferred policy acquisition costs and related items	5			—
	(9		)	(2		)
Realized gains (losses) on securities	$	(18	)	$	34

(*) As discussed in Note A — “Accounting Policies — Investments,” beginning in January 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings. The 2019 quarter includes a $24 million net loss on securities that were still held at September 30, 2019 and the 2018 quarter includes a $25 million net gain on securities that were still held at September 30, 2018.

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 REITs. The $33 million net realized gain from the change in the fair value of equity securities in the third quarter of 2018 includes gains of $11 million on investments in technology companies, $10 million from investments in communications companies and $8 million on health care-related investments.

The impairment charges in the third quarter of 2019 include $13 million in charges on third-party collateralized loan obligations.

Consolidated Income Taxes   AFG’s consolidated provision for income taxes was $34 million for the third quarter of 2019 compared to $41 million for the third quarter of 2018, a decrease of $7 million (17%). See Note M — “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 (losses) attributable to noncontrolling interests was a net loss of $4 million for the third quarter of 2019 compared to $1 million for the third quarter of 2018, an increase of $3 million (300%). Both periods reflect losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer.

76

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, 2019 AND 2018

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 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, 2019 and 2018 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
	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
Life, accident and health net earned premiums	—			—			—			17			17			—			17
Net investment income	352			1,334			(11		)	35			1,710			—			1,710
Realized gains 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			81			(11		)	72			152			1			153
Total revenues	4,177			1,415			168			124			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	—			859			—			—			859			41			900
Life, accident and health benefits	—			—			—			26			26			—			26
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			—			149			288			11			299
Total costs and expenses	3,631			1,121			168			248			5,168			90			5,258
Earnings before income taxes	546			294			—			(124		)	716			133			849
Provision for income taxes	111			59			—			(27		)	143			28			171
Net earnings, including noncontrolling interests	435			235			—			(97		)	573			105			678
Less: Net earnings (losses) attributable to noncontrolling interests	(8		)	—			—			—			(8		)	—			(8		)
Core Net Operating Earnings	443			235			—			(97		)	581
Non-core earnings attributable to shareholders (a):
Realized gains on securities, net of tax	—			—			—			176			176			(176		)	—
Annuity non-core losses, net of tax (b)	—			(48		)	—			—			(48		)	48			—
Special A&E charges, net of tax	(14		)	—			—			(9		)	(23		)	23			—
Net Earnings Attributable to Shareholders	$	429		$	187		$	—		$	70		$	686		$	—		$	686

77

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, 2018
Revenues:
Property and casualty insurance net earned premiums	$	3,595		$	—	$	—		$	—		$	3,595		$	—		$	3,595
Life, accident and health net earned premiums	—			—		—			18			18			—			18
Net investment income	323			1,219		(11		)	21			1,552			—			1,552
Realized losses on securities	—			—		—			—			—			(28		)	(28		)
Income (loss) of MIEs:
Investment income	—			—		187			—			187			—			187
Gain (loss) on change in fair value of assets/liabilities	—			—		(10		)	—			(10		)	—			(10		)
Other income	8			80		(12		)	70			146			—			146
Total revenues	3,926			1,299		154			109			5,488			(28		)	5,460
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	2,188			—		—			—			2,188			18			2,206
Commissions and other underwriting expenses	1,188			—		—			17			1,205			—			1,205
Annuity benefits	—			664		—			—			664			—			664
Life, accident and health benefits	—			—		—			32			32			—			32
Annuity and supplemental insurance acquisition expenses	—			199		—			4			203			—			203
Interest charges on borrowed money	—			—		—			46			46			—			46
Expenses of MIEs	—			—		154			—			154			—			154
Other expenses	31			95		—			137			263			9			272
Total costs and expenses	3,407			958		154			236			4,755			27			4,782
Earnings before income taxes	519			341		—			(127		)	733			(55		)	678
Provision for income taxes	100			65		—			(27		)	138			(12		)	126
Net earnings, including noncontrolling interests	419			276		—			(100		)	595			(43		)	552
Less: Net earnings (losses) attributable to noncontrolling interests	(7		)	—		—			—			(7		)	—			(7		)
Core Net Operating Earnings	426			276		—			(100		)	602
Non-core earnings attributable to shareholders (a):
Realized losses on securities, net of tax	—			—		—			(22		)	(22		)	22			—
Special A&E charges, net of tax	(14		)	—		—			(7		)	(21		)	21			—
Net Earnings Attributable to Shareholders	$	412		$	276	$	—		$	(129	)	$	559		$	—		$	559

(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).

Property and Casualty Insurance Segment — Results of Operations   AFG’s property and casualty insurance operations contributed $528 million in GAAP pretax earnings in the first nine months of 2019 compared to $501 million in the first nine months of 2018, an increase of $27 million (5%). Property and casualty core pretax earnings were $546 million in the first nine months of 2019 compared to $519 million in the first nine months of 2018, an increase of $27 million (5%). The increase in GAAP and core pretax earnings reflects higher net investment income in the first nine months of 2019 compared to the same period in 2018. GAAP pretax earnings also reflects special A&E charges of $18 million in both the first nine months of 2019 and 2018.

78

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 before income taxes from its property and casualty insurance operations for the nine months ended September 30, 2019 and 2018 (dollars in millions):

	Nine months ended September 30,
	2019			2018			% Change
Gross written premiums	$	5,550		$	5,227		6	%
Reinsurance premiums ceded	(1,521		)	(1,412		)	8	%
Net written premiums	4,029			3,815			6	%
Change in unearned premiums	(214		)	(220		)	(3	%)
Net earned premiums	3,815			3,595			6	%
Loss and loss adjustment expenses (*)	2,341			2,188			7	%
Commissions and other underwriting expenses	1,256			1,188			6	%
Core underwriting gain	218			219			—	%
Net investment income	352			323			9	%
Other income and expenses, net	(24		)	(23		)	4	%
Core earnings before income taxes	546			519			5	%
Pretax non-core special A&E charges	(18		)	(18		)	—	%
GAAP earnings before income taxes	$	528		$	501		5	%
(*)   Excludes pretax non-core special A&E charges of $18 million in both the third quarter of 2019 and 2018.
Combined Ratios:
Specialty lines							Change
Loss and LAE ratio	60.9		%	60.8		%	0.1	%
Underwriting expense ratio	32.9		%	33.0		%	(0.1	%)
Combined ratio	93.8		%	93.8		%	—	%
Aggregate — including exited lines
Loss and LAE ratio	61.8		%	61.4		%	0.4	%
Underwriting expense ratio	32.9		%	33.0		%	(0.1	%)
Combined ratio	94.7		%	94.4		%	0.3	%

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.

Gross Written Premiums

Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $5.55 billion for the first nine months of 2019 compared to $5.23 billion for the first nine months of 2018, an increase of $323 million (6%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):

	Nine months ended September 30,
	2019				2018
	GWP		%		GWP		%		% Change
Property and transportation	$	2,131	38	%	$	1,994	38	%	7	%
Specialty casualty	2,839		51	%	2,667		51	%	6	%
Specialty financial	580		11	%	566		11	%	2	%
	$	5,550	100	%	$	5,227	100	%	6	%

79

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 27% of gross written premiums for both the first nine months of 2019 and 2018. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):

	Nine months ended September 30,
	2019					2018					Change in
	Ceded			% of GWP		Ceded			% of GWP		% of GWP
Property and transportation	$	(704	)	33	%	$	(688	)	35	%	(2	%)
Specialty casualty	(807		)	28	%	(739		)	28	%	—	%
Specialty financial	(119		)	21	%	(106		)	19	%	2	%
Other specialty	109					121
	$	(1,521	)	27	%	$	(1,412	)	27	%	—	%

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $4.03 billion for the first nine months of 2019 compared to $3.82 billion for the first nine months of 2018, an increase of $214 million (6%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):

	Nine months ended September 30,
	2019				2018
	NWP		%		NWP		%		% Change
Property and transportation	$	1,427	35	%	$	1,306	34	%	9	%
Specialty casualty	2,032		50	%	1,928		51	%	5	%
Specialty financial	461		11	%	460		12	%	—	%
Other specialty	109		4	%	121		3	%	(10	%)
	$	4,029	100	%	$	3,815	100	%	6	%

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $3.82 billion for the first nine months of 2019 compared to $3.60 billion for the first nine months of 2018, an increase of $220 million (6%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):

	Nine months ended September 30,
	2019				2018
	NEP		%		NEP		%		% Change
Property and transportation	$	1,323	35	%	$	1,250	35	%	6	%
Specialty casualty	1,921		50	%	1,790		50	%	7	%
Specialty financial	458		12	%	457		12	%	—	%
Other specialty	113		3	%	98		3	%	15	%
	$	3,815	100	%	$	3,595	100	%	6	%

The $323 million (6%) increase in gross written premiums for the first nine months of 2019 compared to the first nine months of 2018 reflects growth in each of the Specialty property and casualty sub-segments. Overall average renewal rates increased approximately 3% in the first nine months of 2019. Excluding the workers’ compensation business, renewal pricing increased approximately 5%.

Property and transportation Gross written premiums increased $137 million (7%) in the first nine months of 2019 compared to the first nine months of 2018, due primarily to new business opportunities in the transportation businesses and higher year-over-year premiums in the crop insurance business. Average renewal rates increased approximately 5% for this group in the first nine months of 2019. Reinsurance premiums ceded as a percentage of gross written premiums decreased 2 percentage points in the first nine months of 2019 compared to the first nine months of 2018, reflecting lower cessions in the crop insurance business.

Specialty casualty Gross written premiums increased $172 million (6%) in the first nine months of 2019 compared to the first nine months of 2018 due primarily to the addition of premiums from ABA Insurance Services and growth in the excess and

80

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

surplus lines, executive liability and targeted markets businesses. This growth was partially offset by lower premiums in the workers’ compensation businesses. Average renewal rates increased approximately 2% for this group in the first nine months of 2019. Excluding rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 7%. Reinsurance premiums ceded as a percentage of gross written premiums were comparable for the first nine months of 2019 and the first nine months of 2018.

Specialty financial Gross written premiums increased $14 million (2%) in the first nine months of 2019 compared to the first nine months of 2018 due primarily to higher premiums in the fidelity and equipment leasing businesses, partially offset by lower premiums in the financial institutions business. Average renewal rates for this group increased approximately 1% in the first nine months of 2019. Reinsurance premiums ceded as a percentage of gross written premiums increased 2 percentage points for the first nine months of 2019 compared to the first nine months of 2018, reflecting higher cessions in the financial institutions and equipment leasing businesses.

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 decreased $12 million (10%) in the first nine months of 2019 compared to the first nine months of 2018, reflecting a decrease 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,
	2019		2018		Change		2019		2018
Property and transportation
Loss and LAE ratio	68.3	%	69.2	%	(0.9	%)
Underwriting expense ratio	25.5	%	26.3	%	(0.8	%)
Combined ratio	93.8	%	95.5	%	(1.7	%)
Underwriting profit							$	81	$	56
Specialty casualty
Loss and LAE ratio	61.6	%	60.7	%	0.9	%
Underwriting expense ratio	32.9	%	32.6	%	0.3	%
Combined ratio	94.5	%	93.3	%	1.2	%
Underwriting profit							$	106	$	119
Specialty financial
Loss and LAE ratio	33.3	%	38.0	%	(4.7	%)
Underwriting expense ratio	53.5	%	52.0	%	1.5	%
Combined ratio	86.8	%	90.0	%	(3.2	%)
Underwriting profit							$	60	$	46
Total Specialty
Loss and LAE ratio	60.9	%	60.8	%	0.1	%
Underwriting expense ratio	32.9	%	33.0	%	(0.1	%)
Combined ratio	93.8	%	93.8	%	—	%
Underwriting profit							$	236	$	220
Aggregate — including exited lines
Loss and LAE ratio	61.8	%	61.4	%	0.4	%
Underwriting expense ratio	32.9	%	33.0	%	(0.1	%)
Combined ratio	94.7	%	94.4	%	0.3	%
Underwriting profit							$	200	$	201

The Specialty property and casualty insurance operations generated an underwriting profit of $236 million for the first nine months of 2019 compared to $220 million for the first nine months of 2018, an increase of $16 million (7%). The higher underwriting profit in the first nine months of 2019 reflects higher underwriting profits in the Property and transportation and Specialty financial sub-segments, partially offset by lower underwriting profit in the Specialty casualty sub-segment.

81

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Property and transportation Underwriting profit for this group was $81 million for the first nine months of 2019 compared to $56 million for the first nine months of 2018, an increase of $25 million (45%). Higher underwriting results in the transportation and property and inland marine businesses were partially offset by lower underwriting profit in the crop business.

Specialty casualty Underwriting profit for this group was $106 million for the first nine months of 2019 compared to $119 million for the first nine months of 2018, a decrease of $13 million (11%). Higher underwriting profits in the targeted markets and workers’ compensation businesses were more than offset by lower underwriting profits in the excess and surplus lines, executive liability and general liability businesses and higher underwriting losses at Neon.

Specialty financial Underwriting profit for this group was $60 million for the first nine months of 2019 compared to $46 million for the first nine months of 2018, an increase of $14 million (30%) due primarily to higher underwriting profitability in the financial institutions and equipment leasing businesses.

Other specialty This group reported an underwriting loss of $11 million for the first nine months of 2019 compared to $1 million in the first nine months of 2018, an increase of $10 million (1,000%). This change 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 2019 compared to the first nine months of 2018.

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, 2019 and 2018 for a discussion of the $18 million pretax non-core special A&E charges recorded in both the third quarter of 2019 and 2018. AFG also recorded adverse reserve development of $18 million in the first nine months of 2019 related to business outside of the Specialty group that AFG no longer writes.

82

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 61.8% for the first nine months of 2019 compared to 61.4% for the first nine months of 2018, an increase of 0.4 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
	2019			2018			2019		2018		Ratio
Property and transportation
Current year, excluding catastrophe losses	$	929		$	881		70.1	%	70.5	%	(0.4	%)
Prior accident years development	(49		)	(43		)	(3.7	%)	(3.5	%)	(0.2	%)
Current year catastrophe losses	25			27			1.9	%	2.2	%	(0.3	%)
Property and transportation losses and LAE and ratio	$	905		$	865		68.3	%	69.2	%	(0.9	%)
Specialty casualty
Current year, excluding catastrophe losses	$	1,235		$	1,157		64.2	%	64.6	%	(0.4	%)
Prior accident years development	(63		)	(87		)	(3.2	%)	(4.8	%)	1.6	%
Current year catastrophe losses	12			17			0.6	%	0.9	%	(0.3	%)
Specialty casualty losses and LAE and ratio	$	1,184		$	1,087		61.6	%	60.7	%	0.9	%
Specialty financial
Current year, excluding catastrophe losses	$	168		$	175		36.8	%	38.2	%	(1.4	%)
Prior accident years development	(24		)	(19		)	(5.3	%)	(4.1	%)	(1.2	%)
Current year catastrophe losses	8			18			1.8	%	3.9	%	(2.1	%)
Specialty financial losses and LAE and ratio	$	152		$	174		33.3	%	38.0	%	(4.7	%)
Total Specialty
Current year, excluding catastrophe losses	$	2,411		$	2,274		63.2	%	63.3	%	(0.1	%)
Prior accident years development	(134		)	(151		)	(3.5	%)	(4.3	%)	0.8	%
Current year catastrophe losses	46			64			1.2	%	1.8	%	(0.6	%)
Total Specialty losses and LAE and ratio	$	2,323		$	2,187		60.9	%	60.8	%	0.1	%
Aggregate — including exited lines
Current year, excluding catastrophe losses	$	2,411		$	2,273		63.2	%	63.3	%	(0.1	%)
Prior accident years development	(98		)	(131		)	(2.6	%)	(3.7	%)	1.1	%
Current year catastrophe losses	46			64			1.2	%	1.8	%	(0.6	%)
Aggregate losses and LAE and ratio	$	2,359		$	2,206		61.8	%	61.4	%	0.4	%

Current accident year losses and LAE, excluding catastrophe losses

The current accident year loss and LAE ratio, excluding catastrophe losses for AFG’s Specialty property and casualty insurance operations was 63.2% for the first nine months of 2019 compared to 63.3% for the first nine months of 2018, a decrease of 0.1 percentage points.

Property and transportation   The loss and LAE ratio for the current year, excluding catastrophe losses is comparable in the first nine months of 2019 and the first nine months of 2018.

Specialty casualty   The loss and LAE ratio for the current year, excluding catastrophe losses is comparable in the first nine months of 2019 and the first nine months of 2018.

Specialty financial   The 1.4 percentage point decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio of the financial institutions and fidelity businesses in the first nine months of 2019 compared to the first nine months of 2018.

Net prior year reserve development

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $134 million in the first nine months of 2019 compared to $151 million in the first nine months of 2018, a decrease of $17 million (11%).

83

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Property and transportation 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. Net favorable reserve development of $43 million in the first nine months of 2018 reflects lower than expected losses in the crop business and lower than expected claim severity in the transportation businesses, partially offset by higher than expected claim severity in the Singapore branch and aviation operations.

Specialty casualty 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. Net favorable reserve development of $87 million in the first nine months of 2018 reflects lower than anticipated claim severity in the workers’ compensation businesses, and to a lesser extent, lower than expected claim severity in the executive liability business.

Specialty financial 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. Net favorable reserve development of $19 million in the first nine months of 2018 reflects lower than expected claim frequency and severity in the surety business and lower than expected claim severity in the fidelity business.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $2 million in the first nine months of 2019 compared to net favorable reserve development of $2 million in the first nine months of 2018. The adverse net reserve development in the first nine months of 2019 reflects $6 million of adverse reserve development associated with AFG’s internal reinsurance program, partially offset by the amortization of the deferred gain on the retroactive insurance transaction entered into in connection with the sale of businesses in 1998 and 2001. The net favorable reserve development in the first nine months of 2018 reflects amortization of the deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001, partially offset by adverse reserve development associated with AFG’s internal reinsurance program.

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, 2019 and 2018 for a discussion of the $18 million special A&E charges recorded in both the third quarter of 2019 and 2018.

Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes the special A&E charges mentioned above and net adverse reserve development of $18 million in the first nine months of 2019 and $2 million in the first nine months of 2018 related to business outside the Specialty group that AFG no longer writes.

Catastrophe losses

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. Catastrophe losses of $64 million in the first nine months of 2018 resulted primarily from Hurricane Florence, storms and flooding in several regions of the United States and mudslides in California.

84

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 $1.26 billion in the first nine months of 2019 compared to $1.19 billion for the first nine months of 2018, an increase of $68 million (6%). AFG’s underwriting expense ratio was 32.9% for the first nine months of 2019 compared to 33.0% for the first nine months of 2018, a decrease of 0.1 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,
	2019				2018				Change in
	U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP
Property and transportation	$	337	25.5	%	$	329	26.3	%	(0.8	%)
Specialty casualty	631		32.9	%	584		32.6	%	0.3	%
Specialty financial	246		53.5	%	237		52.0	%	1.5	%
Other specialty	42		37.5	%	38		37.8	%	(0.3	%)
Total Specialty	$	1,256	32.9	%	$	1,188	33.0	%	(0.1	%)

Property and transportation   Commissions and other underwriting expenses as a percentage of net earned premiums decreased 0.8 percentage points in the first nine months of 2019 compared to the first nine months of 2018, reflecting higher ceding commissions received from reinsurers in the crop business.

Specialty casualty   Commissions and other underwriting expenses as a percentage of net earned premiums increased 0.3 percentage points in the first nine months of 2019 compared to the first nine months of 2018, reflecting lower ceding commissions received from reinsurers in the excess and surplus lines businesses, partially offset by lower underwriting expenses related to the exit of certain lines of business at Neon and the impact of higher net earned premiums at Neon.

Specialty financial   Commissions and other underwriting expenses as a percentage of net earned premiums increased 1.5 percentage points in the first nine months of 2019 compared to the first nine months of 2018, reflecting higher profitability-based commissions paid to agents in the financial institutions business, partially offset by a lower underwriting expense ratio in the fidelity business.

Property and Casualty Net Investment Income

Net investment income in AFG’s property and casualty insurance operations was $352 million in the first nine months of 2019 compared to $323 million in the first nine months of 2018, an increase of $29 million (9%). 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,
	2019			2018			Change			% Change
Net investment income	$	352		$	323		$	29		9	%
Average invested assets (at amortized cost)	$	11,192		$	10,405		$	787		8	%
Yield (net investment income as a % of average invested assets)	4.19		%	4.14		%	0.05		%
Tax equivalent yield (*)	4.36		%	4.32		%	0.04		%

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

The property and casualty insurance segment’s increase in net investment income for the first nine months of 2019 as compared to the first nine months of 2018 reflects 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 4.19% for the first nine months of 2019 compared to 4.14% for the first nine months of 2018, an increase of 0.05 percentage points.

85

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 $24 million for the first nine months of 2019 compared to $23 million for the first nine months of 2018, an increase 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,
	2019			2018
Other income	$	10		$	8
Other expenses
Amortization of intangibles	9			7
Other	25			24
Total other expense	34			31
Other income and expenses, net	$	(24	)	$	(23	)

86

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 $234 million in GAAP pretax earnings in the first nine months of 2019 compared to $341 million in the first nine months of 2018, a decrease of $107 million (31%). This decrease in AFG’s GAAP annuity segment results for the first nine months of 2019 as compared to the first nine months of 2018 is due primarily to the unfavorable impact of significantly lower than anticipated interest rates on the fair value of derivatives related to FIAs in the 2019 period compared to the impact of higher than anticipated interest rates in the 2018 period, partially offset by higher unlocking charges in the first nine months of 2018. 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 annual 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). The unlocking of the actuarial assumptions in the third quarter of 2019 resulted in a $1 million net charge to earnings. 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 unlocked its assumptions for option costs and interest rates in the second quarter of 2018 due to continued higher FIA option costs (resulting primarily from higher than expected risk-free rates), resulting in a net charge to earnings of $27 million.

The following table details AFG’s GAAP and core earnings before income taxes from its annuity operations for the nine months ended September 30, 2019 and 2018 (dollars in millions):

	Nine months ended September 30,
	2019			2018		% Change
Revenues:
Net investment income	$	1,334		$	1,219	9	%
Other income:
Guaranteed withdrawal benefit fees	50			48		4	%
Policy charges and other miscellaneous income (a)	31			32		(3	%)
Total revenues	1,415			1,299		9	%
Costs and Expenses:
Annuity benefits (a)(b)	859			664		29	%
Acquisition expenses (a)	157			199		(21	%)
Other expenses	105			95		11	%
Total costs and expenses	1,121			958		17	%
Core earnings before income taxes	294			341		(14	%)
Pretax non-core losses (a)	(60		)	—		—	%
GAAP earnings before income taxes	$	234		$	341	(31	%)

(a) As discussed under “Results of Operations — General,” beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the first nine months of 2019, policy charges and other miscellaneous income excludes the $1 million favorable impact of these items and annuity benefits and acquisition expenses exclude the $41 million and $20 million, respectively, unfavorable impact of these items.

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

87

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 $294 million in the first nine months of 2019 compared to $341 million in the first nine months of 2018, a decrease of $47 million (14%). 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 2019, the annuity segment’s GAAP earnings before income taxes includes $71 million in pretax losses related to these items (including $11 million in the first quarter). 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 unfavorable impact from these items in the first quarter of 2019 and the first nine months of 2018 includes the $18 million favorable impact from these items in that period. Excluding the $11 million unfavorable impact in the first quarter of 2019 and the $18 million favorable impact of these items in the first nine months of 2018, annuity core net operating earnings for the first nine months of 2019 decreased $18 million compared to the first nine months of 2018 reflecting the impact of lower investment yields and higher renewal option costs, partially offset by growth in the business. 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):

	Nine months ended September 30,
	2019			2018			% Change
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	$	305		$	323		(6	%)
Unlocking	(1		)	(27		)	(96	%)
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	(279		)	29			(1,062	%)
Accretion of guaranteed minimum FIA benefits	(305		)	(253		)	21	%
Other annuity benefits	(12		)	(48		)	(75	%)
Less cost of equity options	436			365			19	%
Related impact on the amortization of deferred policy acquisition costs	90			(48		)	(288	%)
Earnings before income taxes	$	234		$	341		(31	%)

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

	Nine months ended September 30,
	2019									2018								Total
	Core			Non-core			Total			Core			Non-core		Total			% Change
Interest credited — fixed	$	294		$	—		$	294		$	265		$	—	$	265		11	%
Accretion of guaranteed minimum FIA benefits	99			206			305			253			—		253			21	%
Interest credited — fixed component of variable annuities	3			—			3			4			—		4			(25	%)
Cost of equity options	295			(295		)	—			—			—		—			—	%
Other annuity benefits:
Amortization of sales inducements	10			—			10			14			—		14			(29	%)
Change in guaranteed withdrawal benefit reserve:
Impact of change in the stock market and interest rates	(12		)	(4		)	(16		)	5			—		5			(420	%)
Accretion of benefits and other	60			—			60			55			—		55			9	%
Change in expected death and annuitization reserves and other	11			—			11			—			—		—			—	%
Change in other benefit reserves — impact of changes in interest rates and the stock market	4			24			28			43			—		43			(35	%)
Unlocking	—			(74		)	(74		)	54			—		54			(237	%)
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market	462			362			824			242			—		242			240	%
Equity option mark-to-market	(367		)	(178		)	(545		)	(271		)	—		(271		)	101	%
Impact of derivatives related to FIAs	95			184			279			(29		)	—		(29		)	(1,062	%)
Total annuity benefits	$	859		$	41		$	900		$	664		$	—	$	664		36	%

88

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):

	Nine months ended September 30,
	2019			2018
Interest credited — fixed	$	294		$	265
Include cost of equity options	436			365
Cost of funds	730			630
Interest credited — fixed component of variable annuities	3			4
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs	81			69
	814			703
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	(74		)	54
Impact of derivatives related to FIAs	279			(29		)
Accretion of guaranteed minimum FIA benefits	305			253
Other annuity benefits — impact of the stock market and interest rates on FIAs	12			48
Less cost of equity options (included in cost of funds)	(436		)	(365		)
Total annuity benefits expense	$	900		$	664

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 2019, annuity benefits expense includes the negative impact of $86 million related to these items (including $45 million in the first quarter). Since annuity core earnings for the first quarter of 2019 and prior periods were not adjusted, core annuity benefits expense for the first nine months of 2019 includes the $45 million in expense from these items in the first quarter of 2019 and the first nine months of 2018 includes the $39 million favorable impact from these items in that period. Excluding the $45 million expense in the first quarter of 2019 and the $39 million favorable impact of these items in the first nine months of 2018, core annuity benefits expense for the first nine months of 2019 increased $111 million compared to the first nine months of 2018 reflecting growth in the annuity business and higher renewal option costs.

See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefit expense in 2019 and 2018.

89

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,
	2019			2018			% Change
Average fixed annuity investments (at amortized cost)	$	37,849		$	33,964		11	%
Average fixed annuity benefits accumulated	38,075			34,240			11	%
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments)	4.68		%	4.76		%
Cost of funds	(2.56		%)	(2.45		%)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*)	(0.10		%)	(0.09		%)
Net interest spread	2.02		%	2.22		%
Policy charges and other miscellaneous income (*)	0.08		%	0.10		%
Acquisition expenses (*)	(0.66		%)	(0.67		%)
Other expenses	(0.36		%)	(0.37		%)
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	1.08		%	1.28		%
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		%)	0.18		%
Annuity non-core earnings (losses)	(0.21		%)	—		%
Unlocking	—		%	(0.11		%)
Net spread earned on fixed annuities	0.83		%	1.35		%

(*) 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 first nine months of 2019 was $1.33 billion compared to $1.22 billion for the first nine months of 2018, an increase of $115 million (9%). This increase reflects the growth in AFG’s annuity business, partially offset by the impact of lower investment yields, including lower earnings from equity securities that are carried at fair value through net investment income. 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 0.08 percentage points to 4.68% from 4.76% for the first nine months of 2019 compared to the first nine months of 2018. The decrease in the net investment yield between periods reflects the lower yields on investments accounted for under the equity method and from equity securities carried at fair value through net investment income.

Annuity Cost of Funds

Cost of funds for the first nine months of 2019 was $730 million compared to $630 million for the first nine months of 2018, an increase of $100 million (16%). This increase reflects the impact of growth in the annuity business and higher renewal option costs. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, increased 0.11 percentage points to 2.56% from 2.45% in the first nine months of 2019 compared to the first nine months of 2018 reflecting higher renewal option costs.

90

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,
	2019		2018
Cost of equity options (FIAs)	$	436	$	365
Interest credited:
Traditional fixed annuities	182		176
Fixed component of fixed-indexed annuities	69		57
Immediate annuities	18		18
Pension risk transfer products	4		—
Federal Home Loan Bank advances	21		14
Total cost of funds	$	730	$	630

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 2019 were $31 million compared to $21 million for the first nine months of 2018, an increase of $10 million (48%). As a percentage of average fixed annuity benefits accumulated, these net expenses increased 0.01 percentage points to 0.10% from 0.09% in the first nine months of 2019 compared to the first nine months of 2018. 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,
	2019			2018
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements	$	10		$	14
Change in guaranteed withdrawal benefit reserve	60			55
Change in other benefit reserves	11			—
Other annuity benefits	81			69
Offset guaranteed withdrawal benefit fees	(50		)	(48		)
Other annuity benefits excluding the impact of the stock market and interest rates, net	31			21
Other annuity benefits — impact of the stock market and interest rates	12			48
Other annuity benefits, net	$	43		$	69

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 $12 million in the first nine months of 2019 compared to $48 million in the first nine months of 2018. This $36 million decrease was the primary cause of the $26 million overall decrease in other annuity benefits, net of guaranteed withdrawal fees in the first nine months of 2019 compared to the first nine months of 2018.

See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefit expense in 2019 and 2018.

Annuity Net Interest Spread

AFG’s net interest spread decreased 0.20 percentage points to 2.02% from 2.22% in the first nine months of 2019 compared to the same period in 2018 due primarily to higher renewal option costs and lower investment yields. 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.

91

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 $1 million favorable impact of unlocking in 2019 and the $1 million unlocking charge in 2018 related to unearned revenue, annuity policy charges and other miscellaneous income, which consist primarily of surrender charges, amortization of deferred upfront policy charges (unearned revenue) and income from sales of real estate, were $31 million in the first nine months of 2019 compared to $33 million in the first nine months of 2018, a decrease of $2 million (6%). 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 decreased 0.02 percentage points to 0.08% from 0.10% in the first nine months of 2019 compared to the first nine months of 2018.

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 2019 and 2018.

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):

	Nine months ended September 30,
	2019			2018
Annuity acquisition expenses before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates	$	191		$	178
Unlocking	76			(28		)
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates:
Included in core	(34		)	49
Annuity non-core earnings (losses)	(56		)	—
Annuity acquisition expenses	$	177		$	199

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 $191 million for the first nine months of 2019 compared to $178 million for the first nine months of 2018, an increase of $13 million (7%), reflecting growth in the annuity business.

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 2019 and 2018. Unanticipated spread compression, decreases in the stock market, adverse mortality experience, and higher than expected lapse rates could lead to 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 during 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. In contrast, the positive impact of higher than anticipated interest rates during the first nine months of 2018 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting acceleration of the amortization of DPAC. 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:

	Nine months ended September 30,
	2019		2018
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	0.66	%	0.67	%
Unlocking	0.27	%	(0.11	%)
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates	(0.32	%)	0.19	%
Annuity acquisition expenses as a % of fixed annuity benefits accumulated	0.61	%	0.75	%

92

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 $105 million for the first nine months of 2019 compared to $95 million for the first nine months of 2018, an increase of $10 million (11%) reflecting growth in the annuity business. 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 0.01 percentage points to 0.36% from 0.37% for the first nine months of 2019 compared to the first nine months of 2018.

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 the 2019 and 2018 unlocking charges) over or under the cost of the equity index options (discussed above) on earnings before income taxes for the annuity segment (dollars in millions):

	Nine months ended September 30,
	2019			2018			% Change
Change in the fair value of derivatives related to FIAs	$	(279	)	$	29		(1,062	%)
Accretion of guaranteed minimum FIA benefits	(305		)	(253		)	21	%
Other annuity benefits	(12		)	(48		)	(75	%)
Less cost of equity options	436			365			19	%
Related impact on the amortization of DPAC	90			(48		)	(288	%)
Impact on annuity segment earnings before income taxes	$	(70	)	$	45		(256	%)

During the first nine months of 2019, the negative impact of significantly lower than anticipated interest rates, partially offset by the positive impact of strong stock market performance, reduced the annuity segments’ earnings before income taxes (excluding unlocking) by $70 million compared to the $45 million favorable impact of the stock market and interest rates (excluding unlocking) on annuity earnings before income taxes for the first nine months of 2018, a change of $115 million (256%). In the first nine months of 2018, the impact of higher than expected interest rates and strong stock market performance was partially offset by the negative impact of higher than expected option costs. As a percentage of average fixed annuity benefits accumulated, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense of 0.25% in the first nine months of 2019 compared to a net expense reduction of 0.18% in the first nine months of 2018.

93

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

The following table provides analysis of the primary factors impacting the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates (excluding the impact of the 2019 and 2018 unlocking charges) 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).

	Nine months ended September 30,
	2019			2018			% Change
Change in the stock market, including volatility	$	44		$	28		57	%
Changes in interest rates higher (lower) than expected	(113		)	37			(405	%)
Other	(1		)	(20		)	(95	%)
Impact on annuity segment earnings before income taxes	$	(70	)	$	45		(256	%)

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 2019 and 2018.

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 0.20 percentage

points to 1.08% in the first nine months of 2019 from 1.28% in the first nine months of 2018 due primarily to the 0.20 percentage point decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities decreased 0.52 percentage points to 0.83% in the first nine months of 2019 from 1.35% in the first nine months of 2018 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

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

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, excess benefits expected to be paid on future deaths and annuitizations (“EDAR”) and guaranteed withdrawal benefits. Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati. The following table is a progression of AFG’s annuity benefits accumulated liability for the nine months ended September 30, 2019 and 2018 (in millions):

	Nine months ended September 30,
	2019			2018
Beginning fixed annuity reserves	$	36,431		$	33,005
Fixed annuity premiums (receipts)	3,805			3,906
Surrenders, benefits and other withdrawals	(2,431		)	(2,040		)
Interest and other annuity benefit expenses:
Cost of funds	730			630
Embedded derivative mark-to-market	824			242
Change in other benefit reserves	(72		)	(24		)
Unlocking	(75		)	55
Ending fixed annuity reserves	$	39,212		$	35,774
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above)	$	39,212		$	35,774
Impact of unrealized investment gains	269			8
Fixed component of variable annuities	170			176
Annuity benefits accumulated per balance sheet	$	39,651		$	35,958

94

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 statutory premiums of $3.82 billion in the first nine months of 2019 compared to $3.93 billion in the first nine months of 2018, a decrease of $104 million (3%). The following table summarizes AFG’s annuity sales (dollars in millions):

	Nine months ended September 30,
	2019		2018		% Change
Financial institutions single premium annuities — indexed	$	1,178	$	1,321	(11	%)
Financial institutions single premium annuities — fixed	959		350		174	%
Retail single premium annuities — indexed	773		1,026		(25	%)
Retail single premium annuities — fixed	95		60		58	%
Broker dealer single premium annuities — indexed	550		936		(41	%)
Broker dealer single premium annuities — fixed	23		10		130	%
Pension risk transfer	99		57		74	%
Education market — fixed and indexed annuities	128		146		(12	%)
Total fixed annuity premiums	3,805		3,906		(3	%)
Variable annuities	16		19		(16	%)
Total annuity premiums	$	3,821	$	3,925	(3	%)

Management attributes the 3% decrease in annuity premiums in the first nine months of 2019 compared to the first nine months of 2018 to the lower market interest rate environment. In response to the continued drop in market interest rates during 2019, AFG lowered crediting rates on several products, which has slowed annuity sales compared to 2018 levels.

Annuity Unlocking

In the third quarter of 2019 and the second quarter of 2018, AFG recorded net charges of $1 million and $27 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,
	2019			2018
Policy charges and other miscellaneous income:
Unearned revenue	$	1		$	(1	)
Total revenues	1			(1		)
Annuity benefits:
Fixed-indexed annuities embedded derivative	(181		)	44
Guaranteed withdrawal benefit reserve	102			11
Other reserves	4			—
Sales inducements asset	1			(1		)
Total annuity benefits	(74		)	54
Annuity and supplemental insurance acquisition expenses:
Deferred policy acquisition costs	76			(28		)
Total costs and expenses	2			26
Net charge	$	(1	)	$	(27	)

See “Annuity Unlocking” under “Annuity Segment — Results of Operations” for the quarters ended September 30, 2019 and 2018 for a discussion of the charge from the unlocking of actuarial assumptions in the third quarter of 2019.

The net charge from unlocking annuity assumptions in the second quarter of 2018 is due primarily to the unfavorable impact of higher projected option costs, partially offset by the favorable impact of an increase in projected net interest spreads on in-force business (due primarily to higher than previously anticipated reinvestment rates). Reinvestment rate assumptions are based primarily on 7-year and 10-year corporate bond yields. For the 2018 unlocking, AFG assumed a net reinvestment rate (net of default and expense assumptions) of 4.44% in the second half of 2018, grading up ratably to an ultimate net reinvestment rate of 5.55% in 2022 and beyond.

95

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, 2019 and 2018 (in millions):

	Nine months ended September 30,
	2019			2018
Earnings on fixed annuity benefits accumulated	$	238		$	348
Earnings impact of investments in excess of fixed annuity benefits accumulated (*)	(7		)	(10		)
Variable annuity earnings	3			3
Earnings before income taxes	$	234		$	341

(*) Net investment income (as a % of investments) of 4.68% and 4.76% for the nine months ended September 30, 2019 and 2018, 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 $135 million in the first nine months of 2019 compared to $136 million in the first nine months of 2018, a decrease of $1 million (1%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $124 million in the first nine months of 2019 compared to $127 million in the first nine months of 2018, a decrease of $3 million (2%).

The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance and annuity segments for the nine months ended September 30, 2019 and 2018 (dollars in millions):

	Nine months ended September 30,
	2019			2018			% Change
Revenues:
Life, accident and health net earned premiums	$	17		$	18		(6	%)
Net investment income	35			21			67	%
Other income — P&C fees	52			50			4	%
Other income	20			20			—	%
Total revenues	124			109			14	%
Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses	19			17			12	%
Life, accident and health benefits	26			32			(19	%)
Life, accident and health acquisition expenses	4			4			—	%
Other expense — expenses associated with P&C fees	33			33			—	%
Other expenses (*)	116			104			12	%
Costs and expenses, excluding interest charges on borrowed money	198			190			4	%
Core loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(74		)	(81		)	(9	%)
Interest charges on borrowed money	50			46			9	%
Core loss before income taxes, excluding realized gains and losses	(124		)	(127		)	(2	%)
Pretax non-core special A&E charges	(11		)	(9		)	22	%
GAAP loss before income taxes, excluding realized gains and losses	$	(135	)	$	(136	)	(1	%)

(*) Excludes pretax non-core special A&E charges of $11 million and $9 million in the third quarter of 2019 and 2018, respectively.

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 $17 million and related benefits and acquisition expenses of $30 million in the first nine months of 2019 compared to net earned premiums of $18 million and related benefits and acquisition expenses of $36 million in the first nine months of 2018. The $6 million (19%) decrease in life, accident and health benefits reflects lower claims in the run-off life and long-term care insurance businesses.

96

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Holding Company and Other — Net Investment Income

AFG recorded net investment income on investments held outside of its property and casualty insurance and annuity operations of $35 million in the first nine months of 2019 compared to $21 million in the first nine months of 2018, an increase of $14 million (67%). 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 $12 million in the first nine months of 2019 compared to $1 million in the first nine months of 2018.

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 months of 2019, AFG collected $52 million in fees for these services compared to $50 million in the first nine months of 2018. Management views this fee income, net of the $33 million in both the first nine months of 2019 and 2018, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. The increase in fee income for the first nine months of 2019 compared to the first nine months of 2018 is due primarily to higher fee income at Neon. 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 — Other Income

Other income in the table above includes $11 million and $12 million in the first nine months of 2019 and 2018, respectively, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under “Results of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance and annuity operations of $9 million in the first nine months of 2019 compared to $8 million the first nine months of 2018.

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 operations recorded other expenses of $116 million in the first nine months of 2019 compared to $104 million the first nine months of 2018, an increase of $12 million (12%). This increase reflects a $3 million charitable donation in the first nine months of 2019 and higher holding company expenses related to employee benefit plans that are tied to stock market performance in the first nine months of 2019 compared to the first nine months of 2018, partially offset by a $5 million charge to increase liabilities related to the environmental exposures of AFG’s former railroad and manufacturing operations in the second quarter of 2018.

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 operations recorded interest expense of $50 million in the first nine months of 2019 compared to $46 million in the first nine months of 2018, an increase of $4 million (9%).

The increase in interest expense for the first nine months of 2019 as compared to the first nine months of 2018 reflects the issuance of $125 million of 5.875% Subordinated Debentures in March 2019.

Holding Company and Other — Special A&E Charges

See “Holding Company and Other — Special A&E Charges” under “Results of Operations — Holding Company, Other and Unallocated” for the quarters ended September 30, 2019 and 2018 for a discussion of the $11 million and $9 million in non-core special A&E charges recorded in the third quarter of 2019 and 2018, respectively.

97

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Consolidated Realized Gains (Losses) on Securities   AFG’s consolidated realized gains (losses) on securities, which are not allocated to segments, were net gains of $222 million in the first nine months of 2019 compared to a net loss of $28 million in the first nine months of 2018, a change of $250 million (893%). Realized gains (losses) on securities consisted of the following (in millions):

	Nine months ended September 30,
	2019			2018
Realized gains (losses) before impairments:
Disposals	$	11		$	11
Change in the fair value of equity securities (*)	211			(39		)
Change in the fair value of derivatives	14			(8		)
Adjustments to annuity deferred policy acquisition costs and related items	(1		)	11
	235			(25		)
Impairment charges:
Securities	(20		)	(3		)
Adjustments to annuity deferred policy acquisition costs and related items	7			—
	(13		)	(3		)
Realized gains (losses) on securities	$	222		$	(28	)

(*) As discussed in Note A — “Accounting Policies — Investments,” beginning in January 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings. These amounts include a $146 million net gain on securities that were still held at September 30, 2019 and a $51 million net loss on securities that were still held at September 30, 2018.

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 $39 million net realized loss from the change in the fair value of equity securities in the first nine months of 2018 includes losses of $15 million on investments in real estate investment trusts, $27 million on investments in banks and financing companies and $14 million on investments in media companies and gains of $18 million on investments in technology companies.

The impairment charges in the first nine months of 2019 include $15 million in charges on third-party collateralized loan obligations.

Consolidated Income Taxes   AFG’s consolidated provision for income taxes was $171 million for the first nine months of 2019 compared to $126 million for the first nine months of 2018, an increase of $45 million (36%). See Note M — “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 (losses) attributable to noncontrolling interests was a net loss of $8 million for the first nine months of 2019 compared to $7 million for the first nine months of 2018, an increase of $1 million (14%). Both periods reflect losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer.

RECENTLY ADOPTED ACCOUNTING STANDARDS

See Note A — “Accounting Policies — Investments” to the financial statements for a discussion of accounting guidance adopted on January 1, 2018, which, among other things, requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net earnings.

See Note A — “Accounting Policies — Leases” and Note K — “Leases” to the financial statements for a discussion of accounting guidance adopted on January 1, 2019, which requires entities that lease assets for terms longer than one year to recognize the assets and liabilities for the rights and obligations created by those leases on the balance sheet based on the present value of cash flows.

98

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

ACCOUNTING STANDARDS TO BE ADOPTED

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides a new credit loss model for determining credit-related impairments for financial instruments measured at amortized cost (e.g. mortgage loans or 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. The expected credit losses, and subsequent increases or decreases in such losses, will be recorded immediately through realized gains (losses) 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. The updated guidance also amends 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 account 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 the income statement through realized gains (losses). AFG will be required to adopt this guidance effective January 1, 2020. AFG cannot estimate the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is adopted.

In August 2018, the FASB issued ASU 2018-12, Financial Services – Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, 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 measurement of market risk benefits associated with deposit contracts (e.g. annuities) to be recorded at fair value, simplifies the amortization of deferred policy acquisition costs to a constant level basis over the expected life of the related contracts and requires enhanced disclosures. AFG will be required to adopt this guidance effective January 1, 2022. AFG cannot estimate the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is adopted.

99

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 3

Quantitative and Qualitative Disclosure about Market Risk

As of September 30, 2019, there were no material changes to the information provided in Item 7A — Quantitative and Qualitative Disclosures about Market Risk of AFG’s 2018 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 fiscal quarter of 2019 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 such as the new investment accounting software system implemented in the second quarter of 2019. There has been no change in AFG’s business processes and procedures during the third fiscal quarter of 2019 that has materially affected, or is reasonably likely to materially affect, AFG’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities   AFG did not repurchase any shares of its Common Stock during the first nine months of 2019. As of September 30, 2019, there were 5,000,000 remaining shares that may be repurchased under the Plans authorized by AFG’s Board of Directors in February 2016 and February 2019.

AFG acquired 46,989 shares of its Common Stock (at an average of $99.06 per share) in the first six months of 2019 and 80 shares (at $105.40 per share) in July 2019 in connection with its stock incentive plans.

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 Financial Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
32	Certification of Co-Chief Executive Officers and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

100

AMERICAN FINANCIAL GROUP, INC. 10-Q

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, 2019	By:	/s/ Joseph E. (Jeff) Consolino
		Joseph E. (Jeff) Consolino
		Executive Vice President and Chief Financial Officer

101

EX-31.A

Exhibit 31(a)

AMERICAN FINANCIAL GROUP, INC. 10-Q

SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS

I, Carl H. Lindner III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 5, 2019	By:	/s/ Carl H. Lindner III
		Carl H. Lindner III
		Co-Chief Executive Officer

E-1

EX-31.B

Exhibit 31(b)

AMERICAN FINANCIAL GROUP, INC. 10-Q

SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS

I, S. Craig Lindner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 5, 2019	By:	/s/ S. Craig Lindner
		S. Craig Lindner
		Co-Chief Executive Officer

E-2

EX-31.C

Exhibit 31(c)

AMERICAN FINANCIAL GROUP, INC. 10-Q

SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS

I, Joseph E. (Jeff) Consolino, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 5, 2019	By:	/s/ Joseph E. (Jeff) Consolino
		Joseph E. (Jeff) Consolino
		Executive Vice President and Chief Financial Officer

E-3

EX-32

Exhibit 32

AMERICAN FINANCIAL GROUP, INC. 10-Q

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002

In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of American Financial Group, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2019 (the “Report”), the undersigned officers of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 5, 2019	By:	/s/ S. Craig Lindner
Date		S. Craig Lindner
		Co-Chief Executive Officer
November 5, 2019	By:	/s/ Carl H. Lindner III
Date		Carl H. Lindner III
		Co-Chief Executive Officer
November 5, 2019	By:	/s/ Joseph E. (Jeff) Consolino
Date		Joseph E. (Jeff) Consolino
		Executive Vice President and Chief Financial Officer

A signed original of this written statement will be retained by the Registrant and

furnished to the Securities and Exchange Commission or its staff upon request.

E-4

XML

Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

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”), non-affiliated common stocks, equity index options and investments of managed investment entities priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.

Level 3 — Valuations derived from market valuation techniques generally consistent with those used to estimate the fair values of Level 2 financial instruments in which one or more significant inputs are unobservable or when the market for a security exhibits significantly less liquidity relative to markets supporting Level 2 fair value measurements. The unobservable inputs may include management’s own assumptions about the assumptions market participants would use based on the best information available at the valuation date. Financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information are classified as Level 3.

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

AFG’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. AFG’s internal investment professionals are a group of approximately 20 analysts 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.

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

	Level 1		Level 2		Level 3		Total
September 30, 2019
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	151	$	70	$	8	$	229
States, municipalities and political subdivisions	—		6,862		102		6,964
Foreign government	—		164		—		164
Residential MBS	—		2,406		156		2,562
Commercial MBS	—		911		55		966
Collateralized loan obligations	—		4,257		57		4,314
Other asset-backed securities	—		5,317		414		5,731
Corporate and other	29		22,258		2,286		24,573
Total AFS fixed maturities	180		42,245		3,078		45,503
Trading fixed maturities	2		106		—		108
Equity securities	1,518		66		420		2,004
Equity index call options	—		750		—		750
Assets of managed investment entities (“MIE”)	228		4,456		18		4,702
Variable annuity assets (separate accounts) (*)	—		601		—		601
Other assets — derivatives	—		69		—		69
Total assets accounted for at fair value	$	1,928	$	48,293	$	3,516	$	53,737
Liabilities:
Liabilities of managed investment entities	$	219	$	4,287	$	17	$	4,523
Derivatives in annuity benefits accumulated	—		—		3,469		3,469
Other liabilities — derivatives	—		6		—		6
Total liabilities accounted for at fair value	$	219	$	4,293	$	3,486	$	7,998
December 31, 2018
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	141	$	83	$	9	$	233
States, municipalities and political subdivisions	—		6,880		59		6,939
Foreign government	—		142		—		142
Residential MBS	—		2,547		197		2,744
Commercial MBS	—		864		56		920
Collateralized loan obligations	—		4,162		116		4,278
Other asset-backed securities	—		4,802		731		5,533
Corporate and other	28		19,184		1,996		21,208
Total AFS fixed maturities	169		38,664		3,164		41,997
Trading fixed maturities	9		96		—		105
Equity securities	1,410		68		336		1,814
Equity index call options	—		184		—		184
Assets of managed investment entities	203		4,476		21		4,700
Variable annuity assets (separate accounts) (*)	—		557		—		557
Other assets — derivatives	—		16		—		16
Total assets accounted for at fair value	$	1,791	$	44,061	$	3,521	$	49,373
Liabilities:
Liabilities of managed investment entities	$	195	$	4,297	$	20	$	4,512
Derivatives in annuity benefits accumulated	—		—		2,720		2,720
Other liabilities — derivatives	—		49		—		49
Total liabilities accounted for at fair value	$	195	$	4,346	$	2,740	$	7,281

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

During the third quarter and first nine months of 2019, there were two preferred stocks with an aggregate fair value of $11 million that transferred from Level 2 to Level 1. During the first nine months of 2019, there was one preferred stock with an aggregate fair value of $6 million that transferred from Level 1 to Level 2. During the third quarter of 2018, there were no transfers between Level 1 and Level 2. During the first nine months of 2018, there were two preferred stocks with an aggregate fair value of $6 million that transferred from Level 1 to Level 2.

Approximately 7% of the total assets carried at fair value at September 30, 2019, were Level 3 assets. Approximately 49% ($1.72 billion) of the 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.

Internally developed Level 3 asset fair values represent approximately $1.48 billion at September 30, 2019. Of this amount, approximately $998 million relates to fixed maturity securities that were priced using management’s best estimate of an appropriate credit spread 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 of approximately 175 securities, the average spread used was 568 basis points over the reference treasury yield and the spreads ranged from 100 basis points to 2,966 basis points (approximately 80% of the spreads were between 400 and 700 basis points). Had management used higher spreads, the fair value of this group of securities would have been lower. Conversely, if the spreads used were lower, the fair values would have been higher. For the remainder of the internally developed prices, any justifiable changes in unobservable inputs used to determine fair value would not have resulted in a material change in AFG’s financial position.

The derivatives embedded in AFG’s fixed-indexed and variable-indexed annuity liabilities are measured using a discounted cash flow approach and had a fair value of $3.47 billion at September 30, 2019. The following table presents information about the unobservable inputs used by management in determining fair value of these Level 3 liabilities. See Note F — “Derivatives.”

Unobservable Input	Range
Adjustment for insurance subsidiary’s credit risk	0.2% – 2.6% over the risk-free rate
Risk margin for uncertainty in cash flows	0.80% reduction in the discount rate
Surrenders	3% – 22% of indexed account value
Partial surrenders	2% – 9% of indexed account value
Annuitizations	0.1% – 1% of indexed account value
Deaths	1.7% – 10.6% of indexed account value
Budgeted option costs	2.3% – 3.3% of indexed account value

The range of adjustments for insurance subsidiary’s credit risk is based on the Moody’s corporate A2 bond index and reflects credit spread variations across the yield curve. The range of projected surrender rates reflects the specific surrender charges and other features of AFG’s individual fixed-indexed and variable-indexed annuity products with an expected range of 7% to 10% in the majority of future calendar years (3% to 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.

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the third quarter and first nine months of 2019 and 2018 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs and $29 million of equity securities transferred into Level 3 in the first quarter of 2018 related to a small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under new guidance adopted on January 1, 2018, as discussed in Note A — “Accounting Policies — Investments.” 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
	Balance at June 30, 2019			Net earnings			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	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	82			—			2			—			—			18		—			102
Residential MBS	139			1			(1		)	—			(4		)	22		(1		)	156
Commercial MBS	50			1			—			—			—			4		—			55
Collateralized loan obligations	50			(2		)	1			8			—			—		—			57
Other asset-backed securities	367			—			1			49			(3		)	—		—			414
Corporate and other	2,014			—			20			324			(81		)	10		(1		)	2,286
Total AFS fixed maturities	2,710			—			23			381			(88		)	54		(2		)	3,078
Equity securities	377			(7		)	—			18			(2		)	34		—			420
Assets of MIE	19			(1		)	—			—			—			—		—			18
Total Level 3 assets	$	3,106		$	(8	)	$	23		$	399		$	(90	)	$	88	$	(2	)	$	3,516
Embedded derivatives (a)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at June 30, 2018			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	61			—			—			—			(1		)	—		—			60
Residential MBS	147			(2		)	(2		)	—			(6		)	13		(5		)	145
Commercial MBS	56			2			—			(1		)	—			—		—			57
Collateralized loan obligations	212			—			(2		)	—			—			—		—			210
Other asset-backed securities	792			—			(1		)	13			(23		)	—		—			781
Corporate and other	1,408			—			(3		)	312			(59		)	—		(12		)	1,646
Total AFS fixed maturities	2,684			—			(8		)	324			(89		)	13		(17		)	2,907
Equity securities	230			(5		)	—			81			—			—		(17		)	289
Assets of MIE	23			(1		)	—			—			—			—		—			22
Total Level 3 assets	$	2,937		$	(6	)	$	(8	)	$	405		$	(89	)	$	13	$	(34	)	$	3,218
Embedded derivatives	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)

(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 $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 the MIE assets.

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2018			Net earnings			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		$	—		$	—		$	—		$	(1	)	$	—	$	—		$	8
State and municipal	59			—			9			—			(2		)	36		—			102
Residential MBS	197			10			(6		)	—			(14		)	24		(55		)	156
Commercial MBS	56			3			—			—			(3		)	4		(5		)	55
Collateralized loan obligations	116			(5		)	7			8			—			13		(82		)	57
Other asset-backed securities	731			—			6			141			(135		)	—		(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		)	—			38			(3		)	56		—			420
Assets of MIE	21			(3		)	—			—			—			—		—			18
Total Level 3 assets	$	3,521		$	—		$	87		$	1,172		$	(488	)	$	145	$	(921	)	$	3,516
Embedded derivatives (a)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2017			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(2		)	—		(84		)	60
Residential MBS	122			(9		)	(2		)	—			(17		)	70		(19		)	145
Commercial MBS	36			1			—			20			—			—		—			57
Collateralized loan obligations	180			(2		)	(3		)	35			—			—		—			210
Other asset-backed securities	564			—			(3		)	318			(80		)	—		(18		)	781
Corporate and other	1,044			2			(21		)	784			(138		)	—		(25		)	1,646
Total AFS fixed maturities	2,102			(8		)	(31		)	1,157			(237		)	70		(146		)	2,907
Equity securities	165			9			—			106			(4		)	30		(17		)	289
Assets of MIE	23			(6		)	—			5			—			—		—			22
Total Level 3 assets	$	2,290		$	(5	)	$	(31	)	$	1,268		$	(241	)	$	100	$	(163	)	$	3,218
Embedded derivatives (a)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)

(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 $181 million in the first nine months of 2019 compared to a loss of $44 million in the first nine months of 2018.

(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.

Fair Value of Financial Instruments   The carrying value and fair value of financial instruments 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
September 30, 2019
Financial assets:
Cash and cash equivalents	$	2,693	$	2,693	$	2,693	$	—	$	—
Mortgage loans	1,174		1,195		—		—		1,195
Policy loans	166		166		—		—		166
Total financial assets not accounted for at fair value	$	4,033	$	4,054	$	2,693	$	—	$	1,361
Financial liabilities:
Annuity benefits accumulated (*)	$	39,401	$	39,468	$	—	$	—	$	39,468
Long-term debt	1,423		1,521		—		1,518		3
Total financial liabilities not accounted for at fair value	$	40,824	$	40,989	$	—	$	1,518	$	39,471
December 31, 2018
Financial assets:
Cash and cash equivalents	$	1,515	$	1,515	$	1,515	$	—	$	—
Mortgage loans	1,068		1,056		—		—		1,056
Policy loans	174		174		—		—		174
Total financial assets not accounted for at fair value	$	2,757	$	2,745	$	1,515	$	—	$	1,230
Financial liabilities:
Annuity benefits accumulated (*)	$	36,384	$	34,765	$	—	$	—	$	34,765
Long-term debt	1,302		1,231		—		1,228		3
Total financial liabilities not accounted for at fair value	$	37,686	$	35,996	$	—	$	1,228	$	34,768

(*) Excludes $250 million and $232 million of life contingent annuities in the payout phase at September 30, 2019 and December 31, 2018, respectively.

The carrying amount of cash and cash equivalents approximates fair value. Fair values for mortgage loans are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The fair value of policy loans is estimated to approximate carrying value; policy loans have no defined maturity dates and are inseparable from insurance contracts. The fair value of annuity benefits was estimated based on expected cash flows discounted using forward interest rates adjusted for the Company’s credit risk and includes the impact of maintenance expenses and capital costs. Fair values of long-term debt are based primarily on quoted market prices.

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Managed Investment Entities

9 Months Ended

Sep. 30, 2019

Variable Interest Entity, Primary Beneficiary, Does Not Hold Majority Voting Interest, Disclosures [Abstract]

Managed Investment Entities

Managed Investment Entities

AFG is the investment manager and its subsidiaries have investments ranging from 15.0% to 60.9% of the most subordinate debt tranche of eleven active collateralized loan obligation entities (“CLOs”), which are considered variable interest entities. AFG’s subsidiaries also own portions of the senior debt tranches of certain of these CLOs. Upon formation between 2012 and 2018, 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 $179 million (including $116 million invested in the most subordinate tranches) at September 30, 2019, and $188 million at December 31, 2018.

In March 2018, AFG formed a new CLO, which issued $463 million face amount of liabilities (including $31 million face amount purchased by subsidiaries of AFG). During the first nine months of 2019 and 2018, AFG subsidiaries received less than $1 million and $45 million, respectively, in sale and redemption proceeds from its CLO investments. During the first nine months of 2018, one AFG CLO was substantially liquidated, as permitted by the CLO indenture.

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,
	2019			2018			2019			2018
Investment in CLO tranches at end of period	$	179		$	191		$	179		$	191
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	(18		)	20			69			5
Liabilities	4			(25		)	(85		)	(15		)
Management fees paid to AFG	4			4			11			12
CLO earnings (losses) attributable to AFG shareholders (b)	(5		)	4			11			11

(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 $165 million and $232 million at September 30, 2019 and December 31, 2018, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by $154 million and $241 million at those dates. The CLO assets include loans with an aggregate fair value of $8 million at September 30, 2019, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of $21 million; none at December 31, 2018).

In addition to the CLOs that it manages, AFG 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 carrying value of $4.31 billion at September 30, 2019 and $4.28 billion at December 31, 2018.

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Segments of Operations - Revenues by segment and sub-segment (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Segment Reporting Information [Line Items]
Total premiums earned	$ 1,442	$ 1,327	$ 3,815	$ 3,595
Net investment income	588	527	1,710	1,552
Other income	52	54	153	146
Revenues before realized gains (losses)	2,141	1,974	5,885	5,488
Realized gains (losses) on securities	(18)	34	222	(28)
Total revenues	2,123	2,008	6,107	5,460
Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned	1,442	1,327	3,815	3,595
Net investment income	124	108	352	323
Other income	5	4	10	8
Revenues before realized gains (losses)	1,571	1,439	4,177	3,926
Annuity
Segment Reporting Information [Line Items]
Net investment income	448	413	1,334	1,219
Other income	28	27	82	80
Revenues before realized gains (losses)	476	440	1,416	1,299
Other
Segment Reporting Information [Line Items]
Revenues before realized gains (losses)	94	95	292	263
Specialty Property and transportation | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned	583	526	1,323	1,250
Specialty casualty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned	658	616	1,921	1,790
Specialty financial | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned	161	149	458	457
Other specialty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned	$ 40	$ 36	$ 113	$ 98

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Insurance (Tables)

9 Months Ended

Sep. 30, 2019

Insurance [Abstract]

Reconciliation of beginning and ending liability for unpaid losses and loss adjustment expenses

The following table provides an analysis of changes in the liability for losses and loss adjustment expenses during the first nine months of 2019 and 2018 (in millions):

	Nine months ended September 30,
	2019			2018
Balance at beginning of year	$	9,741		$	9,678
Less reinsurance recoverables, net of allowance	2,942			2,957
Net liability at beginning of year	6,799			6,721
Provision for losses and LAE occurring in the current period	2,457			2,337
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges	18			18
Other	(116		)	(149		)
Total losses and LAE incurred	2,359			2,206
Payments for losses and LAE of:
Current year	(731		)	(569		)
Prior years	(1,408		)	(1,313		)
Total payments	(2,139		)	(1,882		)
Reserves of business disposed (*)	—			(319		)
Foreign currency translation and other	(5		)	(4		)
Net liability at end of period	7,014			6,722
Add back reinsurance recoverables, net of allowance	2,833			2,948
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,847		$	9,670

(*)

Reflects the reinsurance to close transaction at Neon discussed below.

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Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Schedule of long-term debt instruments

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

	September 30, 2019							December 31, 2018
	Principal		Discount and Issue Costs			Carrying Value		Principal		Discount and Issue Costs			Carrying Value
Direct Senior Obligations of AFG:
4.50% Senior Notes due June 2047	$	590	$	(2	)	$	588	$	590	$	(2	)	$	588
3.50% Senior Notes due August 2026	425		(4		)	421		425		(4		)	421
Other	3		—			3		3		—			3
	1,018		(6		)	1,012		1,018		(6		)	1,012
Direct Subordinated Obligations of AFG:
6-1/4% Subordinated Debentures due September 2054	150		(5		)	145		150		(5		)	145
6% Subordinated Debentures due November 2055	150		(5		)	145		150		(5		)	145
5.875% Subordinated Debentures due March 2059	125		(4		)	121		—		—			—
	425		(14		)	411		300		(10		)	290
	$	1,443	$	(20	)	$	1,423	$	1,318	$	(16	)	$	1,302

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Investments - Gross unrealized losses on securities by investment category and length of time that have been in a continuous unrealized loss position (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Total fixed maturities
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (29)	$ (411)
Fair Value - Less than twelve months	$ 2,957	$ 17,766
Fair Value as % of Cost - Less than twelve months	99.00%	98.00%
Unrealized Loss - Twelve months or more	$ (35)	$ (192)
Fair Value - Twelve months or more	$ 1,900	$ 3,902
Fair Value as % of Cost - Twelve months or more	98.00%	95.00%
U.S. Government and government agencies
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ 0	$ 0
Fair Value - Less than twelve months	$ 0	$ 41
Fair Value as % of Cost - Less than twelve months	0.00%	100.00%
Unrealized Loss - Twelve months or more	$ (1)	$ (3)
Fair Value - Twelve months or more	$ 49	$ 120
Fair Value as % of Cost - Twelve months or more	98.00%	98.00%
States, municipalities and political subdivisions
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ 0	$ (23)
Fair Value - Less than twelve months	$ 54	$ 1,497
Fair Value as % of Cost - Less than twelve months	100.00%	98.00%
Unrealized Loss - Twelve months or more	$ (1)	$ (32)
Fair Value - Twelve months or more	$ 74	$ 902
Fair Value as % of Cost - Twelve months or more	99.00%	97.00%
Foreign government
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ 0	$ 0
Fair Value - Less than twelve months	$ 47	$ 18
Fair Value as % of Cost - Less than twelve months	100.00%	100.00%
Unrealized Loss - Twelve months or more	$ 0	$ 0
Fair Value - Twelve months or more	$ 0	$ 4
Fair Value as % of Cost - Twelve months or more	0.00%	100.00%
Residential MBS
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (3)	$ (4)
Fair Value - Less than twelve months	$ 144	$ 279
Fair Value as % of Cost - Less than twelve months	98.00%	99.00%
Unrealized Loss - Twelve months or more	$ (1)	$ (5)
Fair Value - Twelve months or more	$ 69	$ 139
Fair Value as % of Cost - Twelve months or more	99.00%	97.00%
Commercial MBS
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ 0	$ (1)
Fair Value - Less than twelve months	$ 13	$ 147
Fair Value as % of Cost - Less than twelve months	100.00%	99.00%
Unrealized Loss - Twelve months or more	$ 0	$ (1)
Fair Value - Twelve months or more	$ 0	$ 30
Fair Value as % of Cost - Twelve months or more	0.00%	97.00%
Collateralized loan obligations
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (6)	$ (61)
Fair Value - Less than twelve months	$ 1,063	$ 3,540
Fair Value as % of Cost - Less than twelve months	99.00%	98.00%
Unrealized Loss - Twelve months or more	$ (12)	$ (12)
Fair Value - Twelve months or more	$ 1,255	$ 197
Fair Value as % of Cost - Twelve months or more	99.00%	94.00%
Other asset-backed securities
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (4)	$ (16)
Fair Value - Less than twelve months	$ 518	$ 1,866
Fair Value as % of Cost - Less than twelve months	99.00%	99.00%
Unrealized Loss - Twelve months or more	$ (6)	$ (11)
Fair Value - Twelve months or more	$ 83	$ 432
Fair Value as % of Cost - Twelve months or more	93.00%	98.00%
Corporate and other
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (16)	$ (306)
Fair Value - Less than twelve months	$ 1,118	$ 10,378
Fair Value as % of Cost - Less than twelve months	99.00%	97.00%
Unrealized Loss - Twelve months or more	$ (14)	$ (128)
Fair Value - Twelve months or more	$ 370	$ 2,078
Fair Value as % of Cost - Twelve months or more	96.00%	94.00%

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Investments - Schedule of sources of net investment income (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Net Investment Income [Line Items]
Investment income		$ 593	$ 533	$ 1,727	$ 1,568
Investment expenses		(5)	(6)	(17)	(16)
Net investment income		588	527	1,710	1,552
Fixed maturities
Net Investment Income [Line Items]
Investment income		475	440	1,422	1,283
Equity in earnings of partnerships and similar investments
Net Investment Income [Line Items]
Investment income		43	41	109	128
Other
Net Investment Income [Line Items]
Investment income		36	31	95	82
Accounting Standards Update 2016-01 | Equity securities
Net Investment Income [Line Items]
Investment income	[1]	17	2	35	16
Investment income | Equity securities
Net Investment Income [Line Items]
Investment income		$ 22	$ 19	$ 66	$ 59

[1] 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.

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Derivatives - Narrative (Details) $ in Millions	3 Months Ended			9 Months Ended
	Sep. 30, 2019 USD ($) swap	Sep. 30, 2018 USD ($)	Jun. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) swap	Sep. 30, 2018 USD ($)	Jun. 30, 2019 USD ($)	Dec. 31, 2018 USD ($)
Derivative Instruments, Gain (Loss) [Line Items]
Carrying value of collateral received to support purchased call options	$ 472			$ 472			$ 103
Total realized/unrealized gains (losses) included in net income for the embedded derivatives related to unlocking of actuarial assumptions	$ 181		$ (44)
Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Number of interest rate swaps designated and qualifying as a cash flow hedges | swap	14			14
Derivative, notional amount	$ 2,110			$ 2,110			2,350
Gain (loss) reclassified from AOCI into net investment income		$ (1)		(1)	$ (2)
Collateral receivable supporting interest rate swaps	19			19			135
Other assets | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Net derivatives, at fair value	69			69			16
Other liabilities | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Net derivatives, at fair value							$ (46)
Contract termination | Cash Flow Hedges | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Derivative, notional amount	78			78		$ 138
Maximum | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) reclassified from AOCI into net investment income	(1)
Maximum | Other liabilities | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Net derivatives, at fair value	$ (1)			$ (1)

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Income Taxes - Reconciliation of income taxes at the statutory rate to the provision for income taxes (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Effective Income Tax Rate Reconciliation, Amount [Abstract]
Earnings before income taxes (“EBT”)	$ 177	$ 244	$ 849	$ 678
Income taxes at statutory rate	37	51	178	142
Effect of adjustment to prior year taxes	(3)	(9)	(3)	(9)
Effect of tax exempt interest	(4)	(3)	(11)	(10)
Effect of dividends received deduction	(1)	(1)	(3)	(3)
Effect of employee stock ownership plan dividends paid deduction	0	(1)	(1)	(2)
Effect of stock-based compensation	(2)	0	(6)	(7)
Effect of nondeductible expenses	2	1	6	5
Effect of change in valuation allowance	4	1	7	3
Effect of foreign operations	0	0	0	3
Effect of other income tax reconciliation	1	2	4	4
Provision for income taxes as shown on the Statement of Earnings	$ 34	$ 41	$ 171	$ 126
Effective Income Tax Rate Reconciliation, Percent [Abstract]
Income taxes at statutory rate as a percentage of EBT	21.00%	21.00%	21.00%	21.00%
Effect of adjustment to prior year taxes as a percentage of EBT	(2.00%)	(4.00%)	0.00%	(1.00%)
Effect of tax exempt interest as a percentage of EBT	(2.00%)	(1.00%)	(1.00%)	(1.00%)
Effect of dividends received deduction as a percentage of EBT	(1.00%)	0.00%	0.00%	0.00%
Effect of employee stock ownership plan dividends paid deduction as a percentage of EBT	0.00%	0.00%	0.00%	0.00%
Effect of stock-based compensation as a percentage of EBT	(1.00%)	0.00%	(1.00%)	(1.00%)
Effect of nondeductible expenses as a percentage of EBT	1.00%	0.00%	1.00%	1.00%
Effect of change in valuation allowance as a percentage of EBT	2.00%	0.00%	1.00%	0.00%
Effect of foreign operations as a percentage of EBT	0.00%	0.00%	0.00%	0.00%
Effect of other income tax reconciliation as a percentage of EBT	1.00%	1.00%	(1.00%)	0.00%
Provision for income taxes as shown on the Statement of Earnings as a percentage of EBT	19.00%	17.00%	20.00%	19.00%

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Shareholders' Equity - Preferred stock authorized for issuance (Details)	Sep. 30, 2019 $ / shares shares
Voting Preferred Stock
Class of Stock [Line Items]
Preferred Stock, shares authorized | shares	12,500,000
Preferred Stock, par value (in USD per share) | $ / shares	$ 0
Nonvoting Preferred Stock
Class of Stock [Line Items]
Preferred Stock, shares authorized | shares	12,500,000
Preferred Stock, par value (in USD per share) | $ / shares	$ 0

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Investments - Equity securities reported at fair value (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Debt and Equity Securities, FV-NI [Line Items]
Equity securities	$ 2,004	$ 1,814
Common stocks
Debt and Equity Securities, FV-NI [Line Items]
Equity securities, at cost	1,166	1,241
Equity securities	1,261	1,148
Equity securities, fair value in excess of cost	95	(93)
Perpetual preferred stocks
Debt and Equity Securities, FV-NI [Line Items]
Equity securities, at cost	732	705
Equity securities	743	666
Equity securities, fair value in excess of cost	11	(39)
Equity securities
Debt and Equity Securities, FV-NI [Line Items]
Equity securities, at cost	1,898	1,946
Equity securities	2,004	1,814
Equity securities, fair value in excess of cost	$ 106	$ (132)

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Fair Value Measurements - Changes in balances of Level 3 financial liabilities carried at fair value (Details) - USD ($) $ in Millions		3 Months Ended			9 Months Ended
		Sep. 30, 2019		Sep. 30, 2018	Sep. 30, 2019		Sep. 30, 2018
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Financial liabilities, Beginning Balance		$ (3,541)		$ (2,776)	$ (2,720)		$ (2,542)
Total realized/unrealized gains (losses) included in Net income		70		(223)	(643)		(286)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)		0		0	0		0
Purchases and issuances		(63)		(151)	(276)		(395)
Sales and settlements		65		45	170		118
Transfer into Level 3		0		0	0		0
Transfer out of Level 3		0		0	0		0
Financial liabilities, Ending Balance	[1]	(3,469)		(3,105)	(3,469)		(3,105)
Embedded derivatives
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Financial liabilities, Beginning Balance		(3,541)		(2,776)	(2,720)		(2,542)
Total realized/unrealized gains (losses) included in Net income		70	[2]	(223)	(643)	[3]	(286)	[3]
Total realized/unrealized gains (losses) included in other comprehensive income (loss)		0		0	0		0
Purchases and issuances		(63)		(151)	(276)		(395)
Sales and settlements		65		45	170		118
Transfer into Level 3		0		0	0		0
Transfer out of Level 3		0		0	0		0
Financial liabilities, Ending Balance		$ (3,469)		$ (3,105)	$ (3,469)		$ (3,105)

[1] 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.

[2] 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 $181 million in the third quarter of 2019.

[3] 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 $181 million in the first nine months of 2019 compared to a loss of $44 million in the first nine months of 2018.

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Fair Value Measurements - Narrative (Details) $ in Millions	3 Months Ended				9 Months Ended
	Sep. 30, 2019 USD ($) basispoint security stock	Sep. 30, 2018 USD ($) stock	Jun. 30, 2018 USD ($)	Mar. 31, 2018 USD ($)	Sep. 30, 2019 USD ($) basispoint security professional stock	Sep. 30, 2018 USD ($) stock	Dec. 31, 2018 USD ($)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
AFG's internal investment professionals | professional					20
Level 3 assets as a percentage of total assets measured at fair value					7.00%
Percentage of level 3 assets that were priced using non-binding broker quotes					49.00%
Level 3 assets that were priced using non-binding broker quotes					$ 1,720
Percent of spreads between 400 and 700 basis points	80.00%				80.00%
Fair value of equity securities transferred into Level 3	$ 88	$ 13			$ 145	$ 100
Total realized/unrealized gains (losses) included in net income for the embedded derivatives related to unlocking of actuarial assumptions	181		$ (44)
Life contingent annuities	250				$ 250		$ 232
Fixed-indexed and variable-indexed annuities (embedded derivative), majority of future years | Minimum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Unobservable input surrenders used in Level 3 fair value determination					7.00%
Fixed-indexed and variable-indexed annuities (embedded derivative), majority of future years | Maximum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Unobservable input surrenders used in Level 3 fair value determination					10.00%
Fixed-indexed and variable-indexed annuities (embedded derivative)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value of derivatives in annuity benefits accumulated measured using a discounted cash flow approach	3,470				$ 3,470
Fixed-indexed and variable-indexed annuities (embedded derivative) | Minimum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Unobservable input surrenders used in Level 3 fair value determination					3.00%
Fixed-indexed and variable-indexed annuities (embedded derivative) | Maximum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Unobservable input surrenders used in Level 3 fair value determination					22.00%
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Internally developed level 3 assets	$ 1,480				$ 1,480
Perpetual preferred stocks
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Number of stocks that transferred from Level 2 to Level 1, during the period | stock	2
Number of stocks transferred from Level 2 to Level 1 | stock					2
Fair Value of assets transferred Level 2 to Level 1, during the period	$ 11
Fair Value of assets transferred Level 2 to Level 1	11				$ 11
Number of stocks transferred from Level 1 to Level 2 | stock					1	2
Fair Value of assets transferred Level 1 to Level 2	6	$ 6			$ 6	$ 6
Number of stocks transferred from Level 1 to Level 2, during the period | stock		0
Fixed maturities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value of equity securities transferred into Level 3	54	$ 13			89	70
Equity securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value of equity securities transferred into Level 3	34	$ 0		$ 29	56	30
Third party pricing model | Fixed maturities | Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Internally developed level 3 assets	$ 998				$ 998
Securities priced using a third-party model | security	175				175
Basis points credit spread applied by management using third party model | basispoint	568				568
Third party pricing model | Fixed maturities | Level 3 | Minimum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Basis points credit spread applied by management using third party model | basispoint	400				400
Third party pricing model | Fixed maturities | Level 3 | Maximum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Basis points credit spread applied by management using third party model | basispoint	700				700
Not Designated as Hedging Instrument | Annuity benefits | Fixed-Indexed Annuities (Embedded Derivative)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total realized/unrealized gains (losses) included in net income for the embedded derivatives related to unlocking of actuarial assumptions	$ 181				$ 181	$ (44)
Credit spread used in pricing model | Third party pricing model | Fixed maturities | Level 3 | Minimum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Basis points credit spread applied by management using third party model | basispoint	100				100
Credit spread used in pricing model | Third party pricing model | Fixed maturities | Level 3 | Maximum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Basis points credit spread applied by management using third party model | basispoint	2,966				2,966

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Consolidated Balance Sheet (Unaudited) (Parenthetical) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Statement of Financial Position [Abstract]
Fixed maturities, available for sale at amortized cost	$ 43,334	$ 41,837
Common Stock, par value (USD per share)	$ 0	$ 0
Common Stock, shares authorized	200,000,000	200,000,000
Common Stock, shares outstanding	90,127,423	89,291,724

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Consolidated Statement of Changes in Equity (Unaudited) (Parenthetical) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement of Stockholders' Equity [Abstract]
Cash dividends per Common Share (USD per share)	$ 0.4	$ 0.35	$ 2.70	$ 2.55

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Deferred Policy Acquisition Costs - Progression of deferred policy acquisition costs (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Movement Analysis of Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Deferred policy acquisition costs and present value of future profits, beginning balance		$ 1,203	$ 1,582	$ 1,682	$ 1,216
Deferred policy acquisition costs and present value of future profits, additions		232	247	734	718
Deferred policy acquisition costs and present value of future profits, periodic amortization		(227)	(236)	(622)	(699)
Deferred policy acquisition costs and present value of future profits, annuity unlocking		(77)		(77)	29
Deferred policy acquisition costs and present value of future profits, change included in realized gains		3	3	6	9
Deferred policy acquisition costs and present value of future profits, foreign currency translation		(1)	0	(1)	(1)
Deferred policy acquisition costs and present value of future profits, change in unrealized		(169)	73	(758)	397
Deferred policy acquisition costs and present value of future profits, ending balance		964	1,669	964	1,669
P&C
Movement Analysis of Deferred Policy Acquisition Costs [Roll Forward]
Deferred policy acquisition costs, beginning balance		330	298	299	270
Deferred policy acquisition costs, additions		188	181	569	524
Deferred policy acquisition costs, periodic amortization		(194)	(171)	(544)	(485)
Deferred policy acquisition costs, foreign currency translation		(1)	0	(1)	(1)
Deferred policy acquisition costs, ending balance		323	308	323	308
Annuity and Other
Movement Analysis of Deferred Policy Acquisition Costs [Roll Forward]
Deferred policy acquisition costs, beginning balance		1,373	1,243	1,285	1,217
Deferred policy acquisition costs, additions		43	65	163	192
Deferred policy acquisition costs, periodic amortization		(29)	(58)	(63)	(193)
Deferred policy acquisition costs, annuity unlocking		(76)		(76)	28
Deferred policy acquisition costs, change included in realized gains		3	3	5	9
Deferred policy acquisition costs, ending balance		1,314	1,253	1,314	1,253
Movement in Deferred Sales Inducements [Roll Forward]
Deferred sales inducements, beginning balance		81	94	86	102
Deferred sales inducements, additions		1	1	2	2
Deferred sales inducements, periodic amortization		(3)	(5)	(10)	(15)
Deferred sales inducements, annuity unlocking		(1)		(1)	1
Deferred sales inducements, change included in realized gains		0	0	1	0
Deferred sales inducements, ending balance		78	90	78	90
Movement in Present Value of Future Insurance Profits [Roll Forward]
Present value of future profits, beginning balance		38	45	42	49
Present value of future profits, periodic amortization		(1)	(2)	(5)	(6)
Present value of future profits, annuity unlocking		0		0	0
Present value of future profits, ending balance		37	43	37	43
Movement in Unrealized Gains (Losses) Related to Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Unrealized investment gains (losses), beginning balance	[1]	(619)	(98)	(30)	(422)
Unrealized investment gains (losses), change in unrealized	[1]	(169)	73	(758)	397
Unrealized investment gains (losses), ending balance	[1]	(788)	(25)	(788)	(25)
Movement Analysis of Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Deferred policy acquisition costs and present value of future profits, beginning balance		873	1,284	1,383	946
Deferred policy acquisition costs and present value of future profits, additions		44	66	165	194
Deferred policy acquisition costs and present value of future profits, periodic amortization		(33)	(65)	(78)	(214)
Deferred policy acquisition costs and present value of future profits, annuity unlocking		(77)		(77)	29
Deferred policy acquisition costs and present value of future profits, change included in realized gains		3	3	6	9
Deferred policy acquisition costs and present value of future profits, change in unrealized		(169)	73	(758)	397
Deferred policy acquisition costs and present value of future profits, ending balance		641	1,361	641	1,361
Excluding Unrealized Gains | Annuity and Other
Movement Analysis of Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Deferred policy acquisition costs and present value of future profits, beginning balance		1,492	1,382	1,413	1,368
Deferred policy acquisition costs and present value of future profits, change in unrealized		0	0	0	0
Deferred policy acquisition costs and present value of future profits, ending balance		$ 1,429	$ 1,386	$ 1,429	$ 1,386

[1] Adjustments to DPAC related to net unrealized gains/losses on securities and cash flow hedges.

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Long-Term Debt - Narrative (Details) - USD ($)	9 Months Ended
	Sep. 30, 2019	Mar. 31, 2019	Dec. 31, 2018
Long-term Debt, Fiscal Year Maturity [Abstract]
Scheduled principal payments on debt remainder of fiscal year	$ 0
Scheduled principal payments on debt in year two	0
Scheduled principal payments on debt in year three	0
Scheduled principal payments on debt in year four	0
Scheduled principal payments on debt in year five	0
Scheduled principal payments on debt in year six	0
AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Revolving credit line	500,000,000
Amount borrowed under revolving credit facility	$ 0		$ 0
Interest rate description for revolving credit facility	1.00% to 1.875% (currently 1.375%) over LIBOR
LIBOR | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on revolving debt facility	1.375%
LIBOR | AFG | Minimum
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on revolving debt facility	1.00%
LIBOR | AFG | Maximum
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on revolving debt facility	1.875%
Senior Notes | 4.50% Senior Notes due June 2047 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	4.50%
Senior Notes | 3.50% Senior Notes due August 2026 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	3.50%
Subordinated Debentures | 6-1/4% Subordinated Debentures due September 2054 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	6.25%
Subordinated Debentures | 6% Subordinated Debentures due November 2055 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	6.00%
Subordinated Debentures | 5.875% Subordinated Debentures due in March 2059 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Subordinated Debentures, aggregate principal amount		$ 125,000,000
Interest rate on debt instruments	5.875%

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Shareholders' Equity

9 Months Ended

Sep. 30, 2019

Stockholders' Equity Note [Abstract]

Shareholders' Equity

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.

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
Quarter ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	136		$	(29	)	$	107		$	—		$	107
Reclassification adjustment for realized (gains) losses included in net earnings (a)				1			—			1			—			1
Total net unrealized gains on securities (b)	$	812		137			(29		)	108			—			108			$	—		$	920
Net unrealized gains on cash flow hedges	18			9			(2		)	7			—			7			—			25
Foreign currency translation adjustments	(13		)	(6		)	(1		)	(7		)	(1		)	(8		)	—			(21		)
Pension and other postretirement plans adjustments	(8		)	1			—			1			—			1			—			(7		)
Total	$	809		$	141		$	(32	)	$	109		$	(1	)	$	108		$	—		$	917
Quarter ended September 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(122	)	$	26		$	(96	)	$	—		$	(96	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(2		)	—			(2		)	—			(2		)
Total net unrealized gains (losses) on securities (b)	$	191		(124		)	26			(98		)	—			(98		)	$	—		$	93
Net unrealized losses on cash flow hedges	(27		)	(6		)	1			(5		)	—			(5		)	—			(32		)
Foreign currency translation adjustments	(9		)	—			—			—			—			—			—			(9		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			—			(8		)
Total	$	147		$	(130	)	$	27		$	(103	)	$	—		$	(103	)	$	—		$	44
Nine months ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	1,073		$	(226	)	$	847		$	—		$	847
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(13		)	3			(10		)	—			(10		)
Total net unrealized gains on securities (b)	$	83		1,060			(223		)	837			—			837			$	—		$	920
Net unrealized gains (losses) on cash flow hedges	(11		)	46			(10		)	36			—			36			—			25
Foreign currency translation adjustments	(16		)	(3		)	—			(3		)	(2		)	(5		)	—			(21		)
Pension and other postretirement plans adjustments	(8		)	1			—			1			—			1			—			(7		)
Total	$	48		$	1,104		$	(233	)	$	871		$	(2	)	$	869		$	—		$	917
Nine months ended September 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(662	)	$	139		$	(523	)	$	—		$	(523	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(4		)	1			(3		)	—			(3		)
Total net unrealized gains (losses) on securities (b)	$	840		(666		)	140			(526		)	—			(526		)	$	(221	)	$	93
Net unrealized losses on cash flow hedges	(13		)	(24		)	5			(19		)	—			(19		)	—			(32		)
Foreign currency translation adjustments	(6		)	(2		)	(1		)	(3		)	—			(3		)	—			(9		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			—			(8		)
Total	$	813		$	(692	)	$	144		$	(548	)	$	—		$	(548	)	$	(221	)	$	44

(a)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	Realized gains (losses) on securities
Tax	Provision for income taxes

(b) Includes net unrealized gains of $55 million at September 30, 2019 compared to $59 million at June 30, 2019 and $58 million at December 31, 2018 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.

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 months of 2019, AFG issued 232,635 shares of restricted Common Stock (fair value of $99.28 per share) under the Stock Incentive Plan. AFG did not grant any stock options in the first nine months of 2019.

Total compensation expense related to stock incentive plans of AFG and its subsidiaries was $5 million and $6 million in the third quarters of 2019 and 2018, respectively, and $17 million in both the first nine months of 2019 and 2018.

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Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Basis of Presentation

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. 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, 2019, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

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.

Fair Value Measurements

Fair Value Measurements   Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first nine months of 2019.

Investments

Investments On January 1, 2018, AFG adopted Accounting Standards Update (“ASU”) 2016-01, which 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 December 31, 2017, AFG had $1.60 billion in equity securities classified as “available for sale” under the prior guidance with holding gains and losses included in accumulated other comprehensive income (“AOCI”) instead of net earnings. At the date of adoption, the $221 million net unrealized gain on equity securities included in AOCI was reclassified to retained earnings as the cumulative effect of an accounting change. The cumulative effect of the accounting change also includes the net unrealized gain on AFG’s small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under the new guidance ($4 million net of tax at the date of adoption).

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

Fixed maturity securities classified as “available for sale” are reported at fair value with unrealized gains and losses included in AOCI 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 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 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.

Gains or losses on fixed maturity securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment is charged to earnings (included in realized gains (losses) on securities) and the cost basis of that investment is reduced. If management can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment 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 of an other-than-temporary impairment 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 impairment charge. Both components are shown in the statement of earnings. 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 charge to earnings is recorded to reduce the amortized cost of that security to fair value.

Derivatives

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

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

Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI and are reclassified into earnings when the variability of the cash flows from the hedged items impacts earnings. When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item in the statement of earnings as the cash flows from the hedged item. AFG uses interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities.

Goodwill

Goodwill   Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net assets. 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

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 insurance subsidiaries also assume reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

An AFG subsidiary cedes life insurance policies to a third party on a funds withheld basis whereby the subsidiary retains the assets (securities) associated with the reinsurance contract. Interest is credited to the reinsurer based on the actual investment

performance of the retained assets. This reinsurance contract is considered to contain an embedded derivative (that must be adjusted to fair value) because the yield on the payable is based on a specific block of the ceding company’s assets, rather than the overall creditworthiness of the ceding company. AFG determined that changes in the fair value of the underlying portfolio of fixed maturity securities is an appropriate measure of the value of the embedded derivative. The securities related to this contract are classified as “trading.” The adjustment to fair value on the embedded derivative offsets the investment income recorded on the adjustment to fair value of the related trading portfolio.

Deferred Policy Acquisition Costs (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. DPAC also includes capitalized costs associated with sales inducements offered to fixed annuity policyholders such as enhanced interest rates and premium and persistency bonuses.

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

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

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

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

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

Managed Investment Entities

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.

Unpaid Losses and Loss Adjustment Expenses

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

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

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

Unearned Revenue

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

Life, Accident and Health Reserves

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

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

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

Debt Issuance Costs

Debt Issuance Costs   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

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

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

Leases

Leases   On January 1, 2019, AFG adopted ASU 2016-02, which requires entities that lease assets for terms longer than one year to recognize 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. As permitted under the ASU, AFG adopted the guidance on a modified retrospective basis (comparative periods were not adjusted) and elected the following accounting policies and practical expedients:

• exclude leases with a term of 12 months or less from the calculation of lease assets and liabilities,

• not separate lease and non-lease components except for buildings (office space and storage facilities),

• for contracts existing at the date of adoption – not reassess whether a contract is a lease or contains a lease, how initial direct costs were accounted for or whether the lease is an operating or finance lease, and

• use hindsight to determine the lease term for leases existing at the date of adoption.

Adoption of the new guidance resulted in AFG recognizing a lease liability of $198 million (included in other liabilities) and a corresponding right-of-use asset of $174 million (which is presented net of $24 million in deferred rent and lease incentives) on January 1, 2019. Deferred rent and lease incentives were recognized as liabilities under the previous guidance and result from the straight-line expensing of operating leases. The adoption of the new guidance did not have a material effect on the AFG’s results of operations or liquidity. See Note K — “Leases” for additional disclosures.

Noncontrolling Interests

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

Premium Recognition

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 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

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

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. See Note L — “Shareholders’ Equity” for further information.

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

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

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 2019 and 2018 — 1.1 million and 1.6 million; first nine months of 2019 and 2018 — 1.2 million and 1.7 million, respectively.

There were no anti-dilutive potential common shares in the third quarter or first nine months of 2019 or 2018.

Statement of Cash Flows

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

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Derivatives (Tables)

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives included in Balance Sheet at fair value

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, 2019				December 31, 2018
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	118	$	—	$	109	$	—
Public company warrants	Equity securities	—		—		—		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		3,469		—		2,720
Equity index call options	Equity index call options	750		—		184		—
Equity index put options	Other liabilities	—		1		—		1
Reinsurance contracts (embedded derivative)	Other liabilities	—		4		—		2
		$	868	$	3,474	$	293	$	2,723

Summary of gain (loss) included in the Statement of Earnings for changes in the fair value of derivatives

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 months of 2019 and 2018 (in millions): 

		Three months ended September 30,						Nine months ended September 30,
Derivative	Statement of Earnings Line	2019			2018			2019			2018
MBS with embedded derivatives	Realized gains (losses) on securities	$	3		$	(3	)	$	15		$	(8	)
Public company warrants	Realized gains (losses) on securities	(1		)	1			(1		)	—
Fixed-indexed and variable-indexed annuities (embedded derivative) (*)	Annuity benefits	70			(223		)	(643		)	(286		)
Equity index call options	Annuity benefits	30			219			544			271
Equity index put options	Annuity benefits	—			—			1			—
Reinsurance contract (embedded derivative)	Net investment income	—			—			(2		)	2
		$	102		$	(6	)	$	(86	)	$	(21	)

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Fair Value Measurements - Changes in balances of Level 3 financial assets carried at fair value (Details) - USD ($) $ in Millions	3 Months Ended			9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	$ 3,106	$ 2,937	$ 2,290	$ 3,521	$ 2,290
Total realized/unrealized gains (losses) included in Net income	(8)	(6)		0	(5)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	23	(8)		87	(31)
Purchases and issuances	399	405		1,172	1,268
Sales and settlements	(90)	(89)		(488)	(241)
Transfer into Level 3	88	13		145	100
Transfer out of Level 3	(2)	(34)		(921)	(163)
Financial assets, Ending Balance	3,516	3,218		3,516	3,218
Fixed maturities
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	2,710	2,684	2,102	3,164	2,102
Total realized/unrealized gains (losses) included in Net income	0	0		10	(8)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	23	(8)		87	(31)
Purchases and issuances	381	324		1,134	1,157
Sales and settlements	(88)	(89)		(485)	(237)
Transfer into Level 3	54	13		89	70
Transfer out of Level 3	(2)	(17)		(921)	(146)
Financial assets, Ending Balance	3,078	2,907		3,078	2,907
U.S. government agency
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	8	8	8	9	8
Total realized/unrealized gains (losses) included in Net income	0	0		0	0
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0	0		0	0
Purchases and issuances	0	0		0	0
Sales and settlements	0	0		(1)	0
Transfer into Level 3	0	0		0	0
Transfer out of Level 3	0	0		0	0
Financial assets, Ending Balance	8	8		8	8
State and municipal
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	82	61	148	59	148
Total realized/unrealized gains (losses) included in Net income	0	0		0	0
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	2	0		9	(2)
Purchases and issuances	0	0		0	0
Sales and settlements	0	(1)		(2)	(2)
Transfer into Level 3	18	0		36	0
Transfer out of Level 3	0	0		0	(84)
Financial assets, Ending Balance	102	60		102	60
Residential MBS
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	139	147	122	197	122
Total realized/unrealized gains (losses) included in Net income	1	(2)		10	(9)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	(1)	(2)		(6)	(2)
Purchases and issuances	0	0		0	0
Sales and settlements	(4)	(6)		(14)	(17)
Transfer into Level 3	22	13		24	70
Transfer out of Level 3	(1)	(5)		(55)	(19)
Financial assets, Ending Balance	156	145		156	145
Commercial MBS
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	50	56	36	56	36
Total realized/unrealized gains (losses) included in Net income	1	2		3	1
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0	0		0	0
Purchases and issuances	0	(1)		0	20
Sales and settlements	0	0		(3)	0
Transfer into Level 3	4	0		4	0
Transfer out of Level 3	0	0		(5)	0
Financial assets, Ending Balance	55	57		55	57
Collateralized loan obligations
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	50	212	180	116	180
Total realized/unrealized gains (losses) included in Net income	(2)	0		(5)	(2)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	1	(2)		7	(3)
Purchases and issuances	8	0		8	35
Sales and settlements	0	0		0	0
Transfer into Level 3	0	0		13	0
Transfer out of Level 3	0	0		(82)	0
Financial assets, Ending Balance	57	210		57	210
Other asset-backed securities
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	367	792	564	731	564
Total realized/unrealized gains (losses) included in Net income	0	0		0	0
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	1	(1)		6	(3)
Purchases and issuances	49	13		141	318
Sales and settlements	(3)	(23)		(135)	(80)
Transfer into Level 3	0	0		0	0
Transfer out of Level 3	0	0		(329)	(18)
Financial assets, Ending Balance	414	781		414	781
Corporate and other
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	2,014	1,408	1,044	1,996	1,044
Total realized/unrealized gains (losses) included in Net income	0	0		2	2
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	20	(3)		71	(21)
Purchases and issuances	324	312		985	784
Sales and settlements	(81)	(59)		(330)	(138)
Transfer into Level 3	10	0		12	0
Transfer out of Level 3	(1)	(12)		(450)	(25)
Financial assets, Ending Balance	2,286	1,646		2,286	1,646
Equity securities
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	377	230	165	336	165
Total realized/unrealized gains (losses) included in Net income	(7)	(5)		(7)	9
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0	0		0	0
Purchases and issuances	18	81		38	106
Sales and settlements	(2)	0		(3)	(4)
Transfer into Level 3	34	0	29	56	30
Transfer out of Level 3	0	(17)		0	(17)
Financial assets, Ending Balance	420	289		420	289
Assets of MIE
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	19	23	$ 23	21	23
Total realized/unrealized gains (losses) included in Net income	(1)	(1)		(3)	(6)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0	0		0	0
Purchases and issuances	0	0		0	5
Sales and settlements	0	0		0	0
Transfer into Level 3	0	0		0	0
Transfer out of Level 3	0	0		0	0
Financial assets, Ending Balance	$ 18	$ 22		$ 18	$ 22

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Segments of Operations - Earnings before income taxes by segment and sub-segment (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Segment Reporting Information [Line Items]
Earnings before realized gains (losses) and income taxes		$ 195	$ 210	$ 627	$ 706
Realized gains (losses) on securities		(18)	34	222	(28)
Earnings before income taxes		177	244	849	678
Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		54	38	200	201
Investment and other income, net		118	101	328	300
Earnings before realized gains (losses) and income taxes		172	139	528	501
Annuity
Segment Reporting Information [Line Items]
Earnings before realized gains (losses) and income taxes		73	117	234	341
Other
Segment Reporting Information [Line Items]
Earnings before realized gains (losses) and income taxes	[1]	(50)	(46)	(135)	(136)
Specialty Property and transportation | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		38	0	81	56
Specialty casualty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		23	49	106	119
Specialty financial | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		26	9	60	46
Other specialty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		1	(3)	(11)	(1)
Other lines | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting	[2]	$ (34)	$ (17)	$ (36)	$ (19)

[1] Includes holding company interest and expenses, including special charges of $11 million and $9 million in the third quarter of 2019 and 2018, respectively, to increase A&E reserves related to AFG’s former railroad and manufacturing operations.

[2] Includes special charges of $18 million in both the third quarter of 2019 and 2018, respectively, to increase asbestos and environmental (“A&E”) reserves

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Investments - Available for sale fixed maturities (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	$ 43,334	$ 41,837
Available for sale (AFS) fixed maturities	45,503	41,997
Total fixed maturities
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	43,334	41,837
Fixed maturities, Available for sale, Gross Unrealized, Gains	2,233	763
Fixed maturities, Available for sale, Gross Unrealized, Losses	(64)	(603)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	2,169	160
Available for sale (AFS) fixed maturities	45,503	41,997
U.S. Government and government agencies
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	225	235
Fixed maturities, Available for sale, Gross Unrealized, Gains	5	1
Fixed maturities, Available for sale, Gross Unrealized, Losses	(1)	(3)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	4	(2)
Available for sale (AFS) fixed maturities	229	233
States, municipalities and political subdivisions
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	6,519	6,825
Fixed maturities, Available for sale, Gross Unrealized, Gains	446	169
Fixed maturities, Available for sale, Gross Unrealized, Losses	(1)	(55)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	445	114
Available for sale (AFS) fixed maturities	6,964	6,939
Foreign government
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	160	140
Fixed maturities, Available for sale, Gross Unrealized, Gains	4	2
Fixed maturities, Available for sale, Gross Unrealized, Losses	0	0
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	4	2
Available for sale (AFS) fixed maturities	164	142
Residential MBS
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	2,274	2,476
Fixed maturities, Available for sale, Gross Unrealized, Gains	292	277
Fixed maturities, Available for sale, Gross Unrealized, Losses	(4)	(9)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	288	268
Available for sale (AFS) fixed maturities	2,562	2,744
Commercial MBS
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	928	905
Fixed maturities, Available for sale, Gross Unrealized, Gains	38	17
Fixed maturities, Available for sale, Gross Unrealized, Losses	0	(2)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	38	15
Available for sale (AFS) fixed maturities	966	920
Collateralized loan obligations
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	4,319	4,350
Fixed maturities, Available for sale, Gross Unrealized, Gains	13	1
Fixed maturities, Available for sale, Gross Unrealized, Losses	(18)	(73)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	(5)	(72)
Available for sale (AFS) fixed maturities	4,314	4,278
Other asset-backed securities
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	5,540	5,431
Fixed maturities, Available for sale, Gross Unrealized, Gains	201	129
Fixed maturities, Available for sale, Gross Unrealized, Losses	(10)	(27)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	191	102
Available for sale (AFS) fixed maturities	5,731	5,533
Corporate and other
Debt Securities, Available-for-sale [Line Items]
Fixed maturities, Available for sale, Amortized Cost	23,369	21,475
Fixed maturities, Available for sale, Gross Unrealized, Gains	1,234	167
Fixed maturities, Available for sale, Gross Unrealized, Losses	(30)	(434)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	1,204	(267)
Available for sale (AFS) fixed maturities	$ 24,573	$ 21,208

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Managed Investment Entities - Narrative (Details) $ in Millions	1 Months Ended	9 Months Ended
	Mar. 31, 2018 USD ($) collateralizedloanobligation	Sep. 30, 2019 USD ($) collateralizedloanobligation	Sep. 30, 2018 USD ($) collateralizedloanobligation	Dec. 31, 2018 USD ($)
Variable Interest Entity [Line Items]
Percentage of investment of most subordinate debt tranche, Minimum		15.00%
Percentage of investment of most subordinate debt tranche, Maximum		60.90%
Number of collateralized loan obligation entities | collateralizedloanobligation		11
Number of collateralized loan obligation entities formed during the period | collateralizedloanobligation	1
Proceeds received by subsidiaries related to sales and redemptions of managed investment entities liabilities			$ 45
Number of collateralized loan obligation entities substantially liquidated, during the period | collateralizedloanobligation			1
Difference between aggregate unpaid principal balance and fair value of CLOs' fixed maturity investments		$ 165		$ 232
Difference between aggregate unpaid principal balance and carrying value of CLOs' debt		154		241
Carrying amount of CLO loans in default		8
Aggregate unpaid principal balance of variable interest entity loans in default		21		0
Available for sale (AFS) fixed maturities		45,503		41,997
Variable interest entity, primary beneficiary
Variable Interest Entity [Line Items]
Aggregate fair value of investment in collateralized loan obligations		179	$ 191	188
New Collateralized Loan Obligation Entities
Variable Interest Entity [Line Items]
Face value of liabilities issued by managed investment entities on issuance date	$ 463
Face amount of managed investment entities liabilities purchased by subsidiaries at issuance date	$ 31
Subordinated Debt Obligations | Variable interest entity, primary beneficiary
Variable Interest Entity [Line Items]
Aggregate fair value of investment in collateralized loan obligations		116
Maximum
Variable Interest Entity [Line Items]
Proceeds received by subsidiaries related to sales and redemptions of managed investment entities liabilities		1
Collateralized loan obligations
Variable Interest Entity [Line Items]
Available for sale (AFS) fixed maturities		4,314		4,278
Collateralized loan obligations | Managed by third parties
Variable Interest Entity [Line Items]
Available for sale (AFS) fixed maturities		$ 4,310		$ 4,280

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Long-Term Debt - Schedule of long-term debt (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Summary of Carrying value of long-term debt
Principal	$ 1,443	$ 1,318
Discount and Issue Costs	(20)	(16)
Carrying Value	1,423	1,302
Senior Notes | AFG
Summary of Carrying value of long-term debt
Principal	1,018	1,018
Discount and Issue Costs	(6)	(6)
Carrying Value	1,012	1,012
Senior Notes | 4.50% Senior Notes due June 2047 | AFG
Summary of Carrying value of long-term debt
Principal	590	590
Discount and Issue Costs	(2)	(2)
Carrying Value	588	588
Senior Notes | 3.50% Senior Notes due August 2026 | AFG
Summary of Carrying value of long-term debt
Principal	425	425
Discount and Issue Costs	(4)	(4)
Carrying Value	421	421
Senior Notes | Other | AFG
Summary of Carrying value of long-term debt
Principal	3	3
Discount and Issue Costs	0	0
Carrying Value	3	3
Subordinated Debentures | AFG
Summary of Carrying value of long-term debt
Principal	425	300
Discount and Issue Costs	(14)	(10)
Carrying Value	411	290
Subordinated Debentures | 6-1/4% Subordinated Debentures due September 2054 | AFG
Summary of Carrying value of long-term debt
Principal	150	150
Discount and Issue Costs	(5)	(5)
Carrying Value	145	145
Subordinated Debentures | 6% Subordinated Debentures due November 2055 | AFG
Summary of Carrying value of long-term debt
Principal	150	150
Discount and Issue Costs	(5)	(5)
Carrying Value	145	145
Subordinated Debentures | 5.875% Subordinated Debentures due in March 2059 | AFG
Summary of Carrying value of long-term debt
Principal	125	0
Discount and Issue Costs	(4)	0
Carrying Value	$ 121	$ 0

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Consolidated Balance Sheet (Unaudited) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Assets:
Cash and cash equivalents	$ 2,693	$ 1,515
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $43,334 and $41,837)	45,503	41,997
Fixed maturities, trading at fair value	108	105
Equity securities, at fair value	2,004	1,814
Investments accounted for using the equity method	1,535	1,374
Mortgage loans	1,174	1,068
Policy loans	166	174
Equity index call options	750	184
Real estate and other investments	274	267
Total cash and investments	54,207	48,498
Recoverables from reinsurers	3,261	3,349
Prepaid reinsurance premiums	781	610
Agents’ balances and premiums receivable	1,403	1,234
Deferred policy acquisition costs	964	1,682
Assets of managed investment entities	4,702	4,700
Other receivables	1,187	1,090
Variable annuity assets (separate accounts)	601	557
Other assets	1,754	1,529
Goodwill	207	207
Total assets	69,067	63,456
Liabilities and Equity:
Unpaid losses and loss adjustment expenses	9,847	9,741
Unearned premiums	2,986	2,595
Annuity benefits accumulated	39,651	36,616
Life, accident and health reserves	613	635
Payable to reinsurers	867	752
Liabilities of managed investment entities	4,523	4,512
Long-term debt	1,423	1,302
Variable annuity liabilities (separate accounts)	601	557
Other liabilities	2,235	1,774
Total liabilities	62,746	58,484
Temporary equity
Redeemable noncontrolling interests	0	0
Shareholders’ equity:
Common Stock, no par value — 200,000,000 shares authorized — 90,127,423 and 89,291,724 shares outstanding	90	89
Capital surplus	1,292	1,245
Retained earnings	4,022	3,588
Accumulated other comprehensive income, net of tax	917	48
Total shareholders’ equity	6,321	4,970
Noncontrolling interests	0	2
Total equity	6,321	4,972
Total liabilities and equity	$ 69,067	$ 63,456

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Consolidated Statement of Changes in Equity (Unaudited) - USD ($) $ in Millions		Total	Total	Common Shares	Common Stock and Capital Surplus	Retained Earnings	Accumulated Other Comp. Income (Loss)	Noncontrolling interests
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cumulative effect of accounting change		$ 4	$ 4			$ 225	$ (221)
Beginning Balance, shares at Dec. 31, 2017				88,275,460
Beginning Balance at Dec. 31, 2017		5,331	5,330		$ 1,269	3,248	813	$ 1
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net earnings (losses) attributable to parent		559	559			559
Net earnings (losses) including portion attributable to nonredeemable noncontrolling interest		558						(1)
Other comprehensive income (loss), attributable to parent			(548)				(548)
Other comprehensive income (loss) including portion attributable to nonredeemable noncontrolling interest		(548)
Dividends		(227)	(227)			(227)
Shares issued:
Exercise of stock options, shares				635,364
Exercise of stock options		23	23		23
Restricted stock awards, shares				200,625
Other benefit plans, shares				86,229
Other benefit plans		10	10		10
Dividend reinvestment plan, shares				21,072
Dividend reinvestment plan		2	2		2
Stock-based compensation expense		17	17		17
Shares exchanged — benefit plans, shares				(26,520)
Shares exchanged — benefit plans		(3)	(3)		(1)	(2)
Forfeitures of restricted stock, shares				(3,522)
Other		(3)	(3)			(3)		0
Ending Balance, shares at Sep. 30, 2018				89,188,708
Ending Balance at Sep. 30, 2018		5,164	5,164		1,320	3,800	44	0
Beginning Balance, Redeemable Noncontrolling Interests at Dec. 31, 2017		3
Redeemable Noncontrolling Interest, Equity, Carrying Amount [Abstract]
Net earnings attributable to redeemable noncontrolling interests		(6)
Other		3
Ending Balance, Redeemable Noncontrolling Interests at Sep. 30, 2018		0
Beginning Balance, shares at Jun. 30, 2018				89,072,114
Beginning Balance at Jun. 30, 2018		5,084	5,084		1,309	3,628	147	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net earnings (losses) attributable to parent		204	204			204
Net earnings (losses) including portion attributable to nonredeemable noncontrolling interest		204						0
Other comprehensive income (loss), attributable to parent			(103)				(103)
Other comprehensive income (loss) including portion attributable to nonredeemable noncontrolling interest		(103)
Dividends		(31)	(31)			(31)
Shares issued:
Exercise of stock options, shares				103,638
Exercise of stock options		4	4		4
Restricted stock awards, shares				0
Other benefit plans, shares				12,553
Other benefit plans		2	2		2
Dividend reinvestment plan, shares				3,066
Dividend reinvestment plan		0	0		0
Stock-based compensation expense		6	6		6
Shares exchanged — benefit plans, shares				(2,210)
Shares exchanged — benefit plans		(1)	(1)		(1)	0
Forfeitures of restricted stock, shares				(453)
Other		(1)	(1)			(1)		0
Ending Balance, shares at Sep. 30, 2018				89,188,708
Ending Balance at Sep. 30, 2018		5,164	5,164		1,320	3,800	44	0
Beginning Balance, Redeemable Noncontrolling Interests at Jun. 30, 2018		0
Redeemable Noncontrolling Interest, Equity, Carrying Amount [Abstract]
Net earnings attributable to redeemable noncontrolling interests		(1)
Other		1
Ending Balance, Redeemable Noncontrolling Interests at Sep. 30, 2018		$ 0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cumulative effect of accounting change	[1]						0
Beginning Balance, shares at Dec. 31, 2018		89,291,724		89,291,724
Beginning Balance at Dec. 31, 2018		$ 4,972	4,970		1,334	3,588	48	2
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net earnings (losses) attributable to parent		686	686			686
Net earnings (losses) including portion attributable to nonredeemable noncontrolling interest		686						0
Other comprehensive income (loss), attributable to parent			869				869
Other comprehensive income (loss) including portion attributable to nonredeemable noncontrolling interest		869
Dividends		(242)	(242)			(242)
Shares issued:
Exercise of stock options, shares				591,233
Exercise of stock options		25	25		25
Restricted stock awards, shares				232,635
Other benefit plans, shares				58,488
Other benefit plans		6	6		6
Dividend reinvestment plan, shares				11,059
Dividend reinvestment plan		1	1		1
Stock-based compensation expense		17	17		17
Shares exchanged — benefit plans, shares				(47,069)
Shares exchanged — benefit plans		(5)	(5)		(1)	(4)
Forfeitures of restricted stock, shares				(10,647)
Other		$ (8)	(6)			(6)		(2)
Ending Balance, shares at Sep. 30, 2019		90,127,423		90,127,423
Ending Balance at Sep. 30, 2019		$ 6,321	6,321		1,382	4,022	917	0
Beginning Balance, Redeemable Noncontrolling Interests at Dec. 31, 2018		0
Redeemable Noncontrolling Interest, Equity, Carrying Amount [Abstract]
Net earnings attributable to redeemable noncontrolling interests		(8)
Other comprehensive income (loss) attributable to redeemable noncontrolling interests		2
Other		6
Ending Balance, Redeemable Noncontrolling Interests at Sep. 30, 2019		0
Beginning Balance, shares at Jun. 30, 2019				89,917,601
Beginning Balance at Jun. 30, 2019		6,090	6,090		1,367	3,914	809	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net earnings (losses) attributable to parent		147	147			147
Net earnings (losses) including portion attributable to nonredeemable noncontrolling interest		147						0
Other comprehensive income (loss), attributable to parent			108				108
Other comprehensive income (loss) including portion attributable to nonredeemable noncontrolling interest		108
Dividends		(36)	(36)			(36)
Shares issued:
Exercise of stock options, shares				191,227
Exercise of stock options		8	8		8
Restricted stock awards, shares				70
Other benefit plans, shares				17,345
Other benefit plans		2	2		2
Dividend reinvestment plan, shares				1,570
Dividend reinvestment plan		0	0		0
Stock-based compensation expense		5	5		5
Shares exchanged — benefit plans, shares				(80)
Shares exchanged — benefit plans		0	0		0	0
Forfeitures of restricted stock, shares				(310)
Other		$ (3)	(3)			(3)		0
Ending Balance, shares at Sep. 30, 2019		90,127,423		90,127,423
Ending Balance at Sep. 30, 2019		$ 6,321	$ 6,321		$ 1,382	$ 4,022	917	$ 0
Beginning Balance, Redeemable Noncontrolling Interests at Jun. 30, 2019		0
Redeemable Noncontrolling Interest, Equity, Carrying Amount [Abstract]
Net earnings attributable to redeemable noncontrolling interests		(4)
Other comprehensive income (loss) attributable to redeemable noncontrolling interests		1
Other		3
Ending Balance, Redeemable Noncontrolling Interests at Sep. 30, 2019		$ 0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cumulative effect of accounting change	[1]						$ 0

[1] 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.

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Deferred Policy Acquisition Costs (Tables)

9 Months Ended

Sep. 30, 2019

Deferred Policy Acquisition Costs Disclosures [Abstract]

Deferred Policy Acquisition Costs Details

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, 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		)	—			(77		)	—			(77		)	(77		)
Included in realized gains	—			3			—			—			3			—			3			3
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			(169		)	(169		)	(169		)
Balance at September 30, 2019	$	323		$	1,314		$	78		$	37		$	1,429		$	(788	)	$	641		$	964
Balance at June 30, 2018	$	298		$	1,243		$	94		$	45		$	1,382		$	(98	)	$	1,284		$	1,582
Additions	181			65			1			—			66			—			66			247
Amortization:
Periodic amortization	(171		)	(58		)	(5		)	(2		)	(65		)	—			(65		)	(236		)
Included in realized gains	—			3			—			—			3			—			3			3
Foreign currency translation	—			—			—			—			—			—			—			—
Change in unrealized	—			—			—			—			—			73			73			73
Balance at September 30, 2018	$	308		$	1,253		$	90		$	43		$	1,386		$	(25	)	$	1,361		$	1,669
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		)	—			(77		)	—			(77		)	(77		)
Included in realized gains	—			5			1			—			6			—			6			6
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			(758		)	(758		)	(758		)
Balance at September 30, 2019	$	323		$	1,314		$	78		$	37		$	1,429		$	(788	)	$	641		$	964
Balance at December 31, 2017	$	270		$	1,217		$	102		$	49		$	1,368		$	(422	)	$	946		$	1,216
Additions	524			192			2			—			194			—			194			718
Amortization:
Periodic amortization	(485		)	(193		)	(15		)	(6		)	(214		)	—			(214		)	(699		)
Annuity unlocking	—			28			1			—			29			—			29			29
Included in realized gains	—			9			—			—			9			—			9			9
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			397			397			397
Balance at September 30, 2018	$	308		$	1,253		$	90		$	43		$	1,386		$	(25	)	$	1,361		$	1,669

(*)

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

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Income Taxes

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following is a reconciliation of income taxes 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,
	2019					2018					2019					2018
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	177				$	244				$	849				$	678
Income taxes at statutory rate	$	37		21	%	$	51		21	%	$	178		21	%	$	142		21	%
Effect of:
Adjustment to prior year taxes	(3		)	(2	%)	(9		)	(4	%)	(3		)	—	%	(9		)	(1	%)
Tax exempt interest	(4		)	(2	%)	(3		)	(1	%)	(11		)	(1	%)	(10		)	(1	%)
Dividends received deduction	(1		)	(1	%)	(1		)	—	%	(3		)	—	%	(3		)	—	%
Employee Stock Ownership Plan dividends paid deduction	—			—	%	(1		)	—	%	(1		)	—	%	(2		)	—	%
Stock-based compensation	(2		)	(1	%)	—			—	%	(6		)	(1	%)	(7		)	(1	%)
Nondeductible expenses	2			1	%	1			—	%	6			1	%	5			1	%
Change in valuation allowance	4			2	%	1			—	%	7			1	%	3			—	%
Foreign operations	—			—	%	—			—	%	—			—	%	3			—	%
Other	1			1	%	2			1	%	4			(1	%)	4			—	%
Provision for income taxes as shown in the statement of earnings	$	34		19	%	$	41		17	%	$	171		20	%	$	126		19	%

Approximately $19 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, 2019. 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.

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Segments of Operations (Tables)

9 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Segment Reporting Information, by Segment

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,
	2019			2018		2019		2018
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	583		$	526	$	1,323	$	1,250
Specialty casualty	658			616		1,921		1,790
Specialty financial	161			149		458		457
Other specialty	40			36		113		98
Total premiums earned	1,442			1,327		3,815		3,595
Net investment income	124			108		352		323
Other income	5			4		10		8
Total property and casualty insurance	1,571			1,439		4,177		3,926
Annuity:
Net investment income	448			413		1,334		1,219
Other income	28			27		82		80
Total annuity	476			440		1,416		1,299
Other	94			95		292		263
Total revenues before realized gains (losses)	2,141			1,974		5,885		5,488
Realized gains (losses) on securities	(18		)	34		222		(28		)
Total revenues	$	2,123		$	2,008	$	6,107	$	5,460

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Earnings Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	38		$	—		$	81		$	56
Specialty casualty	23			49			106			119
Specialty financial	26			9			60			46
Other specialty	1			(3		)	(11		)	(1		)
Other lines (a)	(34		)	(17		)	(36		)	(19		)
Total underwriting	54			38			200			201
Investment and other income, net	118			101			328			300
Total property and casualty insurance	172			139			528			501
Annuity	73			117			234			341
Other (b)	(50		)	(46		)	(135		)	(136		)
Total earnings before realized gains (losses) and income taxes	195			210			627			706
Realized gains (losses) on securities	(18		)	34			222			(28		)
Total earnings before income taxes	$	177		$	244		$	849		$	678

(a) Includes special charges of $18 million in both the third quarter of 2019 and 2018, respectively, to increase asbestos and environmental (“A&E”) reserves.

(b)

Includes holding company interest and expenses, including special charges of $11 million and $9 million in the third quarter of 2019 and 2018, respectively, to increase A&E reserves related to AFG’s former railroad and manufacturing operations.

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Investments

9 Months Ended

Sep. 30, 2019

Investments, Debt and Equity Securities [Abstract]

Investments

Investments

Available for sale fixed maturities at September 30, 2019 and December 31, 2018, consisted of the following (in millions):

	September 30, 2019												December 31, 2018
	Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value		Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value
			Gains		Losses										Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	225	$	5	$	(1	)	$	4		$	229	$	235	$	1	$	(3	)	$	(2	)	$	233
States, municipalities and political subdivisions	6,519		446		(1		)	445			6,964		6,825		169		(55		)	114			6,939
Foreign government	160		4		—			4			164		140		2		—			2			142
Residential MBS	2,274		292		(4		)	288			2,562		2,476		277		(9		)	268			2,744
Commercial MBS	928		38		—			38			966		905		17		(2		)	15			920
Collateralized loan obligations	4,319		13		(18		)	(5		)	4,314		4,350		1		(73		)	(72		)	4,278
Other asset-backed securities	5,540		201		(10		)	191			5,731		5,431		129		(27		)	102			5,533
Corporate and other	23,369		1,234		(30		)	1,204			24,573		21,475		167		(434		)	(267		)	21,208
Total fixed maturities	$	43,334	$	2,233	$	(64	)	$	2,169		$	45,503	$	41,837	$	763	$	(603	)	$	160		$	41,997

The non-credit related portion of other-than-temporary impairment charges is included in other comprehensive income. Cumulative non-credit charges taken for securities still owned at September 30, 2019 and December 31, 2018 were $124 million and $140 million, respectively. Gross unrealized gains on such securities at September 30, 2019 and December 31, 2018 were $114 million and $119 million, respectively. Gross unrealized losses on such securities at September 30, 2019 and December 31, 2018 were $3 million and $4 million, respectively. These amounts represent the non-credit other-than-temporary impairment charges recorded in AOCI adjusted for subsequent changes in fair values and relate primarily to residential MBS.

Equity securities, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at September 30, 2019 and December 31, 2018 (in millions):

	September 30, 2019						December 31, 2018
					Fair Value  over (under) Cost						Fair Value over (under) Cost
	Actual Cost						Actual Cost
			Fair Value						Fair Value
Common stocks	$	1,166	$	1,261	$	95	$	1,241	$	1,148	$	(93	)
Perpetual preferred stocks	732		743		11		705		666		(39		)
Total equity securities carried at fair value	$	1,898	$	2,004	$	106	$	1,946	$	1,814	$	(132	)

The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities 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
	Unrealized Loss			Fair Value		Fair Value as % of Cost		Unrealized Loss			Fair Value		Fair Value as % of Cost
September 30, 2019
Fixed maturities:
U.S. Government and government agencies	$	—		$	—	—	%	$	(1	)	$	49	98	%
States, municipalities and political subdivisions	—			54		100	%	(1		)	74		99	%
Foreign government	—			47		100	%	—			—		—	%
Residential MBS	(3		)	144		98	%	(1		)	69		99	%
Commercial MBS	—			13		100	%	—			—		—	%
Collateralized loan obligations	(6		)	1,063		99	%	(12		)	1,255		99	%
Other asset-backed securities	(4		)	518		99	%	(6		)	83		93	%
Corporate and other	(16		)	1,118		99	%	(14		)	370		96	%
Total fixed maturities	$	(29	)	$	2,957	99	%	$	(35	)	$	1,900	98	%
December 31, 2018
Fixed maturities:
U.S. Government and government agencies	$	—		$	41	100	%	$	(3	)	$	120	98	%
States, municipalities and political subdivisions	(23		)	1,497		98	%	(32		)	902		97	%
Foreign government	—			18		100	%	—			4		100	%
Residential MBS	(4		)	279		99	%	(5		)	139		97	%
Commercial MBS	(1		)	147		99	%	(1		)	30		97	%
Collateralized loan obligations	(61		)	3,540		98	%	(12		)	197		94	%
Asset-backed securities	(16		)	1,866		99	%	(11		)	432		98	%
Corporate and other	(306		)	10,378		97	%	(128		)	2,078		94	%
Total fixed maturities	$	(411	)	$	17,766	98	%	$	(192	)	$	3,902	95	%

At September 30, 2019, the gross unrealized losses on fixed maturities of $64 million relate to 602 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 63% of the gross unrealized loss and 88% of the fair value.

AFG analyzes its MBS securities for other-than-temporary 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. In the first nine months of 2019 and 2018, AFG recorded less than $1 million and $1 million, respectively, in other-than-temporary impairment charges related to its residential MBS.

In the first nine months of 2019, AFG recorded $15 million in other-than-temporary impairment charges on third-party collateralized loan obligations.

In the first nine months of 2019 and 2018, AFG recorded $4 million and $2 million, respectively, in other-than-temporary impairment charges related to corporate bonds.

Management believes AFG will recover its cost basis 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, 2019.

A progression of the credit portion of other-than-temporary impairments on fixed maturity securities for which the non-credit portion of an impairment has been recognized in other comprehensive income is shown below (in millions):

	2019			2018
Balance at June 30	$	140		$	144
Additional credit impairments on:
Previously impaired securities	—			—
Securities without prior impairments	—			—
Reductions due to sales or redemptions	(3		)	(1		)
Balance at September 30	$	137		$	143
Balance at January 1	$	142		$	145
Additional credit impairments on:
Previously impaired securities	—			—
Securities without prior impairments	—			1
Reductions due to sales or redemptions	(5		)	(3		)
Balance at September 30	$	137		$	143

The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 30, 2019 (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
	Cost		Amount		%
Maturity
One year or less	$	2,223	$	2,249	5	%
After one year through five years	10,338		10,742		24	%
After five years through ten years	13,997		14,927		33	%
After ten years	3,715		4,012		8	%
	30,273		31,930		70	%
Collateralized loan obligations and other ABS (average life of approximately 4.5 years)	9,859		10,045		22	%
MBS (average life of approximately 4.5 years)	3,202		3,528		8	%
Total	$	43,334	$	45,503	100	%

Certain risks are inherent in fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.

There were no investments in individual issuers that exceeded 10% of shareholders’ equity at September 30, 2019 or December 31, 2018.

Net Unrealized Gain on Marketable 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 annuity, long-term care and life businesses be adjusted to the extent that unrealized gains and losses from securities would result in adjustments to those balances had the unrealized gains or losses actually been realized. The following table shows (in millions) the components of the net unrealized gain on securities that is included in AOCI in AFG’s Balance Sheet.

	Pretax			Deferred Tax			Net
September 30, 2019
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	1,777		$	(373	)	$	1,404
Fixed maturities — all other	392			(83		)	309
Total fixed maturities	2,169			(456		)	1,713
Deferred policy acquisition costs — annuity segment	(760		)	160			(600		)
Annuity benefits accumulated	(259		)	54			(205		)
Unearned revenue	15			(3		)	12
Total net unrealized gain on marketable securities	$	1,165		$	(245	)	$	920
December 31, 2018
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	101		$	(21	)	$	80
Fixed maturities — all other	59			(13		)	46
Total fixed maturities	160			(34		)	126
Deferred policy acquisition costs — annuity segment	(42		)	9			(33		)
Annuity benefits accumulated	(14		)	3			(11		)
Unearned revenue	1			—			1
Total net unrealized gain on marketable securities	$	105		$	(22	)	$	83

(*) Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.

Net Investment Income   The following table shows (in millions) investment income earned and investment expenses incurred.

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Investment income:
Fixed maturities	$	475		$	440		$	1,422		$	1,283
Equity securities:
Dividends	22			19			66			59
Change in fair value (*)	17			2			35			16
Equity in earnings of partnerships and similar investments	43			41			109			128
Other	36			31			95			82
Gross investment income	593			533			1,727			1,568
Investment expenses	(5		)	(6		)	(17		)	(16		)
Net investment income	$	588		$	527		$	1,710		$	1,552

(*) 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.

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

	Three months ended September 30, 2019												Three months ended September 30, 2018
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	9		$	(14	)	$	(5	)	$	367		$	—		$	(2	)	$	(2	)	$	(213	)
Equity securities	(16		)	—			(16		)	—			33			—			33			—
Mortgage loans and other investments	—			—			—			—			—			—			—			—
Other (*)	(2		)	5			3			(230		)	3			—			3			89
Total pretax	(9		)	(9		)	(18		)	137			36			(2		)	34			(124		)
Tax effects	2			2			4			(29		)	(8		)	1			(7		)	26
Net of tax	$	(7	)	$	(7	)	$	(14	)	$	108		$	28		$	(1	)	$	27		$	(98	)
	Nine months ended September 30, 2019												Nine months ended September 30, 2018
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	23		$	(20	)	$	3		$	2,009		$	3		$	(3	)	$	—		$	(1,150	)
Equity securities	210			—			210			—			(39		)	—			(39		)	—
Mortgage loans and other investments	3			—			3			—			—			—			—			—
Other (*)	(1		)	7			6			(949		)	11			—			11			484
Total pretax	235			(13		)	222			1,060			(25		)	(3		)	(28		)	(666		)
Tax effects	(49		)	3			(46		)	(223		)	5			1			6			140
Net of tax	$	186		$	(10	)	$	176		$	837		$	(20	)	$	(2	)	$	(22	)	$	(526	)

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

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 during the first nine months of 2019 and 2018 on securities that were still owned at September 30, 2019 and September 30, 2018 as follows (in millions):

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019		2018
Included in realized gains (losses)	$	(24	)	$	25	$	146	$	(51	)
Included in net investment income	17			2		34		16
	$	(7	)	$	27	$	180	$	(35	)

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

	Nine months ended September 30,
	2019			2018
Gross gains	$	20		$	19
Gross losses	(12		)	(8		)

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Goodwill and Other Intangibles

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangibles

Goodwill and Other Intangibles

There were no changes in the goodwill balance of $207 million during the first nine months of 2019. Included in other assets in AFG’s Balance Sheet is $45 million at September 30, 2019 and $54 million at December 31, 2018 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of $48 million and $39 million, respectively. Amortization of intangibles was $3 million in both the third quarters of 2019 and 2018 and $9 million and $7 million in the first nine months of 2019 and 2018, respectively.

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Income Taxes (Tables)

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Reconciliation of income taxes at the statutory rate and income taxes shown in the Statement of Earnings

The following is a reconciliation of income taxes 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,
	2019					2018					2019					2018
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	177				$	244				$	849				$	678
Income taxes at statutory rate	$	37		21	%	$	51		21	%	$	178		21	%	$	142		21	%
Effect of:
Adjustment to prior year taxes	(3		)	(2	%)	(9		)	(4	%)	(3		)	—	%	(9		)	(1	%)
Tax exempt interest	(4		)	(2	%)	(3		)	(1	%)	(11		)	(1	%)	(10		)	(1	%)
Dividends received deduction	(1		)	(1	%)	(1		)	—	%	(3		)	—	%	(3		)	—	%
Employee Stock Ownership Plan dividends paid deduction	—			—	%	(1		)	—	%	(1		)	—	%	(2		)	—	%
Stock-based compensation	(2		)	(1	%)	—			—	%	(6		)	(1	%)	(7		)	(1	%)
Nondeductible expenses	2			1	%	1			—	%	6			1	%	5			1	%
Change in valuation allowance	4			2	%	1			—	%	7			1	%	3			—	%
Foreign operations	—			—	%	—			—	%	—			—	%	3			—	%
Other	1			1	%	2			1	%	4			(1	%)	4			—	%
Provision for income taxes as shown in the statement of earnings	$	34		19	%	$	41		17	%	$	171		20	%	$	126		19	%

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Managed Investment Entities (Tables)

9 Months Ended

Sep. 30, 2019

Variable Interest Entity, Primary Beneficiary, Does Not Hold Majority Voting Interest, Disclosures [Abstract]

Selected financial information related to collateralized loan obligations

Selected financial information related to the CLOs is shown below (in millions): 

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Investment in CLO tranches at end of period	$	179		$	191		$	179		$	191
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	(18		)	20			69			5
Liabilities	4			(25		)	(85		)	(15		)
Management fees paid to AFG	4			4			11			12
CLO earnings (losses) attributable to AFG shareholders (b)	(5		)	4			11			11

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

(b)

Included in earnings before income taxes in AFG’s Statement of Earnings.

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Segments of Operations - Narrative (Details) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) segment	Sep. 30, 2018 USD ($)
Segment Reporting Information [Line Items]
Number of segments | segment			3
Other
Segment Reporting Information [Line Items]
Special charges to increase asbestos and environmental reserves	$ 11	$ 9
Special Asbestos and Environmental reserve charges
Segment Reporting Information [Line Items]
Net increase (decrease) in the provision for claims of prior years			$ 18	$ 18
Special Asbestos and Environmental reserve charges | Property and Casualty Insurance | Other lines
Segment Reporting Information [Line Items]
Net increase (decrease) in the provision for claims of prior years	$ 18	$ 18	$ 18	$ 18

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Derivatives - Derivatives that do not qualify for hedge accounting under GAAP included in the Balance Sheet at fair value (Details) - Not Designated as Hedging Instrument - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	$ 868	$ 293
Derivative liability, at fair value	3,474	2,723
MBS with embedded derivatives | Fixed maturities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	118	109
Public company warrants | Equity securities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	0	0
Fixed-indexed and variable-indexed annuities (embedded derivative) | Annuity benefits accumulated
Derivatives included in AFG' s Balance Sheet at fair value
Derivative liability, at fair value	3,469	2,720
Equity index call options | Equity index call options
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	750	184
Equity index put options | Other liabilities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative liability, at fair value	1	1
Reinsurance contracts (embedded derivative) | Other liabilities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative liability, at fair value	$ 4	$ 2

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Investments - Credit portion of other-than-temporary impairments on fixed maturities for which the non-credit portion of an impairment has been recognized in OCI (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Roll Forward]
Beginning Balance	$ 140	$ 144	$ 142	$ 145
Additional credit impairments on:
Previously impaired securities	0	0	0	0
Securities without prior impairments	0	0	0	1
Reductions due to sales or redemptions	(3)	(1)	(5)	(3)
Ending Balance	$ 137	$ 143	$ 137	$ 143

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Investments - Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		$ (9)	$ 36	$ 235	$ (25)
Realized — impairments		(9)	(2)	(13)	(3)
Realized gains (losses) on securities		(18)	34	222	(28)
Net of tax
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		(7)	28	186	(20)
Realized — impairments		(7)	(1)	(10)	(2)
Realized gains (losses) on securities		(14)	27	176	(22)
Change in unrealized		108	(98)	837	(526)
Total pretax
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		(9)	36	235	(25)
Realized — impairments		(9)	(2)	(13)	(3)
Realized gains (losses) on securities		(18)	34	222	(28)
Change in unrealized		137	(124)	1,060	(666)
Fixed maturities
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		9	0	23	3
Realized — impairments		(14)	(2)	(20)	(3)
Realized gains (losses) on securities		(5)	(2)	3	0
Change in unrealized		367	(213)	2,009	(1,150)
Equity securities
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		(16)	33	210	(39)
Realized — impairments		0	0	0	0
Realized gains (losses) on securities		(16)	33	210	(39)
Change in unrealized		0	0	0	0
Mortgage Loans And Other Investments [Member]
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		0	0	3	0
Realized — impairments		0	0	0	0
Realized gains (losses) on securities		0	0	3	0
Change in unrealized		0	0	0	0
Other, Including DPAC and reserves related to the annuity business
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments	[1]	(2)	3	(1)	11
Realized — impairments	[1]	5	0	7	0
Realized gains (losses) on securities	[1]	3	3	6	11
Change in unrealized	[1]	(230)	89	(949)	484
Tax effects
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		2	(8)	(49)	5
Realized — impairments		2	1	3	1
Realized gains (losses) on securities		4	(7)	(46)	6
Change in unrealized		$ (29)	$ 26	$ (223)	$ 140

[1] Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.

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Income Taxes - Narrative (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income Tax Disclosure [Abstract]
Statutory rate of income taxes	21.00%	21.00%	21.00%	21.00%
Operating loss carryforwards subject to SRLY tax rules will expire unutilized at December 31, 2019	$ 19		$ 19

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Leases - Schedule of Weighted-Average Remaing Lease Term and Weighted-Average Discount Rate (Details)	Sep. 30, 2019
Leases [Abstract]
Weighted-average remaining lease term (in years)	5 years 7 months 6 days
Weighted-average discount rate (percent)	4.10%

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Deferred Policy Acquisition Costs - Narrative (Details) - USD ($) $ in Millions	Sep. 30, 2019	Dec. 31, 2018
Deferred Policy Acquisition Costs Disclosures [Abstract]
Accumulated amortization of present value of future profits	$ 153	$ 148

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Consolidated Statement of Cash Flows (Unaudited) - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Operating Activities:
Net earnings, including noncontrolling interests	$ 678	$ 552
Adjustments:
Depreciation and amortization	195	163
Annuity benefits	900	664
Realized (gains) losses on investing activities	(223)	28
Net (purchases) sales of trading securities	(2)	116
Deferred annuity and life policy acquisition costs	(163)	(192)
Change in:
Reinsurance and other receivables	(330)	(868)
Other assets	(281)	(257)
Insurance claims and reserves	475	507
Payable to reinsurers	115	189
Other liabilities	417	346
Managed investment entities’ assets/liabilities	(2)	104
Other operating activities, net	(88)	(75)
Net cash provided by operating activities	1,691	1,277
Investing Activities:
Purchases of fixed maturities	(5,533)	(6,700)
Purchases of equity securities	(161)	(342)
Purchases of mortgage loans	(181)	(112)
Purchases of equity index call options and other investments	(658)	(695)
Purchases of real estate, property and equipment	(33)	(60)
Proceeds from maturities and redemptions of fixed maturities	3,411	3,516
Proceeds from repayments of mortgage loans	76	87
Proceeds from sales of fixed maturities	569	275
Proceeds from sales of equity securities	223	150
Proceeds from sales and settlements of equity index call options and other investments	486	688
Proceeds from sales of real estate, property and equipment	3	3
Managed investment entities:
Purchases of investments	(1,062)	(1,674)
Proceeds from sales and redemptions of investments	1,081	1,485
Other investing activities, net	1	4
Net cash used in investing activities	(1,778)	(3,375)
Financing Activities:
Annuity receipts	3,821	3,925
Annuity surrenders, benefits and withdrawals	(2,502)	(2,101)
Net transfers from variable annuity assets	45	35
Additional long-term borrowings	121	0
Issuances of managed investment entities’ liabilities	0	1,572
Retirements of managed investment entities’ liabilities	(8)	(1,463)
Issuances of Common Stock	29	26
Cash dividends paid on Common Stock	(241)	(225)
Net cash provided by financing activities	1,265	1,769
Net Change in Cash and Cash Equivalents	1,178	(329)
Cash and cash equivalents at beginning of period	1,515	2,338
Cash and cash equivalents at end of period	$ 2,693	$ 2,009

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Goodwill and Other Intangibles - Narrative (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]
Changes in the goodwill balance during the period			$ 0
Goodwill	$ 207,000,000		207,000,000		$ 207,000,000
Amortizable intangible assets related to property and casualty insurance acquisitions	45,000,000		45,000,000		54,000,000
Accumulated amortization	48,000,000		48,000,000		$ 39,000,000
Amortization of intangible assets	$ 3,000,000	$ 3,000,000	$ 9,000,000	$ 7,000,000

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Leases - Lease activity (Details) - USD ($) $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Leases [Abstract]
Operating leases	$ 12	$ 34
Short-term leases	0	1
Total lease expense	$ 12	$ 35

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Consolidated Statement of Earnings (Unaudited) - USD ($) shares in Millions, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Revenues:
Property and casualty insurance net earned premiums	$ 1,442	$ 1,327	$ 3,815	$ 3,595
Life, accident and health net earned premiums	6	6	17	18
Net investment income	588	527	1,710	1,552
Realized gains (losses) on securities	(18)	34	222	(28)
Income (loss) of managed investment entities:
Investment income	67	65	206	187
Gain (loss) on change in fair value of assets/liabilities	(14)	(5)	(16)	(10)
Other income	52	54	153	146
Total revenues	2,123	2,008	6,107	5,460
Costs and Expenses:
Property and casualty insurance: Losses and loss adjustment expenses	944	872	2,359	2,206
Property and casualty insurance: Commissions and other underwriting expenses	450	424	1,275	1,205
Annuity benefits	250	222	900	664
Life, accident and health benefits	9	10	26	32
Annuity and supplemental insurance acquisition expenses	120	71	181	203
Interest charges on borrowed money	17	15	50	46
Expenses of managed investment entities	54	52	168	154
Other expenses	102	98	299	272
Total costs and expenses	1,946	1,764	5,258	4,782
Earnings before income taxes	177	244	849	678
Provision for income taxes	34	41	171	126
Net earnings, including noncontrolling interests	143	203	678	552
Less: Net earnings (losses) attributable to noncontrolling interests	(4)	(1)	(8)	(7)
Net Earnings Attributable to Shareholders	$ 147	$ 204	$ 686	$ 559
Earnings Attributable to Shareholders per Common Share:
Basic (USD per share)	$ 1.64	$ 2.30	$ 7.65	$ 6.29
Diluted (USD per share)	$ 1.62	$ 2.26	$ 7.55	$ 6.17
Average number of Common Shares:
Basic (shares)	90.0	89.1	89.7	88.9
Diluted (shares)	91.1	90.7	90.9	90.6
Supplemental disclosure of Realized gains on securities:
Realized gains (losses) before impairments	$ (9)	$ 36	$ 235	$ (25)
Losses on securities with impairment	(9)	(2)	(13)	(3)
Non-credit portion recognized in other comprehensive income (loss)	0	0	0	0
Impairment charges recognized in earnings	(9)	(2)	(13)	(3)
Total realized gains (losses) on securities	$ (18)	$ 34	$ 222	$ (28)

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Fair Value Measurements - The carrying value and fair value of financial instruments (Details) - USD ($) $ in Millions		Sep. 30, 2019	Dec. 31, 2018
Financial assets:
Mortgage loans		$ 1,174	$ 1,068
Policy loans		166	174
Financial liabilities:
Long-term debt		1,423	1,302
Level 1
Financial assets:
Cash and cash equivalents		2,693	1,515
Mortgage loans		0	0
Policy loans		0	0
Total financial assets not accounted for at fair value		2,693	1,515
Financial liabilities:
Annuity benefits accumulated	[1]	0	0
Long-term debt		0	0
Total financial liabilities not accounted for at fair value		0	0
Level 2
Financial assets:
Cash and cash equivalents		0	0
Mortgage loans		0	0
Policy loans		0	0
Total financial assets not accounted for at fair value		0	0
Financial liabilities:
Annuity benefits accumulated	[1]	0	0
Long-term debt		1,518	1,228
Total financial liabilities not accounted for at fair value		1,518	1,228
Level 3
Financial assets:
Cash and cash equivalents		0	0
Mortgage loans		1,195	1,056
Policy loans		166	174
Total financial assets not accounted for at fair value		1,361	1,230
Financial liabilities:
Annuity benefits accumulated	[1]	39,468	34,765
Long-term debt		3	3
Total financial liabilities not accounted for at fair value		39,471	34,768
Carrying Value
Financial assets:
Cash and cash equivalents		2,693	1,515
Mortgage loans		1,174	1,068
Policy loans		166	174
Total financial assets not accounted for at fair value		4,033	2,757
Financial liabilities:
Annuity benefits accumulated	[1]	39,401	36,384
Long-term debt		1,423	1,302
Total financial liabilities not accounted for at fair value		40,824	37,686
Fair Value
Financial assets:
Cash and cash equivalents		2,693	1,515
Mortgage loans		1,195	1,056
Policy loans		166	174
Total financial assets not accounted for at fair value		4,054	2,745
Financial liabilities:
Annuity benefits accumulated	[1]	39,468	34,765
Long-term debt		1,521	1,231
Total financial liabilities not accounted for at fair value		$ 40,989	$ 35,996

[1] Excludes $250 million and $232 million of life contingent annuities in the payout phase at September 30, 2019 and December 31, 2018, respectively.

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Fair Value Measurements - Assets and liabilities measured and carried at fair value in the financial statements (Details) - USD ($) $ in Millions		Sep. 30, 2019	Dec. 31, 2018
Assets:
Available for sale (AFS) fixed maturities		$ 45,503	$ 41,997
Trading fixed maturities		108	105
Equity securities		2,004	1,814
Equity index call options		750	184
Assets of managed investment entities (“MIE”)		4,702	4,700
Variable annuity assets (separate accounts)	[1]	601	557
Total assets accounted for at fair value		53,737	49,373
Liabilities:
Liabilities of managed investment entities		4,523	4,512
Total liabilities accounted for at fair value		7,998	7,281
Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		3,469	2,720
Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		6	49
Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		45,503	41,997
Trading fixed maturities		108	105
U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		229	233
States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		6,964	6,939
Foreign government
Assets:
Available for sale (AFS) fixed maturities		164	142
Residential MBS
Assets:
Available for sale (AFS) fixed maturities		2,562	2,744
Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		966	920
Collateralized loan obligations
Assets:
Available for sale (AFS) fixed maturities		4,314	4,278
Other asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		5,731	5,533
Corporate and other
Assets:
Available for sale (AFS) fixed maturities		24,573	21,208
Equity securities
Assets:
Equity securities		2,004	1,814
Other assets
Assets:
Equity index call options		69	16
Level 1
Assets:
Assets of managed investment entities (“MIE”)		228	203
Variable annuity assets (separate accounts)	[1]	0	0
Total assets accounted for at fair value		1,928	1,791
Liabilities:
Liabilities of managed investment entities		219	195
Total liabilities accounted for at fair value		219	195
Level 1 | Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 1 | Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 1 | Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		180	169
Trading fixed maturities		2	9
Level 1 | U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		151	141
Level 1 | States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Foreign government
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Residential MBS
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Collateralized loan obligations
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Other asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Corporate and other
Assets:
Available for sale (AFS) fixed maturities		29	28
Level 1 | Equity securities
Assets:
Equity securities		1,518	1,410
Level 1 | Other assets
Assets:
Equity index call options		0	0
Level 2
Assets:
Assets of managed investment entities (“MIE”)		4,456	4,476
Variable annuity assets (separate accounts)	[1]	601	557
Total assets accounted for at fair value		48,293	44,061
Liabilities:
Liabilities of managed investment entities		4,287	4,297
Total liabilities accounted for at fair value		4,293	4,346
Level 2 | Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 2 | Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		6	49
Level 2 | Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		42,245	38,664
Trading fixed maturities		106	96
Level 2 | U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		70	83
Level 2 | States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		6,862	6,880
Level 2 | Foreign government
Assets:
Available for sale (AFS) fixed maturities		164	142
Level 2 | Residential MBS
Assets:
Available for sale (AFS) fixed maturities		2,406	2,547
Level 2 | Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		911	864
Level 2 | Collateralized loan obligations
Assets:
Available for sale (AFS) fixed maturities		4,257	4,162
Level 2 | Other asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		5,317	4,802
Level 2 | Corporate and other
Assets:
Available for sale (AFS) fixed maturities		22,258	19,184
Level 2 | Equity securities
Assets:
Equity securities		66	68
Level 2 | Other assets
Assets:
Equity index call options		69	16
Level 3
Assets:
Assets of managed investment entities (“MIE”)		18	21
Variable annuity assets (separate accounts)	[1]	0	0
Total assets accounted for at fair value		3,516	3,521
Liabilities:
Liabilities of managed investment entities		17	20
Total liabilities accounted for at fair value		3,486	2,740
Level 3 | Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		3,469	2,720
Level 3 | Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 3 | Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		3,078	3,164
Trading fixed maturities		0	0
Level 3 | U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		8	9
Level 3 | States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		102	59
Level 3 | Foreign government
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 3 | Residential MBS
Assets:
Available for sale (AFS) fixed maturities		156	197
Level 3 | Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		55	56
Level 3 | Collateralized loan obligations
Assets:
Available for sale (AFS) fixed maturities		57	116
Level 3 | Other asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		414	731
Level 3 | Corporate and other
Assets:
Available for sale (AFS) fixed maturities		2,286	1,996
Level 3 | Equity securities
Assets:
Equity securities		420	336
Level 3 | Other assets
Assets:
Equity index call options		0	0
Equity index call options | Equity index call options
Assets:
Equity index call options		750	184
Equity index call options | Level 1 | Equity index call options
Assets:
Equity index call options		0	0
Equity index call options | Level 2 | Equity index call options
Assets:
Equity index call options		750	184
Equity index call options | Level 3 | Equity index call options
Assets:
Equity index call options		$ 0	$ 0

[1] Variable annuity liabilities equal the fair value of variable annuity assets.

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Insurance

9 Months Ended

Sep. 30, 2019

Insurance [Abstract]

Insurance

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 months of 2019 and 2018 (in millions):

	Nine months ended September 30,
	2019			2018
Balance at beginning of year	$	9,741		$	9,678
Less reinsurance recoverables, net of allowance	2,942			2,957
Net liability at beginning of year	6,799			6,721
Provision for losses and LAE occurring in the current period	2,457			2,337
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges	18			18
Other	(116		)	(149		)
Total losses and LAE incurred	2,359			2,206
Payments for losses and LAE of:
Current year	(731		)	(569		)
Prior years	(1,408		)	(1,313		)
Total payments	(2,139		)	(1,882		)
Reserves of business disposed (*)	—			(319		)
Foreign currency translation and other	(5		)	(4		)
Net liability at end of period	7,014			6,722
Add back reinsurance recoverables, net of allowance	2,833			2,948
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,847		$	9,670

(*) Reflects the reinsurance to close transaction at Neon discussed below.

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

The net decrease in the provision for claims of prior years during the first nine months of 2018 reflects (i) lower than expected losses in the crop business and lower than expected claim severity in the transportation businesses (within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses, and to a lesser extent, lower than expected claim severity in the executive liability business (within the Specialty casualty sub-segment), and (iii) lower than expected claim frequency and severity in the surety business and lower than expected claim severity in the fidelity business (all within the Specialty financial sub-segment). This favorable development was partially offset by (i) the $18 million special charge to increase asbestos and environmental reserves and (ii) higher than expected claim severity in the Singapore branch and aviation operations (within the Property and transportation sub-segment).

In December 2017, the Neon Lloyd’s syndicate entered into a reinsurance to close transaction for the 2015 and prior years of account with StarStone Underwriting Limited, a subsidiary of Enstar Group Limited, which was effective as of December 31, 2017 and settled in early 2018. In the Lloyd’s market, a reinsurance to close transaction transfers the responsibility for discharging all of the liabilities that attach to the transferred year of account plus the right to any income due to the closing year of account in return for a premium. This transaction provided Neon with finality on its legacy business.

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Investments (Tables)

9 Months Ended

Sep. 30, 2019

Investments, Debt and Equity Securities [Abstract]

Available for sale fixed maturities

Available for sale fixed maturities at September 30, 2019 and December 31, 2018, consisted of the following (in millions):

	September 30, 2019												December 31, 2018
	Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value		Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value
			Gains		Losses										Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	225	$	5	$	(1	)	$	4		$	229	$	235	$	1	$	(3	)	$	(2	)	$	233
States, municipalities and political subdivisions	6,519		446		(1		)	445			6,964		6,825		169		(55		)	114			6,939
Foreign government	160		4		—			4			164		140		2		—			2			142
Residential MBS	2,274		292		(4		)	288			2,562		2,476		277		(9		)	268			2,744
Commercial MBS	928		38		—			38			966		905		17		(2		)	15			920
Collateralized loan obligations	4,319		13		(18		)	(5		)	4,314		4,350		1		(73		)	(72		)	4,278
Other asset-backed securities	5,540		201		(10		)	191			5,731		5,431		129		(27		)	102			5,533
Corporate and other	23,369		1,234		(30		)	1,204			24,573		21,475		167		(434		)	(267		)	21,208
Total fixed maturities	$	43,334	$	2,233	$	(64	)	$	2,169		$	45,503	$	41,837	$	763	$	(603	)	$	160		$	41,997

Equity securities reported at fair value

Equity securities, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at September 30, 2019 and December 31, 2018 (in millions):

	September 30, 2019						December 31, 2018
					Fair Value  over (under) Cost						Fair Value over (under) Cost
	Actual Cost						Actual Cost
			Fair Value						Fair Value
Common stocks	$	1,166	$	1,261	$	95	$	1,241	$	1,148	$	(93	)
Perpetual preferred stocks	732		743		11		705		666		(39		)
Total equity securities carried at fair value	$	1,898	$	2,004	$	106	$	1,946	$	1,814	$	(132	)

Available for sale securities in a continuous unrealized loss position

The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities 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
	Unrealized Loss			Fair Value		Fair Value as % of Cost		Unrealized Loss			Fair Value		Fair Value as % of Cost
September 30, 2019
Fixed maturities:
U.S. Government and government agencies	$	—		$	—	—	%	$	(1	)	$	49	98	%
States, municipalities and political subdivisions	—			54		100	%	(1		)	74		99	%
Foreign government	—			47		100	%	—			—		—	%
Residential MBS	(3		)	144		98	%	(1		)	69		99	%
Commercial MBS	—			13		100	%	—			—		—	%
Collateralized loan obligations	(6		)	1,063		99	%	(12		)	1,255		99	%
Other asset-backed securities	(4		)	518		99	%	(6		)	83		93	%
Corporate and other	(16		)	1,118		99	%	(14		)	370		96	%
Total fixed maturities	$	(29	)	$	2,957	99	%	$	(35	)	$	1,900	98	%
December 31, 2018
Fixed maturities:
U.S. Government and government agencies	$	—		$	41	100	%	$	(3	)	$	120	98	%
States, municipalities and political subdivisions	(23		)	1,497		98	%	(32		)	902		97	%
Foreign government	—			18		100	%	—			4		100	%
Residential MBS	(4		)	279		99	%	(5		)	139		97	%
Commercial MBS	(1		)	147		99	%	(1		)	30		97	%
Collateralized loan obligations	(61		)	3,540		98	%	(12		)	197		94	%
Asset-backed securities	(16		)	1,866		99	%	(11		)	432		98	%
Corporate and other	(306		)	10,378		97	%	(128		)	2,078		94	%
Total fixed maturities	$	(411	)	$	17,766	98	%	$	(192	)	$	3,902	95	%

Roll forward of cumulative credit portion of other-than-temporary impairments on fixed maturity securities

A progression of the credit portion of other-than-temporary impairments on fixed maturity securities for which the non-credit portion of an impairment has been recognized in other comprehensive income is shown below (in millions):

	2019			2018
Balance at June 30	$	140		$	144
Additional credit impairments on:
Previously impaired securities	—			—
Securities without prior impairments	—			—
Reductions due to sales or redemptions	(3		)	(1		)
Balance at September 30	$	137		$	143
Balance at January 1	$	142		$	145
Additional credit impairments on:
Previously impaired securities	—			—
Securities without prior impairments	—			1
Reductions due to sales or redemptions	(5		)	(3		)
Balance at September 30	$	137		$	143

Available for sale fixed maturity securities by contractual maturity date

The table below sets forth the scheduled maturities of available for sale fixed maturities as of September 30, 2019 (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
	Cost		Amount		%
Maturity
One year or less	$	2,223	$	2,249	5	%
After one year through five years	10,338		10,742		24	%
After five years through ten years	13,997		14,927		33	%
After ten years	3,715		4,012		8	%
	30,273		31,930		70	%
Collateralized loan obligations and other ABS (average life of approximately 4.5 years)	9,859		10,045		22	%
MBS (average life of approximately 4.5 years)	3,202		3,528		8	%
Total	$	43,334	$	45,503	100	%

Components of the net unrealized gain on securities, included in Accumulated Other Comprehensive Income

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, 2019
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	1,777		$	(373	)	$	1,404
Fixed maturities — all other	392			(83		)	309
Total fixed maturities	2,169			(456		)	1,713
Deferred policy acquisition costs — annuity segment	(760		)	160			(600		)
Annuity benefits accumulated	(259		)	54			(205		)
Unearned revenue	15			(3		)	12
Total net unrealized gain on marketable securities	$	1,165		$	(245	)	$	920
December 31, 2018
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	101		$	(21	)	$	80
Fixed maturities — all other	59			(13		)	46
Total fixed maturities	160			(34		)	126
Deferred policy acquisition costs — annuity segment	(42		)	9			(33		)
Annuity benefits accumulated	(14		)	3			(11		)
Unearned revenue	1			—			1
Total net unrealized gain on marketable securities	$	105		$	(22	)	$	83

(*)

Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.

Net investment income earned and investment expenses incurred

The following table shows (in millions) investment income earned and investment expenses incurred.

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Investment income:
Fixed maturities	$	475		$	440		$	1,422		$	1,283
Equity securities:
Dividends	22			19			66			59
Change in fair value (*)	17			2			35			16
Equity in earnings of partnerships and similar investments	43			41			109			128
Other	36			31			95			82
Gross investment income	593			533			1,727			1,568
Investment expenses	(5		)	(6		)	(17		)	(16		)
Net investment income	$	588		$	527		$	1,710		$	1,552

(*)

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.

Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments

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

	Three months ended September 30, 2019												Three months ended September 30, 2018
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	9		$	(14	)	$	(5	)	$	367		$	—		$	(2	)	$	(2	)	$	(213	)
Equity securities	(16		)	—			(16		)	—			33			—			33			—
Mortgage loans and other investments	—			—			—			—			—			—			—			—
Other (*)	(2		)	5			3			(230		)	3			—			3			89
Total pretax	(9		)	(9		)	(18		)	137			36			(2		)	34			(124		)
Tax effects	2			2			4			(29		)	(8		)	1			(7		)	26
Net of tax	$	(7	)	$	(7	)	$	(14	)	$	108		$	28		$	(1	)	$	27		$	(98	)
	Nine months ended September 30, 2019												Nine months ended September 30, 2018
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	23		$	(20	)	$	3		$	2,009		$	3		$	(3	)	$	—		$	(1,150	)
Equity securities	210			—			210			—			(39		)	—			(39		)	—
Mortgage loans and other investments	3			—			3			—			—			—			—			—
Other (*)	(1		)	7			6			(949		)	11			—			11			484
Total pretax	235			(13		)	222			1,060			(25		)	(3		)	(28		)	(666		)
Tax effects	(49		)	3			(46		)	(223		)	5			1			6			140
Net of tax	$	186		$	(10	)	$	176		$	837		$	(20	)	$	(2	)	$	(22	)	$	(526	)

(*)

Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.

Holding gains (losses) on equity securities still held

AFG recorded net holding gains (losses) on equity securities during the first nine months of 2019 and 2018 on securities that were still owned at September 30, 2019 and September 30, 2018 as follows (in millions):

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019		2018
Included in realized gains (losses)	$	(24	)	$	25	$	146	$	(51	)
Included in net investment income	17			2		34		16
	$	(7	)	$	27	$	180	$	(35	)

Gross realized gains and losses on available for sale fixed maturity and equity security investments

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

	Nine months ended September 30,
	2019			2018
Gross gains	$	20		$	19
Gross losses	(12		)	(8		)

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Accounting Policies - Narrative (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Jan. 01, 2019	Jan. 01, 2018	Dec. 31, 2017
Significant Accounting Policies [Line Items]
Cumulative effect of accounting change							$ 4
Operating lease liability	$ 184		$ 184		$ 198
Operating lease right-of-use asset	162		162		174
Deferred rent and lease incentives	$ 22		$ 22		$ 24
Weighted average common shares adjustment related to stock-based compensation (shares)	1,100,000	1,600,000	1,200,000	1,700,000
Anti-dilutive potential common shares related to stock-based compensation plans (shares)	0	0	0	0
Maturities of short term investments			3 months
Equity securities
Significant Accounting Policies [Line Items]
Available-for-sale securities, Equity securities							$ 1,600
Equity securities | Accounting Standards Update 2016-01
Significant Accounting Policies [Line Items]
Cumulative effect of accounting change						$ (221)
Limited partnerships and similar investments | Accounting Standards Update 2016-01
Significant Accounting Policies [Line Items]
Cumulative effect of accounting change						$ (4)

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Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Lease activity

The following table details AFG’s lease activity for the quarter and nine months ended September 30, 2019 (in millions):

	Three months ended		Nine months ended
	September 30, 2019		September 30, 2019
Lease expense:
Operating leases	$	12	$	34
Short-term leases	—		1
Total lease expense	$	12	$	35

Other operating lease liability information

Other operating lease information for the nine months ended September 30, 2019 (in millions):

Cash paid for lease liabilities reported in operating cash flows	$	37
Right-of-use assets obtained under new leases	15

Undiscounted contractual maturities of operating lease liabilities

The following table presents the undiscounted contractual maturities of AFG’s operating lease liability at September 30, 2019 (in millions):

Operating lease payments:
Remainder of 2019	$	12
2020	45
2021	40
2022	31
2023	26
Thereafter	54
Total lease payments	208
Impact of discounting	(24		)
Operating lease liability	$	184

Schedule of weighted-average remaining lease term and weighted-average discount rate

Weighted-average remaining lease term	5.6 years
Weighted-average discount rate	4.1	%

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Segments of Operations

9 Months Ended

Sep. 30, 2019

Segment Reporting [Abstract]

Segments of Operations

Segments of Operations

AFG manages its business as three segments: (i) Property and casualty insurance, (ii) Annuity and (iii) Other, which includes holding company costs, revenues and costs of AFG’s limited insurance operations outside of property and casualty insurance and annuity segments, and operations attributable to the noncontrolling interests of the managed investment entities.

AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes physical damage and liability coverage for buses and trucks, inland and ocean marine, agricultural-related products and other commercial property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, executive and professional liability, general liability, umbrella and excess liability, specialty coverages in targeted markets, customized programs for small to mid-sized businesses and workers’ compensation insurance, and (iii) Specialty

financial, which includes risk management insurance programs for lending and leasing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), fidelity and surety products and trade credit insurance. Premiums and underwriting profit included under Other specialty represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments and amortization of deferred gains on retroactive reinsurance transactions related to the sales of businesses in prior years. AFG’s annuity business sells traditional fixed, fixed-indexed and variable-indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets. AFG’s reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.

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

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019		2018
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	583		$	526	$	1,323	$	1,250
Specialty casualty	658			616		1,921		1,790
Specialty financial	161			149		458		457
Other specialty	40			36		113		98
Total premiums earned	1,442			1,327		3,815		3,595
Net investment income	124			108		352		323
Other income	5			4		10		8
Total property and casualty insurance	1,571			1,439		4,177		3,926
Annuity:
Net investment income	448			413		1,334		1,219
Other income	28			27		82		80
Total annuity	476			440		1,416		1,299
Other	94			95		292		263
Total revenues before realized gains (losses)	2,141			1,974		5,885		5,488
Realized gains (losses) on securities	(18		)	34		222		(28		)
Total revenues	$	2,123		$	2,008	$	6,107	$	5,460

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Earnings Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	38		$	—		$	81		$	56
Specialty casualty	23			49			106			119
Specialty financial	26			9			60			46
Other specialty	1			(3		)	(11		)	(1		)
Other lines (a)	(34		)	(17		)	(36		)	(19		)
Total underwriting	54			38			200			201
Investment and other income, net	118			101			328			300
Total property and casualty insurance	172			139			528			501
Annuity	73			117			234			341
Other (b)	(50		)	(46		)	(135		)	(136		)
Total earnings before realized gains (losses) and income taxes	195			210			627			706
Realized gains (losses) on securities	(18		)	34			222			(28		)
Total earnings before income taxes	$	177		$	244		$	849		$	678

(a) Includes special charges of $18 million in both the third quarter of 2019 and 2018, respectively, to increase asbestos and environmental (“A&E”) reserves.

(b)

Includes holding company interest and expenses, including special charges of $11 million and $9 million in the third quarter of 2019 and 2018, respectively, to increase A&E reserves related to AFG’s former railroad and manufacturing operations.

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Deferred Policy Acquisition Costs

9 Months Ended

Sep. 30, 2019

Deferred Policy Acquisition Costs Disclosures [Abstract]

Deferred Policy Acquisition Costs

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, 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		)	—			(77		)	—			(77		)	(77		)
Included in realized gains	—			3			—			—			3			—			3			3
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			(169		)	(169		)	(169		)
Balance at September 30, 2019	$	323		$	1,314		$	78		$	37		$	1,429		$	(788	)	$	641		$	964
Balance at June 30, 2018	$	298		$	1,243		$	94		$	45		$	1,382		$	(98	)	$	1,284		$	1,582
Additions	181			65			1			—			66			—			66			247
Amortization:
Periodic amortization	(171		)	(58		)	(5		)	(2		)	(65		)	—			(65		)	(236		)
Included in realized gains	—			3			—			—			3			—			3			3
Foreign currency translation	—			—			—			—			—			—			—			—
Change in unrealized	—			—			—			—			—			73			73			73
Balance at September 30, 2018	$	308		$	1,253		$	90		$	43		$	1,386		$	(25	)	$	1,361		$	1,669
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		)	—			(77		)	—			(77		)	(77		)
Included in realized gains	—			5			1			—			6			—			6			6
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			(758		)	(758		)	(758		)
Balance at September 30, 2019	$	323		$	1,314		$	78		$	37		$	1,429		$	(788	)	$	641		$	964
Balance at December 31, 2017	$	270		$	1,217		$	102		$	49		$	1,368		$	(422	)	$	946		$	1,216
Additions	524			192			2			—			194			—			194			718
Amortization:
Periodic amortization	(485		)	(193		)	(15		)	(6		)	(214		)	—			(214		)	(699		)
Annuity unlocking	—			28			1			—			29			—			29			29
Included in realized gains	—			9			—			—			9			—			9			9
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			397			397			397
Balance at September 30, 2018	$	308		$	1,253		$	90		$	43		$	1,386		$	(25	)	$	1,361		$	1,669

(*) 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 $153 million and $148 million of accumulated amortization at September 30, 2019 and December 31, 2018, respectively.

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Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

Leases

AFG and its subsidiaries lease real estate that is primarily used for office space and, to a lesser extent, equipment under operating lease arrangements. Most of AFG’s real estate leases include an option to extend or renew the lease term at AFG’s option. The operating lease liability includes lease payments related to options to extend or renew the lease term if AFG is reasonably certain of exercising those options. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, AFG uses an estimate of its incremental secured borrowing rate. AFG did not have any material contracts accounted for as finance leases at September 30, 2019 or January 1, 2019.

At September 30, 2019, AFG’s $162 million operating lease right-of-use asset (presented net of $22 million in deferred rent and lease incentives) and $184 million operating lease liability are included in other assets and other liabilities, respectively, in AFG’s Balance Sheet.

The following table details AFG’s lease activity for the quarter and nine months ended September 30, 2019 (in millions):

	Three months ended		Nine months ended
	September 30, 2019		September 30, 2019
Lease expense:
Operating leases	$	12	$	34
Short-term leases	—		1
Total lease expense	$	12	$	35

Other operating lease information for the nine months ended September 30, 2019 (in millions):

Cash paid for lease liabilities reported in operating cash flows	$	37
Right-of-use assets obtained under new leases	15

The following table presents the undiscounted contractual maturities of AFG’s operating lease liability at September 30, 2019 (in millions):

Operating lease payments:
Remainder of 2019	$	12
2020	45
2021	40
2022	31
2023	26
Thereafter	54
Total lease payments	208
Impact of discounting	(24		)
Operating lease liability	$	184

Weighted-average remaining lease term	5.6 years
Weighted-average discount rate	4.1	%

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Insurance - Narrative (Details) - Special Asbestos and Environmental reserve charges - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Insurance [Line Items]
Net increase (decrease) in the provision for claims of prior years			$ 18	$ 18
Other lines | Property and Casualty Insurance
Insurance [Line Items]
Net increase (decrease) in the provision for claims of prior years	$ 18	$ 18	$ 18	$ 18

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Shareholders' Equity - Narrative (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Jun. 30, 2019	Dec. 31, 2018	Jan. 01, 2018	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Net of tax unrealized gains (losses) related to credit-only impaired securities	$ 55		$ 55		$ 59	$ 58
Cumulative effect of accounting change								$ 4
Compensation expense related to stock incentive plans	$ 5	$ 6	$ 17	$ 17
Stock Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted Common Stock, shares issued (shares)			232,635
Restricted Common Stock, fair value per share (USD per share)			$ 99.28
Common Stock options issued under stock incentive plan (shares)			0
Accounting Standards Update 2016-01 | Equity securities
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Cumulative effect of accounting change							$ (221)

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Leases - Other operating lease liability information (Details) $ in Millions	9 Months Ended
	Sep. 30, 2019 USD ($)
Leases [Abstract]
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows	$ 37
Right-of-use assets obtained in exchange for new lease liabilities	$ 15

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Investments - Components of the net unrealized gain on securities that is included in AOCI in the Balance Sheet (Details) - USD ($) $ in Millions		Sep. 30, 2019	Dec. 31, 2018
Unrealized gain on:
Pretax		$ 1,165	$ 105
Deferred Tax		(245)	(22)
Net		920	83
Total fixed maturities
Unrealized gain on:
Pretax		2,169	160
Deferred Tax		(456)	(34)
Net		1,713	126
Fixed maturities — annuity segment
Unrealized gain on:
Pretax	[1]	1,777	101
Deferred Tax	[1]	(373)	(21)
Net	[1]	1,404	80
Fixed maturities — all other
Unrealized gain on:
Pretax		392	59
Deferred Tax		(83)	(13)
Net		309	46
Deferred policy acquisition costs — annuity segment
Unrealized gain on:
Pretax		(760)	(42)
Deferred Tax		160	9
Net		(600)	(33)
Annuity benefits accumulated
Unrealized gain on:
Pretax		(259)	(14)
Deferred Tax		54	3
Net		(205)	(11)
Unearned revenue
Unrealized gain on:
Pretax		15	1
Deferred Tax		(3)	0
Net		$ 12	$ 1

[1] Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.

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Investments - Gross realized gains and losses on available for sale fixed maturity investment transactions (Details) - Fixed maturities - USD ($) $ in Millions	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Gross realized gains and losses on the sale of available for sale fixed maturity and equity security investments
Gross gains	$ 20	$ 19
Gross losses	$ (12)	$ (8)

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Acquisition of Business - Narrative (Details) - Atlas Financial Holdings - Paratransit Business - USD ($) shares in Millions, $ in Millions	12 Months Ended
	Dec. 31, 2017	Jun. 10, 2019
Business Acquisition [Line Items]
Gross written premiums eligible for renewal	$ 110
Business acquisition, price as a percent of gross written premiums		15.00%
Warrant term to acquire shares		5 years
Number of shares able to be acquired with the warrant		2.4
Maximum | Equity securities | Public company warrants
Business Acquisition [Line Items]
Fair value of warrant on date received		$ 1

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Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2019

Stockholders' Equity Note [Abstract]

Components of accumulated other comprehensive income (loss)

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
Quarter ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	136		$	(29	)	$	107		$	—		$	107
Reclassification adjustment for realized (gains) losses included in net earnings (a)				1			—			1			—			1
Total net unrealized gains on securities (b)	$	812		137			(29		)	108			—			108			$	—		$	920
Net unrealized gains on cash flow hedges	18			9			(2		)	7			—			7			—			25
Foreign currency translation adjustments	(13		)	(6		)	(1		)	(7		)	(1		)	(8		)	—			(21		)
Pension and other postretirement plans adjustments	(8		)	1			—			1			—			1			—			(7		)
Total	$	809		$	141		$	(32	)	$	109		$	(1	)	$	108		$	—		$	917
Quarter ended September 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(122	)	$	26		$	(96	)	$	—		$	(96	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(2		)	—			(2		)	—			(2		)
Total net unrealized gains (losses) on securities (b)	$	191		(124		)	26			(98		)	—			(98		)	$	—		$	93
Net unrealized losses on cash flow hedges	(27		)	(6		)	1			(5		)	—			(5		)	—			(32		)
Foreign currency translation adjustments	(9		)	—			—			—			—			—			—			(9		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			—			(8		)
Total	$	147		$	(130	)	$	27		$	(103	)	$	—		$	(103	)	$	—		$	44
Nine months ended September 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	1,073		$	(226	)	$	847		$	—		$	847
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(13		)	3			(10		)	—			(10		)
Total net unrealized gains on securities (b)	$	83		1,060			(223		)	837			—			837			$	—		$	920
Net unrealized gains (losses) on cash flow hedges	(11		)	46			(10		)	36			—			36			—			25
Foreign currency translation adjustments	(16		)	(3		)	—			(3		)	(2		)	(5		)	—			(21		)
Pension and other postretirement plans adjustments	(8		)	1			—			1			—			1			—			(7		)
Total	$	48		$	1,104		$	(233	)	$	871		$	(2	)	$	869		$	—		$	917
Nine months ended September 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(662	)	$	139		$	(523	)	$	—		$	(523	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(4		)	1			(3		)	—			(3		)
Total net unrealized gains (losses) on securities (b)	$	840		(666		)	140			(526		)	—			(526		)	$	(221	)	$	93
Net unrealized losses on cash flow hedges	(13		)	(24		)	5			(19		)	—			(19		)	—			(32		)
Foreign currency translation adjustments	(6		)	(2		)	(1		)	(3		)	—			(3		)	—			(9		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			—			(8		)
Total	$	813		$	(692	)	$	144		$	(548	)	$	—		$	(548	)	$	(221	)	$	44

(a)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	Realized gains (losses) on securities
Tax	Provision for income taxes

(b) Includes net unrealized gains of $55 million at September 30, 2019 compared to $59 million at June 30, 2019 and $58 million at December 31, 2018 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.

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Long-Term Debt

9 Months Ended

Sep. 30, 2019

Debt Disclosure [Abstract]

Long-Term Debt

Long-Term Debt

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

	September 30, 2019							December 31, 2018
	Principal		Discount and Issue Costs			Carrying Value		Principal		Discount and Issue Costs			Carrying Value
Direct Senior Obligations of AFG:
4.50% Senior Notes due June 2047	$	590	$	(2	)	$	588	$	590	$	(2	)	$	588
3.50% Senior Notes due August 2026	425		(4		)	421		425		(4		)	421
Other	3		—			3		3		—			3
	1,018		(6		)	1,012		1,018		(6		)	1,012
Direct Subordinated Obligations of AFG:
6-1/4% Subordinated Debentures due September 2054	150		(5		)	145		150		(5		)	145
6% Subordinated Debentures due November 2055	150		(5		)	145		150		(5		)	145
5.875% Subordinated Debentures due March 2059	125		(4		)	121		—		—			—
	425		(14		)	411		300		(10		)	290
	$	1,443	$	(20	)	$	1,423	$	1,318	$	(16	)	$	1,302

AFG has no scheduled principal payments on its long-term debt for the balance of 2019 or in the subsequent five years.

In March 2019, AFG issued $125 million in 5.875% Subordinated Debentures due in 2059.

AFG can borrow up to $500 million under its revolving credit facility, which expires in June 2021. 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. No amounts were borrowed under this facility at September 30, 2019 or December 31, 2018.

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Acquisition of Business

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Acquisition of Business

Acquisition of Business

Effective June 10, 2019, National Interstate, a property and casualty insurance subsidiary of AFG, entered into an agreement with Atlas Financial Holdings, Inc. (“AFH”) to become the exclusive underwriter of AFH’s paratransit book of business. National Interstate estimates that the majority of AFH’s $110 million paratransit business will be eligible for quotation under this arrangement over the first 12 months following inception of the agreement. Under the terms of the agreement, AFH will act as an underwriting manager for National Interstate for at least 12 months, after which time National Interstate is entitled to acquire the renewal rights for the business from AFH for a purchase price equal to 15% of the in force gross written premiums at that date. The majority of the purchase price ultimately paid for the renewal rights will be recorded as an intangible renewal rights asset and will be amortized over the estimated life of the business acquired. In connection with the transaction, AFG was granted a five-year warrant to acquire approximately 2.4 million shares of AFH. The estimated fair value of the warrant was approximately $1 million at the date it was received.

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Derivatives

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

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

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

		September 30, 2019				December 31, 2018
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	118	$	—	$	109	$	—
Public company warrants	Equity securities	—		—		—		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		3,469		—		2,720
Equity index call options	Equity index call options	750		—		184		—
Equity index put options	Other liabilities	—		1		—		1
Reinsurance contracts (embedded derivative)	Other liabilities	—		4		—		2
		$	868	$	3,474	$	293	$	2,723

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

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

AFG’s fixed-indexed and variable-indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG receives collateral from certain counterparties to support its purchased call option assets (net of collateral required under put option contracts with the same counterparties). This collateral ($472 million at September 30, 2019 and $103 million at December 31, 2018) is included in other assets in AFG’s Balance Sheet with an offsetting liability to return the collateral, which is included in other liabilities. AFG’s strategy is designed so that the 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. 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.

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

The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives that do not qualify for hedge accounting for the third quarter and first nine months of 2019 and 2018 (in millions): 

		Three months ended September 30,						Nine months ended September 30,
Derivative	Statement of Earnings Line	2019			2018			2019			2018
MBS with embedded derivatives	Realized gains (losses) on securities	$	3		$	(3	)	$	15		$	(8	)
Public company warrants	Realized gains (losses) on securities	(1		)	1			(1		)	—
Fixed-indexed and variable-indexed annuities (embedded derivative) (*)	Annuity benefits	70			(223		)	(643		)	(286		)
Equity index call options	Annuity benefits	30			219			544			271
Equity index put options	Annuity benefits	—			—			1			—
Reinsurance contract (embedded derivative)	Net investment income	—			—			(2		)	2
		$	102		$	(6	)	$	(86	)	$	(21	)

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

Derivatives Designated and Qualifying as Cash Flow Hedges   As of September 30, 2019, AFG has fourteen active interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of AFG’s floating-rate fixed maturity securities to fixed rates by offsetting the variability in cash flows attributable to changes in short-term LIBOR.

Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on short-term LIBOR. The notional amounts of the interest rate swaps generally decline over each swap’s respective life (the swaps expire between April 2020 and June 2030) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR. The total outstanding notional amount of AFG’s interest rate swaps was $2.11 billion at September 30, 2019 compared to $2.35 billion at December 31, 2018, reflecting the scheduled amortization discussed above, the termination of a swap with a notional amount of $138 million (on the settlement date) in the second quarter of 2019 and the expiration of a swap with a notional amount of $78 million (on the expiration date) in the third quarter of 2019. The fair value of the interest rate swaps in an asset position and included in other assets was $69 million at September 30, 2019 and $16 million at December 31, 2018. The fair value of the interest rate swaps in a liability position and included in other liabilities was less than $1 million at September 30, 2019 and $46 million at December 31, 2018. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of DPAC and deferred taxes. Amounts reclassified from AOCI (before DPAC and taxes) to net investment income were losses of less than $1 million in the third quarter of 2019 and $1 million in the third quarter of 2018 and losses of $1 million and $2 million for the first nine months of 2019 and 2018, respectively. A collateral receivable supporting these swaps of $19 million at September 30, 2019 and $135 million at December 31, 2018 is included in other assets in AFG’s Balance Sheet.

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Shareholders' Equity - Progression of the components of accumulated other comprehensive income (Details) - USD ($) $ in Millions		3 Months Ended				9 Months Ended
		Sep. 30, 2019		Sep. 30, 2018		Sep. 30, 2019		Sep. 30, 2018		Jan. 01, 2018		Dec. 31, 2017
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance						$ 48
Other comprehensive income (loss), net of tax		$ 109		$ (103)		871		$ (548)
Cumulative effect of accounting change												$ 4
AOCI ending balance		917				917
Accumulated Net Investment Gain (Loss) Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, Pretax		136		(122)		1,073		(662)
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, tax		(29)		26		(226)		139
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, net of tax		107		(96)		847		(523)
Reclassification from accumulated other comprehensive income, pretax	[1]	1		(2)		(13)		(4)
Reclassification from accumulated other comprehensive income, tax	[1]	0		0		3		1
Reclassification from accumulated other comprehensive income, net of tax		1		(2)		(10)		(3)
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		137		(124)		1,060		(666)
Other comprehensive income (loss), tax		(29)		26		(223)		140
Other comprehensive income (loss), net of tax		108		(98)		837		(526)
Accumulated Net Investment Gain (Loss) Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, net of tax		0		0		0		0
Reclassification from accumulated other comprehensive income, net of tax	[1]	0		0		0		0
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Net Investment Gain (Loss) Attributable to Parent
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, net of tax		107		(96)		847		(523)
Reclassification from accumulated other comprehensive income, net of tax		1		(2)		(10)		(3)
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		812	[2]	191		83	[2]	840
Other comprehensive income (loss), net of tax		108		(98)		837		(526)
Cumulative effect of accounting change	[3]	0		0		0		0		$ (221)
AOCI ending balance		920	[2]	93		920	[2]	93
Accumulated Net Gain (Loss) from Cash Flow Hedges Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		9		(6)		46		(24)
Other comprehensive income (loss), tax		(2)		1		(10)		5
Other comprehensive income (loss), net of tax		7		(5)		36		(19)
Accumulated Net Gain (Loss) from Cash Flow Hedges Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Net Gain (Loss) from Cash Flow Hedges Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		18		(27)		(11)		(13)
Other comprehensive income (loss), net of tax		7		(5)		36		(19)
Cumulative effect of accounting change	[3]	0		0		0		0		0
AOCI ending balance		25		(32)		25		(32)
Accumulated Foreign Currency Adjustment Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		(6)		0		(3)		(2)
Other comprehensive income (loss), tax		(1)		0		0		(1)
Other comprehensive income (loss), net of tax		(7)		0		(3)		(3)
Accumulated Foreign Currency Adjustment Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		(1)		0		(2)		0
Accumulated Foreign Currency Adjustment Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		(13)		(9)		(16)		(6)
Other comprehensive income (loss), net of tax		(8)		0		(5)		(3)
Cumulative effect of accounting change	[3]	0		0		0		0		0
AOCI ending balance		(21)		(9)		(21)		(9)
Accumulated Defined Benefit Plans Adjustment Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		1		0		1		0
Other comprehensive income (loss), tax		0		0		0		0
Other comprehensive income (loss), net of tax		1		0		1		0
Accumulated Defined Benefit Plans Adjustment Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Defined Benefit Plans Adjustment Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		(8)		(8)		(8)		(8)
Other comprehensive income (loss), net of tax		1		0		1		0
Cumulative effect of accounting change	[3]	0		0		0		0		0
AOCI ending balance		(7)		(8)		(7)		(8)
AOCI Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		141		(130)		1,104		(692)
Other comprehensive income (loss), tax		(32)		27		(233)		144
Other comprehensive income (loss), net of tax		109		(103)		871		(548)
AOCI Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		(1)		0		(2)		0
AOCI Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		809		147		48		813
Other comprehensive income (loss), net of tax		108		(103)		869		(548)
Cumulative effect of accounting change		0	[3]	0	[3]	0	[3]	0	[3]	$ (221)	[3]	$ (221)
AOCI ending balance		$ 917		$ 44		$ 917		$ 44

[1] 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   Realized gains (losses) on securities     Tax   Provision for income taxes  

[2] Includes net unrealized gains of $55 million at September 30, 2019 compared to $59 million at June 30, 2019 and $58 million at December 31, 2018 related to securities for which only the credit portion of an other-than-temporary impairment has been recorded in earnings.

[3] 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.

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Leases - Undiscounted contractual maturities of operating lease liabilities (Details) - USD ($) $ in Millions	Sep. 30, 2019	Jan. 01, 2019
Leases [Abstract]
Lease payments due remainder of fiscal year	$ 12
Lease payments due in 2020	45
Lease payments due in 2021	40
Lease payments due in 2022	31
Lease payments due in 2023	26
Lease payments due thereafter	54
Total lease payments	208
Less: Future lease payments impact of discounting	(24)
Operating lease liability	$ 184	$ 198

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Insurance - Analysis of changes in the liability for losses and loss adjustment expenses, net of reinsurance (Details) - USD ($) $ in Millions		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018
Analysis of changes in the liability for losses and loss adjustment expenses, net of reinsurance
Balance at beginning of year		$ 9,741	$ 9,678
Less reinsurance recoverables, net of allowance		2,942	2,957
Net liability at beginning of year		6,799	6,721
Liability for losses and loss adjustment expenses, period increase (decrease) [Abstract]
Provision for losses and LAE occurring in the current period		2,457	2,337
Total losses and LAE incurred		2,359	2,206
Payments for losses and LAE of:
Current year		(731)	(569)
Prior years		(1,408)	(1,313)
Total payments		(2,139)	(1,882)
Reserves of business disposed	[1]	0	(319)
Foreign currency translation and other		(5)	(4)
Net liability at end of period		7,014	6,722
Add back reinsurance recoverables, net of allowance		2,833	2,948
Gross unpaid losses and LAE included in the balance sheet at end of period		9,847	9,670
Special Asbestos and Environmental reserve charges
Liability for losses and loss adjustment expenses, period increase (decrease) [Abstract]
Net increase (decrease) in the provision for claims of prior years		18	18
Other
Liability for losses and loss adjustment expenses, period increase (decrease) [Abstract]
Net increase (decrease) in the provision for claims of prior years		$ (116)	$ (149)

[1] Reflects the reinsurance to close transaction at Neon discussed below.

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Investments - Scheduled maturities of available for sale fixed maturities (Details) $ in Millions	9 Months Ended
	Sep. 30, 2019 USD ($)
Fair Value Percent, Fiscal Year Maturity [Abstract]
Average life of ABS	4 years 6 months
Average life of MBS	4 years 6 months
Fixed maturities
Amortized Cost Basis, Fiscal Year Maturity [Abstract]
One year or less	$ 2,223
After one year through five years	10,338
After five years through ten years	13,997
After ten years	3,715
Fixed maturities amortized cost, Subtotal	30,273
Collateralized loan obligations and other ABS (average life of approximately 4.5 years)	9,859
MBS (average life of approximately 4.5 years)	3,202
Amortized Cost	43,334
Fair Value, Fiscal Year Maturity [Abstract]
One year or less	2,249
After one year through five years	10,742
After five years through ten years	14,927
After ten years	4,012
Fixed maturities fair value, Subtotal	31,930
Collateralized loan obligations and other ABS (average life of approximately 4.5 years)	10,045
MBS (average life of approximately 4.5 years)	3,528
Fair Value	$ 45,503
Fair Value Percent, Fiscal Year Maturity [Abstract]
One year or less	5.00%
After one year through five years	24.00%
After five years through ten years	33.00%
After ten years	8.00%
Fixed maturities fair value, Subtotal, Percent	70.00%
Collateralized loan obligations and other ABS (average life of approximately 4.5 years)	22.00%
MBS (average life of approximately 4.5 years)	8.00%
Fair value, Total, Percent	100.00%

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Investments - Holding gains (losses) on equity securities still held (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Realized gains (losses) on securities still owned	$ (18)	$ 34	$ 222	$ (28)
Included in net investment income	593	533	1,727	1,568
Equity securities
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Realized gains (losses) on securities still owned	(16)	33	210	(39)
Equity securities still owned | Equity securities | Accounting Standards Update 2016-01
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Net holding gains (losses) on equity securities	(7)	27	180	(35)
Equity securities still owned | Realized gains (losses) on securities | Equity securities | Accounting Standards Update 2016-01
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Realized gains (losses) on securities still owned	(24)	25	146	(51)
Equity securities still owned | Investment income | Equity securities | Accounting Standards Update 2016-01
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Included in net investment income	$ 17	$ 2	$ 34	$ 16

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 01, 2019
Entity Information [Line Items]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2019
Document Transition Report	false
Entity File Number	1-13653
Entity Registrant Name	AMERICAN FINANCIAL GROUP, INC.
Entity Incorporation, State or Country Code	OH
Entity Tax Identification Number	31-1544320
Entity Central Index Key	0001042046
Entity Address, Address Line One	301 East Fourth Street
Entity Address, City or Town	Cincinnati
Entity Address, State or Province	OH
Entity Address, Postal Zip Code	45202
City Area Code	513
Local Phone Number	579-2121
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Amendment Flag	false
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		90,176,219
Entity Common Stock, Shares Outstanding Owned by Subsidiaries		14,900,000
Common stocks
Entity Information [Line Items]
Title of 12(b) Security	Common Stock
Trading Symbol	AFG
Security Exchange Name	NYSE
6-1/4% Subordinated Debentures due September 2054
Entity Information [Line Items]
Title of 12(b) Security	6-1/4% Subordinated Debentures due September 30, 2054
Trading Symbol	AFGE
Security Exchange Name	NYSE
6% Subordinated Debentures due November 2055
Entity Information [Line Items]
Title of 12(b) Security	6% Subordinated Debentures due November 15, 2055
Trading Symbol	AFGH
Security Exchange Name	NYSE
5.875% Subordinated Debentures due in March 2059
Entity Information [Line Items]
Title of 12(b) Security	5.875% Subordinated Debentures due March 30, 2059
Trading Symbol	AFGB
Security Exchange Name	NYSE

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Leases - Narrative (Details) - USD ($) $ in Millions	Sep. 30, 2019	Jan. 01, 2019
Leases [Abstract]
Operating lease right-of-use asset	$ 162	$ 174
Deferred rent and lease incentives	22	24
Operating lease liability	$ 184	$ 198

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Consolidated Statement of Comprehensive Income (Unaudited) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement of Comprehensive Income [Abstract]
Net earnings, including noncontrolling interests	$ 143	$ 203	$ 678	$ 552
Net unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	107	(96)	847	(523)
Reclassification adjustment for realized (gains) losses included in net earnings	1	(2)	(10)	(3)
Total net unrealized gains (losses) on securities	108	(98)	837	(526)
Net unrealized gains (losses) on cash flow hedges	7	(5)	36	(19)
Foreign currency translation adjustments	(7)	0	(3)	(3)
Pension and other postretirement plans adjustments	(1)	0	(1)	0
Other comprehensive income (loss), net of tax	109	(103)	871	(548)
Total comprehensive income, net of tax	252	100	1,549	4
Less: Comprehensive income (loss) attributable to noncontrolling interests	(3)	(1)	(6)	(7)
Comprehensive income attributable to shareholders	$ 255	$ 101	$ 1,555	$ 11

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Derivatives - Gain (loss) included in the Statement of Earnings for changes in the fair value of derivatives that do not qualify for hedge accounting (Details) - Not Designated as Hedging Instrument - USD ($) $ in Millions	3 Months Ended			9 Months Ended
	Sep. 30, 2019		Sep. 30, 2018	Sep. 30, 2019		Sep. 30, 2018
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	$ 102		$ (6)	$ (86)		$ (21)
MBS with embedded derivatives | Realized gains (losses) on securities
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	3		(3)	15		(8)
Public company warrants | Realized gains (losses) on securities
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	(1)		1	(1)		0
Fixed-indexed and variable-indexed annuities (embedded derivative) | Annuity benefits
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	70	[1]	(223)	(643)	[1]	(286)	[1]
Equity index call options | Annuity benefits
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	30		219	544		271
Equity index put options | Annuity benefits
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	0		0	1		0
Reinsurance contracts (embedded derivative) | Net investment income
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	$ 0		$ 0	$ (2)		$ 2

[1] The change in fair value of the embedded derivative includes a favorable adjustment related to the unlocking of actuarial assumptions of $181 million in the third quarter of 2019 and a loss of $44 million in the second quarter of 2018.

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Accounting Policies

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Accounting Policies

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. 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, 2019, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

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.

Fair Value Measurements   Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first nine months of 2019.

Investments On January 1, 2018, AFG adopted Accounting Standards Update (“ASU”) 2016-01, which 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 December 31, 2017, AFG had $1.60 billion in equity securities classified as “available for sale” under the prior guidance with holding gains and losses included in accumulated other comprehensive income (“AOCI”) instead of net earnings. At the date of adoption, the $221 million net unrealized gain on equity securities included in AOCI was reclassified to retained earnings as the cumulative effect of an accounting change. The cumulative effect of the accounting change also includes the net unrealized gain on AFG’s small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under the new guidance ($4 million net of tax at the date of adoption).

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

Fixed maturity securities classified as “available for sale” are reported at fair value with unrealized gains and losses included in AOCI 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 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 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.

Gains or losses on fixed maturity securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment is charged to earnings (included in realized gains (losses) on securities) and the cost basis of that investment is reduced. If management can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment 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 of an other-than-temporary impairment 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 impairment charge. Both components are shown in the statement of earnings. 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 charge to earnings is recorded to reduce the amortized cost of that security to fair value.

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

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

Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI and are reclassified into earnings when the variability of the cash flows from the hedged items impacts earnings. When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item in the statement of earnings as the cash flows from the hedged item. AFG uses interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities.

Goodwill   Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net assets. 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 insurance subsidiaries also assume reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

An AFG subsidiary cedes life insurance policies to a third party on a funds withheld basis whereby the subsidiary retains the assets (securities) associated with the reinsurance contract. Interest is credited to the reinsurer based on the actual investment

performance of the retained assets. This reinsurance contract is considered to contain an embedded derivative (that must be adjusted to fair value) because the yield on the payable is based on a specific block of the ceding company’s assets, rather than the overall creditworthiness of the ceding company. AFG determined that changes in the fair value of the underlying portfolio of fixed maturity securities is an appropriate measure of the value of the embedded derivative. The securities related to this contract are classified as “trading.” The adjustment to fair value on the embedded derivative offsets the investment income recorded on the adjustment to fair value of the related trading portfolio.

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

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

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

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

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

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

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

AFG manages, and has investments in, collateralized loan obligations (“CLOs”) that are VIEs (see Note 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.

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

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

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

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

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

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

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

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

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

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

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

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

Leases   On January 1, 2019, AFG adopted ASU 2016-02, which requires entities that lease assets for terms longer than one year to recognize 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. As permitted under the ASU, AFG adopted the guidance on a modified retrospective basis (comparative periods were not adjusted) and elected the following accounting policies and practical expedients:

• exclude leases with a term of 12 months or less from the calculation of lease assets and liabilities,

• not separate lease and non-lease components except for buildings (office space and storage facilities),

• for contracts existing at the date of adoption – not reassess whether a contract is a lease or contains a lease, how initial direct costs were accounted for or whether the lease is an operating or finance lease, and

• use hindsight to determine the lease term for leases existing at the date of adoption.

Adoption of the new guidance resulted in AFG recognizing a lease liability of $198 million (included in other liabilities) and a corresponding right-of-use asset of $174 million (which is presented net of $24 million in deferred rent and lease incentives) on January 1, 2019. Deferred rent and lease incentives were recognized as liabilities under the previous guidance and result from the straight-line expensing of operating leases. The adoption of the new guidance did not have a material effect on the AFG’s results of operations or liquidity. See Note K — “Leases” for additional disclosures.

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

Premium Recognition   Property and casualty premiums are earned generally over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations. For traditional life, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. For interest-sensitive life and universal life products, premiums are recorded in a policyholder account, which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses.

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

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

Stock-Based Compensation   All share-based grants are recognized as compensation expense on a straight-line basis over their vesting periods based on their calculated fair value at the date of grant. AFG uses the Black Scholes pricing model to measure the fair value of employee stock options. See Note L — “Shareholders’ Equity” for further information.

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 2019 and 2018 — 1.1 million and 1.6 million; first nine months of 2019 and 2018 — 1.2 million and 1.7 million, respectively.

There were no anti-dilutive potential common shares in the third quarter or first nine months of 2019 or 2018.

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

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Managed Investment Entities - Selected financial information related to CLOs (Details) - USD ($) $ in Millions		3 Months Ended		9 Months Ended
		Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Gains (losses) on change in fair value of assets/liabilities:
Assets	[1]	$ (18)	$ 20	$ 69	$ 5
Liabilities	[1]	4	(25)	(85)	(15)
Management fees paid to AFG		4	4	11	12
CLO earnings (losses) attributable to AFG shareholders	[2]	(5)	4	11	11
Variable interest entity, primary beneficiary
Variable Interest Entity [Line Items]
Investment in CLO tranches at end of period		$ 179	$ 191	$ 179	$ 191	$ 188

[1] Included in revenues in AFG’s Statement of Earnings.

[2] Included in earnings before income taxes in AFG’s Statement of Earnings.

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Investments - Narrative (Details) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) security	Sep. 30, 2018 USD ($)	Dec. 31, 2018 USD ($)
Investment [Line Items]
Percentage (based on amount of unrealized loss) of available for sale fixed maturities that are in an unrealized loss position and rated investment grade			63.00%
Percentage (based on fair value) of available for sale fixed maturities that are in an unrealized loss position and rated investment grade			88.00%
Other than temporary impairment charges	$ 9	$ 2	$ 13	$ 3
Residential MBS
Investment [Line Items]
Non-credit related portion of other-than-temporary impairment charges taken for securities still owned	124		124		$ 140
Gross unrealized losses on fixed maturities	(4)		(4)		(9)
Other than temporary impairment charges				1
Collateralized loan obligations
Investment [Line Items]
Gross unrealized losses on fixed maturities	(18)		(18)		(73)
Other than temporary impairment charges			15
Securities with non-credit other-than-temporary impairment charges
Investment [Line Items]
Gross unrealized gains	114		114		119
Gross unrealized losses	(3)		(3)		(4)
Fixed maturities
Investment [Line Items]
Gross unrealized losses on fixed maturities	(64)		$ (64)		$ (603)
Number of available for sale securities in an unrealized loss position | security			602
Other than temporary impairment charges	$ 14	$ 2	$ 20	3
Corporate bonds
Investment [Line Items]
Other than temporary impairment charges			4	$ 2
Maximum | Residential MBS
Investment [Line Items]
Other than temporary impairment charges			$ 1

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Fair Value Measurements - Unobservable inputs used in determining fair value of embedded derivatives (Details) - Embedded derivatives	9 Months Ended
	Sep. 30, 2019
Unobservable inputs used by management in determining fair value of embedded derivatives
Risk margin for uncertainty in cash flows	0.80%
Minimum
Unobservable inputs used by management in determining fair value of embedded derivatives
Adjustment for insurance subsidiary’s credit risk	0.20%
Surrenders	3.00%
Partial surrenders	2.00%
Annuitizations	0.10%
Deaths	1.70%
Budgeted option costs	2.30%
Maximum
Unobservable inputs used by management in determining fair value of embedded derivatives
Adjustment for insurance subsidiary’s credit risk	2.60%
Surrenders	22.00%
Partial surrenders	9.00%
Annuitizations	1.00%
Deaths	10.60%
Budgeted option costs	3.30%

XML

Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

Contingencies

Contingencies

There have been no significant changes to the matters discussed and referred to in Note M — “Contingencies” of AFG’s 2018 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, as well as contingencies related to the sale of substantially all of AFG’s run-off long-term care insurance business.

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Assets and liabilities measured at fair value

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

	Level 1		Level 2		Level 3		Total
September 30, 2019
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	151	$	70	$	8	$	229
States, municipalities and political subdivisions	—		6,862		102		6,964
Foreign government	—		164		—		164
Residential MBS	—		2,406		156		2,562
Commercial MBS	—		911		55		966
Collateralized loan obligations	—		4,257		57		4,314
Other asset-backed securities	—		5,317		414		5,731
Corporate and other	29		22,258		2,286		24,573
Total AFS fixed maturities	180		42,245		3,078		45,503
Trading fixed maturities	2		106		—		108
Equity securities	1,518		66		420		2,004
Equity index call options	—		750		—		750
Assets of managed investment entities (“MIE”)	228		4,456		18		4,702
Variable annuity assets (separate accounts) (*)	—		601		—		601
Other assets — derivatives	—		69		—		69
Total assets accounted for at fair value	$	1,928	$	48,293	$	3,516	$	53,737
Liabilities:
Liabilities of managed investment entities	$	219	$	4,287	$	17	$	4,523
Derivatives in annuity benefits accumulated	—		—		3,469		3,469
Other liabilities — derivatives	—		6		—		6
Total liabilities accounted for at fair value	$	219	$	4,293	$	3,486	$	7,998
December 31, 2018
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	141	$	83	$	9	$	233
States, municipalities and political subdivisions	—		6,880		59		6,939
Foreign government	—		142		—		142
Residential MBS	—		2,547		197		2,744
Commercial MBS	—		864		56		920
Collateralized loan obligations	—		4,162		116		4,278
Other asset-backed securities	—		4,802		731		5,533
Corporate and other	28		19,184		1,996		21,208
Total AFS fixed maturities	169		38,664		3,164		41,997
Trading fixed maturities	9		96		—		105
Equity securities	1,410		68		336		1,814
Equity index call options	—		184		—		184
Assets of managed investment entities	203		4,476		21		4,700
Variable annuity assets (separate accounts) (*)	—		557		—		557
Other assets — derivatives	—		16		—		16
Total assets accounted for at fair value	$	1,791	$	44,061	$	3,521	$	49,373
Liabilities:
Liabilities of managed investment entities	$	195	$	4,297	$	20	$	4,512
Derivatives in annuity benefits accumulated	—		—		2,720		2,720
Other liabilities — derivatives	—		49		—		49
Total liabilities accounted for at fair value	$	195	$	4,346	$	2,740	$	7,281

(*)

Variable annuity liabilities equal the fair value of variable annuity assets.

Unobservable inputs used by management in determining fair value of embedded derivatives

The following table presents information about the unobservable inputs used by management in determining fair value of these Level 3 liabilities. See Note F — “Derivatives.”

Unobservable Input	Range
Adjustment for insurance subsidiary’s credit risk	0.2% – 2.6% over the risk-free rate
Risk margin for uncertainty in cash flows	0.80% reduction in the discount rate
Surrenders	3% – 22% of indexed account value
Partial surrenders	2% – 9% of indexed account value
Annuitizations	0.1% – 1% of indexed account value
Deaths	1.7% – 10.6% of indexed account value
Budgeted option costs	2.3% – 3.3% of indexed account value

Changes in balances of Level 3 financial assets

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the third quarter and first nine months of 2019 and 2018 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs and $29 million of equity securities transferred into Level 3 in the first quarter of 2018 related to a small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under new guidance adopted on January 1, 2018, as discussed in Note A — “Accounting Policies — Investments.” 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
	Balance at June 30, 2019			Net earnings			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	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	82			—			2			—			—			18		—			102
Residential MBS	139			1			(1		)	—			(4		)	22		(1		)	156
Commercial MBS	50			1			—			—			—			4		—			55
Collateralized loan obligations	50			(2		)	1			8			—			—		—			57
Other asset-backed securities	367			—			1			49			(3		)	—		—			414
Corporate and other	2,014			—			20			324			(81		)	10		(1		)	2,286
Total AFS fixed maturities	2,710			—			23			381			(88		)	54		(2		)	3,078
Equity securities	377			(7		)	—			18			(2		)	34		—			420
Assets of MIE	19			(1		)	—			—			—			—		—			18
Total Level 3 assets	$	3,106		$	(8	)	$	23		$	399		$	(90	)	$	88	$	(2	)	$	3,516
Embedded derivatives (a)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at June 30, 2018			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	61			—			—			—			(1		)	—		—			60
Residential MBS	147			(2		)	(2		)	—			(6		)	13		(5		)	145
Commercial MBS	56			2			—			(1		)	—			—		—			57
Collateralized loan obligations	212			—			(2		)	—			—			—		—			210
Other asset-backed securities	792			—			(1		)	13			(23		)	—		—			781
Corporate and other	1,408			—			(3		)	312			(59		)	—		(12		)	1,646
Total AFS fixed maturities	2,684			—			(8		)	324			(89		)	13		(17		)	2,907
Equity securities	230			(5		)	—			81			—			—		(17		)	289
Assets of MIE	23			(1		)	—			—			—			—		—			22
Total Level 3 assets	$	2,937		$	(6	)	$	(8	)	$	405		$	(89	)	$	13	$	(34	)	$	3,218
Embedded derivatives	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)

(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 $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 the MIE assets.

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2018			Net earnings			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		$	—		$	—		$	—		$	(1	)	$	—	$	—		$	8
State and municipal	59			—			9			—			(2		)	36		—			102
Residential MBS	197			10			(6		)	—			(14		)	24		(55		)	156
Commercial MBS	56			3			—			—			(3		)	4		(5		)	55
Collateralized loan obligations	116			(5		)	7			8			—			13		(82		)	57
Other asset-backed securities	731			—			6			141			(135		)	—		(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		)	—			38			(3		)	56		—			420
Assets of MIE	21			(3		)	—			—			—			—		—			18
Total Level 3 assets	$	3,521		$	—		$	87		$	1,172		$	(488	)	$	145	$	(921	)	$	3,516
Embedded derivatives (a)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2017			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(2		)	—		(84		)	60
Residential MBS	122			(9		)	(2		)	—			(17		)	70		(19		)	145
Commercial MBS	36			1			—			20			—			—		—			57
Collateralized loan obligations	180			(2		)	(3		)	35			—			—		—			210
Other asset-backed securities	564			—			(3		)	318			(80		)	—		(18		)	781
Corporate and other	1,044			2			(21		)	784			(138		)	—		(25		)	1,646
Total AFS fixed maturities	2,102			(8		)	(31		)	1,157			(237		)	70		(146		)	2,907
Equity securities	165			9			—			106			(4		)	30		(17		)	289
Assets of MIE	23			(6		)	—			5			—			—		—			22
Total Level 3 assets	$	2,290		$	(5	)	$	(31	)	$	1,268		$	(241	)	$	100	$	(163	)	$	3,218
Embedded derivatives (a)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)

(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 $181 million in the first nine months of 2019 compared to a loss of $44 million in the first nine months of 2018.

(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.

Changes in balances of Level 3 financial liabilities

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the third quarter and first nine months of 2019 and 2018 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs and $29 million of equity securities transferred into Level 3 in the first quarter of 2018 related to a small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under new guidance adopted on January 1, 2018, as discussed in Note A — “Accounting Policies — Investments.” 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
	Balance at June 30, 2019			Net earnings			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	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	82			—			2			—			—			18		—			102
Residential MBS	139			1			(1		)	—			(4		)	22		(1		)	156
Commercial MBS	50			1			—			—			—			4		—			55
Collateralized loan obligations	50			(2		)	1			8			—			—		—			57
Other asset-backed securities	367			—			1			49			(3		)	—		—			414
Corporate and other	2,014			—			20			324			(81		)	10		(1		)	2,286
Total AFS fixed maturities	2,710			—			23			381			(88		)	54		(2		)	3,078
Equity securities	377			(7		)	—			18			(2		)	34		—			420
Assets of MIE	19			(1		)	—			—			—			—		—			18
Total Level 3 assets	$	3,106		$	(8	)	$	23		$	399		$	(90	)	$	88	$	(2	)	$	3,516
Embedded derivatives (a)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(3,541	)	$	70		$	—		$	(63	)	$	65		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at June 30, 2018			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	61			—			—			—			(1		)	—		—			60
Residential MBS	147			(2		)	(2		)	—			(6		)	13		(5		)	145
Commercial MBS	56			2			—			(1		)	—			—		—			57
Collateralized loan obligations	212			—			(2		)	—			—			—		—			210
Other asset-backed securities	792			—			(1		)	13			(23		)	—		—			781
Corporate and other	1,408			—			(3		)	312			(59		)	—		(12		)	1,646
Total AFS fixed maturities	2,684			—			(8		)	324			(89		)	13		(17		)	2,907
Equity securities	230			(5		)	—			81			—			—		(17		)	289
Assets of MIE	23			(1		)	—			—			—			—		—			22
Total Level 3 assets	$	2,937		$	(6	)	$	(8	)	$	405		$	(89	)	$	13	$	(34	)	$	3,218
Embedded derivatives	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,776	)	$	(223	)	$	—		$	(151	)	$	45		$	—	$	—		$	(3,105	)

(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 $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 the MIE assets.

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2018			Net earnings			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		$	—		$	—		$	—		$	(1	)	$	—	$	—		$	8
State and municipal	59			—			9			—			(2		)	36		—			102
Residential MBS	197			10			(6		)	—			(14		)	24		(55		)	156
Commercial MBS	56			3			—			—			(3		)	4		(5		)	55
Collateralized loan obligations	116			(5		)	7			8			—			13		(82		)	57
Other asset-backed securities	731			—			6			141			(135		)	—		(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		)	—			38			(3		)	56		—			420
Assets of MIE	21			(3		)	—			—			—			—		—			18
Total Level 3 assets	$	3,521		$	—		$	87		$	1,172		$	(488	)	$	145	$	(921	)	$	3,516
Embedded derivatives (a)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)
Total Level 3 liabilities (b)	$	(2,720	)	$	(643	)	$	—		$	(276	)	$	170		$	—	$	—		$	(3,469	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2017			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at September 30, 2018
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(2		)	—		(84		)	60
Residential MBS	122			(9		)	(2		)	—			(17		)	70		(19		)	145
Commercial MBS	36			1			—			20			—			—		—			57
Collateralized loan obligations	180			(2		)	(3		)	35			—			—		—			210
Other asset-backed securities	564			—			(3		)	318			(80		)	—		(18		)	781
Corporate and other	1,044			2			(21		)	784			(138		)	—		(25		)	1,646
Total AFS fixed maturities	2,102			(8		)	(31		)	1,157			(237		)	70		(146		)	2,907
Equity securities	165			9			—			106			(4		)	30		(17		)	289
Assets of MIE	23			(6		)	—			5			—			—		—			22
Total Level 3 assets	$	2,290		$	(5	)	$	(31	)	$	1,268		$	(241	)	$	100	$	(163	)	$	3,218
Embedded derivatives (a)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(286	)	$	—		$	(395	)	$	118		$	—	$	—		$	(3,105	)

(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 $181 million in the first nine months of 2019 compared to a loss of $44 million in the first nine months of 2018.

(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.

Fair value of financial instruments

The carrying value and fair value of financial instruments 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
September 30, 2019
Financial assets:
Cash and cash equivalents	$	2,693	$	2,693	$	2,693	$	—	$	—
Mortgage loans	1,174		1,195		—		—		1,195
Policy loans	166		166		—		—		166
Total financial assets not accounted for at fair value	$	4,033	$	4,054	$	2,693	$	—	$	1,361
Financial liabilities:
Annuity benefits accumulated (*)	$	39,401	$	39,468	$	—	$	—	$	39,468
Long-term debt	1,423		1,521		—		1,518		3
Total financial liabilities not accounted for at fair value	$	40,824	$	40,989	$	—	$	1,518	$	39,471
December 31, 2018
Financial assets:
Cash and cash equivalents	$	1,515	$	1,515	$	1,515	$	—	$	—
Mortgage loans	1,068		1,056		—		—		1,056
Policy loans	174		174		—		—		174
Total financial assets not accounted for at fair value	$	2,757	$	2,745	$	1,515	$	—	$	1,230
Financial liabilities:
Annuity benefits accumulated (*)	$	36,384	$	34,765	$	—	$	—	$	34,765
Long-term debt	1,302		1,231		—		1,228		3
Total financial liabilities not accounted for at fair value	$	37,686	$	35,996	$	—	$	1,228	$	34,768

(*)

Excludes $250 million and $232 million of life contingent annuities in the payout phase at September 30, 2019 and December 31, 2018, respectively.