Level 1 — Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis). AFG’s Level 1 financial instruments consist primarily of publicly traded equity securities, highly liquid government bonds for which quoted market prices in active markets are available and short-term investments of managed investment entities.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. AFG’s Level 2 financial instruments include separate account assets, corporate and municipal fixed maturity securities, asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), certain non-affiliated common stocks, equity index options and investments of managed investment entities priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.

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

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

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


	Level 1		Level 2		Level 3		Total
March 31, 2021
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	212	$	3	$	—	$	215
States, municipalities and political subdivisions	—		2,128		39		2,167
Foreign government	—		190		—		190
Residential MBS	—		820		27		847
Commercial MBS	—		109		—		109
Collateralized loan obligations	—		1,125		6		1,131
Other asset-backed securities	—		1,862		326		2,188
Corporate and other	4		2,234		204		2,442
Total AFS fixed maturities	216		8,471		602		9,289
Trading fixed maturities	—		26		—		26
Equity securities	670		47		227		944
Assets of managed investment entities (“MIE”)	288		4,800		14		5,102

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

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

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

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

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

Approximately 5% of the total assets of continuing operations carried at fair value at March 31, 2021, were Level 3 assets. Approximately 22% ($185 million) of those Level 3 assets were priced using non-binding broker quotes, for which there is a lack of transparency as to the inputs used to determine fair value. Details as to the quantitative inputs are neither provided by the brokers nor otherwise reasonably obtainable by AFG. Approximately $78 million (9%) of the Level 3 assets were priced by pricing services where either a single price was not corroborated, prices varied enough among the providers, or other market factors led management to determine these securities be classified as Level 3 assets.

Internally developed Level 3 asset fair values of continuing operations represent approximately $488 million (58%) of the total fair value of Level 3 assets at March 31, 2021. These fixed maturities are priced using a variety of inputs, including appropriate credit spreads over the treasury yield (of a similar duration), trade information and prices of comparable securities and other security specific features (such as optional early redemption). Internally developed prices for equity

securities are based primarily on financial information of the entities invested in and sales of comparable companies. Since internally developed Level 3 asset fair values represent less than 10% of AFG’s Shareholders’ Equity, any justifiable changes in unobservable inputs used to determine internally developed fair values would not have a material impact on AFG’s financial position.


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


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

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

Unobservable Input

Range

Adjustment for insurance subsidiary’s credit risk

0% – 2.1% over the risk-free rate

Risk margin for uncertainty in cash flows

0.99% reduction in the discount rate

Surrenders

7% – 22% of indexed account value

Partial surrenders

2% – 11% of indexed account value

Annuitizations

0.1% – 1% of indexed account value

Deaths

2.0% – 13.6% of indexed account value

Budgeted option costs

2.2% – 2.9% of indexed account value

The range of adjustments for insurance subsidiary’s credit risk is based on the Moody’s corporate A2 bond index and reflects credit spread variations across the yield curve. The range of projected surrender rates reflects the specific surrender charges and other features of AFG’s individual fixed-indexed and variable-indexed annuity products with an expected range of 8% to 11% in the majority of future calendar years (7% 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 first three months of 2021 and 2020 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period.


			Total realized/unrealized gains (losses) included in
	Balance at December 31, 2020		Net earnings (loss)		Other comprehensive income (loss)		Purchases and issuances		Sales and settlements		Transfer into Level 3		Transfer out of Level 3		Balance at March 31, 2021
AFS fixed maturities:
U.S. government agency	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal	39		—		—		—		—		—		—		39
Residential MBS	38		(3)		—		6		—		3		(17)		27
Commercial MBS	2		—		—		—		—		—		(2)		—
Collateralized loan obligations	16		1		(1)		—		(1)		—		(9)		6
Other asset-backed securities	305		—		—		52		(23)		14		(22)		326
Corporate and other	138		1		(1)		84		(18)		2		(2)		204
Total AFS fixed maturities	538		(1)		(2)		142		(42)		19		(52)		602
Equity securities	176		53		—		12		(14)		—		—		227
Assets of MIE	21		4		—		1		—		—		(12)		14
Assets of discontinued annuity operations	2,971		70		(43)		196		(191)		32		(229)		2,806
Total Level 3 assets	$	3,706	$	126	$	(45)	$	351	$	(247)	$	51	$	(293)	$	3,649

Liabilities of discontinued annuity operations	$	(3,933)	$	(40)	$	—	$	(74)	$	93	$	—	$	—	$	(3,954)
Total Level 3 liabilities (*)	$	(3,933)	$	(40)	$	—	$	(74)	$	93	$	—	$	—	$	(3,954)


			Total realized/unrealized gains (losses) included in
	Balance at December 31, 2019		Net earnings (loss)		Other comprehensive income (loss)		Purchases and issuances		Sales and settlements		Transfer into Level 3		Transfer out of Level 3		Balance at March 31, 2020
AFS fixed maturities:
U.S. government agency	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal	40		—		1		—		—		—		—		41
Residential MBS	45		1		(2)		—		(1)		1		—		44
Commercial MBS	6		—		—		—		—		—		—		6
Collateralized loan obligations	1		—		—		—		—		43		—		44
Other asset-backed securities	256		(6)		—		22		(41)		7		—		238
Corporate and other	223		(1)		(3)		24		(7)		2		(66)		172
Total AFS fixed maturities	571		(6)		(4)		46		(49)		53		(66)		545
Equity securities	161		(18)		—		3		—		9		—		155
Assets of MIE	17		(1)		—		—		—		—		—		16
Assets of discontinued annuity operations	3,092		(18)		(44)		153		(174)		133		(345)		2,797
Total Level 3 assets	$	3,841	$	(43)	$	(48)	$	202	$	(223)	$	195	$	(411)	$	3,513

Liabilities of discontinued annuity operations	$	(3,730)	$	647	$	—	$	(78)	$	62	$	—	$	—	$	(3,099)
Total Level 3 liabilities (*)	$	(3,730)	$	647	$	—	$	(78)	$	62	$	—	$	—	$	(3,099)


	Carrying		Fair Value
	Value		Total		Level 1		Level 2		Level 3
March 31, 2021
Financial assets:
Cash and cash equivalents	$	1,691	$	1,691	$	1,691	$	—	$	—
Mortgage loans	408		411		—		—		411
Total financial assets not accounted for at fair value	$	2,099	$	2,102	$	1,691	$	—	$	411

Long-term debt	$	1,963	$	2,218	$	—	$	2,215	$	3
Total financial liabilities not accounted for at fair value	$	1,963	$	2,218	$	—	$	2,215	$	3

December 31, 2020
Financial assets:
Cash and cash equivalents	$	1,665	$	1,665	$	1,665	$	—	$	—
Mortgage loans	377		382		—		—		382
Total financial assets not accounted for at fair value	$	2,042	$	2,047	$	1,665	$	—	$	382

Long-term debt	$	1,963	$	2,325	$	—	$	2,322	$	3
Total financial liabilities not accounted for at fair value	$	1,963	$	2,325	$	—	$	2,322	$	3


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

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

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

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