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Investments

3 Months Ended

Mar. 31, 2021

Investments, Debt and Equity Securities [Abstract]

Available for sale fixed maturities held by AFG’s continuing operations at March 31, 2021 and December 31, 2020, consisted of the following (in millions):


	Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized				Net Unrealized		Fair Value
					Gains		Losses
March 31, 2021
Fixed maturities:
U.S. Government and government agencies	$	212	$	—	$	4	$	(1)	$	3	$	215
States, municipalities and political subdivisions	2,076		—		91		—		91		2,167
Foreign government	188		—		2		—		2		190
Residential MBS	796		—		53		(2)		51		847
Commercial MBS	106		—		3		—		3		109
Collateralized loan obligations	1,131		1		4		(3)		1		1,131
Other asset-backed securities	2,178		8		24		(6)		18		2,188
Corporate and other	2,372		1		75		(4)		71		2,442
Total fixed maturities	$	9,059	$	10	$	256	$	(16)	$	240	$	9,289

December 31, 2020
Fixed maturities:
U.S. Government and government agencies	$	192	$	—	$	6	$	—	$	6	$	198
States, municipalities and political subdivisions	2,196		—		116		—		116		2,312
Foreign government	172		—		4		—		4		176
Residential MBS	859		—		57		(1)		56		915
Commercial MBS	89		—		3		—		3		92
Collateralized loan obligations	1,065		3		4		(4)		—		1,062
Other asset-backed securities	2,040		7		27		(13)		14		2,047
Corporate and other	2,199		2		88		(3)		85		2,282
Total fixed maturities	$	8,812	$	12	$	305	$	(21)	$	284	$	9,084

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


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

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

Equity securities held by AFG’s continuing operations, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at March 31, 2021 and December 31, 2020 (in millions):


	March 31, 2021						December 31, 2020
					Fair Value						Fair Value
	Actual Cost				over (under)		Actual Cost				over (under)
			Fair Value		Cost				Fair Value		Cost
Common stocks	$	467	$	536	$	69	$	516	$	510	$	(6)
Perpetual preferred stocks	371		408		37		369		379		10
Total equity securities carried at fair value	$	838	$	944	$	106	$	885	$	889	$	4

Investments accounted for using the equity method held by AFG’s continuing operations, by category, carrying value and net investment income are as follows (in millions):


	Carrying Value				Net Investment Income
	March 31, 2021		December 31, 2020		Three months ended March 31,
					2021		2020
Real estate-related investments (*)	$	985	$	915	$	54	$	26
Private equity	284		266		21		(5)
Private debt	55		54		3		2
Total investments accounted for using the equity method	$	1,324	$	1,235	$	78	$	23

(*)Includes 88% invested in multi-family properties, 2% in single family properties and 10% in other property types as of March 31, 2021 and 87% invested in multi-family properties, 2% in single family properties and 11% in other property types as of December 31, 2020.

The valuation of these investments is generally reported on a three-month lag due to the timing required to obtain the necessary information from the funds. AFG regularly reviews and discusses fund performance with the fund managers to

corroborate the reasonableness of the reported asset values and to assess whether any events have occurred within the lag period that may materially affect the valuation of these investments.

With respect to partnerships and similar investments, AFG’s continuing operations had unfunded commitments of $260 million and $290 million as of March 31, 2021 and December 31, 2020, respectively.

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

The following table shows gross unrealized losses (dollars in millions) on available for sale fixed maturities held by AFG’s continuing operations by investment category and length of time that individual securities have been in a continuous unrealized loss position at the following balance sheet dates.


	Less Than Twelve Months						Twelve Months or More
	Unrealized Loss		Fair Value		Fair Value as % of Cost		Unrealized Loss		Fair Value		Fair Value as % of Cost
March 31, 2021
Fixed maturities:
U.S. Government and government agencies	$	(1)	$	105	99	%	$	—	$	—	—	%
States, municipalities and political subdivisions	—		29		100	%	—		18		100	%
Foreign government	—		35		100	%	—		—		—	%
Residential MBS	(1)		86		99	%	(1)		11		92	%
Commercial MBS	—		14		100	%	—		5		100	%
Collateralized loan obligations	(1)		113		99	%	(2)		354		99	%
Other asset-backed securities	(3)		382		99	%	(3)		187		98	%
Corporate and other	(3)		255		99	%	(1)		55		98	%
Total fixed maturities	$	(9)	$	1,019	99	%	$	(7)	$	630	99	%

December 31, 2020
Fixed maturities:
U.S. Government and government agencies	$	—	$	23	100	%	$	—	$	—	—	%
States, municipalities and political subdivisions	—		39		100	%	—		10		100	%
Foreign government	—		7		100	%	—		—		—	%
Residential MBS	(1)		86		99	%	—		7		100	%
Commercial MBS	—		7		100	%	—		5		100	%
Collateralized loan obligations	(1)		192		99	%	(3)		366		99	%
Other asset-backed securities	(10)		465		98	%	(3)		92		97	%
Corporate and other	(2)		133		99	%	(1)		17		94	%
Total fixed maturities	$	(14)	$	952	99	%	$	(7)	$	497	99	%

At March 31, 2021, the gross unrealized losses on fixed maturities of $16 million relate to 434 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 75% of the gross unrealized loss and 91% of the fair value.

To evaluate fixed maturities for expected credit losses (impairment), management considers whether the unrealized loss is credit-driven or a result of changes in market interest rates, the extent to which fair value is less than cost basis, historical operating, balance sheet and cash flow data from the issuer, third party research and communications with industry specialists and discussions with issuer management.

AFG analyzes its MBS securities for expected credit losses (impairment) each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan to collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data.

Management believes AFG will recover its cost basis (net of any allowance) in the securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at March 31, 2021.

Credit losses on available for sale fixed maturities are measured based on the present value of expected future cash flows compared to amortized cost. Beginning January 1, 2020, impairment losses are recognized through an allowance instead of directly writing down the amortized cost. Recoveries of previously impaired amounts are recorded as an immediate reversal of all or a portion of the allowance. In addition, the allowance on available for sale fixed maturities cannot cause the amortized cost net of the allowance to be below fair value. Accordingly, future changes in the fair value of an impaired security (when the allowance was limited by the fair value) due to reasons other than issuer credit (e.g. changes in market interest rates) result in increases or decreases in the allowance, which are recorded through realized gains (losses) on securities. A progression of the allowance for expected credit losses on fixed maturity securities held by AFG’s continuing operations is shown below (in millions):


	Structured Securities (*)		Corporate and Other		Total








Balance at January 1, 2021	$	10	$	2	$	12

Initial allowance for purchased securities with credit deterioration	—		—		—
Provision for expected credit losses on securities with no previous allowance	—		—		—
Additions (reductions) to previously recognized expected credit losses	(1)		—		(1)
Reductions due to sales or redemptions	—		(1)		(1)
Balance at March 31, 2021	$	9	$	1	$	10

Balance at January 1, 2020	$	—	$	—	$	—
Impact of adoption of new accounting policy	—		—		—

Provision for expected credit losses on securities with no previous allowance	11		3		14

Reductions due to sales or redemptions	—		—		—
Balance at March 31, 2020	$	11	$	3	$	14

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

In the first three months of 2021 and 2020, AFG did not purchase any securities with expected credit losses.

The table below sets forth the scheduled maturities of available for sale fixed maturities held by AFG’s continuing operations as of March 31, 2021 (dollars in millions). Securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.


	Amortized		Fair Value
	Cost, net (*)		Amount		%
Maturity
One year or less	$	974	$	986	11	%
After one year through five years	2,456		2,553		27	%
After five years through ten years	1,126		1,174		13	%
After ten years	291		301		3	%
	4,847		5,014		54	%
Collateralized loan obligations and other ABS (average life of approximately 3-1/2 years)	3,300		3,319		36	%
MBS (average life of approximately 3 years)	902		956		10	%
Total	$	9,049	$	9,289	100	%

(*)Amortized cost, net of allowance for expected credit losses.

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

There were no investments in individual issuers that exceeded 10% of shareholders’ equity at March 31, 2021 or December 31, 2020.

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

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

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

December 31, 2020
Net unrealized gain on fixed maturities held by continuing operations	$	284	$	(60)	$	224

Discontinued operations:
Net unrealized gain on fixed maturities	$	2,555	$	(536)	$	2,019
Deferred policy acquisition costs — annuity segment	(934)		196		(738)
Annuity benefits accumulated	(324)		68		(256)
Life, accident and health reserves	(3)		—		(3)
Unearned revenue	11		(2)		9
Total net unrealized gain from discontinued operations	1,305		(274)		1,031
Total net unrealized gain on fixed maturity securities	$	1,589	$	(334)	$	1,255

Net Investment Income The following table shows (in millions) investment income earned and investment expenses incurred in AFG’s continuing operations.


	Three months ended March 31,
		2021		2020
Investment income:
Fixed maturities		$	72	$	82
Equity securities:
Dividends		8		10
Change in fair value (a) (b)		26		(17)
Equity in earnings of partnerships and similar investments		78		23
Other		6		8
Gross investment income		190		106
Investment expenses		(2)		(2)
Net investment income (b)		$	188	$	104

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

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

Net investment income included in net earnings (loss) from discontinued operations was $447 million and $415 million in the first three months of 2021 and 2020, respectively.

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













	Three months ended March 31, 2021								Three months ended March 31, 2020
	Realized gains (losses)								Realized gains (losses)
	Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairments		Total		Change in Unrealized
Fixed maturities	$	(1)	$	1	$	—	$	(44)	$	3	$	(14)	$	(11)	$	(277)
Equity securities	77		—		77		—		(318)		—		(318)		—
Mortgage loans and other investments	—		—		—		—		1		—		1		—
Total pretax	76		1		77		(44)		(314)		(14)		(328)		(277)
Tax effects	(16)		—		(16)		9		66		3		69		58
Net of tax	$	60	$	1	$	61	$	(35)	$	(248)	$	(11)	$	(259)	$	(219)

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

All equity securities other than those accounted for under the equity method are carried at fair value through net earnings. AFG recorded net holding gains (losses) on equity securities from continuing operations during the first quarter and first three months of 2021 and 2020 on securities that were still owned at March 31, 2021 and March 31, 2020 as follows (in millions):


	Three months ended March 31,
		2021		2020
Included in realized gains (losses)		$	67	$	(321)
Included in net investment income		26		(10)
		$	93	$	(331)

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


	Three months ended March 31,
	2021		2020
Gross gains	$	2	$	3
Gross losses	(1)		(1)

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