Derivatives

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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):


		March 31, 2021				December 31, 2020
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	67	$	—	$	37	$	—
Discontinued Annuity Operations:
MBS with embedded derivatives	Assets of discontinued annuity operations	152		—		137		—

Fixed-indexed and variable-indexed annuities (embedded derivative)	Liabilities of discontinued annuity operations	—		3,954		—		3,933
Equity index call options	Assets of discontinued annuity operations	813		—		825		—
Equity index put options	Liabilities of discontinued annuity operations	—		6		—		5
Reinsurance contract (embedded derivative)	Liabilities of discontinued annuity operations	—		4		—		5
		$	1,032	$	3,964	$	999	$	3,943

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.

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 ($363 million at March 31, 2021 and $351 million at December 31, 2020) is included in assets of discontinued annuity operations in AFG’s Balance Sheet with an offsetting liability to return the collateral, which is included in liabilities of discontinued annuity operations. 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. 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 under “Reinsurance” in Note A, AFG has a life business 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 first three months of 2021 and 2020 (in millions):


		Three months ended March 31,
Derivative	Statement of Earnings Line		2021		2020
MBS with embedded derivatives	Realized gains (losses) on securities		$	(2)	$	1
Discontinued Annuity Operations:
MBS with embedded derivatives - discontinued operations	Net earnings (loss) from discontinued operations		—		3

Fixed-indexed and variable-indexed annuities (embedded derivative)	Net earnings (loss) from discontinued operations		(40)		647
Equity index call options	Net earnings (loss) from discontinued operations		114		(628)
Equity index put options	Net earnings (loss) from discontinued operations		2		(6)
Reinsurance contract (embedded derivative)	Net earnings (loss) from discontinued operations		1		2
			$	75	$	19

Derivatives Designated and Qualifying as Cash Flow Hedges As of March 31, 2021, Great American Life Insurance Company (“GALIC”) has nine 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 GALIC’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of GALIC’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, GALIC 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 December 2023 and June 2030) in anticipation of the expected decline in GALIC’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR. The total outstanding notional amount of GALIC’s interest rate swaps was $1.60 billion at March 31, 2021 compared to $1.63 billion at December 31, 2020, reflecting the scheduled amortization discussed above. The fair value of the interest rate swaps in an asset position and included in assets of discontinued annuity operations was $69 million at March 31, 2021 and $102 million at December 31, 2020. 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 earnings (loss) from discontinued operations were income of $9 million and $12 million for the first three months of 2021 and 2020, respectively. A collateral receivable supporting these swaps of $10 million at March 31, 2021 and $2 million at December 31, 2020 is included in assets of discontinued annuity operations in AFG’s Balance Sheet.