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Investments

9 Months Ended

Sep. 30, 2021

Investments, Debt and Equity Securities [Abstract]

Available for sale fixed maturities held by AFG’s continuing operations at September 30, 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
September 30, 2021
Fixed maturities:
U.S. Government and government agencies	$	216	$	—	$	3	$	(1)	$	2	$	218
States, municipalities and political subdivisions	1,849		—		77		—		77		1,926
Foreign government	216		—		2		(1)		1		217
Residential MBS	704		—		51		(1)		50		754
Commercial MBS	110		—		3		—		3		113
Collateralized loan obligations	1,827		1		5		(2)		3		1,829
Other asset-backed securities	2,631		7		25		(5)		20		2,644
Corporate and other	2,658		1		73		(4)		69		2,726
Total fixed maturities	$	10,211	$	9	$	239	$	(14)	$	225	$	10,427

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 December 31, 2020, consisted of the following (in millions):


	Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized				Net Unrealized		Fair Value
					Gains		Losses
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 September 30, 2021 and December 31, 2020 (in millions):


	September 30, 2021						December 31, 2020
					Fair Value						Fair Value
	Actual Cost				over (under)		Actual Cost				over (under)
			Fair Value		Cost				Fair Value		Cost
Common stocks	$	464	$	563	$	99	$	516	$	510	$	(6)
Perpetual preferred stocks	386		430		44		369		379		10
Total equity securities carried at fair value	$	850	$	993	$	143	$	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
	September 30, 2021		December 31, 2020		Three months ended September 30,				Nine months ended September 30,
					2021		2020		2021		2020
Real estate-related investments (*)	$	1,024	$	915	$	52	$	17	$	151	$	55
Private equity	336		266		21		21		66		4
Private debt	47		54		—		(2)		5		(6)
Total investments accounted for using the equity method	$	1,407	$	1,235	$	73	$	36	$	222	$	53

(*)Includes 88% invested in multi-family properties, 2% in single family properties and 10% in other property types as of September 30, 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 earnings (losses) from these investments are 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 underlying 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 $302 million and $290 million as of September 30, 2021 and December 31, 2020, respectively.

Assets of discontinued annuity operations included investments accounted for under the equity method of $646 million as of December 31, 2020.

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
September 30, 2021
Fixed maturities:
U.S. Government and government agencies	$	(1)	$	97	99	%	$	—	$	19	100	%
States, municipalities and political subdivisions	—		13		100	%	—		15		100	%
Foreign government	(1)		48		98	%	—		—		—	%
Residential MBS	—		54		100	%	(1)		8		89	%
Commercial MBS	—		—		—	%	—		—		—	%
Collateralized loan obligations	(1)		687		100	%	(1)		168		99	%
Other asset-backed securities	(2)		662		100	%	(3)		76		96	%
Corporate and other	(3)		278		99	%	(1)		31		97	%
Total fixed maturities	$	(8)	$	1,839	100	%	$	(6)	$	317	98	%

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 September 30, 2021, the gross unrealized losses on fixed maturities of $14 million relate to 394 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 74% of the gross unrealized loss and 94% 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 September 30, 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 June 30, 2021	$	8	$	1	$	9
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	—		—		—
Reductions due to sales or redemptions	—		—		—
Balance at September 30, 2021	$	8	$	1	$	9

Balance at June 30, 2020	$	11	$	3	$	14
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	—		—		—
Reductions due to sales or redemptions	—		—		—
Balance at September 30, 2020	$	11	$	3	$	14

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	(2)		1		(1)
Reductions due to sales or redemptions	—		(2)		(2)
Balance at September 30, 2021	$	8	$	1	$	9

Balance at January 1, 2020	$	—	$	—	$	—
Impact of adoption of new accounting policy	—		—		—
Initial allowance for purchased securities with credit deterioration	—		—		—
Provision for expected credit losses on securities with no previous allowance	12		4		16
Additions (reductions) to previously recognized expected credit losses	(1)		(1)		(2)
Reductions due to sales or redemptions	—		—		—
Balance at September 30, 2020	$	11	$	3	$	14

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

In the third quarter and first nine months of 2021 and 2020, AFG’s continuing operations did not purchase any securities with expected credit losses.

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturities as of September 30, 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	$	1,182	$	1,194	11	%
After one year through five years	2,571		2,662		26	%
After five years through ten years	901		939		9	%
After ten years	284		292		3	%
	4,938		5,087		49	%
Collateralized loan obligations and other ABS (average life of approximately 3 years)	4,450		4,473		43	%
MBS (average life of approximately 3 years)	814		867		8	%
Total	$	10,202	$	10,427	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 September 30, 2021 or December 31, 2020.

Net Unrealized Gain on Fixed Maturity Securities 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, 2021
Net unrealized gain on fixed maturities	$	225	$	(47)	$	178










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

(*)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.

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


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Investment income:
Fixed maturities	$	73	$	73	$	217	$	232
Equity securities:
Dividends	6		9		21		27
Change in fair value (a) (b)	7		(2)		41		(10)
Equity in earnings of partnerships and similar investments	73		36		222		53
Other	14		8		28		17
Gross investment income	173		124		529		319
Investment expenses	(4)		(2)		(8)		(5)
Net investment income (b)	$	169	$	122	$	521	$	314

(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 third quarter and first nine months of 2020 includes income of $1 million and losses of $5 million, respectively, 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.

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 September 30, 2021								Three months ended September 30, 2020
	Realized gains (losses)								Realized gains (losses)
	Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairment Allowance		Total		Change in Unrealized
Fixed maturities	$	(2)	$	—	$	(2)	$	(35)	$	1	$	—	$	1	$	59
Equity securities	(15)		—		(15)		—		22		—		22		—
Mortgage loans and other investments	—		—		—		—		—		—		—		—
Total pretax	(17)		—		(17)		(35)		23		—		23		59
Tax effects	5		—		5		8		(5)		—		(5)		(12)
Net of tax	$	(12)	$	—	$	(12)	$	(27)	$	18	$	—	$	18	$	47

	Nine months ended September 30, 2021								Nine months ended September 30, 2020
	Realized gains (losses)								Realized gains (losses)
	Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairment Allowance		Total		Change in Unrealized
Fixed maturities	$	(2)	$	1	$	(1)	$	(59)	$	5	$	(14)	$	(9)	$	39
Equity securities	104		—		104		—		(189)		—		(189)		—
Mortgage loans and other investments	—		—		—		—		1		—		1		—
Total pretax	102		1		103		(59)		(183)		(14)		(197)		39
Tax effects	(20)		—		(20)		13		38		3		41		(8)
Net of tax	$	82	$	1	$	83	$	(46)	$	(145)	$	(11)	$	(156)	$	31

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 third quarter and first nine months of 2021 and 2020 on securities that were still owned at September 30, 2021 and September 30, 2020 as follows (in millions):


	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Included in realized gains (losses)	$	(16)	$	17	$	82	$	(174)
Included in net investment income	7		(1)		41		(2)
	$	(9)	$	16	$	123	$	(176)

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


	Nine months ended September 30,
	2021		2020
Gross gains	$	4	$	8
Gross losses	(2)		(4)