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Investments

9 Months Ended

Sep. 30, 2022

Investments, Debt and Equity Securities [Abstract]

Available for sale fixed maturities at September 30, 2022 and December 31, 2021, consisted of the following (in millions):


	Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized				Net Unrealized		Fair Value
					Gains		Losses
September 30, 2022
Fixed maturities:
U.S. government and government agencies	$	229	$	—	$	—	$	(15)	$	(15)	$	214
States, municipalities and political subdivisions	1,356		—		2		(100)		(98)		1,258
Foreign government	235		—		—		(12)		(12)		223
Residential MBS	1,759		1		22		(176)		(154)		1,604
Commercial MBS	88		—		—		(3)		(3)		85
Collateralized loan obligations	1,879		1		—		(72)		(72)		1,806
Other asset-backed securities	2,449		7		—		(171)		(171)		2,271
Corporate and other	2,749		—		3		(179)		(176)		2,573
Total fixed maturities	$	10,744	$	9	$	27	$	(728)	$	(701)	$	10,034

December 31, 2021
Fixed maturities:
U.S. government and government agencies	$	216	$	—	$	2	$	(2)	$	—	$	216
States, municipalities and political subdivisions	1,758		—		74		—		74		1,832
Foreign government	248		—		—		(2)		(2)		246
Residential MBS	915		—		48		(3)		45		960
Commercial MBS	102		—		2		—		2		104
Collateralized loan obligations	1,643		1		3		(2)		1		1,643
Other asset-backed securities	2,677		7		17		(11)		6		2,676
Corporate and other	2,634		1		55		(8)		47		2,680
Total fixed maturities	$	10,193	$	9	$	201	$	(28)	$	173	$	10,357

Equity securities which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at September 30, 2022 and December 31, 2021 (in millions):


	September 30, 2022						December 31, 2021

	Actual Cost				Fair Value		Actual Cost
			Fair Value		over (under) Cost				Fair Value		Fair Value over Cost
Common stocks	$	549	$	530	$	(19)	$	491	$	586	$	95
Perpetual preferred stocks	462		466		4		403		456		53
Total equity securities carried at fair value	$	1,011	$	996	$	(15)	$	894	$	1,042	$	148

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):


					Net Investment Income
	Carrying Value				Three months ended September 30,				Nine months ended September 30,
	September 30, 2022		December 31, 2021		2022		2021		2022		2021
Real estate-related investments (*)	$	1,218	$	1,130	$	40	$	52	$	209	$	151
Private equity	413		352		(2)		21		36		66
Private debt	30		35		(1)		—		1		5
Total investments accounted for using the equity method	$	1,661	$	1,517	$	37	$	73	$	246	$	222

(*)Includes 92% with underlying investments in multi-family properties, 1% in single family properties and 7% in other property types as of September 30, 2022 and 88% with underlying investments in multi-family properties, 1% in single family properties and 11% in other property types as of December 31, 2021.

The earnings (losses) from these investments are generally reported on a quarter 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 had unfunded commitments of $389 million and $366 million as of September 30, 2022 and December 31, 2021, respectively.

The following table shows 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, 2022
Fixed maturities:
U.S. government and government agencies	$	(4)	$	108	96	%	$	(11)	$	106	91	%
States, municipalities and political subdivisions	(98)		1,124		92	%	(2)		14		88	%
Foreign government	(7)		145		95	%	(5)		61		92	%
Residential MBS	(174)		1,421		89	%	(2)		19		90	%
Commercial MBS	(3)		68		96	%	—		10		100	%
Collateralized loan obligations	(61)		1,465		96	%	(11)		329		97	%
Other asset-backed securities	(137)		1,806		93	%	(34)		326		91	%
Corporate and other	(151)		2,174		94	%	(28)		208		88	%
Total fixed maturities	$	(635)	$	8,311	93	%	$	(93)	$	1,073	92	%

December 31, 2021
Fixed maturities:
U.S. government and government agencies	$	(1)	$	92	99	%	$	(1)	$	22	96	%
States, municipalities and political subdivisions	—		9		100	%	—		13		100	%
Foreign government	(2)		160		99	%	—		—		—	%
Residential MBS	(3)		419		99	%	—		7		100	%
Commercial MBS	—		34		100	%	—		—		—	%
Collateralized loan obligations	(1)		806		100	%	(1)		77		99	%
Other asset-backed securities	(8)		1,250		99	%	(3)		81		96	%
Corporate and other	(8)		500		98	%	—		26		100	%
Total fixed maturities	$	(23)	$	3,270	99	%	$	(5)	$	226	98	%

At September 30, 2022, the gross unrealized losses on fixed maturities of $728 million relate to approximately 1,900 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 94% 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 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, 2022.

Credit losses on available for sale fixed maturities are measured based on the present value of expected future cash flows compared to amortized cost. Impairment losses are recognized through an allowance and 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, 2022	$	7	$	—	$	7
Initial allowance for purchased securities with credit deterioration	—		—		—
Provision for expected credit losses on securities with no previous allowance	2		—		2
Additions (reductions) to previously recognized expected credit losses	—		—		—
Reductions due to sales or redemptions	—		—		—
Balance at September 30, 2022	$	9	$	—	$	9

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 January 1, 2022	$	8	$	1	$	9
Initial allowance for purchased securities with credit deterioration	—		—		—
Provision for expected credit losses on securities with no previous allowance	3		—		3
Additions (reductions) to previously recognized expected credit losses	(2)		—		(2)
Reductions due to sales or redemptions	—		(1)		(1)
Balance at September 30, 2022	$	9	$	—	$	9

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

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

In the third quarter and first nine months of 2022 and 2021, AFG 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, 2022 (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	$	578	$	575	6	%
After one year through five years	2,693		2,511		25	%
After five years through ten years	1,018		932		9	%
After ten years	280		250		2	%
	4,569		4,268		42	%
Collateralized loan obligations and other ABS (average life of approximately 3.5 years)	4,320		4,077		41	%
MBS (average life of approximately 5.5 years)	1,846		1,689		17	%
Total	$	10,735	$	10,034	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, 2022 or December 31, 2021.

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,
	2022		2021		2022		2021
Investment income:
Fixed maturities	$	98	$	73	$	263	$	217
Equity securities:
Dividends	9		6		24		21
Change in fair value (*)	(6)		7		(8)		41
Equity in earnings of partnerships and similar investments	37		73		246		222
Other	17		14		37		28
Gross investment income	155		173		562		529
Investment expenses	(4)		(4)		(13)		(8)
Net investment income	$	151	$	169	$	549	$	521

(*)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 its portfolio of limited partnerships and similar investments that do not qualify for equity method accounting and certain other securities classified at purchase as “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, 2022								Three months ended September 30, 2021
	Realized gains (losses)								Realized gains (losses)
	Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairment Allowance		Total		Change in Unrealized
Fixed maturities	$	(6)	$	(2)	$	(8)	$	(288)	$	(2)	$	—	$	(2)	$	(35)
Equity securities	(27)		—		(27)		—		(15)		—		(15)		—
Mortgage loans and other investments	—		—		—		—		—		—		—		—
Total pretax	(33)		(2)		(35)		(288)		(17)		—		(17)		(35)
Tax effects	7		—		7		60		5		—		5		8
Net of tax	$	(26)	$	(2)	$	(28)	$	(228)	$	(12)	$	—	$	(12)	$	(27)

	Nine months ended September 30, 2022								Nine months ended September 30, 2021
	Realized gains (losses)								Realized gains (losses)
	Before Impairments		Impairment Allowance		Total		Change in Unrealized		Before Impairments		Impairment Allowance		Total		Change in Unrealized
Fixed maturities	$	(20)	$	(1)	$	(21)	$	(874)	$	(2)	$	1	$	(1)	$	(59)
Equity securities	(122)		—		(122)		—		104		—		104		—
Mortgage loans and other investments	—		—		—		—		—		—		—		—
Total pretax	(142)		(1)		(143)		(874)		102		1		103		(59)
Tax effects	30		—		30		184		(20)		—		(20)		13
Net of tax	$	(112)	$	(1)	$	(113)	$	(690)	$	82	$	1	$	83	$	(46)

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 2022 and 2021 on securities that were still owned at September 30, 2022 and September 30, 2021 as follows (in millions):


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021
Included in realized gains (losses)	$	(26)	$	(16)	$	(119)	$	82
Included in net investment income	(7)		7		(4)		41
	$	(33)	$	(9)	$	(123)	$	123

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,
	2022		2021
Gross gains	$	2	$	4
Gross losses	(11)		(2)

Derivatives Designated and Qualifying as Cash Flow Hedges As of September 30, 2022, AFG has 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 reference rates (LIBOR or SOFR).

Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on short-term LIBOR or SOFR. The notional amounts of the interest rate swaps generally decline over each swap’s respective life (the swaps expire between July 2024 and July 2028) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR or SOFR. The total outstanding notional amount of AFG’s interest rate swaps was $1.22 billion at September 30, 2022, all of which were entered into in the first nine months of 2022. The fair value of the interest rate swaps in an asset position and included in other assets at

September 30, 2022 was less than $1 million. The fair value of the interest rate swaps in a liability position and included in other liabilities at September 30, 2022 was $37 million. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of deferred taxes. The amount reclassified from AOCI (before taxes) to net earnings was income of $1 million and $3 million for the third quarter and first nine months of 2022, respectively. A collateral receivable supporting these swaps of $63 million at September 30, 2022 is included in other assets in AFG’s Balance Sheet.