Derivatives

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

As discussed under “Derivatives” in Note A — “Accounting Policies,” AFG uses derivatives to mitigate certain market risks related to its investment portfolio and deferred compensation obligations to employees.

The following table presents the classification of derivative assets and liabilities included in AFG’s Balance Sheet at fair value (in millions):


		December 31, 2022				December 31, 2021
	Balance Sheet Line	Asset		Liability		Asset		Liability
Derivatives designated and qualifying as cash flow hedges:
Interest rate swaps	Other liabilities	$	—	$	37	$	—	$	—

Derivatives not designated as hedging instruments:
MBS with embedded derivatives	Fixed maturities	40		—		59		—
Total return swap	Other liabilities	—		5		—		—
		$	40	$	42	$	59	$	—

AFG’s interest rate swaps 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 $1.25 billion at December 31, 2022, all of which were entered into in 2022. In 2022, less than $1 million (net) was reclassified from AOCI to net earnings. A collateral receivable supporting these swaps of $62 million at December 31, 2022 is included in other assets in AFG’s Balance Sheet.

The MBS with embedded derivatives consist of primarily interest-only and principal-only MBS. AFG records the 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 is exposed to fair value changes from certain equity and fixed maturity market-based exposures related to its deferred compensation obligations to certain employees. To mitigate this risk, AFG entered into a total return swap in 2022. A collateral receivable supporting this swap of $7 million at December 31, 2022 is included in other assets in AFG’s Balance Sheet.

The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives for 2022, 2021 and 2020 (in millions):


		Non-designated hedges - gains (losses) included in net earnings						Qualifying cash flow hedges - gains (losses) reclassified from AOCI to net earnings
	Statement of Earnings Line	2022		2021		2020		2022		2021		2020
Derivative instruments of continuing operations:
Interest rate swaps	Net investment income	$	—	$	—	$	—	$	—	$	—	$	—
MBS with embedded derivatives	Realized gains (losses) on securities	(12)		(6)		(1)		—		—		—
Total return swap	Other expenses	(5)		—		—		—		—		—
Total earnings (losses) of continuing operations		$	(17)	$	(6)	$	(1)	$	—	$	—	$	—

Derivative instruments of discontinued operations (*):
Interest rate swaps	Net earnings from discontinued operations	$	—	$	—	$	—	$	—	$	14	$	40
MBS with embedded derivatives	Net earnings from discontinued operations	—		(1)		(2)		—		—		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Net earnings from discontinued operations	—		(222)		(283)		—		—		—
Equity index call options	Net earnings from discontinued operations	—		237		223		—		—		—
Equity index put options	Net earnings from discontinued operations	—		5		3		—		—		—
Reinsurance contract (embedded derivative)	Net earnings from discontinued operations	—		1		(1)		—		—		—
Total earnings (losses) of discontinued operations		—		20		(60)		—		14		40
Earnings (losses) attributable to shareholders		$	(17)	$	14	$	(61)	$	—	$	14	$	40

(*)Earnings (losses) for 2021 are through the May 31, 2021 effective date of the sale of the annuity business.

Based on forward interest rate curves at December 31, 2022, management estimates that it will reclassify approximately $20 million of pre-tax net losses on interest rate swaps in AOCI to expense within the next 12 months. The actual amount will vary based on interest rates at the reset dates, which occur every one to three months.