Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Accounting standards for measuring fair value are based on inputs used in estimating fair value. The three levels of the hierarchy are as follows:

Level 1 — Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis). AFG’s Level 1 financial instruments consist primarily of publicly traded equity securities, highly liquid government bonds for which quoted market prices in active markets are available and short-term investments of managed investment entities.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. AFG’s Level 2 financial instruments include corporate and municipal fixed maturity securities, asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), certain non-affiliated common stocks and investments of managed investment entities priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.

Level 3 — Valuations derived from market valuation techniques generally consistent with those used to estimate the fair values of Level 2 financial instruments in which one or more significant inputs are unobservable or when the market for a security exhibits significantly less liquidity relative to markets supporting Level 2 fair value measurements. The unobservable inputs may include management’s own assumptions about the assumptions market participants would use based on the best information available at the valuation date. Financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information are classified as Level 3.

The contingent consideration liability related to the 2021 acquisition of Verikai ($22 million at December 31, 2022) was measured using a weighted probability-based income approach, which includes significant unobservable inputs and is classified as Level 3, and represents the fair value of the up to $50 million in potential acquisition-related contingent consideration tied to performance measures over a specific time period. Due to slower than anticipated growth in the business supported by the Verikai technology, the fair value of this liability was reduced to zero in the third quarter of 2023. The $22 million gain from this change in fair value and a goodwill impairment charge of $26 million related to Verikai (see Note H — “Goodwill and Other Intangibles”) is included in realized loss on subsidiary in AFG’s Statement of Earnings.

As discussed in Note A — “Accounting Policies — Managed Investment Entities,” AFG has set the carrying value of its CLO liabilities equal to the fair value of the CLO assets (which have more observable fair values) as an alternative to reporting those liabilities at separately measured fair values. As a result, the CLO liabilities are categorized within the fair value hierarchy on the same basis (proportionally) as the related CLO assets. Since the portion of the CLO liabilities allocated to Level 3 is derived from the fair value of the CLO assets, these amounts are excluded from the progression of Level 3 financial instruments.

AFG’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. AFG’s internal investment professionals are a group of approximately 20 investment professionals whose primary responsibility is to manage AFG’s investment portfolio. These professionals monitor individual investments as well as overall industries and are active in the financial markets on a daily basis. The group is led by AFG’s chief investment officer, who reports directly to one of AFG’s Co-CEOs. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG’s internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, AFG communicates directly with the pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the service to value specific securities.

Assets and liabilities measured and carried at fair value in the financial statements are summarized below (in millions):

	Level 1		Level 2		Level 3		Total
September 30, 2023
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. government and government agencies	$	228	$	1	$	—	$	229
States, municipalities and political subdivisions	—		909		2		911
Foreign government	—		218		—		218
Residential MBS	—		1,614		5		1,619
Commercial MBS	—		76		—		76
Collateralized loan obligations	—		1,722		1		1,723
Other asset-backed securities	—		1,947		330		2,277
Corporate and other	9		2,517		352		2,878
Total AFS fixed maturities	237		9,004		690		9,931
Trading fixed maturities	—		51		—		51
Equity securities	521		32		454		1,007
Assets of managed investment entities (“MIE”)	674		4,187		10		4,871
Total assets accounted for at fair value	$	1,432	$	13,274	$	1,154	$	15,860
Liabilities:
Contingent consideration — acquisitions	$	—	$	—	$	2	$	2
Liabilities of managed investment entities	654		4,064		10		4,728
Other liabilities — derivatives	—		48		—		48
Total liabilities accounted for at fair value	$	654	$	4,112	$	12	$	4,778
December 31, 2022
Assets:
Available for sale fixed maturities:
U.S. government and government agencies	$	219	$	—	$	—	$	219
States, municipalities and political subdivisions	—		1,181		5		1,186
Foreign government	—		226		—		226
Residential MBS	—		1,589		9		1,598
Commercial MBS	—		85		—		85
Collateralized loan obligations	—		1,919		2		1,921
Other asset-backed securities	—		1,916		329		2,245
Corporate and other	8		2,288		319		2,615
Total AFS fixed maturities	227		9,204		664		10,095
Trading fixed maturities	—		32		—		32
Equity securities	556		27		427		1,010
Assets of managed investment entities	659		4,777		11		5,447
Total assets accounted for at fair value	$	1,442	$	14,040	$	1,102	$	16,584
Liabilities:
Contingent consideration — acquisitions	$	—	$	—	$	25	$	25
Liabilities of managed investment entities	645		4,676		11		5,332
Other liabilities — derivatives	—		42		—		42
Total liabilities accounted for at fair value	$	645	$	4,718	$	36	$	5,399

Approximately 7% of the total assets carried at fair value at September 30, 2023, were Level 3 assets. Approximately 10% ($113 million) of those Level 3 assets were priced using non-binding broker quotes, for which there is a lack of transparency as to the inputs used to determine fair value. Details as to the quantitative inputs are neither provided by the brokers nor otherwise reasonably obtainable by AFG. Approximately 1% ($13 million) of the Level 3 assets were priced by pricing services where either a single price was not corroborated, prices varied enough among the providers, or other market factors led management to determine these securities be classified as Level 3 assets. Approximately 28% ($322 million) of the Level 3 assets were equity investments in limited partnerships and similar investments that do not

qualify for equity method accounting whose prices were determined based on financial information provided by the limited partnerships.

Internally developed prices for fixed maturities are estimated using a variety of inputs, including appropriate credit spreads over the treasury yield (of a similar duration), trade information and prices of comparable securities and other security specific features (such as optional early redemption). Internally developed Level 3 asset fair values represent approximately 61% ($706 million) of the total fair value of Level 3 assets at September 30, 2023. Approximately 68% ($481 million) of these internally developed Level 3 assets are priced using a pricing model that uses a discounted cash flow approach to estimate the fair value of fixed maturity securities. The credit spread applied by management is the significant unobservable input of the pricing model. In instances where the security is currently callable at par value and the pricing model suggests a higher price, management caps the fair value at par value. Approximately 18% ($124 million) of the internally developed Level 3 assets are equity securities which are priced primarily using internal models with some inputs that are not market observable. Management believes that any justifiable changes in unobservable inputs used to determine internally developed fair values would not have resulted in a material change in AFG’s financial position.

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the third quarter and first nine months of 2023 and 2022 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period.

			Total realized/unrealized gains (losses) included in
	Balance at June 30, 2023		Net earnings (loss)		Other comprehensive income (loss)		Purchases and issuances		Sales and settlements		Transfer into Level 3		Transfer out of Level 3		Balance at September 30, 2023
AFS fixed maturities:
U.S. government agency	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal	5		—		—		—		(1)		—		(2)		2
Residential MBS	5		—		—		—		—		—		—		5
Commercial MBS	—		—		—		—		—		—		—		—
Collateralized loan obligations	1		(1)		1		—		—		—		—		1
Other asset-backed securities	321		—		(4)		28		(3)		—		(12)		330
Corporate and other	369		(14)		—		11		(12)		5		(7)		352
Total AFS fixed maturities	701		(15)		(3)		39		(16)		5		(21)		690
Equity securities	448		4		—		23		(4)		—		(17)		454
Assets of MIE	11		(1)		—		—		—		—		—		10
Total Level 3 assets	$	1,160	$	(12)	$	(3)	$	62	$	(20)	$	5	$	(38)	$	1,154
Contingent consideration — acquisitions	$	(25)	$	23	$	—	$	—	$	—	$	—	$	—	$	(2)
Total Level 3 liabilities	$	(25)	$	23	$	—	$	—	$	—	$	—	$	—	$	(2)

			Total realized/unrealized gains (losses) included in
	Balance at June 30, 2022		Net earnings (loss)		Other comprehensive income (loss)		Purchases and issuances		Sales and settlements		Transfer into Level 3		Transfer out of Level 3		Balance at September 30, 2022
AFS fixed maturities:
U.S. government agency	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal	1		—		—		—		—		—		—		1
Residential MBS	8		—		—		—		—		4		(4)		8
Commercial MBS	—		—		—		—		—		—		—		—
Collateralized loan obligations	2		—		—		—		—		—		—		2
Other asset-backed securities	313		—		(8)		5		(9)		—		—		301
Corporate and other	269		(1)		(12)		45		(5)		—		(1)		295
Total AFS fixed maturities	593		(1)		(20)		50		(14)		4		(5)		607
Equity securities	378		(2)		—		24		(15)		—		(1)		384
Assets of MIE	12		(1)		—		—		—		—		—		11
Total Level 3 assets	$	983	$	(4)	$	(20)	$	74	$	(29)	$	4	$	(6)	$	1,002
Contingent consideration — acquisitions	$	(23)	$	—	$	—	$	(2)	$	—	$	—	$	—	$	(25)
Total Level 3 liabilities	$	(23)	$	—	$	—	$	(2)	$	—	$	—	$	—	$	(25)

			Total realized/unrealized gains (losses) included in
	Balance at December 31, 2022		Net earnings (loss)		Other comprehensive income (loss)		Purchases and issuances		Sales and settlements		Transfer into Level 3		Transfer out of Level 3		Balance at September 30, 2023
AFS fixed maturities:
U.S. government agency	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal	5		—		—		—		(1)		—		(2)		2
Residential MBS	9		—		—		—		(3)		4		(5)		5
Commercial MBS	—		—		—		—		—		—		—		—
Collateralized loan obligations	2		(1)		1		—		—		—		(1)		1
Other asset-backed securities	329		(2)		—		38		(34)		31		(32)		330
Corporate and other	319		(13)		10		67		(25)		7		(13)		352
Total AFS fixed maturities	664		(16)		11		105		(63)		42		(53)		690
Equity securities	427		11		—		84		(29)		—		(39)		454
Assets of MIE	11		(3)		—		2		—		—		—		10
Total Level 3 assets	$	1,102	$	(8)	$	11	$	191	$	(92)	$	42	$	(92)	$	1,154
Contingent consideration — acquisitions	$	(25)	$	23	$	—	$	—	$	—	$	—	$	—	$	(2)
Total Level 3 liabilities	$	(25)	$	23	$	—	$	—	$	—	$	—	$	—	$	(2)

			Total realized/unrealized gains (losses) included in
	Balance at December 31, 2021		Net earnings (loss)		Other comprehensive income (loss)		Purchases and issuances		Sales and settlements		Transfer into Level 3		Transfer out of Level 3		Balance at September 30, 2022
AFS fixed maturities:
U.S. government agency	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal	41		—		(3)		—		(1)		—		(36)		1
Residential MBS	14		—		—		—		(1)		4		(9)		8
Commercial MBS	—		—		—		—		—		—		—		—
Collateralized loan obligations	—		—		—		—		—		2		—		2
Other asset-backed securities	278		2		(24)		62		(51)		34		—		301
Corporate and other	267		(1)		(26)		105		(15)		—		(35)		295
Total AFS fixed maturities	600		1		(53)		167		(68)		40		(80)		607
Equity securities	313		20		—		75		(20)		3		(7)		384
Assets of MIE	13		(3)		—		1		—		—		—		11
Total Level 3 assets	$	926	$	18	$	(53)	$	243	$	(88)	$	43	$	(87)	$	1,002
Contingent consideration — acquisitions	$	(23)	$	—	$	—	$	(2)	$	—	$	—	$	—	$	(25)
Total Level 3 liabilities	$	(23)	$	—	$	—	$	(2)	$	—	$	—	$	—	$	(25)

Fair Value of Financial Instruments   The carrying value and fair value of financial instruments that are not carried at fair value in the financial statements are summarized below (in millions):

	Carrying Value		Fair Value
			Total		Level 1		Level 2		Level 3
September 30, 2023
Financial assets:
Cash and cash equivalents	$	1,221	$	1,221	$	1,221	$	—	$	—
Mortgage loans	644		590		—		—		590
Total financial assets not accounted for at fair value	$	1,865	$	1,811	$	1,221	$	—	$	590
Long-term debt	$	1,474	$	1,213	$	—	$	1,210	$	3
Total financial liabilities not accounted for at fair value	$	1,474	$	1,213	$	—	$	1,210	$	3
December 31, 2022
Financial assets:
Cash and cash equivalents	$	872	$	872	$	872	$	—	$	—
Mortgage loans	676		626		—		—		626
Total financial assets not accounted for at fair value	$	1,548	$	1,498	$	872	$	—	$	626
Long-term debt	$	1,496	$	1,302	$	—	$	1,299	$	3
Total financial liabilities not accounted for at fair value	$	1,496	$	1,302	$	—	$	1,299	$	3