Derivatives

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

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):

		September 30, 2023				December 31, 2022
	Balance Sheet Line	Asset		Liability		Asset		Liability
Derivatives designated and qualifying as cash flow hedges:
Interest rate swaps	Other assets/Other liabilities	$	—	$	43	$	—	$	37
Derivatives not designated as hedging instruments:
Fixed maturities with embedded derivatives	Fixed maturities	80		—		40		—
Total return swap	Other assets/Other liabilities	—		5		—		5
		$	80	$	48	$	40	$	42

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 the applicable Secured Overnight Financing Rate (“SOFR”).

Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on SOFR (previously based on LIBOR). 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 SOFR. The total outstanding notional amount of AFG’s interest rate swaps was $1.33 billion at September 30, 2023 compared to $1.25 billion at December 31, 2022, reflecting the issuance of five new swaps with a total notional amount of $200 million in the first nine months of 2023, partially offset by scheduled amortization. In the third quarter of 2023 and 2022, a loss of $7 million and income of $1 million, respectively, and in the first nine months of 2023 and 2022, a loss of $19 million and income of $3 million, respectively, were reclassified from AOCI to net earnings. Based on forward interest rate curves at September 30, 2023, management estimates that it will reclassify approximately $27 million of pre-tax net losses on interest rate swaps in AOCI to net investment income over the next twelve months. The actual amount will vary based on changes in SOFR. A collateral receivable supporting these swaps of $69 million and $62 million at September 30, 2023 and December 31, 2022, respectively, is included in other assets in AFG’s Balance Sheet.

The fixed maturities with embedded derivatives consist of convertible fixed maturity securities and interest-only and principal-only MBS. AFG records the change in the fair value of these securities in net 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 of $5 million and $7 million supporting this swap is included in other assets in AFG’s Balance Sheet at September 30, 2023 and December 31, 2022, respectively.

The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives for the third quarter and nine months ended September 30, 2023 and 2022 (in millions):

		Three months ended September 30,				Nine months ended September 30,
	Statement of Earnings Line	2023		2022		2023		2022
Qualifying cash flow hedges - gains (losses) reclassified from AOCI to net earnings:
Interest rate swaps	Net investment income	$	(7)	$	1	$	(19)	$	3
Non-designated hedges - gains (losses) included in net earnings:
Fixed maturities with embedded derivatives	Realized gains (losses) on securities	(1)		(3)		(4)		(11)
Fixed maturities with embedded derivatives	Net investment income	(11)		—		(1)		—
Total return swap	Other expenses	(6)		(6)		3		(10)
Earnings (losses) on non-designated hedges		(18)		(9)		(2)		(21)
Total earnings (losses) on derivatives		$	(25)	$	(8)	$	(21)	$	(18)