UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended ~~June 30, 2019~~March 31, 2020

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____

Commission File No. 1-13653

AMERICAN FINANCIAL GROUP, INC.

Incorporated under the Laws of Ohio IRS Employer I.D. No. 31-1544320

301 East Fourth Street, Cincinnati, Ohio 45202

(513) 579-2121

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes ☑ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑



Securities Registered Pursuant to Section 12(b) of the Act:
	Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
	Common Stock	AFG	New York Stock Exchange
	~~6-1/4% Subordinated Debentures due September 30, 2054~~	~~AFGE~~	~~New York Stock Exchange~~
	6% Subordinated Debentures due November 15, 2055	AFGH	New York Stock Exchange
	5.875% Subordinated Debentures due March 30, 2059	AFGB	New York Stock Exchange
	5.125% Subordinated Debentures due December 15, 2059	AFGC	New York Stock Exchange

As of ~~August~~May 1, ~~2019~~,2020, there were ~~89,941,874~~89,841,655 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

TABLE OF CONTENTS

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

PART I

ITEM I1. — FINANCIAL STATEMENTS

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

(Dollars in Millions)


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Assets:
Cash and cash equivalents	$	2,374	$	1,515	$	1,673	$	2,314
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $42,908 and $41,837)	44,710		41,997
Fixed maturities, available for sale at fair value (amortized cost — $46,101 and $44,524; allowance for expected credit losses of $61 at March 31, 2020)					46,134		46,505
Fixed maturities, trading at fair value	106		105		96		113
Equity securities, at fair value	1,985		1,814		1,559		1,937
Investments accounted for using the equity method	1,506		1,374		1,763		1,688
Mortgage loans	1,073		1,068		1,346		1,329
Policy loans	170		174		161		164
Equity index call options	712		184		209		924
Real estate and other investments	271		267		280		278
Total cash and investments	52,907		48,498		53,221		55,252
Recoverables from reinsurers	3,150		3,349		3,387		3,415
Prepaid reinsurance premiums	651		610		708		678
Agents’ balances and premiums receivable	1,398		1,234		1,302		1,335
Deferred policy acquisition costs	1,203		1,682		1,573		1,037
Assets of managed investment entities	4,781		4,700		4,026		4,736
Other receivables	999		1,090		981		975
Variable annuity assets (separate accounts)	616		557		497		628
Other assets	1,785		1,529		1,741		1,867
Goodwill	207		207		207		207
Total assets	$	67,697	$	63,456	$	67,643	$	70,130

Liabilities and Equity:
Unpaid losses and loss adjustment expenses	$	9,577	$	9,741	$	10,106	$	10,232
Unearned premiums	2,683		2,595		2,808		2,830
Annuity benefits accumulated	39,044		36,616		40,463		40,406
Life, accident and health reserves	619		635		607		612
Payable to reinsurers	755		752		779		814
Liabilities of managed investment entities	4,590		4,512		3,865		4,571
Long-term debt	1,423		1,302		1,473		1,473
Variable annuity liabilities (separate accounts)	616		557		497		628
Other liabilities	2,300		1,774		1,998		2,295
Total liabilities	61,607		58,484		62,596		63,861

Redeemable noncontrolling interests	—		—		—		—

Shareholders’ equity:
Common Stock, no par value — 200,000,000 shares authorized — 89,917,601 and 89,291,724 shares outstanding	90		89
Common Stock, no par value — 200,000,000 shares authorized — 89,827,336 and 90,303,686 shares outstanding					90		90
Capital surplus	1,277		1,245		1,309		1,307
Retained earnings	3,914		3,588		3,616		4,009
Accumulated other comprehensive income, net of tax	809		48		32		863
Total shareholders’ equity	6,090		4,970		5,047		6,269
Noncontrolling interests	—		2		—		—
Total equity	6,090		4,972		5,047		6,269
Total liabilities and equity	$	67,697	$	63,456	$	67,643	$	70,130

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

(In Millions, Except Per Share Data)


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2019			2018			2019			2018			2020			2019
Revenues:
Property and casualty insurance net earned premiums	$	1,200		$	1,161		$	2,373		$	2,268		$	1,209		$	1,173
Life, accident and health net earned premiums	5			6			11			12
Net investment income	580			530			1,122			1,025			544			542
Realized gains (losses) on securities (*)	56			31			240			(62		)	(551		)	184
Income (loss) of managed investment entities:
Investment income	70			64			139			122			59			69
Loss on change in fair value of assets/liabilities	(2		)	(2		)	(2		)	(5		)
Gain (loss) on change in fair value of assets/liabilities													(43		)	—
Other income	51			43			101			92			57			56
Total revenues	1,960			1,833			3,984			3,452			1,275			2,024

Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	723			693			1,415			1,334			707			692
Commissions and other underwriting expenses	426			400			825			781			420			399
Annuity benefits	339			260			650			442			276			311
Life, accident and health benefits	8			11			17			22
Annuity and supplemental insurance acquisition expenses	33			50			61			132			113			28
Interest charges on borrowed money	17			16			33			31			17			16
Expenses of managed investment entities	59			54			114			102			48			55
Other expenses	96			89			197			174			82			110
Total costs and expenses	1,701			1,573			3,312			3,018			1,663			1,611
Earnings before income taxes	259			260			672			434
Provision for income taxes	50			52			137			85
Net earnings, including noncontrolling interests	209			208			535			349
Less: Net earnings (losses) attributable to noncontrolling interests	(1		)	(2		)	(4		)	(6		)
Net Earnings Attributable to Shareholders	$	210		$	210		$	539		$	355
Earnings (loss) before income taxes													(388		)	413
Provision (credit) for income taxes													(84		)	87
Net earnings (loss), including noncontrolling interests													(304		)	326
Less: Net earnings (loss) attributable to noncontrolling interests													(3		)	(3		)
Net Earnings (Loss) Attributable to Shareholders													$	(301	)	$	329

Earnings Attributable to Shareholders per Common Share:
Earnings (Loss) Attributable to Shareholders per Common Share:
Basic	$	2.34		$	2.36		$	6.02		$	3.99		$	(3.34	)	$	3.68
Diluted	$	2.31		$	2.31		$	5.94		$	3.92		$	(3.34	)	$	3.63
Average number of Common Shares:
Basic	89.7			89.0			89.6			88.8			90.3			89.4
Diluted	91.0			90.7			90.8			90.5			90.3			90.7
________________________________________
(*) Consists of the following:
Realized gains (losses) before impairments	$	58		$	31		$	244		$	(61	)	$	(505	)	$	186

Losses on securities with impairment	(2		)	—			(4		)	(1		)	(69		)	(2		)
Non-credit portion recognized in other comprehensive income (loss)	—			—			—			—			23			—
Impairment charges recognized in earnings	(2		)	—			(4		)	(1		)	(46		)	(2		)
Total realized gains (losses) on securities	$	56		$	31		$	240		$	(62	)	$	(551	)	$	184

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

(In Millions)


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2019			2018			2019			2018			2020			2019
Net earnings, including noncontrolling interests	$	209		$	208		$	535		$	349
Net earnings (loss), including noncontrolling interests													$	(304	)	$	326
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	356			(148		)	740			(427		)	(865		)	384
Reclassification adjustment for realized (gains) losses included in net earnings	(8		)	(3		)	(11		)	(1		)	19			(3		)
Total net unrealized gains (losses) on securities	348			(151		)	729			(428		)	(846		)	381
Net unrealized gains (losses) on cash flow hedges	18			(3		)	29			(14		)
Net unrealized gains on cash flow hedges													27			11
Foreign currency translation adjustments	—			(4		)	4			(3		)	(10		)	4
Other comprehensive income (loss), net of tax	366			(158		)	762			(445		)	(829		)	396
Total comprehensive income (loss), net of tax	575			50			1,297			(96		)	(1,133		)	722
Less: Comprehensive income (loss) attributable to noncontrolling interests	—			(2		)	(3		)	(6		)	(1		)	(3		)
Comprehensive income (loss) attributable to shareholders	$	575		$	52		$	1,300		$	(90	)	$	(1,132	)	$	725

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(Dollars in Millions)

Shareholders’ Equity Redeemable
Common
Shares

Common Stock
and Capital
Surplus

Retained
Earnings

Accumulated
Other Comp.
Income (Loss)
Total
Noncon-
trolling
Interests

Total
Equity
Noncon-
trolling
Interests
Balance at March 31, 2019 89,637,713
$ 1,346
$ 3,875
$ 444
$ 5,665
$ —
$ 5,665
$ —
Net earnings (losses) —
—
210
—
210
—
210
(1 )
Other comprehensive income (loss) —
—
—
365
365
—
365
1
Dividends ($1.90 per share) —
—
(170 ) —
(170 ) —
(170 ) —
Shares issued:

Exercise of stock options 247,753
11
—
—
11
—
11
—
Restricted stock awards —
—
—
—
—
—
—
—
Other benefit plans 30,081
3
—
—
3
—
3
—
Dividend reinvestment plan 7,596
1
—
—
1
—
1
—
Stock-based compensation expense —
6
—
—
6
—
6
—
Shares exchanged — benefit plans (3,519 ) —
(1 ) —
(1 ) —
(1 ) —
Forfeitures of restricted stock (2,023 ) —
—
—
—
—
—
—
Other —
—
—
—
—
—
—
—
Balance at June 30, 2019 89,917,601
$ 1,367
$ 3,914
$ 809
$ 6,090
$ —
$ 6,090
$ —

Balance at March 31, 2018 88,881,213
$ 1,294
$ 3,584
$ 305
$ 5,183
$ —
$ 5,183
$ —
Net earnings (losses) —
—
210
—
210
—
210
(2 )
Other comprehensive loss —
—
—
(158 ) (158 ) —
(158 ) —
Dividends ($1.85 per share) —
—
(165 ) —
(165 ) —
(165 ) —
Shares issued:

Exercise of stock options 157,412
5
—
—
5
—
5
—
Restricted stock awards —
—
—
—
—
—
—
—
Other benefit plans 21,093
2
—
—
2
—
2
—
Dividend reinvestment plan 15,227
2
—
—
2
—
2
—
Stock-based compensation expense —
6
—
—
6
—
6
—
Shares exchanged — benefit plans (428 ) —
1
—
1
—
1
—
Forfeitures of restricted stock (2,403 ) —
—
—
—
—
—
—
Other —
—
(2 ) —
(2 ) —
(2 ) 2
Balance at June 30, 2018 89,072,114
$ 1,309
$ 3,628
$ 147
$ 5,084
$ —
$ 5,084
$ —

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) — CONTINUED~~

~~(Dollars in Millions)~~


			Shareholders’ Equity																		Redeemable					Shareholders’ Equity																		Redeemable
	Common Shares		Common Stock and Capital Surplus			Retained Earnings			Accumulated Other Comp. Income (Loss)			Total			Noncon- trolling Interests			Total Equity			Noncon- trolling Interests			Common		Common Stock and Capital			Retained			Accumulated Other Comp.						Noncon- trolling			Total			Noncon- trolling
																								Shares		Surplus			Earnings			Inc. (Loss)			Total			Interests			Equity			Interests
																								90,303,686		$	1,397		$	4,009		$	863		$	6,269		$	—		$	6,269		$	—
																								—		—			7			—			7			—			7			—
Net earnings (loss)																								—		—			(301		)	—			(301		)	—			(301		)	(3		)
Other comprehensive income (loss)																								—		—			—			(831		)	(831		)	—			(831		)	2
Dividends ($0.45 per share)																								—		—			(40		)	—			(40		)	—			(40		)	—
Shares issued:
Exercise of stock options																								204,093		9			—			—			9			—			9			—
Restricted stock awards																								227,867		—			—			—			—			—			—			—
Other benefit plans																								14,541		1			—			—			1			—			1			—
Dividend reinvestment plan																								1,617		—			—			—			—			—			—			—
Stock-based compensation expense																								—		6			—			—			6			—			6			—
Shares acquired and retired																								(826,283	)	(12		)	(49		)	—			(61		)	—			(61		)	—
Shares exchanged — benefit plans																								(95,854	)	(2		)	(9		)	—			(11		)	—			(11		)	—
Forfeitures of restricted stock																								(2,331	)	—			—			—			—			—			—			—
Other																								—		—			(1		)	—			(1		)	—			(1		)	1
Balance at March 31, 2020																								89,827,336		$	1,399		$	3,616		$	32		$	5,047		$	—		$	5,047		$	—

Balance at December 31, 2018	89,291,724		$	1,334		$	3,588		$	48		$	4,970		$	2		$	4,972		$	—		89,291,724		$	1,334		$	3,588		$	48		$	4,970		$	2		$	4,972		$	—
Net earnings (losses)	—		—			539			—			539			—			539			(4		)
Net earnings (loss)																								—		—			329			—			329			—			329			(3		)
Other comprehensive income	—		—			—			761			761			—			761			1			—		—			—			396			396			—			396			—
Dividends ($2.30 per share)	—		—			(206		)	—			(206		)	—			(206		)	—
Dividends ($0.40 per share)																								—		—			(36		)	—			(36		)	—			(36		)	—
Shares issued:
Exercise of stock options	400,006		17			—			—			17			—			17			—			152,253		6			—			—			6			—			6			—
Restricted stock awards	232,565		—			—			—			—			—			—			—			232,565		—			—			—			—			—			—			—
Other benefit plans	41,143		4			—			—			4			—			4			—			11,062		1			—			—			1			—			1			—
Dividend reinvestment plan	9,489		1			—			—			1			—			1			—			1,893		—			—			—			—			—			—			—
Stock-based compensation expense	—		12			—			—			12			—			12			—			—		6			—			—			6			—			6			—
Shares exchanged — benefit plans	(46,989	)	(1		)	(4		)	—			(5		)	—			(5		)	—			(43,470	)	(1		)	(3		)	—			(4		)	—			(4		)	—
Forfeitures of restricted stock	(10,337	)	—			—			—			—			—			—			—			(8,314	)	—			—			—			—			—			—			—
Other	—		—			(3		)	—			(3		)	(2		)	(5		)	3			—		—			(3		)	—			(3		)	(2		)	(5		)	3
Balance at June 30, 2019	89,917,601		$	1,367		$	3,914		$	809		$	6,090		$	—		$	6,090		$	—

Balance at December 31, 2017	88,275,460		$	1,269		$	3,248		$	813		$	5,330		$	1		$	5,331		$	3
Cumulative effect of accounting change	—		—			225			(221		)	4			—			4			—
Net earnings (losses)	—		—			355			—			355			(1		)	354			(5		)
Other comprehensive loss	—		—			—			(445		)	(445		)	—			(445		)	—
Dividends ($2.20 per share)	—		—			(196		)	—			(196		)	—			(196		)	—
Shares issued:
Exercise of stock options	531,726		19			—			—			19			—			19			—
Restricted stock awards	200,625		—			—			—			—			—			—			—
Other benefit plans	73,676		8			—			—			8			—			8			—
Dividend reinvestment plan	18,006		2			—			—			2			—			2			—
Stock-based compensation expense	—		11			—			—			11			—			11			—
Shares exchanged — benefit plans	(24,310	)	—			(2		)	—			(2		)	—			(2		)	—
Forfeitures of restricted stock	(3,069	)	—			—			—			—			—			—			—
Other	—		—			(2		)	—			(2		)	—			(2		)	2
Balance at June 30, 2018	89,072,114		$	1,309		$	3,628		$	147		$	5,084		$	—		$	5,084		$	—
Balance at March 31, 2019																								89,637,713		$	1,346		$	3,875		$	444		$	5,665		$	—		$	5,665		$	—

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(In Millions)


	Six months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Operating Activities:
Net earnings, including noncontrolling interests	$	535		$	349
Net earnings (loss), including noncontrolling interests							$	(304	)	$	326
Adjustments:
Depreciation and amortization	72			106			113			34
Annuity benefits	650			442			276			311
Realized (gains) losses on investing activities	(241		)	64			550			(184		)
Net sales of trading securities	—			83			8			1
Deferred annuity and life policy acquisition costs	(120		)	(127		)	(49		)	(64		)
Change in:
Reinsurance and other receivables	85			72			161			128
Other assets	(298		)	(16		)	410			(271		)
Insurance claims and reserves	(92		)	(268		)	(152		)	(112		)
Payable to reinsurers	3			(22		)	(35		)	(22		)
Other liabilities	329			55			(543		)	304
Managed investment entities’ assets/liabilities	(3		)	138			89			16
Other operating activities, net	(43		)	(53		)	8			(13		)
Net cash provided by operating activities	877			823			532			454

Investing Activities:
Purchases of:
Fixed maturities	(3,761		)	(4,549		)	(4,140		)	(1,801		)
Equity securities	(80		)	(248		)	(232		)	(35		)
Mortgage loans	(43		)	(90		)	(21		)	(38		)
Equity index options and other investments	(467		)	(446		)	(245		)	(220		)
Real estate, property and equipment	(20		)	(44		)	(9		)	(10		)
Proceeds from:
Maturities and redemptions of fixed maturities	2,347			2,283			1,220			1,032
Repayments of mortgage loans	38			68			4			29
Sales of fixed maturities	459			203			1,483			201
Sales of equity securities	139			106			80			95
Sales and settlements of equity index options and other investments	329			446			248			79
Sales of real estate, property and equipment	2			1			1			1
Managed investment entities:
Purchases of investments	(697		)	(1,261		)	(414		)	(391		)
Proceeds from sales and redemptions of investments	702			1,035			370			373
Other investing activities, net	—			11			2			1
Net cash used in investing activities	(1,052		)	(2,485		)	(1,653		)	(684		)

Financing Activities:
Annuity receipts	2,744			2,547			1,410			1,395
Annuity surrenders, benefits and withdrawals	(1,668		)	(1,372		)	(813		)	(782		)
Net transfers from variable annuity assets	28			21			15			13
Additional long-term borrowings	121			—			—			121
Issuances of managed investment entities’ liabilities	—			1,572
Retirements of managed investment entities’ liabilities	(5		)	(1,461		)	(41		)	(3		)
Issuances of Common Stock	19			21			10			7
Repurchases of Common Stock							(61		)	—
Cash dividends paid on Common Stock	(205		)	(194		)	(40		)	(36		)
Net cash provided by financing activities	1,034			1,134			480			715
Net Change in Cash and Cash Equivalents	859			(528		)	(641		)	485
Cash and cash equivalents at beginning of period	1,515			2,338			2,314			1,515
Cash and cash equivalents at end of period	$	2,374		$	1,810		$	1,673		$	2,000

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



INDEX TO NOTES

A.	Accounting Policies	I.	Goodwill and Other Intangibles
B.	Acquisition of Business	J.	Long-Term Debt
C.	Segments of Operations	K.	~~Leases~~Shareholders’ Equity
D.	Fair Value Measurements	L.	~~Shareholders’ Equity~~Income Taxes
E.	Investments	M.	~~Income Taxes~~Contingencies
F.	Derivatives	N.	~~Contingencies~~Insurance
G.	Deferred Policy Acquisition Costs	O.	~~Insurance~~Subsequent Events
H.	Managed Investment Entities

A. Accounting Policies

Basis of Presentation The accompanying consolidated financial statements for American Financial Group, Inc. and its subsidiaries (“AFG”) are unaudited; however, management believes that all adjustments (consisting only of normal recurring accruals unless otherwise disclosed herein) necessary for fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary to be in conformity with U.S. generally accepted accounting principles (“GAAP”).

Certain reclassifications have been made to prior periods to conform to the current year’s presentation. All significant intercompany balances and transactions have been eliminated. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements. Events or transactions occurring subsequent to ~~June 30, 2019~~March 31, 2020, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates.

FairValueMeasurements Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first ~~six~~three months of ~~2019~~2020.

~~Investments~~Credit Losses on Financial Instruments On January 1, ~~2018,~~2020, AFG adopted Accounting Standards Update (“ASU”) ~~2016-01,~~2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides a new loss model for determining credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) and requires ~~all equity~~an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses considers historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. Expected credit losses, and subsequent increases or decreases in such expected losses, are recorded immediately through net earnings as an allowance that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the balance sheet at the amount expected to be collected. AFG’s portfolio of mortgage loans crosses a wide variety of commercial properties with very strong loan to value ratios and no credit losses in recent years. In addition, the reinsurance used in AFG’s insurance operations is purchased from financially strong (highly rated) reinsurers and the Company has a long history of collecting premiums receivable through various economic cycles. At the date of adoption, the impact of adjusting AFG’s existing allowances for uncollectable mortgage loans, premiums receivable and reinsurance recoverables to the allowances calculated under the new guidance resulted in a reduction in the net allowance, which was recorded as the cumulative effect of an accounting change ($7 million increase in retained earnings at January 1, 2020).

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The updated guidance also amended the current other-than-temporary impairment model for available for sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. Subsequent increases or decreases in expected credit losses will be recorded immediately in net earnings through realized gains (losses).

Investments Equity securities other than those accounted for under the equity method ~~to be~~are reported at fair value with holding gains and losses recognized in net earnings. At December 31, 2017, AFG had $1.60 billion in equity securities classified as “available for sale” under the prior guidance with holding gains and losses included in accumulated other comprehensive income (“AOCI”) instead of net earnings. At the date of adoption, the $221 million net unrealized gain on equity securities included in AOCI was reclassified to retained earnings as the cumulative effect of an accounting change. The cumulative effect of the accounting change also includes the net unrealized gain on AFG’s small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under the new guidance ($4 million net of tax at the date of adoption).

~~Holding gains and losses on equity securities carried at fair value are~~ generally recorded in realized gains (losses) on securities. However, AFG records holding gains and losses on securities classified as “trading” under previous guidance, its small portfolio of limited partnerships and similar investments carried at fair value and certain other securities classified at purchase as “fair value through net investment income” in net investment income.

Fixed maturity securities classified as “available for sale” are reported at fair value with unrealized gains and losses included in AOCI in AFG’s Balance Sheet. Fixed maturity securities classified as “trading” are reported at fair value with changes in unrealized holding gains or losses during the period included in net investment income. Mortgage and policy loans are carried primarily at the aggregate unpaid balance.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

Premiums and discounts on fixed maturity securities are amortized using the effective interest method. Mortgage-backed securities (“MBS”) are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.

Limited partnerships and similar investments are generally accounted for using the equity method of accounting. Under the equity method, AFG records its share of the earnings or losses of the investee based on when they are reported by the investee in its financial statements rather than in the period in which the investee declares a dividend. AFG’s share of the earnings or losses from equity method investments is generally recorded on a quarter lag due to the timing of the receipt of the investee’s financial statements. AFG’s equity in the earnings (losses) of limited partnerships and similar investments is included in net investment income.

~~Gains~~Realized gains or losses on the disposal of fixed maturity securities are determined on the specific identification basis. When a decline in the value of ~~a specific investment~~an available for sale fixed maturity is considered to be other-than-temporary at the balance sheet date, ~~a provision~~an allowance for ~~impairment~~credit losses (impairment), including any write-off of accrued interest, is charged to earnings (included in realized gains (losses) on securities) ~~and the cost basis of that investment is reduced.~~. If management can assert that it does not intend to sell ~~an impaired fixed maturity~~the security and it is not more likely than not that it will have to sell ~~the security~~it before recovery of its amortized cost basis (net of allowance), then the ~~other-than-temporary~~ impairment allowance is separated into two components: (i) the amount related to credit losses (recorded in earnings) and (ii) the amount related to all other factors (recorded in other comprehensive income). The credit-related portion ~~of an other-than-temporary impairment~~ is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the ~~impairment~~ charge. Both components are shown in the statement of earnings. If management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment ~~charge to earnings~~ is recorded in earnings to reduce the amortized cost (net of allowance) of that security to fair value. See “Credit Losses on Financial Instruments” above for a discussion of new guidance adopted on January 1, 2020.

Derivatives Derivatives included in AFG’s Balance Sheet are recorded at fair value. Changes in fair value of derivatives are included in earnings unless the derivatives are designated and qualify as highly effective cash flow hedges. Derivatives that do not qualify for hedge accounting under GAAP consist primarily of (i) components of certain fixed maturity securities (primarily interest-only and principal-only MBS) and (ii) the equity-based component of certain annuity products (included in annuity benefits accumulated) and related equity index options designed to be consistent with the characteristics of the liabilities and used to mitigate the risk embedded in those annuity products.

To qualify for hedge accounting, at the inception of a derivative contract, AFG formally documents the relationship between the terms of the hedge and the hedged items and its risk management objective. This documentation includes defining how hedge effectiveness and ineffectiveness will be measured on a retrospective and prospective basis.

Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI and are reclassified into earnings when the variability of the cash flows from the hedged items impacts earnings. ~~Any hedge ineffectiveness is immediately recorded in current period earnings.~~ When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item in the statement of earnings as the cash flows from the hedged item. AFG uses 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.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Goodwill Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net assets. Goodwill is not amortized, but is subject to an impairment test at least annually. An entity is not required to complete the quantitative annual goodwill impairment test on a reporting unit if the entity elects to perform a qualitative analysis and determines that it is more likely than not that the reporting unit’s fair value exceeds its carrying amount.

Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG’s property and casualty insurance subsidiaries report as assets (i) the estimated reinsurance recoverable on paid and unpaid losses, including an estimate for losses incurred but not reported, and (ii) amounts paid or due to reinsurers applicable to the unexpired terms of policies in force. Payable to reinsurers includes ceded premiums due to reinsurers, as well as ceded premiums retained by AFG’s property and casualty insurance subsidiaries under contracts to fund ceded losses as they become due. AFG’s insurance subsidiaries also assume reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

An AFG subsidiary cedes life insurance policies to a third party on a funds withheld basis whereby the subsidiary retains the assets (securities) associated with the reinsurance contract. Interest is credited to the reinsurer based on the actual investment

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

performance of the retained assets. This reinsurance contract is considered to contain an embedded derivative (that must be adjusted to fair value) because the yield on the payable is based on a specific block of the ceding company’s assets, rather than the overall creditworthiness of the ceding company. AFG determined that changes in the fair value of the underlying portfolio of fixed maturity securities is an appropriate measure of the value of the embedded derivative. The securities related to this contract are classified as “trading.” The adjustment to fair value on the embedded derivative offsets the investment income recorded on the adjustment to fair value of the related trading portfolio.

Deferred PolicyAcquisitionCosts(“DPAC”) Policy acquisition costs (principally commissions, premium taxes and certain underwriting and policy issuance costs) directly related to the successful acquisition or renewal of an insurance contract are deferred. DPAC also includes capitalized costs associated with sales inducements offered to fixed annuity policyholders such as enhanced interest rates and premium and persistency bonuses.

For the property and casualty companies, DPAC is limited based upon recoverability without any consideration for anticipated investment income and is charged against income ratably over the terms of the related policies. A premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses and unamortized acquisition costs exceed the related unearned premiums. A premium deficiency is first recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency and reported with unpaid losses and loss adjustment expenses.

DPAC related to annuities is deferred to the extent deemed recoverable and amortized, with interest, in relation to the present value of actual and expected gross profits on the policies. Expected gross profits consist principally of estimated future investment margin (estimated future net investment income less interest credited on policyholder funds) and surrender, mortality, and other life and annuity policy charges, less death, annuitization and guaranteed withdrawal benefits in excess of account balances and estimated future policy administration expenses. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, such adjustments are reflected as components of realized gains (losses) on securities.

DPAC related to traditional life and health insurance is amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. See “Life, Accident and Health ~~Reserves~~”Reserves” below for details on the impact of loss recognition on the accounting for traditional life and health insurance contracts.

DPAC includes the present value of future profits on business in force of annuity and life, accident and health insurance companies acquired (“PVFP”). PVFP represents the portion of the costs to acquire companies that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. PVFP is amortized with interest in relation to expected gross profits of the acquired policies for annuities and universal life products and in relation to the premium paying period for traditional life and health insurance products.

DPAC and certain other balance sheet amounts related to annuity and life businesses are also adjusted, net of tax, for the change in expense that would have been recorded if the unrealized gains (losses) from securities had actually been realized. These adjustments are included in unrealized gains (losses) on marketable securities, a component of AOCI in AFG’s Balance Sheet.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Managed Investment Entities A company is considered the primary beneficiary of, and therefore must consolidate, a variable interest entity (“VIE”) based primarily on its ability to direct the activities of the VIE that most significantly impact that entity’s economic performance and the obligation to absorb losses of, or receive benefits from, the entity that could potentially be significant to the VIE.

AFG manages, and has investments in, collateralized loan obligations (“CLOs”) that are VIEs (see Note H — “~~Managed~~“Managed Investment ~~Entities~~”Entities”). AFG has determined that it is the primary beneficiary of these CLOs because (i) its role as asset manager gives it the power to direct the activities that most significantly impact the economic performance of the CLOs and (ii) through its investment in the CLO debt tranches, it has exposure to CLO losses (limited to the amount AFG invested) and the right to receive CLO benefits that could potentially be significant to the CLOs.

Because AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities, the assets and liabilities of the CLOs are shown separately in AFG’s Balance Sheet. AFG has elected the fair value option for reporting on the CLO assets and liabilities to improve the transparency of financial reporting related to the CLOs. The net gain or loss from accounting for the CLO assets and liabilities at fair value is presented separately in AFG’s Statement of Earnings.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

The fair values of a CLO’s assets may differ from the separately measured fair values of its liabilities even though the CLO liabilities only have recourse to the CLO assets. AFG has set the carrying value of the 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 a separately measured fair value. CLO earnings attributable to AFG’s shareholders are measured by the change in the fair value of AFG’s investments in the CLOs and management fees earned.

Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims represent management’s best estimate and are based upon (i) the accumulation of case estimates for losses reported prior to the close of the accounting period on direct business written; (ii) estimates received from ceding reinsurers and insurance pools and associations; (iii) estimates of unreported losses (including possible development on known claims) based on past experience; (iv) estimates based on experience of expenses for investigating and adjusting claims; and (v) the current state of the law and coverage litigation. Establishing reserves for asbestos, environmental and other mass tort claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage.

Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency and other factors. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the statement of earnings in the period in which determined. Despite the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.

Annuity Benefits Accumulated Annuity receipts and benefit payments are recorded as increases or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in this liability for interest credited are charged to annuity benefits expense and decreases for annuity policy charges are recorded in other income. For traditional fixed annuities, the liability for annuity benefits accumulated represents the account value that had accrued to the benefit of the policyholder as of the balance sheet date. For fixed-indexed annuities (“FIAs”), the liability for annuity benefits accumulated includes an embedded derivative that represents the estimated fair value of the index participation with the remaining component representing the discounted value of the guaranteed minimum contract benefits.

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, guaranteed withdrawals and excess benefits expected to be paid on future deaths and annuitizations (“EDAR”). The liabilities for EDAR and guaranteed withdrawals are accrued for and modified using assumptions consistent with those used in determining DPAC and DPAC amortization, except that amounts are determined in relation to the present value of total expected assessments. Total expected assessments consist principally of estimated future investment margin, surrender, mortality, and other life and annuity policy charges, and unearned revenues once they are recognized as income.

Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Unearned Revenue Certain upfront policy charges on annuities are deferred as unearned revenue (included in other liabilities) and recognized in net earnings (included in other income) using the same assumptions and estimated gross profits used to amortize DPAC.

Life, Accident and Health Reserves Liabilities for future policy benefits under traditional life, accident and health policies are computed using the net level premium method. Computations are based on the original projections of investment yields, mortality, morbidity and surrenders and include provisions for unfavorable deviations unless a loss recognition event (premium deficiency) occurs. Claim reserves and liabilities established for accident and health claims are modified as necessary to reflect actual experience and developing trends.

For long-duration contracts (such as traditional life and long-term care policies), loss recognition occurs when, based on current expectations as of the measurement date, existing contract liabilities plus the present value of future premiums (including reasonably expected rate increases) are not expected to cover the present value of future claims payments and related settlement and maintenance costs (excluding overhead) as well as unamortized acquisition costs. If a block of business is determined to be in loss recognition, a charge is recorded in earnings in an amount equal to the excess of the present value of expected future claims costs and unamortized acquisition costs over existing reserves plus the present value of expected future premiums (with no provision for adverse deviation). The charge is recorded first to reduce unamortized acquisition costs and then as an additional reserve (if unamortized acquisition costs have been reduced to zero).

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

In addition, reserves for traditional life and long-term care policies are subject to adjustment for loss recognition charges that would have been recorded if the unrealized gains (losses) from securities had actually been realized. This adjustment is included in unrealized gains (losses) on marketable securities, a component of AOCI in AFG’s Balance Sheet.

DebtIssuanceCosts Debt issuance costs related to AFG’s outstanding debt are presented in its Balance Sheet as a direct reduction in the carrying value of long-term debt and are amortized over the life of the related debt using the effective interest method as a component of interest expense. Debt issuance costs related to AFG’s revolving credit facilities are included in other assets in AFG’s Balance Sheet.

Variable Annuity Assets and Liabilities Separate accounts related to variable annuities represent the fair value of deposits invested in underlying investment funds on which AFG earns a fee. Investment funds are selected and may be changed only by the policyholder, who retains all investment risk.

AFG’s variable annuity contracts contain a guaranteed minimum death benefit (“GMDB”) to be paid if the policyholder dies before the annuity payout period commences. In periods of declining equity markets, the GMDB may exceed the value of the policyholder’s account. A GMDB liability is established for future excess death benefits using assumptions together with a range of reasonably possible scenarios for investment fund performance that are consistent with DPAC capitalization and amortization assumptions.

Leases On January 1, 2019, AFG adopted ASU 2016-02, which requires entities that lease assets for terms longer than one year to recognize assets and liabilities for the rights and obligations created by those leases on the balance sheet based on the present value of contractual cash flows. ~~As permitted under the ASU, AFG adopted the guidance on a modified retrospective basis (comparative periods were not adjusted) and elected the following accounting policies and practical expedients:~~

~~exclude leases with a term of 12 months or less from the calculation of lease assets and liabilities,~~

~~not separate lease and non-lease components except for buildings (office space and storage facilities),~~

for contracts existing at the date of adoption – not reassess whether a contract is a lease or contains a lease, how initial direct costs were accounted for or whether the lease is an operating or finance lease, and

~~use hindsight to determine the lease term for leases existing at the date of adoption.~~

Adoption of the new guidance resulted in AFG recognizing a lease liability of $198 million (included in other liabilities) and a corresponding right-of-use asset of $174 million (which is presented net of $24 million in deferred rent and lease incentives) on January 1, 2019. Deferred rent and lease incentives were recognized as liabilities under the previous guidance and result from the straight-line expensing of operating leases. The adoption of the new guidance did not have a material effect on ~~the~~ AFG’s results of operations or liquidity. ~~See~~ ~~Note~~ K ~~— “Leases~~” ~~for additional disclosures.~~

At March 31, 2020 AFG has a $182 million lease liability included in other liabilities and a lease right-of-use asset of $162 million included in other assets compared to $180 million and $158 million, respectively, at December 31, 2019.

NoncontrollingInterests For balance sheet purposes, noncontrolling interests represent the interests of shareholders other than AFG in consolidated entities. In the statement of earnings, net earnings and losses attributable to noncontrolling interests represents such shareholders’ interest in the earnings and losses of those entities. Noncontrolling interests that are redeemable at the option of the holder are presented separately in the mezzanine section of the balance sheet (between liabilities and equity).

PremiumRecognition Property and casualty premiums are earned generally over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations. For traditional life, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. For interest-sensitive life and universal life products, premiums are recorded in a policyholder account,

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses.

Income Taxes Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. A valuation allowance is established to reduce total deferred tax assets to an amount that will more likely than not be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recorded in net earnings in the period that includes the enactment date.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

AFG recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on AFG’s reserve for uncertain tax positions are recognized as a component of tax expense.

Stock-Based Compensation All share-based grants are recognized as compensation expense on a straight-line basis over their vesting periods based on their calculated fair value at the date of grant. AFG uses the Black Scholes pricing model to measure the fair value of employee stock options. ~~See~~ ~~Note~~ L ~~— “Shareholders’ Equity~~” ~~for further information.~~

AFG records excess tax benefits or deficiencies for share-based payments through income tax expense in the statement of earnings. In addition, AFG accounts for forfeitures of awards when they occur.

Benefit Plans AFG provides retirement benefits to qualified employees of participating companies through the AFG 401(k) Retirement and Savings Plan, a defined contribution plan. AFG makes all contributions to the retirement fund portion of the plan and matches a percentage of employee contributions to the savings fund. Company contributions are expensed in the year for which they are declared. AFG and many of its subsidiaries provide health care and life insurance benefits to eligible retirees. AFG also provides postemployment benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. The projected future cost of providing these benefits is expensed over the period employees earn such benefits.

Earnings Per Share Although basic earnings per share only considers shares of common stock outstanding during the period, the calculation of diluted earnings per share includes the following adjustments to weighted average common shares related to stock-based compensation plans: ~~second quarter 2019 and 2018 — 1.3 million and 1.7 million;~~ first ~~six~~three months of 2020 and 2019 — NaN and ~~2018 — 1.2 million and 1.7~~1.3 million, respectively.

There were no0.8 million anti-dilutive potential common shares infor the ~~second quarter or~~ first ~~six~~three months of ~~2019~~2020 ~~or 2018.~~due to AFG’s net loss and 0 anti-dilutive potential common shares for the first three months of 2019.

Statement of Cash Flows For cash flow purposes, “investing activities” are defined as making and collecting loans and acquiring and disposing of debt or equity instruments, property and equipment and businesses. “Financing activities” include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. Annuity receipts, surrenders, benefits and withdrawals are also reflected as financing activities. All other activities are considered “operating.” Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial ~~statements.~~statements

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

B. Acquisition of Business

Effective in June ~~10,~~ 2019, National Interstate, a property and casualty insurance subsidiary of AFG, entered into an agreement with Atlas Financial Holdings, Inc. (“AFH”) to become the exclusive underwriter of AFH’s paratransit book of business. National Interstate estimates that the majority of AFH’s $110 million paratransit business will be eligible for quotation under this arrangement over the first 12 months following inception of the agreement. Under the terms of the agreement, AFH will act as an underwriting manager for National Interstate for at least 12 months, after which time National Interstate is entitled to acquire the renewal rights for the business from AFH for a purchase price equal to 15% of the in force gross written premiums at that date. The majority of the purchase price ultimately paid for the renewal rights will be recorded as an intangible renewal rights asset and will be amortized over the estimated life of the business acquired. In connection with the transaction, AFG was granted a five-year warrant to acquire approximately 2.4 million shares of ~~AFH.~~AFH (19.9% at the acquisition date). The estimated fair value of the warrant was approximately $1 million at the date it was received.

C. Segments of Operations

AFG manages its business as ~~three~~3 segments: (i) Property and casualty insurance, (ii) Annuity and (iii) Other, which includes holding company costs, revenues and costs of AFG’s limited insurance operations outside of property and casualty insurance and ~~annuities,~~annuity segments, and operations attributable to the noncontrolling interests of the managed investment entities.

AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes physical damage and liability coverage for buses and trucks, inland and ocean marine, agricultural-related products and other commercial property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, executive and professional liability, general liability, umbrella and excess liability, specialty coverages in targeted markets, customized programs for small to mid-sized businesses and workers’ compensation insurance, and (iii) Specialty

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

financial, which includes risk management insurance programs for lending and leasing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), fidelity and surety products and trade credit insurance. Premiums and underwriting profit included under Other specialty represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments and amortization of deferred gains on retroactive reinsurance transactions related to the sales of businesses in prior years. AFG’s annuity business sells traditional fixed ~~fixed-indexed~~ and ~~variable-indexed~~indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets. AFG’s reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The following tables (in millions) show AFG’s revenues and earnings before income taxes by segment and sub-segment.

Three months ended June 30, Six months ended June 30,
2019 2018 2019 2018
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation $ 379
$ 374
$ 740
$ 724
Specialty casualty 634
595
1,263
1,174
Specialty financial 151
159
297
308
Other specialty 36
33
73
62
Total premiums earned 1,200
1,161
2,373
2,268
Net investment income 124
115
228
215
Other income 2
2
5
4
Total property and casualty insurance 1,326
1,278
2,606
2,487
Annuity:
Net investment income 451
412
886
806
Other income 27
27
54
53
Total annuity 478
439
940
859
Other 100
85
198
168
Total revenues before realized gains (losses) 1,904
1,802
3,744
3,514
Realized gains (losses) on securities 56
31
240
(62 )
Total revenues $ 1,960
$ 1,833
$ 3,984
$ 3,452

Earnings Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation $ 4
$ 23
$ 43
$ 56
Specialty casualty 47
29
83
70
Specialty financial 21
22
34
37
Other specialty (12 ) (1 ) (12 ) 2
Other lines (1 ) (1 ) (2 ) (2 )
Total underwriting 59
72
146
163
Investment and other income, net 115
106
210
199
Total property and casualty insurance 174
178
356
362
Annuity 71
99
161
224
Other (*) (42 ) (48 ) (85 ) (90 )
Total earnings before realized gains (losses) and income taxes 203
229
432
496
Realized gains (losses) on securities 56
31
240
(62 )
Total earnings before income taxes $ 259
$ 260
$ 672
$ 434



	Three months ended March 31,
	2020			2019
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	386		$	361
Specialty casualty	556			629
Specialty financial	156			146
Other specialty	40			37
Other lines (a)	71			—
Total premiums earned	1,209			1,173
Net investment income (b)	93			104
Other income	5			3
Total property and casualty insurance	1,307			1,280
Annuity:
Net investment income	422			435
Other income	35			28
Total annuity	457			463
Other	62			97
Total revenues before realized gains (losses)	1,826			1,840
Realized gains (losses) on securities	(551		)	184
Total revenues	$	1,275		$	2,024


~~(*)~~(a)	Represents premiums earned in the Neon exited lines during the first three months of 2020. Neon’s $88 million in earned premiums during the first three months of 2019 are included in the Specialty casualty sub-segment.


(b)	Includes a net loss of $6 million in the Neon exited lines, primarily from the change in fair value of equity securities.



	Three months ended March 31,
	2020			2019
Earnings (Loss) Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	27		$	39
Specialty casualty	52			36
Specialty financial	17			13
Other specialty	(7		)	—
Other lines (a)	(2		)	(1		)
Total underwriting	87			87
Investment and other income, net (b)	84			95
Total property and casualty insurance	171			182
Annuity	29			90
Other (c)	(37		)	(43		)
Total earnings before realized gains (losses) and income taxes	163			229
Realized gains (losses) on securities	(551		)	184
Total earnings (loss) before income taxes	$	(388	)	$	413


(a)	Includes a $1 million underwriting loss in the first three months of 2020 in the Neon exited lines. Neon’s $10 million underwriting loss in the first three months of 2019 is included in the Specialty casualty sub-segment.


(b)	Includes $9 million in net expenses from the Neon exited lines, before noncontrolling interest.


(c)	Includes holding company interest and expenses.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

D. 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 separate account assets, corporate and municipal fixed maturity securities, asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), certain non-affiliated common stocks, equity index options 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. ~~AFG’s Level 3 is comprised of financial~~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.~~information are classified as Level 3.

As discussed in Note A — “~~Accounting~~“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 analysts 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, the Company 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.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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		Level 1		Level 2		Level 3		Total
June 30, 2019
March 31, 2020
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	143	$	77	$	8	$	228	$	158	$	32	$	15	$	205
States, municipalities and political subdivisions	—		6,914		82		6,996		—		6,801		105		6,906
Foreign government	—		149		—		149		—		170		—		170
Residential MBS	—		2,528		139		2,667		—		2,968		163		3,131
Commercial MBS	—		924		50		974		—		875		32		907
Collateralized loan obligations	—		4,283		50		4,333		—		3,970		168		4,138
Other asset-backed securities	—		5,577		367		5,944		—		5,728		1,030		6,758
Corporate and other	29		21,376		2,014		23,419		25		22,346		1,548		23,919
Total AFS fixed maturities	172		41,828		2,710		44,710		183		42,890		3,061		46,134
Trading fixed maturities	4		102		—		106		1		95		—		96
Equity securities	1,532		76		377		1,985		1,056		67		436		1,559
Equity index call options	—		712		—		712		—		209		—		209
Assets of managed investment entities (“MIE”)	225		4,537		19		4,781		169		3,841		16		4,026
Variable annuity assets (separate accounts) (*)	—		616		—		616		—		497		—		497
Other assets — derivatives	—		54		—		54		—		125		—		125
Total assets accounted for at fair value	$	1,933	$	47,925	$	3,106	$	52,964	$	1,409	$	47,724	$	3,513	$	52,646
Liabilities:
Liabilities of managed investment entities	$	216	$	4,356	$	18	$	4,590	$	162	$	3,688	$	15	$	3,865
Derivatives in annuity benefits accumulated	—		—		3,541		3,541		—		—		3,099		3,099
Other liabilities — derivatives	—		12		—		12		—		10		—		10
Total liabilities accounted for at fair value	$	216	$	4,368	$	3,559	$	8,143	$	162	$	3,698	$	3,114	$	6,974

December 31, 2018
December 31, 2019
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	141	$	83	$	9	$	233	$	151	$	43	$	15	$	209
States, municipalities and political subdivisions	—		6,880		59		6,939		—		6,858		105		6,963
Foreign government	—		142		—		142		—		172		—		172
Residential MBS	—		2,547		197		2,744		—		2,987		173		3,160
Commercial MBS	—		864		56		920		—		892		35		927
Collateralized loan obligations	—		4,162		116		4,278		—		4,265		15		4,280
Other asset-backed securities	—		4,802		731		5,533		—		5,842		1,286		7,128
Corporate and other	28		19,184		1,996		21,208		29		21,879		1,758		23,666
Total AFS fixed maturities	169		38,664		3,164		41,997		180		42,938		3,387		46,505
Trading fixed maturities	9		96		—		105		2		111		—		113
Equity securities	1,410		68		336		1,814		1,433		67		437		1,937
Equity index call options	—		184		—		184		—		924		—		924
Assets of managed investment entities	203		4,476		21		4,700		213		4,506		17		4,736
Variable annuity assets (separate accounts) (*)	—		557		—		557		—		628		—		628
Other assets — derivatives	—		16		—		16		—		50		—		50
Total assets accounted for at fair value	$	1,791	$	44,061	$	3,521	$	49,373	$	1,828	$	49,224	$	3,841	$	54,893
Liabilities:
Liabilities of managed investment entities	$	195	$	4,297	$	20	$	4,512	$	206	$	4,349	$	16	$	4,571
Derivatives in annuity benefits accumulated	—		—		2,720		2,720		—		—		3,730		3,730
Other liabilities — derivatives	—		49		—		49		—		10		—		10
Total liabilities accounted for at fair value	$	195	$	4,346	$	2,740	$	7,281	$	206	$	4,359	$	3,746	$	8,311


(*)	Variable annuity liabilities equal the fair value of variable annuity assets.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

During the second quarter and first six months of 2019, there was one preferred stock with an aggregate fair value of $6 million that transferred from Level 1 to Level 2. During the second quarter and first six months of 2018, there were two preferred stocks with an aggregate fair value of $6 million that transferred from Level 1 to Level 2.

Approximately 6%7% of the total assets carried at fair value at ~~June 30, 2019,~~March 31, 2020, were Level 3 assets. Approximately ~~55%~~43% ($~~1.71~~1.52 billion) of the 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.

Internally developed Level 3 asset fair values represent approximately ~~$1.19~~$1.63 billion at ~~June 30, 2019.~~March 31, 2020. Of this amount, approximately ~~$833~~$727 million relates to fixed maturity securities that were priced using management’s best estimate of an appropriate credit spread over the treasury yield (of a similar duration) to discount future expected cash flows using a ~~third party~~third-party model. The credit spread applied by management is the significant unobservable input. For this group of ~~approximately 140~~37 securities, the average spread used was ~~576~~414 basis points over the reference treasury yield and the spreads ranged from ~~100~~53 basis points to ~~2,966~~1,253 basis points (approximately ~~80%~~70% of the spreads were between ~~400~~200 and 700 basis points). Had management used higher spreads, the fair value of this group of securities would have been lower. Conversely, if the spreads used were lower, the fair values would have been higher. For the remainder of the internally developed prices, any justifiable changes in unobservable inputs used to determine fair value would not have resulted in a material change in AFG’s financial position.

The derivatives embedded in AFG’s fixed-indexed and variable-indexed annuity liabilities are measured using a discounted cash flow approach and had a fair value of $~~3.54~~3.10 billion at ~~June 30, 2019~~March 31, 2020. The following table presents information about the unobservable inputs used by management in determining fair value of these Level 3 liabilities. See Note F — “~~Derivatives~~.“Derivatives.”



	Unobservable Input		Range
	Adjustment for insurance subsidiary’s credit risk		~~less than 0.1%~~1.9% – ~~2.4%~~3.6% over the ~~risk free~~risk-free rate
	Risk margin for uncertainty in cash flows		~~0.73%~~0.80% reduction in the discount rate
	Surrenders		4% – ~~23%~~21% of indexed account value
	Partial surrenders		2% – 9% of indexed account value
	Annuitizations		0.1% – 1% of indexed account value
	Deaths		~~1.7%~~1.9% – ~~9.5%~~10.6% of indexed account value
	Budgeted option costs		~~2.6%~~2.5% – ~~3.6%~~3.3% of indexed account value

The range of adjustments for insurance subsidiary’s credit risk is based on the Moody’s corporate A2 bond index and reflects credit spread variations across the yield curve. The range of projected surrender rates reflects the specific surrender charges and other features of AFG’s individual fixed-indexed and variable-indexed annuity products with an expected range of 7% to ~~11%~~10% in the majority of future calendar years (4% to ~~23%~~21% over all periods). Increasing the budgeted option cost or risk margin for uncertainty in cash flow assumptions in the table above would increase the fair value of the fixed-indexed and variable-indexed annuity embedded derivatives, while increasing any of the other unobservable inputs in the table above would decrease the fair value of the embedded derivatives.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the ~~second quarter and~~ first ~~six~~three months of ~~2019~~2020 and ~~2018~~2019 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs and $29 million of equity securities transferred into Level 3 in the first quarter of 2018 related to a small number of limited partnerships and similar investments carried at cost under the prior guidance that are carried at fair value through net earnings under new guidance adopted on January 1, 2018, as discussed in ~~Note~~ A — “~~Accounting Policies~~ — ~~Investments~~.”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 March 31, 2019 Net
earnings
Other
comprehensive
income (loss)

Purchases
and
issuances

Sales and
settlements

Transfer
into
Level 3

Transfer
out of
Level 3
Balance at June 30, 2019
AFS fixed maturities:
U.S. government agency $ 8
$ —
$ —
$ —
$ —
$ —
$ —
$ 8
State and municipal 63
—
2
—
(1 ) 18
—
82
Residential MBS 169
4
—
—
(4 ) 2
(32 ) 139
Commercial MBS 55
2
—
—
(2 ) —
(5 ) 50
Collateralized loan obligations 37
—
—
—
—
13
—
50
Other asset-backed securities 633
—
3
17
(18 ) —
(268 ) 367
Corporate and other 2,346
—
20
229
(161 ) 2
(422 ) 2,014
Total AFS fixed maturities 3,311
6
25
246
(186 ) 35
(727 ) 2,710
Equity securities 354
(1 ) —
19
(1 ) 6
—
377
Assets of MIE 20
(1 ) —
—
—
—
—
19
Total Level 3 assets $ 3,685
$ 4
$ 25
$ 265
$ (187 ) $ 41
$ (727 ) $ 3,106

Embedded derivatives $ (3,247 ) $ (251 ) $ —
$ (101 ) $ 58
$ —
$ —
$ (3,541 )
Total Level 3 liabilities (b) $ (3,247 ) $ (251 ) $ —
$ (101 ) $ 58
$ —
$ —
$ (3,541 )

Total realized/unrealized
gains (losses) included in

Balance at March 31, 2018 Net
earnings
Other
comprehensive
income (loss)

Purchases
and
issuances

Sales and
settlements

Transfer
into
Level 3

Transfer
out of
Level 3
Balance at June 30, 2018
AFS fixed maturities:
U.S. government agency $ 8
$ —
$ —
$ —
$ —
$ —
$ —
$ 8
State and municipal 62
—
(1 ) —
—
—
—
61
Residential MBS 115
(3 ) —
—
(5 ) 50
(10 ) 147
Commercial MBS 47
—
—
9
—
—
—
56
Collateralized loan obligations 181
—
(4 ) 35
—
—
—
212
Other asset-backed securities 731
—
(2 ) 101
(20 ) —
(18 ) 792
Corporate and other 1,238
1
(4 ) 234
(48 ) —
(13 ) 1,408
Total AFS fixed maturities 2,382
(2 ) (11 ) 379
(73 ) 50
(41 ) 2,684
Equity securities 194
19
—
16
—
1
—
230
Assets of MIE 24
(3 ) —
2
—
—
—
23
Total Level 3 assets $ 2,600
$ 14
$ (11 ) $ 397
$ (73 ) $ 51
$ (41 ) $ 2,937

Embedded derivatives (a) $ (2,549 ) $ (126 ) $ —
$ (141 ) $ 40
$ —
$ —
$ (2,776 )
Total Level 3 liabilities (b) $ (2,549 ) $ (126 ) $ —
$ (141 ) $ 40
$ —
$ —
$ (2,776 )


~~(a)~~	Total realized/unrealized gains (losses) included in net earnings for the embedded derivatives reflects losses related to the unlocking of actuarial assumptions of $44 million in the second quarter of 2018.


~~(b)~~	~~As previously discussed, these tables exclude the portion of MIE liabilities allocated to Level 3, which are derived from the fair value of the MIE assets.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~


				Total realized/unrealized gains (losses) included in																							Total realized/unrealized gains (losses) included in
	Balance at December 31, 2018			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at June 30, 2019			Balance at December 31, 2019			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at March 31, 2020
AFS fixed maturities:
U.S. government agency	$	9		$	—		$	—		$	—		$	(1	)	$	—	$	—		$	8		$	15		$	1		$	(1	)	$	—		$	—		$	—	$	—		$	15
State and municipal	59			—			7			—			(2		)	18		—			82			105			—			1			—			(1		)	—		—			105
Residential MBS	197			9			(5		)	—			(10		)	2		(54		)	139			173			5			(12		)	—			(5		)	2		—			163
Commercial MBS	56			2			—			—			(3		)	—		(5		)	50			35			—			—			—			(3		)	—		—			32
Collateralized loan obligations	116			(3		)	6			—			—			13		(82		)	50			15			(7		)	2			—			—			158		—			168
Other asset-backed securities	731			—			5			92			(132		)	—		(329		)	367			1,286			(14		)	(11		)	77			(178		)	13		(143		)	1,030
Corporate and other	1,996			2			51			661			(249		)	2		(449		)	2,014			1,758			(3		)	(27		)	119			(36		)	5		(268		)	1,548
Total AFS fixed maturities	3,164			10			64			753			(397		)	35		(919		)	2,710			3,387			(18		)	(48		)	196			(223		)	178		(411		)	3,061
Equity securities	336			—			—			20			(1		)	22		—			377			437			(24		)	—			6			—			17		—			436
Assets of MIE	21			(2		)	—			—			—			—		—			19			17			(1		)	—			—			—			—		—			16
Total Level 3 assets	$	3,521		$	8		$	64		$	773		$	(398	)	$	57	$	(919	)	$	3,106		$	3,841		$	(43	)	$	(48	)	$	202		$	(223	)	$	195	$	(411	)	$	3,513

Embedded derivatives	$	(2,720	)	$	(713	)	$	—		$	(213	)	$	105		$	—	$	—		$	(3,541	)	$	(3,730	)	$	647		$	—		$	(78	)	$	62		$	—	$	—		$	(3,099	)
Total Level 3 liabilities (b)	$	(2,720	)	$	(713	)	$	—		$	(213	)	$	105		$	—	$	—		$	(3,541	)
Total Level 3 liabilities (*)																								$	(3,730	)	$	647		$	—		$	(78	)	$	62		$	—	$	—		$	(3,099	)


				Total realized/unrealized gains (losses) included in																							Total realized/unrealized gains (losses) included in
	Balance at December 31, 2017			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at June 30, 2018			Balance at December 31, 2018			Net earnings			Other comprehensive income (loss)			Purchases and issuances			Sales and settlements			Transfer into Level 3		Transfer out of Level 3			Balance at March 31, 2019
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8		$	9		$	—		$	—		$	—		$	(1	)	$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(1		)	—		(84		)	61			59			—			5			—			(1		)	—		—			63
Residential MBS	122			(7		)	—			—			(11		)	57		(14		)	147			197			5			(5		)	—			(6		)	—		(22		)	169
Commercial MBS	36			(1		)	—			21			—			—		—			56			56			—			—			—			(1		)	—		—			55
Collateralized loan obligations	180			(2		)	(1		)	35			—			—		—			212			116			—			—			—			—			—		—			116
Other asset-backed securities	564			—			(2		)	305			(57		)	—		(18		)	792			731			(3		)	8			75			(114		)	—		(143		)	554
Corporate and other	1,044			2			(18		)	472			(79		)	—		(13		)	1,408			1,996			2			31			432			(88		)	—		(27		)	2,346
Total AFS fixed maturities	2,102			(8		)	(23		)	833			(148		)	57		(129		)	2,684			3,164			4			39			507			(211		)	—		(192		)	3,311
Equity securities	165			14			—			25			(4		)	30		—			230			336			1			—			1			—			16		—			354
Assets of MIE	23			(5		)	—			5			—			—		—			23			21			(1		)	—			—			—			—		—			20
Total Level 3 assets	$	2,290		$	1		$	(23	)	$	863		$	(152	)	$	87	$	(129	)	$	2,937		$	3,521		$	4		$	39		$	508		$	(211	)	$	16	$	(192	)	$	3,685

Embedded derivatives ~~(a)~~	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)	$	(2,720	)	$	(462	)	$	—		$	(112	)	$	47		$	—	$	—		$	(3,247	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)
Total Level 3 liabilities (*)																								$	(2,720	)	$	(462	)	$	—		$	(112	)	$	47		$	—	$	—		$	(3,247	)


~~(a)~~	Total realized/unrealized gains (losses) included in net earnings for the embedded derivatives reflects losses related to the unlocking of actuarial assumptions of $44 million in the first six months of 2018.


~~(b)~~(*)	As previously discussed, these tables exclude the portion of MIE liabilities allocated to Level 3, which are derived from the fair value of the MIE assets.

1918

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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		Fair Value								Carrying		Fair Value
	Value		Total		Level 1		Level 2		Level 3		Value		Total		Level 1		Level 2		Level 3
June 30, 2019
March 31, 2020
Financial assets:
Cash and cash equivalents	$	2,374	$	2,374	$	2,374	$	—	$	—	$	1,673	$	1,673	$	1,673	$	—	$	—
Mortgage loans	1,073		1,080		—		—		1,080		1,346		1,350		—		—		1,350
Policy loans	170		170		—		—		170		161		161		—		—		161
Total financial assets not accounted for at fair value	$	3,617	$	3,624	$	2,374	$	—	$	1,250	$	3,180	$	3,184	$	1,673	$	—	$	1,511
Financial liabilities:
Annuity benefits accumulated (*)	$	38,806	$	38,634	$	—	$	—	$	38,634	$	40,218	$	39,773	$	—	$	—	$	39,773
Long-term debt	1,423		1,482		—		1,479		3		1,473		1,411		—		1,408		3
Total financial liabilities not accounted for at fair value	$	40,229	$	40,116	$	—	$	1,479	$	38,637	$	41,691	$	41,184	$	—	$	1,408	$	39,776

December 31, 2018
December 31, 2019
Financial assets:
Cash and cash equivalents	$	1,515	$	1,515	$	1,515	$	—	$	—	$	2,314	$	2,314	$	2,314	$	—	$	—
Mortgage loans	1,068		1,056		—		—		1,056		1,329		1,346		—		—		1,346
Policy loans	174		174		—		—		174		164		164		—		—		164
Total financial assets not accounted for at fair value	$	2,757	$	2,745	$	1,515	$	—	$	1,230	$	3,807	$	3,824	$	2,314	$	—	$	1,510
Financial liabilities:
Annuity benefits accumulated (*)	$	36,384	$	34,765	$	—	$	—	$	34,765	$	40,159	$	40,182	$	—	$	—	$	40,182
Long-term debt	1,302		1,231		—		1,228		3		1,473		1,622		—		1,619		3
Total financial liabilities not accounted for at fair value	$	37,686	$	35,996	$	—	$	1,228	$	34,768	$	41,632	$	41,804	$	—	$	1,619	$	40,185


(*)	Excludes ~~$238~~$245 million and ~~$232~~$247 million of life contingent annuities in the payout phase at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

The carrying amount of cash and cash equivalents approximates fair value. Fair values for mortgage loans are estimated by discounting the future contractual cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The fair value of policy loans is estimated to approximate carrying value; policy loans have no defined maturity dates and are inseparable from insurance contracts. The fair value of annuity benefits was estimated based on expected cash flows discounted using forward interest rates adjusted for the Company’s credit risk and includes the impact of maintenance expenses and capital costs. Fair values of long-term debt are based primarily on quoted market prices.

2019

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

E. Investments

Available for sale fixed maturities at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, consisted of the following (in millions):


	June 30, 2019												December 31, 2018												Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized					Net Unrealized			Fair Value
	Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value		Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value						Gains		Losses
			Gains		Losses										Gains		Losses
March 31, 2020
Fixed maturities:
U.S. Government and government agencies	$	226	$	4	$	(2	)	$	2		$	228	$	235	$	1	$	(3	)	$	(2	)	$	233	$	190	$	—	$	15	$	—		$	15		$	205
States, municipalities and political subdivisions	6,628		374		(6		)	368			6,996		6,825		169		(55		)	114			6,939		6,526		—		388		(8		)	380			6,906
Foreign government	146		3		—			3			149		140		2		—			2			142		164		—		6		—			6			170
Residential MBS	2,368		303		(4		)	299			2,667		2,476		277		(9		)	268			2,744		3,078		6		133		(74		)	59			3,131
Commercial MBS	938		36		—			36			974		905		17		(2		)	15			920		892		—		20		(5		)	15			907
Collateralized loan obligations	4,359		10		(36		)	(26		)	4,333		4,350		1		(73		)	(72		)	4,278		4,456		17		5		(306		)	(301		)	4,138
Other asset-backed securities	5,749		205		(10		)	195			5,944		5,431		129		(27		)	102			5,533		7,069		14		65		(362		)	(297		)	6,758
Corporate and other	22,494		960		(35		)	925			23,419		21,475		167		(434		)	(267		)	21,208		23,726		24		786		(569		)	217			23,919
Total fixed maturities	$	42,908	$	1,895	$	(93	)	$	1,802		$	44,710	$	41,837	$	763	$	(603	)	$	160		$	41,997	$	46,101	$	61	$	1,418	$	(1,324	)	$	94		$	46,134

December 31, 2019
Fixed maturities:
U.S. Government and government agencies																									$	199	$	—	$	10	$	—		$	10		$	209
States, municipalities and political subdivisions																									6,604		—		363		(4		)	359			6,963
Foreign government																									170		—		3		(1		)	2			172
Residential MBS																									2,900		—		265		(5		)	260			3,160
Commercial MBS																									896		—		31		—			31			927
Collateralized loan obligations																									4,307		—		10		(37		)	(27		)	4,280
Other asset-backed securities																									6,992		—		156		(20		)	136			7,128
Corporate and other																									22,456		—		1,231		(21		)	1,210			23,666
Total fixed maturities																									$	44,524	$	—	$	2,069	$	(88	)	$	1,981		$	46,505

~~The non-credit related portion of other-than-temporary impairment charges is included in other comprehensive income. Cumulative non-credit charges taken for securities still owned at~~ ~~June 30, 2019~~ ~~and~~ ~~December 31, 2018~~ ~~were $130 million and $140 million, respectively. Gross unrealized gains on such securities at~~ ~~June 30, 2019~~ ~~and~~ ~~December 31, 2018~~ were $120 million and $119 million, respectively. Gross unrealized losses on such securities at both June 30, 2019 and December 31, 2018 were $4 million. These amounts represent the non-credit other-than-temporary impairment charges recorded in AOCI adjusted for subsequent changes in fair values and relate primarily to residential MBS.

Equity securities, which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in millions):


	June 30, 2019								December 31, 2018										March 31, 2020										December 31, 2019
					Fair Value over (under) Cost											Fair Value over (under) Cost									Fair Value										Fair Value
	Actual Cost							Actual Cost							Actual Cost								over (under)			Actual Cost							over (under)
	Actual Cost		Fair Value					Actual Cost			Fair Value over (under) Cost		Fair Value		Actual Cost						Fair Value			Cost		Actual Cost					Fair Value			Cost
Common stocks	$	1,163	$	1,251		$	88		$	1,241				1,148			$	(93	)	$	1,315		$	919		$	(396	)		$	1,164		$	1,283		$	119
Perpetual preferred stocks	731		734		3			705					666			(39		)	685			640			(45		)		640			654			14
Total equity securities carried at fair value	$	1,894	$	1,985	$	91			$	1,946		$	1,814			$	(132	)	$	2,000		$	1,559		$	(441	)		$	1,804		$	1,937		$	133

2120

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The following tables show 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							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		Unrealized Loss			Fair Value		Fair Value as % of Cost		Unrealized Loss			Fair Value		Fair Value as % of Cost
June 30, 2019
March 31, 2020
Fixed maturities:
U.S. Government and government agencies	$	—		$	—	—	%	$	(2	)	$	63	97	%	$	—		$	—	—	%	$	—		$	1	100	%
States, municipalities and political subdivisions	(1		)	92		99	%	(5		)	411		99	%	(8		)	235		97	%	—			26		100	%
Foreign government	—			62		100	%	—			—		—	%	—			3		100	%	—			—		—	%
Residential MBS	(2		)	107		98	%	(2		)	84		98	%	(70		)	1,562		96	%	(4		)	31		89	%
Commercial MBS	—			18		100	%	—			—		—	%	(5		)	117		96	%	—			—		—	%
Collateralized loan obligations	(18		)	1,840		99	%	(18		)	960		98	%	(141		)	2,234		94	%	(165		)	1,691		91	%
Other asset-backed securities	(4		)	656		99	%	(6		)	108		95	%	(352		)	4,597		93	%	(10		)	94		90	%
Corporate and other	(9		)	604		99	%	(26		)	858		97	%	(554		)	7,738		93	%	(15		)	98		87	%
Total fixed maturities	$	(34	)	$	3,379	99	%	$	(59	)	$	2,484	98	%	$	(1,130	)	$	16,486	94	%	$	(194	)	$	1,941	91	%

December 31, 2018
December 31, 2019
Fixed maturities:
U.S. Government and government agencies	$	—		$	41	100	%	$	(3	)	$	120	98	%	$	—		$	16	100	%	$	—		$	11	100	%
States, municipalities and political subdivisions	(23		)	1,497		98	%	(32		)	902		97	%	(3		)	254		99	%	(1		)	82		99	%
Foreign government	—			18		100	%	—			4		100	%	(1		)	70		99	%	—			—		—	%
Residential MBS	(4		)	279		99	%	(5		)	139		97	%	(4		)	509		99	%	(1		)	69		99	%
Commercial MBS	(1		)	147		99	%	(1		)	30		97	%	—			17		100	%	—			—		—	%
Collateralized loan obligations	(61		)	3,540		98	%	(12		)	197		94	%	(11		)	1,284		99	%	(26		)	1,728		99	%
Asset-backed securities	(16		)	1,866		99	%	(11		)	432		98	%
Other asset-backed securities															(12		)	1,211		99	%	(8		)	123		94	%
Corporate and other	(306		)	10,378		97	%	(128		)	2,078		94	%	(13		)	1,100		99	%	(8		)	211		96	%
Total fixed maturities	$	(411	)	$	17,766	98	%	$	(192	)	$	3,902	95	%	$	(44	)	$	4,461	99	%	$	(44	)	$	2,224	98	%

At ~~June 30, 2019~~March 31, 2020, the gross unrealized losses on fixed maturities of ~~$93 million~~$1.32 billion relate to ~~712~~1,871 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately ~~75%~~83% of the gross unrealized loss and ~~91%~~89% 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 ~~other-than-temporary impairment~~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. In ~~both~~ the first ~~six~~three months of ~~2019~~2020 ~~and 2018,~~, AFG recorded ~~less than $1~~an allowance for credit losses of $6 million ~~in other-than-temporary impairment charges~~ related to its residential MBS.

In the first ~~six~~three months of ~~2019 and 2018,~~2020, AFG recorded $5an allowance for credit losses of $24 million ~~and less than $1 million, respectively, in other-than-temporary impairment charges~~ related to corporate bonds and other fixed ~~maturities.~~maturities, $17 million on third-party collateralized loan obligations and $14 million on other asset-backed securities.

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 ~~June 30, 2019~~March 31, 2020.

2221

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

See Note A — “Accounting Policies — Credit Losses on Financial Instruments,” for a discussion of new guidance effective January 1, 2020, which impacts the accounting for expected credit losses (impairments) of fixed maturity securities. Under the new guidance, credit losses on available for sale fixed maturities continue to be measured based on the present value of expected future cash flows compared to amortized cost; however, impairment losses are now recognized through an allowance instead of a direct writedown of amortized cost. Under the new guidance, recoveries of previously impaired amounts are recorded as an immediate reversal of all or a portion of the allowance instead of accredited as investment income through a yield adjustment. 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) could result in increases or decreases in the allowance, which will be recorded through realized gains (losses) on securities. A progression of the allowance for expected credit ~~portion of other-than-temporary impairments~~losses on fixed maturity securities ~~for which the non-credit portion of an impairment has been recognized in other comprehensive income~~ is shown below (in millions):

2019 2018
Balance at March 31 $ 141
$ 144
Additional credit impairments on:
Previously impaired securities —
—
Securities without prior impairments —
1
Reductions due to sales or redemptions (1 ) (1 )
Balance at June 30 $ 140
$ 144

Balance at January 1 $ 142
$ 145
Additional credit impairments on:
Previously impaired securities —
—
Securities without prior impairments —
1
Reductions due to sales or redemptions (2 ) (2 )
Balance at June 30 $ 140
$ 144



	2020
Balance at January 1	$	—
Impact of adoption of new accounting policy	—
Provision for expected credit losses	61
Reductions due to sales or redemptions	—
Balance at March 31	$	61

The table below sets forth the scheduled maturities of available for sale fixed maturities as of ~~June 30, 2019~~March 31, 2020 (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				Amortized		Fair Value
	Cost		Amount		%		Cost, net (*)		Amount		%
Maturity
One year or less	$	1,580	$	1,601	4	%	$	2,018	$	2,027	4	%
After one year through five years	10,179		10,523		24	%	10,563		10,710		23	%
After five years through ten years	14,140		14,861		33	%	14,450		14,722		32	%
After ten years	3,595		3,807		8	%	3,551		3,741		8	%
	29,494		30,792		69	%	30,582		31,200		67	%
Collateralized loan obligations and other ABS (average life of approximately 4.5 years)	10,108		10,277		23	%
MBS (average life of approximately 4.5 years)	3,306		3,641		8	%
Collateralized loan obligations and other ABS (average life of approximately 4-1/2 years)							11,494		10,896		24	%
MBS (average life of approximately 3-1/2 years)							3,964		4,038		9	%
Total	$	42,908	$	44,710	100	%	$	46,040	$	46,134	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 ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018~~2019.

2322

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Net Unrealized Gain on Marketable Securities 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 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. 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			Pretax			Deferred Tax			Net
June 30, 2019
March 31, 2020
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	1,461		$	(307	)	$	1,154		$	124		$	(26	)	$	98
Fixed maturities — all other	341			(71		)	270			(30		)	7			(23		)
Total fixed maturities	1,802			(378		)	1,424			94			(19		)	75
Deferred policy acquisition costs — annuity segment	(602		)	126			(476		)	(57		)	12			(45		)
Annuity benefits accumulated	(186		)	39			(147		)	(18		)	3			(15		)
Unearned revenue	14			(3		)	11			1			—			1
Total net unrealized gain on marketable securities	$	1,028		$	(216	)	$	812		$	20		$	(4	)	$	16

December 31, 2018
December 31, 2019
Net unrealized gain on:
Fixed maturities — annuity segment (*)	$	101		$	(21	)	$	80		$	1,611		$	(338	)	$	1,273
Fixed maturities — all other	59			(13		)	46			370			(78		)	292
Total fixed maturities	160			(34		)	126			1,981			(416		)	1,565
Deferred policy acquisition costs — annuity segment	(42		)	9			(33		)	(681		)	143			(538		)
Annuity benefits accumulated	(14		)	3			(11		)	(219		)	46			(173		)
Life, accident and health reserves										(1		)	—			(1		)
Unearned revenue	1			—			1			11			(2		)	9
Total net unrealized gain on marketable securities	$	105		$	(22	)	$	83		$	1,091		$	(229	)	$	862


(*)	Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.

Net Investment Income The following table shows (in millions) investment income earned and investment expenses incurred.


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2019			2018			2019			2018			2020			2019
Investment income:
Fixed maturities	$	478		$	431		$	947		$	843		$	491		$	469
Equity securities:
Dividends	22			20			44			40			17			22
Change in fair value (*)	7			15			18			14
Change in fair value (a) (b)													(12		)	11
Equity in earnings of partnerships and similar investments	45			41			66			87			25			21
Other	34			28			59			51			28			25
Gross investment income	586			535			1,134			1,035			549			548
Investment expenses	(6		)	(5		)	(12		)	(10		)	(5		)	(6		)
Net investment income(b)	$	580		$	530		$	1,122		$	1,025		$	544		$	542

~~(*)~~(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 first three months of 2020 includes a loss of $6 million 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.

2423

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Realized gains (losses) and changes in unrealized appreciation (depreciation) included in AOCI related to fixed maturity and equity security investments are summarized as follows (in millions):


	Three months ended June 30, 2019												Three months ended June 30, 2018												Three months ended March 31, 2020												Three months ended March 31, 2019
	Realized gains (losses)												Realized gains (losses)												Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairment Allowance			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	11		$	(3	)	$	8		$	789		$	4		$	—		$	4		$	(338	)	$	29		$	(61	)	$	(32	)	$	(1,887	)	$	3		$	(3	)	$	—		$	853
Equity securities	44			—			44			—			23			—			23			—			(535		)	—			(535		)	—			182			—			182			—
Mortgage loans and other investments	3			—			3			—			—			—			—			—			4			—			4			—			—			—			—			—
Other (*)	—			1			1			(349		)	4			—			4			147			(3		)	15			12			816			1			1			2			(370		)
Total pretax	58			(2		)	56			440			31			—			31			(191		)	(505		)	(46		)	(551		)	(1,071		)	186			(2		)	184			483
Tax effects	(12		)	1			(11		)	(92		)	(6		)	—			(6		)	40			106			10			116			225			(39		)	—			(39		)	(102		)
Net of tax	$	46		$	(1	)	$	45		$	348		$	25		$	—		$	25		$	(151	)	$	(399	)	$	(36	)	$	(435	)	$	(846	)	$	147		$	(2	)	$	145		$	381


	Six months ended June 30, 2019												Six months ended June 30, 2018
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	14		$	(6	)	$	8		$	1,642		$	3		$	(1	)	$	2		$	(937	)
Equity securities	226			—			226			—			(72		)	—			(72		)	—
Mortgage loans and other investments	3			—			3			—			—			—			—			—
Other (*)	1			2			3			(719		)	8			—			8			395
Total pretax	244			(4		)	240			923			(61		)	(1		)	(62		)	(542		)
Tax effects	(51		)	1			(50		)	(194		)	13			—			13			114
Net of tax	$	193		$	(3	)	$	190		$	729		$	(48	)	$	(1	)	$	(49	)	$	(428	)


(*)	Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.

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 during the first ~~six~~three months of ~~2019~~2020 and ~~2018~~2019 on securities that were still owned at ~~June 30,~~March 31, 2020 and March 31, 2019 ~~and June 30, 2018~~ as follows (in millions):


	Three months ended June 30,				Six months ended June 30,					Three months ended March 31,
	2019		2018		2019		2018			2020			2019
Included in realized gains (losses)	$	38	$	16	$	193	$	(71	)	$	(540	)	$	163
Included in net investment income	7		15		18		14			(5		)	11
	$	45	$	31	$	211	$	(57	)	$	(545	)	$	174

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


	Six months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Gross gains	$	11		$	16		$	29		$	6
Gross losses	(9		)	(8		)	(4		)	(9		)

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

F. Derivatives

As discussed under “~~Derivatives~~”Derivatives” in Note A — “~~Accounting~~“Accounting Policies,,” AFG uses derivatives in certain areas of its operations.

Derivatives That Do Not Qualify for Hedge Accounting The following derivatives that do not qualify for hedge accounting under GAAP are included in AFG’s Balance Sheet at fair value (in millions):


		June 30, 2019				December 31, 2018					March 31, 2020				December 31, 2019
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability		Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	117	$	—	$	109	$	—	Fixed maturities	$	103	$	—	$	102	$	—
Public company warrants	Equity securities	1		—		—		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		3,541		—		2,720		Annuity benefits accumulated	—		3,099		—		3,730
Equity index call options	Equity index call options	712		—		184		—		Equity index call options	209		—		924		—
Equity index put options	Other liabilities	—		1		—		1		Other liabilities	—		8		—		1
Reinsurance contracts (embedded derivative)	Other liabilities	—		4		—		2		Other liabilities	—		2		—		4
		$	830	$	3,546	$	293	$	2,723		$	312	$	3,109	$	1,026	$	3,735

The MBS with embedded derivatives consist of primarily interest-only and principal-only MBS. AFG records the entire 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.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Warrants to purchase shares of publicly traded companies, which represent a small component of AFG’s overall investment portfolio, are considered to be derivatives that are required to be carried at fair value through earnings.

AFG’s fixed-indexed and variable-indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG receives collateral from certain counterparties to support its purchased call option assets (net of collateral required under put option contracts with the same counterparties). This collateral ($~~449~~76 million at ~~June 30, 2019~~March 31, 2020 and ~~$103~~$577 million at December 31, ~~2018)~~2019) is included in other assets in AFG’s Balance Sheet with an offsetting liability to return the collateral, which is included in other liabilities. AFG’s strategy is designed so that the net change in the fair value of the call option assets and put ~~options~~option liabilities will generally offset the economic change in the ~~liabilities~~net liability from the index participation. Both the index-based component of the annuities (an embedded derivative) and the related call and put options are considered ~~derivatives.~~derivatives that must be adjusted for changes in fair value through earnings each period. The fair values of these derivatives are impacted by actual and expected stock market performance and interest rates as well as other factors. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, ~~among other factors, can cause volatility~~are not economic in nature for the ~~periodic measurement~~current reporting period, but rather impact the timing of ~~fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products.~~reported results.

As discussed under “~~Reinsurance~~”Reinsurance” in Note A, AFG has a reinsurance contract that is considered to contain an embedded derivative.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives that do not qualify for hedge accounting for the ~~second quarter and~~ first ~~six~~three months of ~~2019~~2020 and ~~2018~~2019 (in millions):


		Three months ended June 30,						Six months ended June 30,							Three months ended March 31,
Derivative	Statement of Earnings Line	2019			2018			2019			2018			Statement of Earnings Line	2020			2019
MBS with embedded derivatives	Realized gains (losses) on securities	$	6		$	(1	)	$	12		$	(5	)	Realized gains (losses) on securities	$	4		$	6
Public company warrants	Realized gains (losses) on securities	—			—			—			(1		)
Fixed-indexed and variable-indexed annuities (embedded derivative) (*)	Annuity benefits	(251		)	(126		)	(713		)	(63		)
Fixed-indexed and variable-indexed annuities (embedded derivative)														Annuity benefits	647			(462		)
Equity index call options	Annuity benefits	148			90			514			52			Annuity benefits	(628		)	366
Equity index put options	Annuity benefits	—			—			1			—			Annuity benefits	(6		)	1
Reinsurance contract (embedded derivative)	Net investment income	(1		)	1			(2		)	2			Net investment income	2			(1		)
		$	(98	)	$	(36	)	$	(188	)	$	(15	)		$	19		$	(90	)


~~(*)~~	~~The change in fair value of the embedded derivative includes a loss related to the unlocking of actuarial assumptions of $44 million in the second quarter of 2018.~~

Derivatives Designated and Qualifying as Cash Flow Hedges As of ~~June 30, 2019,~~March 31, 2020, AFG has ~~fifteen~~12 active 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 LIBOR.

Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on short-term LIBOR. The notional amounts of the interest rate swaps generally decline over each swap’s respective life (the swaps expire between ~~August 2019~~April 2020 and June 2030) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR. The total outstanding notional amount of AFG’s interest rate swaps was ~~$2.14~~$1.86 billion at ~~June 30, 2019~~March 31, 2020 compared to ~~$2.35~~$1.98 billion at December 31, ~~2018,~~2019, reflecting the scheduled amortization discussed above and the termination of a swap with a total notional amount of ~~$138~~$83 million ~~(on the settlement date)~~ in the ~~second~~first quarter of ~~2019.~~2020. The fair value ~~of the effective portion~~ of the interest rate swaps in an asset position and included in other assets was ~~$54~~$125 million at ~~June 30, 2019~~March 31, 2020 and ~~$16~~$50 million at December 31, ~~2018.~~2019. The fair value ~~of the effective portion~~ of the interest rate swaps in a liability position and included in other liabilities was $7less than $1 million at ~~June 30, 2019~~March 31, 2020 and ~~$46~~$5 million at December 31, ~~2018.~~2019. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of DPAC and deferred taxes. Amounts reclassified from AOCI (before DPAC and taxes) to net investment income were income of $1$12 million ~~in the second quarter~~and income reductions of ~~2019 compared to a loss of~~ $2 ~~million in the second quarter of 2018 and losses of $1~~ million for the first ~~six~~three months of ~~both~~2020 and 2019, ~~and 2018. There was no ineffectiveness recorded in net earnings during these periods. A~~respectively. AFG had a $19 million liability to return collateral ~~receivable supporting~~related to these swaps ~~of $76~~(included in other liabilities) at March 31, 2020 and a $20 million ~~at June 30, 2019 and $135 million~~receivable for collateral posted related to these swaps (included in other assets) at December 31, ~~2018 is included in other assets in AFG’s Balance Sheet.~~2019.

2725

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

G. Deferred Policy Acquisition Costs

A progression of deferred policy acquisition costs is presented below (in millions):


	P&C			Annuity and Other																					P&C			Annuity and Other
	Deferred			Deferred			Sales															Consolidated			Deferred			Deferred			Sales															Consolidated
	Costs			Costs			Inducements			PVFP			Subtotal			Unrealized (*)			Total			Total			Costs			Costs			Inducements			PVFP			Subtotal			Unrealized (*)			Total			Total
Balance at March 31, 2019	$	312		$	1,336		$	84		$	40		$	1,460		$	(325	)	$	1,135		$	1,447
Balance at December 31, 2019																									$	322		$	1,303		$	75		$	36		$	1,414		$	(699	)	$	715		$	1,037
Additions	194			56			—			—			56			—			56			250			158			49			1			—			50			—			50			208
Amortization:
Periodic amortization	(175		)	(19		)	(4		)	(2		)	(25		)	—			(25		)	(200		)	(170		)	(98		)	(3		)	(2		)	(103		)	—			(103		)	(273		)
Included in realized gains	—			—			1			—			1			—			1			1			—			10			—			—			10			—			10			10
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)	—			—			—			—			—			—			—			—
Change in unrealized	—			—			—			—			—			(294		)	(294		)	(294		)	—			—			—			—			—			591			591			591
Balance at June 30, 2019	$	330		$	1,373		$	81		$	38		$	1,492		$	(619	)	$	873		$	1,203

Balance at March 31, 2018	$	279		$	1,208		$	97		$	47		$	1,352		$	(214	)	$	1,138		$	1,417
Additions	181			70			1			—			71			—			71			252
Amortization:
Periodic amortization	(160		)	(66		)	(5		)	(2		)	(73		)	—			(73		)	(233		)
Annuity unlocking	—			28			1			—			29			—			29			29
Included in realized gains	—			3			—			—			3			—			3			3
Foreign currency translation	(2		)	—			—			—			—			—			—			(2		)
Change in unrealized	—			—			—			—			—			116			116			116
Balance at June 30, 2018	$	298		$	1,243		$	94		$	45		$	1,382		$	(98	)	$	1,284		$	1,582
Balance at March 31, 2020																									$	310		$	1,264		$	73		$	34		$	1,371		$	(108	)	$	1,263		$	1,573

Balance at December 31, 2018	$	299		$	1,285		$	86		$	42		$	1,413		$	(30	)	$	1,383		$	1,682		$	299		$	1,285		$	86		$	42		$	1,413		$	(30	)	$	1,383		$	1,682
Additions	381			120			1			—			121			—			121			502			187			64			1			—			65			—			65			252
Amortization:
Periodic amortization	(350		)	(34		)	(7		)	(4		)	(45		)	—			(45		)	(395		)	(175		)	(15		)	(3		)	(2		)	(20		)	—			(20		)	(195		)
Included in realized gains	—			2			1			—			3			—			3			3			—			2			—			—			2			—			2			2
Foreign currency translation	—			—			—			—			—			—			—			—			1			—			—			—			—			—			—			1
Change in unrealized	—			—			—			—			—			(589		)	(589		)	(589		)	—			—			—			—			—			(295		)	(295		)	(295		)
Balance at June 30, 2019	$	330		$	1,373		$	81		$	38		$	1,492		$	(619	)	$	873		$	1,203

Balance at December 31, 2017	$	270		$	1,217		$	102		$	49		$	1,368		$	(422	)	$	946		$	1,216
Additions	343			127			1			—			128			—			128			471
Amortization:
Periodic amortization	(314		)	(135		)	(10		)	(4		)	(149		)	—			(149		)	(463		)
Annuity unlocking	—			28			1			—			29			—			29			29
Included in realized gains	—			6			—			—			6			—			6			6
Foreign currency translation	(1		)	—			—			—			—			—			—			(1		)
Change in unrealized	—			—			—			—			—			324			324			324
Balance at June 30, 2018	$	298		$	1,243		$	94		$	45		$	1,382		$	(98	)	$	1,284		$	1,582
Balance at March 31, 2019																									$	312		$	1,336		$	84		$	40		$	1,460		$	(325	)	$	1,135		$	1,447


(*)	Adjustments to DPAC related to net unrealized gains/losses on securities and cash flow hedges.

The present value of future profits (“PVFP”) amounts in the table above are net of $~~152~~156 million and $~~148~~154 million of accumulated amortization at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, respectively.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

H. Managed Investment Entities

AFG is the investment manager and its subsidiaries have investments ranging from 15.0% to ~~60.9%~~100.0% of the most subordinate debt tranche of ~~eleven~~11 active collateralized loan obligation entities (“CLOs”), which are considered variable interest entities. AFG’s subsidiaries also own portions of the senior debt tranches of certain of these CLOs. Upon formation between 2012 and 2018, these entities issued securities in various senior and subordinate classes and invested the proceeds primarily in secured bank loans, which serve as collateral for the debt securities issued by each ~~particular~~ CLO. None of the collateral was purchased from AFG. AFG’s investments in the subordinate debt tranches of these entities receive residual income from the CLOs only after the CLOs pay expenses (including management fees to AFG) and interest on and returns of capital to senior levels of debt securities. There are no contractual requirements for AFG to provide additional funding for these entities. AFG has not provided and does not intend to provide any financial support to these entities.

AFG’s maximum exposure to economic loss on the CLOs that it manages is limited to its investment in those CLOs, which had an aggregate fair value of $~~191~~161 million (including ~~$128~~$81 million invested in the most subordinate tranches) at ~~June 30, 2019~~March 31, 2020, and $~~188~~165 million at December 31, ~~2018~~2019.

~~In March 2018,~~During the first three months of 2020, AFG ~~formed a new CLO, which issued $463~~subsidiaries purchased $57 million face amount of ~~liabilities (including $31 million face amount purchased by subsidiaries~~senior debt and subordinate tranches of ~~AFG).~~existing CLOs for $39 million. During both the first ~~six~~three months of ~~2019~~2020 and ~~2018,~~2019, AFG subsidiaries received less than $1 million, ~~and $45 million, respectively,~~ in sale and redemption proceeds from its CLO investments. ~~During the first six months of 2018, one AFG CLO was substantially liquidated, as permitted by the CLO indenture.~~

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

The revenues and expenses of the CLOs are separately identified in AFG’s Statement of Earnings, after the elimination of management fees and earnings attributable to shareholders of AFG as measured by the change in the fair value of AFG’s investments in the CLOs. Selected financial information related to the CLOs is shown below (in millions):


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2019			2018			2019			2018			2020			2019
Investment in CLO tranches at end of period	$	191		$	192		$	191		$	192		$	161		$	193
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	—			(29		)	87			(15		)	(679		)	87
Liabilities	(2		)	27			(89		)	10			636			(87		)
Management fees paid to AFG	4			4			7			8			4			3
CLO earnings attributable to AFG shareholders (b)	5			4			16			7
CLO earnings (losses) attributable to AFG shareholders (b)													(36		)	11


(a)	Included in revenues in AFG’s Statement of Earnings.


(b)	Included in earnings before income taxes in AFG’s Statement of Earnings.

The aggregate unpaid principal balance of the CLOs’ fixed maturity investments exceeded the fair value of the investments by $~~145~~818 million and $~~232~~146 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by $~~150~~747 million and ~~$241~~$129 million at those dates. The CLO assets include loans with an aggregate fair value of $7$20 million at ~~June 30,~~March 31, 2020 and $10 million at December 31, 2019, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of ~~$15 million; none~~$50 million at March 31, 2020 and $25 million at December 31, ~~2018)~~2019).

In addition to the CLOs that it manages, AFG had investments in CLOs that are managed by third parties (therefore not consolidated), which are included in available for sale fixed maturity securities and had a carrying value of ~~$4.33~~$4.14 billion at ~~June 30, 2019~~March 31, 2020 and $4.28 billion at December 31, ~~2018.~~2019.

I. Goodwill and Other Intangibles

There were no0 changes in the goodwill balance of $207 million during the first ~~six~~three months of ~~2019~~2020. Included in other assets in AFG’s Balance Sheet is $4840 million at ~~June 30, 2019~~March 31, 2020 and $5443 million at December 31, ~~2018~~2019 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of ~~$45~~$53 million and $3950 million, respectively. Amortization of intangibles was $3 million ~~and $2 million~~ in ~~the second quarters of 2019 and 2018, respectively, and $6 million and $4 million in~~both the first ~~six~~three months of ~~2019~~2020 and ~~2018~~2019~~, respectively.~~.

J. Long-Term Debt

Long-term debt consisted of the following (in millions):



	March 31, 2020							December 31, 2019
	Principal		Discount and Issue Costs			Carrying Value		Principal		Discount and Issue Costs			Carrying Value
Direct Senior Obligations of AFG:
4.50% Senior Notes due June 2047	$	590	$	(2	)	$	588	$	590	$	(2	)	$	588
3.50% Senior Notes due August 2026	425		(3		)	422		425		(3		)	422
Other	3		—			3		3		—			3
	1,018		(5		)	1,013		1,018		(5		)	1,013

Direct Subordinated Obligations of AFG:
5.125% Subordinate Debentures due December 2059	200		(6		)	194		200		(6		)	194
6% Subordinated Debentures due November 2055	150		(5		)	145		150		(5		)	145
5.875% Subordinated Debentures due March 2059	125		(4		)	121		125		(4		)	121
	475		(15		)	460		475		(15		)	460
	$	1,493	$	(20	)	$	1,473	$	1,493	$	(20	)	$	1,473

2927

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

J. ~~Long-Term Debt~~

~~Long-term debt consisted of the following (in millions):~~

June 30, 2019 December 31, 2018
Principal Discount and Issue Costs Carrying Value Principal Discount and Issue Costs Carrying Value
Direct Senior Obligations of AFG:
4.50% Senior Notes due June 2047 $ 590
$ (2 ) $ 588
$ 590
$ (2 ) $ 588
3.50% Senior Notes due August 2026 425
(4 ) 421
425
(4 ) 421
Other 3
—
3
3
—
3
1,018
(6 ) 1,012
1,018
(6 ) 1,012

Direct Subordinated Obligations of AFG:
6-1/4% Subordinated Debentures due September 2054 150
(5 ) 145
150
(5 ) 145
6% Subordinated Debentures due November 2055 150
(5 ) 145
150
(5 ) 145
5.875% Subordinated Debentures due March 2059 125
(4 ) 121
—
—
—
425
(14 ) 411
300
(10 ) 290
$ 1,443
$ (20 ) $ 1,423
$ 1,318
$ (16 ) $ 1,302

AFG has no0 scheduled principal payments on its long-term debt for the balance of ~~2019~~2020 or in the subsequent five years.

~~In March 2019, AFG issued $125 million in 5.875% Subordinated Debentures due in 2059.~~

AFG can borrow up to $500 million under its revolving credit facility, which expires in June 2021. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG’s credit rating. NoNaN amounts were borrowed under this facility at ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018~~2019.

K. ~~Leases~~

AFG and its subsidiaries lease real estate that is primarily used for office space and, to a lesser extent, equipment under operating lease arrangements. Most of AFG’s real estate leases include an option to extend or renew the lease term at AFG’s option. The operating lease liability includes lease payments related to options to extend or renew the lease term if AFG is reasonably certain of exercising those options. Lease payments are discounted using the implicit discount rate in the lease. If the implicit discount rate for the lease cannot be readily determined, AFG uses an estimate of its incremental secured borrowing rate. AFG did not have any material contracts accounted for as finance leases at June 30, 2019 or January 1, 2019.

At June 30, 2019, AFG’s $162 million operating lease right-of-use asset (presented net of $23 million in deferred rent and lease incentives) and $185 million operating lease liability are included in other assets and other liabilities, respectively, in AFG’s Balance Sheet.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

~~The following table details AFG’s lease activity for the six months ended June 30, 2019 (dollars in millions):~~

Three months ended Six months ended
June 30, 2019 June 30, 2019
Lease expense:
Operating leases $ 11
$ 22
Short-term leases 1
1
Total lease expense $ 12
$ 23

Other operating lease information:
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows $ 24
Right-of-use assets obtained in exchange for new lease liabilities 8

Weighted-average remaining lease term 5.8 years
Weighted-average discount rate 4.1 %

~~The following table presents the undiscounted contractual maturities of AFG’s operating lease liability at June 30, 2019 (in millions):~~

June 30, 2019
Operating lease payments:
Remainder of 2019 $ 24
2020 43
2021 37
2022 29
2023 24
Thereafter 52
Total lease payments 209
Impact of discounting (24 )
Operating lease liability $ 185

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

L. Shareholders’ Equity

AFG is authorized to issue 12.5 million shares of Voting Preferred Stock and 12.5 million shares of Nonvoting Preferred Stock, each without par value.

Accumulated Other Comprehensive Income, Net of Tax (“AOCI”) Comprehensive income is defined as all changes in shareholders’ equity except those arising from transactions with shareholders. Comprehensive income includes net earnings and other comprehensive income, which consists primarily of changes in net unrealized gains or losses on available for sale securities.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

The progression of the components of accumulated other comprehensive income follows (in millions):

Other Comprehensive Income (Loss)

AOCI
Beginning
Balance
Pretax Tax
Net
of
tax

Attributable to
noncontrolling
interests

Attributable to
shareholders
Other (c)
AOCI
Ending
Balance
Quarter ended June 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period $ 450
$ (94 ) $ 356
$ —
$ 356

Reclassification adjustment for realized (gains) losses included in net earnings (a) (10 ) 2
(8 ) —
(8 )

Total net unrealized gains on securities (b) $ 464
440
(92 ) 348
—
348
$ —
$ 812
Net unrealized gains on cash flow hedges —
23
(5 ) 18
—
18
—
18
Foreign currency translation adjustments (12 ) (1 ) 1
—
(1 ) (1 ) —
(13 )
Pension and other postretirement plans adjustments (8 ) —
—
—
—
—
—
(8 )
Total $ 444
$ 462
$ (96 ) $ 366
$ (1 ) $ 365
$ —
$ 809

Quarter ended June 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period $ (187 ) $ 39
$ (148 ) $ —
$ (148 )
Reclassification adjustment for realized (gains) losses included in net earnings (a) (4 ) 1
(3 ) —
(3 )
Total net unrealized gains (losses) on securities (b) $ 342
(191 ) 40
(151 ) —
(151 ) $ —
$ 191
Net unrealized losses on cash flow hedges (24 ) (4 ) 1
(3 ) —
(3 ) —
(27 )
Foreign currency translation adjustments (5 ) (4 ) —
(4 ) —
(4 ) —
(9 )
Pension and other postretirement plans adjustments (8 ) —
—
—
—
—
—
(8 )
Total $ 305
$ (199 ) $ 41
$ (158 ) $ —
$ (158 ) $ —
$ 147

Six months ended June 30, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period $ 937
$ (197 ) $ 740
$ —
$ 740

Reclassification adjustment for realized (gains) losses included in net earnings (a) (14 ) 3
(11 ) —
(11 )

Total net unrealized gains on securities (b) $ 83
923
(194 ) 729
—
729
$ —
$ 812
Net unrealized gains (losses) on cash flow hedges (11 ) 37
(8 ) 29
—
29
—
18
Foreign currency translation adjustments (16 ) 3
1
4
(1 ) 3
—
(13 )
Pension and other postretirement plans adjustments (8 ) —
—
—
—
—
—
(8 )
Total $ 48
$ 963
$ (201 ) $ 762
$ (1 ) $ 761
$ —
$ 809

Six months ended June 30, 2018
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period $ (540 ) $ 113
$ (427 ) $ —
$ (427 )
Reclassification adjustment for realized (gains) losses included in net earnings (a) (2 ) 1
(1 ) —
(1 )
Total net unrealized gains (losses) on securities (b) $ 840
(542 ) 114
(428 ) —
(428 ) $ (221 ) $ 191
Net unrealized losses on cash flow hedges (13 ) (18 ) 4
(14 ) —
(14 ) —
(27 )
Foreign currency translation adjustments (6 ) (2 ) (1 ) (3 ) —
(3 ) —
(9 )
Pension and other postretirement plans adjustments (8 ) —
—
—
—
—
—
(8 )
Total $ 813
$ (562 ) $ 117
$ (445 ) $ —
$ (445 ) $ (221 ) $ 147

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~



				Other Comprehensive Income (Loss)
	AOCI Beginning Balance			Pretax			Tax			Net of tax			Attributable to noncontrolling interests			Attributable to shareholders			AOCI Ending Balance
Three months ended March 31, 2020
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period				$	(1,095	)	$	230		$	(865	)	$	—		$	(865	)
Reclassification adjustment for realized (gains) losses included in net earnings (*)				24			(5		)	19			—			19
Total net unrealized gains (losses) on securities	$	862		(1,071		)	225			(846		)	—			(846		)	$	16
Net unrealized gains on cash flow hedges	17			34			(7		)	27			—			27			44
Foreign currency translation adjustments	(9		)	(10		)	—			(10		)	(2		)	(12		)	(21		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—			—			(7		)
Total	$	863		$	(1,047	)	$	218		$	(829	)	$	(2	)	$	(831	)	$	32

Three months ended March 31, 2019
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	487		$	(103	)	$	384		$	—		$	384
Reclassification adjustment for realized (gains) losses included in net earnings (*)				(4		)	1			(3		)	—			(3		)
Total net unrealized gains on securities	$	83		483			(102		)	381			—			381			$	464
Net unrealized gains (losses) on cash flow hedges	(11		)	14			(3		)	11			—			11			—
Foreign currency translation adjustments	(16		)	4			—			4			—			4			(12		)
Pension and other postretirement plans adjustments	(8		)	—			—			—			—			—			(8		)
Total	$	48		$	501		$	(105	)	$	396		$	—		$	396		$	444

~~(a)~~(*) The reclassification adjustment out of net unrealized gains (losses) on securities affected the following lines in AFG’s Statement of Earnings:



	OCI component		Affected line in the statement of earnings
	Pretax		Realized gains (losses) on securities
	Tax		Provision (credit) for income taxes


~~(b)~~	Includes net unrealized gains of $59 million at June 30, 2019 compared to $61 million at March 31, 2019 and $58 million at December 31, 2018 related to securities for which only the credit portion of an other-than-temporary impairment has been recorded in earnings.

~~(c)~~

On January 1, 2018, AFG adopted new guidance that requires all equity securities other than those accounted for under the equity method to be reported at fair value with holding gains and losses recognized in net earnings. At the date of adoption, the $221 million net unrealized gain on equity securities classified as available for sale (with unrealized holding gains and losses reported in AOCI) under the prior guidance was reclassified from AOCI to retained earnings as the cumulative effect of an accounting change.

Stock Incentive Plans Under AFG’s stock incentive plans, employees of AFG and its subsidiaries are eligible to receive equity awards in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock awards. In the first ~~six~~three months of ~~2019,~~2020, AFG issued ~~232,565~~227,867 shares of restricted Common Stock (fair value of ~~$99.28~~$104.15 per share) under the Stock Incentive Plan. ~~AFG did not grant any stock options in the first six months~~

Table of ~~2019.~~Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Total compensation expense related to stock incentive plans of AFG and its subsidiaries was ~~$6 million in both the second quarters of 2019 and 2018 and $12~~$5 million and ~~$11~~$6 million in the first ~~six~~three months of ~~2019~~2020 and ~~2018~~2019, respectively.

ML. Income Taxes

The following is a reconciliation of income taxes at the statutory rate of 21% to the provision for income taxes as shown in AFG’s Statement of Earnings (dollars in millions):


	Three months ended June 30,										Six months ended June 30,										Three months ended March 31,
	2019					2018					2019					2018					2020					2019
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	259				$	260				$	672				$	434
Earnings (loss) before income taxes (“EBT”)																					$	(388	)			$	413

Income taxes at statutory rate	$	54		21	%	$	54		21	%	$	141		21	%	$	91		21	%	$	(81	)	21	%	$	87		21	%
Effect of:
Stock-based compensation																					(4		)	1	%	(2		)	—	%
Tax exempt interest	(3		)	(1	%)	(4		)	(2	%)	(7		)	(1	%)	(7		)	(2	%)	(3		)	1	%	(4		)	(1	%)
Dividends received deduction	(1		)	—	%	(1		)	—	%	(2		)	—	%	(2		)	—	%	(1		)	—	%	(1		)	—	%
Employee Stock Ownership Plan dividends paid deduction	(1		)	—	%	(1		)	—	%	(1		)	—	%	(1		)	—	%
Stock-based compensation	(2		)	(1	%)	(2		)	(1	%)	(4		)	(1	%)	(7		)	(2	%)
Nondeductible expenses	2			1	%	2			1	%	4			1	%	4			1	%	2			(1	%)	2			—	%
Change in valuation allowance	1			—	%	2			1	%	3			—	%	2			—	%	2			(1	%)	2			—	%
Foreign operations	—			—	%	—			—	%	—			—	%	3			1	%	1			—	%	—			—	%
Other	—			(1	%)	2			—	%	3			—	%	2			1	%	—			1	%	3			1	%
Provision for income taxes as shown in the statement of earnings	$	50		19	%	$	52		20	%	$	137		20	%	$	85		20	%
Provision (credit) for income taxes as shown in the statement of earnings																					$	(84	)	22	%	$	87		21	%

Approximately ~~$19~~$23 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, ~~2019.~~2020. Since AFG maintains a full valuation allowance against its SRLY NOLs, the expiration of these loss carryforwards will be offset by a corresponding reduction in the valuation allowance and will have no overall impact on AFG’s income tax expense or results of operations.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED~~

NM. Contingencies

In December 2015, AFG completed the sale of substantially all of its run-off long-term care insurance business to HC2 Holdings, Inc. (“HC2”). As part of the transaction, AFG agreed to provide up to an aggregate of $35 million of capital support for the insurance companies, on an as-needed basis to maintain specified surplus levels, subject to immediate reimbursement by HC2 through a five-year capital maintenance agreement. As of March 31, 2020, AFG has been released of any obligation to perform under this agreement.

~~There~~Other than the matter described above, there have been no significant changes to the matters discussed and referred to in Note MN — “Contingencies” of AFG’s ~~2018~~2019 Form 10-K, which covers property and casualty insurance reserves for claims related to environmental exposures, asbestos and other mass tort claims and environmental and occupational injury and disease claims of former subsidiary railroad and manufacturing ~~operations, as well as contingencies related to the sale of substantially all of AFG’s run-off long-term care insurance business.~~operations.

OTable of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

N. Insurance

Property and Casualty Insurance Reserves The following table provides an analysis of changes in the liability for losses and loss adjustment expenses during the first ~~six~~three months of ~~2019~~2020 and ~~2018~~2019 (in millions):


	Six months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Balance at beginning of year	$	9,741		$	9,678		$	10,232		$	9,741
Less reinsurance recoverables, net of allowance	2,942			2,957			3,024			2,942
Net liability at beginning of year	6,799			6,721			7,208			6,799
Provision for losses and LAE occurring in the current period	1,501			1,434			749			737
Net decrease in the provision for claims of prior years	(86		)	(100		)
Total losses and LAE incurred	1,415			1,334
Net increase (decrease) in the provision for claims of prior years							(42		)	(45		)
Total losses and LAE incurred (*)							707			692
Payments for losses and LAE of:
Current year	(291		)	(294		)	(75		)	(89		)
Prior years	(1,079		)	(975		)	(676		)	(615		)
Total payments	(1,370		)	(1,269		)	(751		)	(704		)
Reserves of business disposed (*)	—			(319		)
Foreign currency translation and other	1			(4		)	(22		)	1
Net liability at end of period	6,845			6,463			7,142			6,788
Add back reinsurance recoverables, net of allowance	2,732			2,630			2,964			2,835
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,577		$	9,093		$	10,106		$	9,623


(*)	~~Reflects~~Includes $40 million in losses and LAE incurred in the ~~reinsurance to close transaction at~~ Neon ~~discussed below.~~exited lines in the first three months of 2020.

The net decrease in the provision for claims of prior years during the first ~~six~~three months of 2020 reflects (i) lower than expected losses in the crop business and lower than anticipated claim frequency and severity at National Interstate

(within the Property and transportation sub-segment) and (ii) lower than anticipated claim severity in the workers’ compensation businesses and lower than anticipated claim frequency and severity in the executive liability business (within the Specialty casualty sub-segment). This favorable development was partially offset by (i) higher than expected claim severity in the property and inland marine business (within the Property and transportation sub-segment), (ii) higher than expected claim frequency and severity in the excess and surplus lines businesses and higher than expected claim severity in the public sector business (within the Specialty casualty sub-segment), and (iii) higher than expected losses at Neon.

The net decrease in the provision for claims of prior years during the first three months of 2019 reflects (i) lower than expected

losses in the crop business and lower than expected claim frequency ~~and severity in the transportation businesses~~at National Interstate (all within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation ~~businesses~~business (within the Specialty casualty sub-segment), and (iii) lower than expected claim frequency and severity in the surety ~~and financial institutions businesses~~business and lower than anticipated claim severity in the fidelity business (all within the Specialty financial sub-segment). This favorable development was partially offset by higher than expected claim severity in the ~~excess and surplus lines~~in the targeted markets businesses and higher than expected losses at Neon (all within the Specialty casualty sub-segment).

~~The net decrease in~~Recoverables from Reinsurers and Premiums ReceivableSee Note A — “Accounting Policies — Credit Losses on Financial Instruments,” for a discussion of new guidance effective January 1, 2020, which impacts the ~~provision~~accounting for ~~claims~~expected credit losses of ~~prior years during the first six months of 2018 reflects (i) lower than expected losses in the crop business~~recoverables from reinsurers and lower than expected claim severity in the transportation businesses (all within the Property and transportation sub-segment), (ii) lower than anticipated claim frequency and severity in the workers’ compensation businesses (within the Specialty casualty sub-segment), and (iii) lower than expected claim frequency and severity in the surety business and lower than expected claim severity in the fidelity business (all within the Specialty financial sub-segment).

In December 2017, the Neon Lloyd’s syndicate entered into a reinsurance to close transaction for the 2015 and prior years of account with StarStone Underwriting Limited, a subsidiary of Enstar Group Limited, which was effective as of December 31, 2017 and settled in early 2018. In the Lloyd’s market, a reinsurance to close transaction transfers the responsibility for discharging allpremiums receivable. Progressions of the ~~liabilities that attach to the transferred year of account plus the right to any income due to the closing year of account in return~~2020 allowance for ~~a premium. This transaction provided Neon with finality on its legacy business.~~expected credit losses are shown below (in millions):



	Recoverables from Reinsurers			Premiums Receivable
Balance at January 1	$	18		$	13
Impact of adoption of new accounting policy	(6		)	(3		)
Provision (credit) for expected credit losses	1			(1		)
Write-offs charged against the allowance	—			—
Balance at March 31	$	13		$	9

3530

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

O. Subsequent Events

Since March 31, 2020, the U.S. federal and state governments, along with governments around the world, have enacted emergency measures to reduce the spread of the COVID-19 pandemic. These actions have caused significant disruption in the global economy, which has prompted stabilization efforts including monetary and fiscal interventions. Some states have ordered or requested insurers to issue refunds or credits to policyholders with reduced exposures due to workforce reductions, travel limitations or otherwise diminished operations due to the pandemic. In addition, stay at home orders and other restrictions have reduced sales of annuities in the second quarter of 2020. Management cannot reliably estimate how long the pandemic and related recessionary economic conditions will last, whether the regulatory interventions will be successful or the ultimate impact on AFG’s financial condition, results of operations or liquidity.

Because the majority of AFG’s investments in limited partnerships and similar investments accounted for under the equity method are reported on a quarter lag, AFG will likely record a loss from those investments in the second quarter of 2020 from the downturn in the financial markets that occurred in the first quarter.

On April 2, 2020, AFG issued $300 million of 5.25% Senior Notes due in April 2030, which will increase liquidity and provide flexibility at the parent company in its response to the uncertainties of the current economic environment.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 2

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

							INDEX TO MD&A
	Page		Page	Page		Page
Forward-Looking Statements	36	Results of Operations — Second Quarter	51	32	Managed Investment Entities	41
Overview	37	Segmented Statement of Earnings	51	33	Results of Operations	44
Critical Accounting Policies	37	Property and Casualty Insurance	52	34	General	44
Liquidity and Capital Resources	38	Annuity	61	34	Segmented Statement of Earnings	47
Ratios	38	Holding Company, Other and Unallocated	71	34	Property and Casualty Insurance	48
Condensed Consolidated Cash Flows	38	Results of Operations — First Six Months	74	35	Annuity	58
Parent and Subsidiary Liquidity	39	Segmented Statement of Earnings	74	36	Holding Company, Other and Unallocated	67
Investments	40	Property and Casualty Insurance	75	37	Recent and Pending Accounting Standards	69
Uncertainties	43	Annuity	83	41
Managed Investment Entities	44	Holding Company, Other and Unallocated	92
Results of Operations	48	Recent and Pending Accounting Standards	94
General	48

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of words such as “anticipates”, “believes”, “expects”, “projects”, “estimates”, “intends”, “plans”, “seeks”, “could”, “may”, “should”, “will” or the negative version of those words or other comparable terminology. Such forward-looking statements include statements relating to: expectations concerning market and other conditions and their effect on future premiums, revenues, earnings, investment activities, and the amount and timing of share repurchases; recoverability of asset values; expected losses and the adequacy of reserves for asbestos, environmental pollution and mass tort claims; rate changes; and improved loss experience.

Actual results and/or financial condition could differ materially from those contained in or implied by such forward-looking statements for a variety of reasons including but not limited to:

changes in financial, political and economic conditions, including changes in interest and inflation rates, currency fluctuations and extended economic recessions or expansions in the U.S. and/or abroad;

performance of securities markets, including the cost of equity index options;

new legislation or declines in credit quality or credit ratings that could have a material impact on the valuation of securities in AFG’s investment portfolio;

the availability of capital;

changes in insurance law or regulation, including changes in statutory accounting rules and changes in regulation of the Lloyd’s market, including modifications to ~~the establishment of~~ capital requirements, ~~for~~changes in costs associated with the exit from the Lloyd’s market and ~~approval~~the run-off of ~~business plans for syndicate participation;~~AFG’s Lloyd’s based insurer, Neon;

the effects of the COVID-19 outbreak, including the effects on the international and national economy and credit markets, legislative or regulatory developments affecting the insurance industry, quarantines or other travel or health-related restrictions;

changes in the legal environment affecting AFG or its customers;

tax law and accounting ~~changes, including the impact of recent changes in U.S. corporate tax law;~~changes;

levels of natural catastrophes and severe weather, terrorist activities (including any nuclear, biological, chemical or radiological events), incidents of war or losses resulting from pandemics, civil unrest and other major losses;

disruption caused by cyber-attacks or other technology breaches or failures by AFG or its business partners and service providers, which could negatively impact AFG’s business and/or expose AFG to litigation;

development of insurance loss reserves and establishment of other reserves, particularly with respect to amounts associated with asbestos and environmental claims;

availability of reinsurance and ability of reinsurers to pay their obligations;

trends in persistency and mortality;

competitive pressures;

the ability to obtain adequate rates and policy terms;

changes in AFG’s credit ratings or the financial strength ratings assigned by major ratings agencies to AFG’s operating subsidiaries; and

the impact of the conditions in the international financial markets and the global economy relating to AFG’s international operations.

The forward-looking statements herein are made only as of the date of this report. The Company assumes no obligation to publicly update any forward-looking statements.

3632

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

OVERVIEW

Financial Condition

AFG is organized as a holding company with almost all of its operations being conducted by subsidiaries. AFG, however, has continuing cash needs for administrative expenses, the payment of principal and interest on borrowings, shareholder dividends, and taxes. Therefore, certain analyses are most meaningfully presented on a parent only basis while others are best done on a total enterprise basis. In addition, because most of its businesses are financial in nature, AFG does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful.

Results of Operations

Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses, and in the sale of traditional fixed ~~fixed-indexed~~ and ~~variable-indexed~~indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets.

~~Net~~AFG reported a net loss attributable to shareholders for the first three months of 2020 of $301 million ($3.34 per share, diluted), compared to net earnings attributable to ~~AFG’s~~ shareholders ~~for the second quarter and first six months~~ of ~~2019 were $210~~$329 million ($~~2.31 per share, diluted) and $539 million ($5.94 per share, diluted), respectively, compared to $210 million ($2.31 per share, diluted) and $355 million ($3.92~~3.63 per share, diluted) reported in the same ~~periods~~period of ~~2018, reflecting:~~

~~lower earnings~~2019. The COVID-19 pandemic has had widespread financial and economic impacts, including a significant decrease in both the ~~annuity segment,~~

~~lower underwriting profit in the property~~equity and ~~casualty insurance segment,~~

~~higher net investment income in the property and casualty insurance segment, and~~

~~higher realized gains~~credit markets, which adversely impacted returns on ~~securities in the second quarter~~AFG’s $3.58 billion of 2019 compared to the second quarter of 2018 and realized gains on securities in the first six months of 2019 compared to realized losses on securities in the first six months of 2018. Both the 2019 and 2018 periods reflect the change in the fair value of equity securitiesinvestments that are required to be carried at fair value through net earnings. AFG’s results reflect:

net realized losses on securities in the first three months of 2020 compared to net realized gains on securities in the first three months of 2019,

lower earnings in the annuity segment reflecting negative adjustments to investments that are marked to market through net investment income,

lower net investment income in the property and casualty insurance segment due primarily to negative adjustments to investments that are marked to market through net investment income, and

lower holding company expenses.

Outlook

The COVID-19 pandemic began to have a significant impact on global, social and economic activity during the first three months of 2020. AFG has taken actions under ~~new accounting guidance adopted~~its business continuity plan to minimize risk to the Company’s employees and to prevent any significant disruption to AFG’s business, agents or policyholders.

Management believes that AFG’s strong financial position coming into 2020 and current liquidity and capital at its subsidiaries will give AFG the flexibility to continue to effectively address and respond to the ongoing uncertainties presented by the pandemic. Even with management’s expectation that the impacts of the pandemic will continue through 2020, AFG’s insurance subsidiaries are projected to have capital at or in excess of the levels required by ratings agencies in order to maintain their current ratings, and the parent company does not have any near-term debt maturities.

The widespread economic impacts of the pandemic, including a significant decrease in both equity and credit markets, adversely affected AFG’s investment returns during the first quarter of 2020. Because the majority of AFG’s investments in limited partnerships and similar investments accounted for using the equity method are reported on ~~January 1, 2018.~~a quarter lag, second quarter 2020 returns from those investments will reflect the financial results and valuations as of March 31, 2020, including the impact of the downturn in financial markets during the first quarter and could be negative. Management expects there to be continued volatility in the financial markets for the remainder of 2020.

While AFG’s underwriting results for the first three months of 2020 were not significantly impacted by the COVID-19 pandemic, management anticipates that the pandemic and current recessionary economic conditions will have a negative impact on premiums and earnings for the remainder of 2020. As the economy continues to contract, exposures in many of AFG’s property and casualty businesses will change due to workforce reduction, fewer miles driven and reduced revenue. This may lead to lower frequency and severity in certain lines while there may be COVID-19 related increases in claim frequency in other lines of business. As states mandate longer grace periods for premium payments, AFG’s property and casualty subsidiaries are likely to see a slowdown in cash collections and higher premiums receivable balances throughout the remainder of 2020, which will require management to monitor the reinvestment of cash flows from the property and casualty subsidiaries’ investment portfolios. There is also uncertainty as to potential government decree or legislation that could alter the coverage landscape such as the imposition of retroactive business interruption insurance. Like most of the insurance industry, AFG’s business interruption coverages require direct physical damage to covered

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

property for business interruption coverage to apply and the vast majority of AFG’s property policies also contain virus exclusions. While AFG has not experienced an increase in death claims or surrender activity in the annuity business related to COVID-19, stay at home orders and other restrictions are likely to continue to reduce annuity sales for the remainder of 2020. See Part II, Item 1A — “Risk Factors.”

CRITICAL ACCOUNTING POLICIES

Significant accounting policies are summarized in Note A— “~~Accounting Policies~~”“Accounting Policies” to the financial statements. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that can have a significant effect on amounts reported in the financial statements. As more information becomes known, these estimates and assumptions change and, thus, impact amounts reported in the future. The areas where management believes the degree of judgment required to determine amounts recorded in the financial statements is most significant are as follows:

the establishment of insurance reserves, especially asbestos and environmental-related reserves,

the recoverability of reinsurance,

the ~~recoverability~~amortization of annuity deferred policy acquisition costs,

the measurement of the derivatives embedded in ~~fixed-indexed and variable-indexed~~indexed annuity liabilities,

the establishment of asbestos and environmental reserves of former railroad and manufacturing operations, and

the valuation of investments, including the determination of other-than-temporary impairments.

For a discussion of these policies, see Management’s Discussion and Analysis — “Critical Accounting Policies” in AFG’s ~~2018~~2019 Form 10-K.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

LIQUIDITY AND CAPITAL RESOURCES

Ratios

~~Ratios~~AFG’s debt to total capital ratio on a consolidated basis is shown below (dollars in millions):


	June 30, 2019			December 31,						March 31, 2020						December 31,
				2018			2017			Actual			Adjusted (*)			2019			2018
Principal amount of long-term debt	$	1,443		$	1,318		$	1,318		$	1,493		$	1,793		$	1,493		$	1,318
Total capital	6,703			6,218			6,046			6,480			6,780			6,883			6,218
Ratio of debt to total capital:
Including subordinated debt	21.5		%	21.2		%	21.8		%	23.0		%	26.4		%	21.7		%	21.2		%
Excluding subordinated debt	15.2		%	16.4		%	16.8		%	15.7		%	19.4		%	14.8		%	16.4		%


(*)	Reflects the impact of the April 2, 2020 issuance of $300 million of 5.25% Senior Notes due in April 2030.

The ratio of debt to total capital is a non-GAAP measure that management believes is useful for investors, analysts and ~~independent~~ ratings agencies to evaluate AFG’s financial strength and liquidity and to provide insight into how AFG finances its operations. In addition, maintaining a ratio of debt, excluding subordinated debt and debt secured by real estate (if any), to total capital of 35% or lower is a financial covenant in AFG’s bank credit facility. The ratio is calculated by dividing the principal amount of AFG’s long-term debt by its total capital, which includes long-term debt, noncontrolling interests and shareholders’ equity (excluding unrealized gains (losses) related to fixed maturity investments).

Fixed charges are computed on a “total enterprise” basis. For purposes of calculating the ratios, “earnings (loss)” have been computed by adding to pretax earnings (loss) the fixed charges and the noncontrolling interests in earnings of subsidiaries having fixed charges and the undistributed equity in earnings or losses of investees. Fixed charges include interest (including annuity benefits as indicated), amortization of debt premium/discount and expense, preferred dividend and distribution requirements of subsidiaries and a portion of rental expense deemed to be representative of the interest factor. The ratio of core earnings to fixed charges excluding annuity benefits and the ratio of earnings (loss) to fixed charges excluding and including annuity benefits are shown in the table below:

~~AFG’s~~Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued



	Three Months Ended March 31, 2020		Year Ended December 31, 2019
Ratio of core earnings to fixed charges excluding annuity benefits	11.15		12.78
Impact of non-core items	(29.95	)	1.83
Ratio of earnings to fixed charges excluding annuity benefits	*		14.61
Impact of including interest on annuities as a fixed charge	(18.47	)	(12.76	)
Ratio of earnings to fixed charges including annuity benefits	*		1.85


*	Earnings for the three months ended March 31, 2020 were insufficient to cover fixed charges by $396 million.

Although the ratio of earnings to fixed charges ~~including annuity benefits as a fixed charge, was 1.95 for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2019~~ ~~and 1.54 for the year ended~~ ~~December 31, 2018. Excluding annuity benefits, this ratio was 15.60 and 7.86, respectively. The ratio~~ excluding annuity benefits is ~~presented because~~not required or encouraged to be disclosed under Securities and Exchange Commission rules, some investors and lenders may not consider interest credited to annuity ~~policyholder~~policyholders’ accounts ~~is not always considered~~ a borrowing cost for an insurance ~~company.~~company, and accordingly, believe this ratio is meaningful.

Condensed Consolidated Cash Flows

AFG’s principal sources of cash include insurance premiums, income from its investment portfolio and proceeds from the maturities, redemptions and sales of investments. Insurance premiums in excess of acquisition expenses and operating costs are invested until they are needed to meet policyholder obligations or made available to the parent company through dividends to cover debt obligations and corporate expenses, and to provide returns to shareholders through share repurchases and dividends. Cash flows from operating, investing and financing activities as detailed in AFG’s Consolidated Statement of Cash Flows are shown below (in millions):


	Six months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Net cash provided by operating activities	$	877		$	823		$	532		$	454
Net cash used in investing activities	(1,052		)	(2,485		)	(1,653		)	(684		)
Net cash provided by financing activities	1,034			1,134			480			715
Net change in cash and cash equivalents	$	859		$	(528	)	$	(641	)	$	485

Net Cash Provided by Operating Activities AFG’s property and casualty insurance operations typically produce positive net operating cash flows as premiums collected and investment income exceed policy acquisition costs, claims payments and operating expenses. AFG’s net cash provided by operating activities is impacted by the level and timing of property and casualty premiums, claim and expense payments and recoveries from reinsurers. AFG’s annuity operations typically produce positive net operating cash flows as investment income exceeds acquisition costs and operating expenses. Interest credited on annuity policyholder funds is a non-cash increase in AFG’s annuity benefits accumulated liability and annuity premiums, benefits and withdrawals are considered financing activities due to the deposit-type nature of annuities. Cash flows provided by operating activities also include the activity of AFG’s managed investment entities (collateralized loan obligations) other than those activities included in investing or financing activities. The changes in the assets and liabilities of the managed investment entities included in operating activities ~~reduced cash flows from operating activities by $3 million during the first six months of 2019 and~~ increased cash flows from operating activities by ~~$138~~$89 million during the first three months of 2020 and $16 million in the first ~~six~~three months of ~~2018,~~2019, accounting for a ~~$141~~$73 million ~~decline~~increase in cash flows from operating activities in the ~~2019~~2020 period compared to the ~~2018~~2019 period. As discussed in Note A — “~~Accounting~~“Accounting Policies — Managed Investment ~~Entities~~”Entities” to the financial statements, AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities and such assets and liabilities are shown separately in AFG’s Balance Sheet. Excluding the impact of the managed investment entities, net cash provided by operating activities was ~~$880~~$443 million in the first ~~six~~three months of ~~2019~~2020 compared to ~~$685~~$438 million in the first ~~six~~three months of ~~2018,~~2019, an increase of ~~$195~~$5 million.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Net Cash Used in Investing Activities AFG’s investing activities consist primarily of the investment of funds provided by its property and casualty and annuity businesses. Net cash used in investing activities was ~~$1.05~~$1.65 billion for the first ~~six~~three months of 2020 compared to $684 million in the first three months of 2019, ~~compared to~~ ~~$2.49 billion~~ ~~in the first six months~~an increase of ~~2018, a decrease of $1.44 billion.~~$969 million. As discussed below (under net cash provided by financing activities), AFG’s annuity ~~group~~segment had net cash flows from annuity policyholders of ~~$1.10 billion~~$612 million in the first ~~six~~three months of ~~2019~~2020 and ~~$1.20 billion~~$626 million in the first ~~six~~three months of ~~2018, which is the primary source of AFG’s cash used in investing activities.~~2019. In addition, AFG’s cash on hand ~~increased~~decreased by ~~$859~~$641 million ~~during the first six months of 2019 as AFG held more cash due to fewer investment opportunities~~ in the first ~~six~~three months of ~~2019 compared to a decrease of cash on hand of $528 million during the first six months of 2018,~~2020 as AFG opportunistically invested a large portion of its cash on hand ~~at December 31, 2017.~~when credit spreads widened in March of 2020 compared to an increase of $485 million in the first three months of 2019 when AFG held more cash due to fewer attractive investment opportunities. In addition to the investment of funds provided by the insurance operations, investing activities also include the purchase

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

and disposal of managed investment entity investments, which are presented separately in AFG’s Balance Sheet. Net investment activity in the managed investment entities was a $544 million ~~source~~use of cash in the first ~~six~~three months of ~~2019~~2020 compared to aan $~~226~~18 million use of cash in the ~~2018~~2019 period, accounting for ~~a $231~~an $26 million ~~decrease~~increase in net cash used in investing activities in the first ~~six~~three months of ~~2019~~2020 compared to the same ~~2018~~2019 period. See Note A — “~~Accounting~~“Accounting Policies — Managed Investment ~~Entities~~”Entities” and Note H — “~~Managed~~“Managed Investment ~~Entities~~”Entities” to the financial statements.

Net Cash Provided by Financing Activities AFG’s financing activities consist primarily of transactions with annuity policyholders, issuances and retirements of long-term debt, issuances and repurchases of common stock, and dividend payments. Net cash provided by financing activities was $~~1.03 billion~~480 million for the first ~~six~~three months of ~~2019~~2020 compared to $~~1.13 billion~~715 million in the first ~~six~~three months of ~~2018,~~2019, a decrease of $~~100~~235 million. Annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by ~~$1.10 billion~~$612 million in the first ~~six~~three months of 2020 compared to $626 million in the first three months of 2019, ~~compared to $1.20 billion in the first six months of 2018,~~ accounting for a ~~$92~~$14 million decrease in net cash provided by financing activities in the ~~2019~~2020 period compared to the ~~2018~~2019 period. In March 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in 2059, the net proceeds of which contributed $121 million to net cash provided by financing activities in the first ~~six~~three months of 2019. During the first three months of 2020, AFG repurchased $61 million of its Common Stock compared to no share repurchases in the 2019 period. Financing activities also include issuances and retirements of managed investment entity liabilities, which are nonrecourse to AFG and presented separately in AFG’s Balance Sheet. Retirements of managed investment entity liabilities ~~exceeded issuances by~~were $541 million in the first ~~six~~three months of ~~2019~~2020 compared to ~~issuances of managed investment entity liabilities exceeding retirements by~~ $~~111~~3 million in the first ~~six~~three months of ~~2018,~~2019, accounting for a $~~116~~38 million decrease in net cash provided by financing activities in the ~~2019~~2020 period compared to the ~~2018~~2019 period. See Note A — “~~Accounting~~“Accounting Policies — Managed Investment ~~Entities~~”Entities” and Note H — “~~Managed~~“Managed Investment ~~Entities~~”Entities” to the financial statements.

Parent and Subsidiary Liquidity

Parent Holding Company Liquidity Management believes AFG has sufficient resources to meet its liquidity requirements. If funds generated from operations, including dividends, tax payments and borrowings from subsidiaries, are insufficient to meet fixed charges in any period, AFG would be required to utilize parent company cash and marketable securities or to generate cash through borrowings, sales of other assets, or similar transactions.

AFG can borrow up to $500 million under its revolving credit facility which expires in June 2021. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG’s credit rating. There were no borrowings under this agreement, or under any other parent company short-term borrowing arrangements, during ~~2018~~2019 or the first ~~six~~three months of ~~2019.~~2020.

On April 2, 2020, AFG issued $300 million of 5.25% Senior Notes due in April 2030 to increase liquidity and provide flexibility at the parent holding company. The net proceeds of the offering will be used for general corporate purposes.

During the first three months of 2020, AFG repurchased 826,283 shares of its Common Stock for $61 million. Through the date of this filing, AFG has not repurchased any additional shares.

In ~~May~~December 2019, AFG ~~paid a special cash dividend~~issued $200 million of ~~$1.50 per share~~5.125% Subordinated Debentures due in December 2059. A portion of ~~AFG Common Stock totaling $135 million.~~the net proceeds of the offering were used to redeem AFG’s $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due in September 2054, at par value, with the remainder used for general corporate purposes.

In March 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in March 2059. The net proceeds of the offering were used for general corporate purposes.

In ~~2018,~~2019, AFG paid special cash dividends of ~~$3.00~~$3.30 per share of AFG Common Stock ($1.50 per share in May and $1.80 per share in November) totaling approximately ~~$267 million and repurchased 65,589 shares of its Common Stock for $6~~$297 million.

Under a tax allocation agreement with AFG, its 80%-owned U.S. subsidiaries generally pay taxes to (or recover taxes from) AFG based on each subsidiary’s contribution to amounts due under AFG’s consolidated tax return.

Subsidiary Liquidity Great American Life Insurance Company (“GALIC”), a wholly-owned annuity subsidiary, is a member of the Federal Home Loan Bank of Cincinnati (“FHLB”). The FHLB makes advances and provides other banking services to member institutions, which provides the annuity operations with an additional source of liquidity. At ~~June 30, 2019~~March 31, 2020, GALIC had ~~$1.1~~$1.30 billion in outstanding advances from the FHLB (included in annuity benefits accumulated), bearing interest at rates ranging from ~~0.13%~~0.69% to ~~0.21% over LIBOR~~1.35% (average rate of ~~2.59%~~1.12% at ~~June 30, 2019~~March 31, 2020). While these advances ~~must be repaid~~

3936

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

must be repaid between 2020 and ~~2021~~2025 ($~~510~~165 million in 2020, ~~and $586~~$931 million in ~~2021)~~2021 and $200 million in 2025), GALIC has the option to prepay all or a portion on the majority of the advances. GALIC has invested the proceeds from the advances in fixed maturity securities with similar expected lives as the advances for the purpose of earning a spread over the interest payments due to the FHLB. At ~~June 30, 2019,~~March 31, 2020, GALIC estimated that it had additional borrowing capacity of approximately ~~$375~~$550 million from the FHLB.

The liquidity requirements of AFG’s insurance subsidiaries relate primarily to the liabilities associated with their products as well as operating costs and expenses, payments of dividends and taxes to AFG and contributions of capital to their subsidiaries. Historically, cash flows from premiums and investment income have generally provided more than sufficient funds to meet these requirements. Funds received in excess of cash requirements are generally invested in additional marketable securities. In addition, the insurance subsidiaries generally hold a significant amount of highly liquid, short-term investments.

The excess cash flow of AFG’s property and casualty group allows it to extend the duration of its investment portfolio somewhat beyond that of its claim reserves.

In the annuity business, where profitability is largely dependent on earning a spread between invested assets and annuity liabilities, the duration of investments is generally maintained close to that of liabilities. In a rising interest rate environment, significant protection from withdrawals exists in the form of temporary and permanent surrender charges on AFG’s annuity products. With declining rates, AFG receives some protection (from spread compression) due to the ability to lower crediting rates, subject to contractually guaranteed minimum interest rates (“GMIRs”). At ~~June 30, 2019,~~March 31, 2020, AFG could reduce the average crediting rate on approximately ~~$30~~$31 billion of traditional fixed, fixed-indexed and variable-indexed annuities without guaranteed withdrawal benefits by approximately ~~120~~118 basis points (on a weighted average basis). Annuity policies are subject to GMIRs at policy issuance. AFG has taken action to lower crediting rates on annuity policies near or after the end of the surrender charge period. The table below shows the breakdown of annuity reserves by GMIR. The current interest crediting rates on substantially all of AFG’s annuities with a GMIR of 3% or higher are at their minimum.

% of Reserves
June 30, December 31,
GMIR 2019 2018 2017
1 — 1.99% 80% 79% 76%
2 — 2.99% 4% 4% 5%
3 — 3.99% 7% 8% 10%
4.00% and above 9% 9% 9%

Annuity benefits accumulated (in millions) $39,044 $36,616 $33,316



	% of Reserves
	March 31,	December 31,
GMIR	2020	2019	2018
1 — 1.99%	83%	83%	80%
2 — 2.99%	3%	3%	4%
3 — 3.99%	7%	7%	8%
4.00% and above	7%	7%	8%

Annuity benefits accumulated (in millions)	$40,463	$40,406	$36,616

AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and benefits and operating expenses. In addition, these subsidiaries have sufficient capital to meet commitments in the event of unforeseen events such as reserve deficiencies, inadequate premium rates or reinsurer insolvencies. Even in the current uncertain COVID-19 environment, management believes that the capital levels in AFG’s insurance subsidiaries are adequate to maintain its businesses and rating agency ratings. Should the current adverse financial conditions continue through 2020, AFG’s insurance subsidiaries will reduce dividend payments to AFG parent as needed to maintain sufficient capital at the insurance companies. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries’ investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital.

Investments

~~Investments~~AFG’s investment portfolio at ~~June 30, 2019~~March 31, 2020, contained $~~44.71~~46.13 billion in fixed maturity securities classified as available for sale and carried at fair value with unrealized gains and losses included in ~~a separate component of shareholders’ equity on an after-tax basis~~accumulated other comprehensive income and $~~106~~96 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG’s investment portfolio includes ~~$1.76~~$1.25 billion in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and ~~$220~~$306 million in equity securities carried at fair value with holding gains and losses included in net investment income.

Fair values for AFG’s portfolio are determined by AFG’s internal investment professionals using data from nationally recognized pricing services as well as non-binding broker quotes. Fair values of equity securities are generally based on

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

published closing prices. For AFG’s fixed maturity portfolio, approximately ~~91%~~89% was priced using pricing services at ~~June 30, 2019~~March 31, 2020 and the balance was priced primarily by using non-binding broker quotes. When prices obtained for the same security vary, AFG’s internal investment professionals select the price they believe is most indicative of an exit price.

The pricing services use a variety of observable inputs to estimate fair value of fixed maturities that do not trade on a daily basis. Based upon information provided by the pricing services, these inputs include, but are not limited to, recent reported trades, benchmark yields, issuer spreads, bids or offers, reference data, and measures of volatility. Included in the pricing of mortgage-backed securities (“MBS”) are estimates of the rate of future prepayments and defaults of principal over the

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

remaining life of the underlying collateral. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on brokers’ prices are classified as Level 3 in the GAAP hierarchy unless the price can be corroborated, for example, by comparison to similar securities priced using observable inputs.

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 pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the services to value specific securities.

In general, the fair value of AFG’s fixed maturity investments is inversely correlated to changes in interest rates. The following table demonstrates the sensitivity of such fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG’s fixed maturity portfolio and accumulated other comprehensive income that an immediate increase of 100 basis points in the interest rate yield curve would have at ~~June 30, 2019~~March 31, 2020 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional.


Fair value of fixed maturity portfolio	$	44,816		$	46,230
Percentage impact on fair value of 100 bps increase in interest rates	(4.5		%)	(4.0		%)
Pretax impact on fair value of fixed maturity portfolio	$	(2,017	)	$	(1,849	)
Offsetting adjustments to deferred policy acquisition costs and other balance sheet amounts	800			850
Estimated pretax impact on accumulated other comprehensive income	(1,217		)	(999		)
Deferred income tax	256			210
Estimated after-tax impact on accumulated other comprehensive income	$	(961	)	$	(789	)

Approximately 91% of the fixed maturities held by AFG at ~~June 30, 2019~~March 31, 2020, were rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies. Investment grade securities generally bear lower yields and lower degrees of risk than those that are unrated and non-investment grade. Management believes that the ~~high quality~~high-quality investment portfolio should generate a stable and predictable investment return.

MBS are subject to significant prepayment risk ~~due to the fact that,~~because, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as borrowers refinance higher rate mortgages to take advantage of lower rates. ~~Although interest rates have been low in recent years, tighter lending standards have resulted in fewer buyers being able to refinance the mortgages underlying much~~

Table of ~~AFG’s non-agency residential MBS portfolio.~~Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Summarized information for AFG’s MBS (including those classified as trading) at ~~June 30, 2019~~March 31, 2020, is shown in the table below (dollars in millions). Agency-backed securities are those issued by a U.S. government-backed agency; Alt-A mortgages are those with risk profiles between prime and subprime. The average life of the residential and commercial MBS is approximately ~~4.5~~4 years and 43 years, respectively.


	Amortized Cost		Fair Value		Fair Value as % of Cost		Unrealized Gain (Loss)		% Rated Investment Grade		Amortized Cost, net (*)		Fair Value		Fair Value as % of Cost		Unrealized Gain (Loss)		% Rated Investment Grade
Collateral type
Residential:
Agency-backed	$	156	$	158	101	%	$	2	100	%	$	494	$	506	102	%	$	12	100	%
Non-agency prime	913		1,044		114	%	131		28	%	1,359		1,383		102	%	24		61	%
Alt-A	969		1,097		113	%	128		36	%	904		918		102	%	14		40	%
Subprime	331		369		111	%	38		27	%	316		325		103	%	9		28	%
Commercial	938		974		104	%	36		96	%	892		907		102	%	15		96	%
	$	3,307	$	3,642	110	%	$	335	52	%	$	3,965	$	4,039	102	%	$	74	66	%

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~


(*)	Amortized cost, net of allowance for expected credit losses.

The National Association of Insurance Commissioners (“NAIC”) assigns creditworthiness designations on a scale of 1 to 6 with 1 being the highest quality and 6 being the lowest quality. The NAIC retains third-party investment management firms to assist in the determination of appropriate NAIC designations for MBS based not only on the probability of loss (which is the primary basis of ratings by the major ratings firms), but also on the severity of loss and statutory carrying value. At ~~June 30, 2019~~March 31, 2020, ~~95%~~96% (based on statutory carrying value of ~~$3.25~~$3.92 billion) of AFG’s MBS had an NAIC designation of 1.

Municipal bonds represented approximately ~~16%~~15% of AFG’s fixed maturity portfolio at ~~June 30, 2019~~March 31, 2020. AFG’s municipal bond portfolio is high quality, with 99% of the securities rated investment grade at that date. The portfolio is well diversified across the states of issuance and individual issuers. At ~~June 30, 2019~~March 31, 2020, approximately ~~78%~~79% of the municipal bond portfolio was held in revenue bonds, with the remaining ~~22%~~21% held in general obligation bonds. ~~AFG does not own general obligation bonds issued by Puerto Rico.~~

Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at ~~June 30, 2019,~~March 31, 2020, is shown in the following table (dollars in millions). Approximately $~~686 million~~1.17 billion of available for sale fixed maturity securities had no unrealized gains or losses at ~~June 30, 2019~~March 31, 2020.


	Securities With Unrealized Gains			Securities With Unrealized Losses			Securities With Unrealized Gains			Securities With Unrealized Losses
Available for Sale Fixed Maturities
Fair value of securities	$	38,161		$	5,863		$	26,535		$	18,427
Amortized cost of securities	$	36,266		$	5,956
Amortized cost of securities, net of allowance for expected credit losses							$	25,117		$	19,751
Gross unrealized gain (loss)	$	1,895		$	(93	)	$	1,418		$	(1,324	)
Fair value as % of amortized cost	105		%	98		%	106		%	93		%
Number of security positions	4,648			712			3,520			1,871
Number individually exceeding $2 million gain or loss	128			5			117			183
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):
States and municipalities	$	374		$	(6	)	$	388		$	(8	)
Banks, savings and credit institutions							165			(33		)
Mortgage-backed securities	339			(4		)	153			(79		)
Banks, savings and credit institutions	219			(3		)
Insurance							113			(29		)
Other financials							97			(131		)
Other asset-backed securities	205			(10		)	65			(362		)
Healthcare	60			(6		)
Energy – exploration and production	35			(5		)
Energy							19			(205		)
Collateralized loan obligations	10			(36		)	5			(306		)
Percentage rated investment grade	92		%	91		%	95		%	89		%

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturity securities at ~~June 30, 2019~~March 31, 2020, based on their fair values. 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.

Securities
With
Unrealized
Gains

Securities
With
Unrealized
Losses
Maturity
One year or less 4 % 1 %
After one year through five years 25 % 12 %
After five years through ten years 36 % 15 %
After ten years 9 % 8 %
74 % 36 %
Collateralized loan obligations and other asset-backed securities (average life of approximately 4.5 years) 17 % 61 %
Mortgage-backed securities (average life of approximately 4.5 years) 9 % 3 %
100 % 100 %

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~



	Securities With Unrealized Gains		Securities With Unrealized Losses
Maturity
One year or less	4	%	4	%
After one year through five years	31	%	12	%
After five years through ten years	39	%	24	%
After ten years	12	%	4	%
	86	%	44	%
Collateralized loan obligations and other asset-backed securities (average life of approximately 4-1/2 years)	6	%	47	%
Mortgage-backed securities (average life of approximately 3-1/2 years)	8	%	9	%
	100	%	100	%

The table below (dollars in millions) summarizes the unrealized gains and losses on fixed maturity securities by dollar amount:

Aggregate
Fair
Value

Aggregate
Unrealized
Gain (Loss)

Fair
Value as
% of Cost
Fixed Maturities at June 30, 2019
Securities with unrealized gains:
Exceeding $500,000 (1,188 securities) $ 19,046
$ 1,371
108 %
$500,000 or less (3,460 securities) 19,115
524
103 %
$ 38,161
$ 1,895
105 %
Securities with unrealized losses:
Exceeding $500,000 (41 securities) $ 823
$ (46 ) 95 %
$500,000 or less (671 securities) 5,040
(47 ) 99 %
$ 5,863
$ (93 ) 98 %



	Aggregate Fair Value		Aggregate Unrealized Gain (Loss)			Fair Value as % of Cost
Fixed Maturities at March 31, 2020
Securities with unrealized gains:
Exceeding $500,000 (830 securities)	$	13,559	$	1,036		108	%
$500,000 or less (2,690 securities)	12,976		382			103	%
	$	26,535	$	1,418		106	%
Securities with unrealized losses:
Exceeding $500,000 (709 securities)	$	11,374	$	(1,172	)	91	%
$500,000 or less (1,162 securities)	7,053		(152		)	98	%
	$	18,427	$	(1,324	)	93	%

The following table (dollars in millions) summarizes the unrealized losses for all securities with unrealized losses by issuer quality and the length of time those securities have been in an unrealized loss position:

Aggregate
Fair
Value

Aggregate
Unrealized
Loss

Fair
Value as
% of Cost
Securities with Unrealized Losses at June 30, 2019
Investment grade fixed maturities with losses for:
Less than one year (221 securities) $ 2,998
$ (26 ) 99 %
One year or longer (348 securities) 2,317
(44 ) 98 %
$ 5,315
$ (70 ) 99 %
Non-investment grade fixed maturities with losses for:
Less than one year (101 securities) $ 381
$ (8 ) 98 %
One year or longer (42 securities) 167
(15 ) 92 %
$ 548
$ (23 ) 96 %



	Aggregate Fair Value		Aggregate Unrealized Loss			Fair Value as % of Cost
Securities with Unrealized Losses at March 31, 2020
Investment grade fixed maturities with losses for:
Less than one year (1,231 securities)	$	14,456	$	(921	)	94	%
One year or longer (151 securities)	1,865		(179		)	91	%
	$	16,321	$	(1,100	)	94	%
Non-investment grade fixed maturities with losses for:
Less than one year (454 securities)	$	2,030	$	(209	)	91	%
One year or longer (35 securities)	76		(15		)	84	%
	$	2,106	$	(224	)	90	%

When a decline in the value of a specific investment is considered to be other-than-temporary, ~~a provision~~an allowance for ~~impairment~~credit losses (impairment) is charged to earnings (accounted for as a realized loss) ~~and the cost basis of that investment is reduced by the amount of the charge.~~. The determination of whether unrealized losses are other-than-temporary requires judgment based on subjective as well as objective factors as detailed in AFG’s ~~2018~~2019 Form 10-K under Management’s Discussion and Analysis — “Investments.”

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Based on its analysis, management believes AFG will recover its cost basis (net of any allowance) in the fixed maturity 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 ~~June 30, 2019~~March 31, 2020. Although AFG has the ability to continue holding its fixed maturity investments with unrealized losses, its intent to hold them may change due to deterioration in the issuers’ creditworthiness, decisions to lessen exposure to a particular issuer or industry, asset/liability management decisions, market movements, changes in views about appropriate asset allocation or the desire to offset taxable realized gains. Should AFG’s ability or intent change ~~with regard to~~regarding a particular security, a charge for impairment would likely be required. While it is not possible to accurately predict if or when a specific security will become impaired, charges for other-than-temporary impairment could be material to results of operations in future periods. Significant declines in the fair value of AFG’s investment portfolio could have a significant adverse effect on AFG’s liquidity. For information on AFG’s realized gains (losses) on securities, including charges for other-than-temporary impairment, see “Results of Operations — Consolidated Realized Gains (Losses) on Securities.”

Uncertainties

~~Uncertainties~~Management believes that the areas posing the greatest risk of material loss are the adequacy of its insurance reserves and contingencies arising out of its former railroad and manufacturing operations. See Management’s Discussion and Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance ~~Reserves”~~Reserves” in AFG’s ~~2018~~2019 Form 10-K. In addition to its ongoing monitoring of A&E exposures, AFG has scheduled an in-depth internal review of these liabilities to be completed in the third quarter of 2019 by AFG’s internal A&E claims specialists in consultation with specialty outside counsel.10‑K.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

MANAGED INVESTMENT ENTITIES

Accounting standards require AFG to consolidate its investments in collateralized loan obligation (“CLO”) entities that it manages and owns an interest in (in the form of debt). See Note A — “~~Accounting~~“Accounting Policies— Managed Investment ~~Entities~~”Entities” and Note H— “~~Managed~~“Managed Investment ~~Entities~~”Entities” to the financial statements. The effect of consolidating these entities is shown in the tables below (in millions). The “Before CLO Consolidation” columns include AFG’s investment and earnings in the CLOs on an unconsolidated basis.

4441

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

CONDENSED CONSOLIDATING BALANCE SHEET


	Before CLO Consolidation		Managed Investment Entities		Consol. Entries				Consolidated As Reported		Before CLO Consolidation		Managed Investment Entities		Consol. Entries				Consolidated As Reported
June 30, 2019
March 31, 2020
Assets:
Cash and investments	$	53,098	$	—	$	(191	)	(a)	$	52,907	$	53,381	$	—	$	(160	)	(a)	$	53,221
Assets of managed investment entities	—		4,781		—				4,781		—		4,026		—				4,026
Other assets	10,009		—		—			(a)	10,009		10,397		—		(1		)	(a)	10,396
Total assets	$	63,107	$	4,781	$	(191	)		$	67,697	$	63,778	$	4,026	$	(161	)		$	67,643
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	12,260	$	—	$	—			$	12,260	$	12,914	$	—	$	—			$	12,914
Annuity, life, accident and health benefits and reserves	39,663		—		—				39,663		41,070		—		—				41,070
Liabilities of managed investment entities	—		4,781		(191		)	(a)	4,590		—		4,026		(161		)	(a)	3,865
Long-term debt and other liabilities	5,094		—		—				5,094		4,747		—		—				4,747
Total liabilities	57,017		4,781		(191		)		61,607		58,731		4,026		(161		)		62,596

Redeemable noncontrolling interests	—		—		—				—		—		—		—				—

Shareholders’ equity:
Common Stock and Capital surplus	1,367		—		—				1,367		1,399		—		—				1,399
Retained earnings	3,914		—		—				3,914		3,616		—		—				3,616
Accumulated other comprehensive income, net of tax	809		—		—				809		32		—		—				32
Total shareholders’ equity	6,090		—		—				6,090		5,047		—		—				5,047
Noncontrolling interests	—		—		—				—		—		—		—				—
Total equity	6,090		—		—				6,090		5,047		—		—				5,047
Total liabilities and equity	$	63,107	$	4,781	$	(191	)		$	67,697	$	63,778	$	4,026	$	(161	)		$	67,643

December 31, 2018
December 31, 2019
Assets:
Cash and investments	$	48,685	$	—	$	(187	)	(a)	$	48,498	$	55,416	$	—	$	(164	)	(a)	$	55,252
Assets of managed investment entities	—		4,700		—				4,700		—		4,736		—				4,736
Other assets	10,259		—		(1		)	(a)	10,258		10,143		—		(1		)	(a)	10,142
Total assets	$	58,944	$	4,700	$	(188	)		$	63,456	$	65,559	$	4,736	$	(165	)		$	70,130
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	12,336	$	—	$	—			$	12,336	$	13,062	$	—	$	—			$	13,062
Annuity, life, accident and health benefits and reserves	37,251		—		—				37,251		41,018		—		—				41,018
Liabilities of managed investment entities	—		4,700		(188		)	(a)	4,512		—		4,736		(165		)	(a)	4,571
Long-term debt and other liabilities	4,385		—		—				4,385		5,210		—		—				5,210
Total liabilities	53,972		4,700		(188		)		58,484		59,290		4,736		(165		)		63,861

Redeemable noncontrolling interests	—		—		—				—		—		—		—				—

Shareholders’ equity:
Common Stock and Capital surplus	1,334		—		—				1,334		1,397		—		—				1,397
Retained earnings	3,588		—		—				3,588		4,009		—		—				4,009
Accumulated other comprehensive income, net of tax	48		—		—				48		863		—		—				863
Total shareholders’ equity	4,970		—		—				4,970		6,269		—		—				6,269
Noncontrolling interests	2		—		—				2		—		—		—				—
Total equity	4,972		—		—				4,972		6,269		—		—				6,269
Total liabilities and equity	$	58,944	$	4,700	$	(188	)		$	63,456	$	65,559	$	4,736	$	(165	)		$	70,130


(a)	Elimination of the fair value of AFG’s investment in CLOs and related accrued interest.

4542

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS


	Before CLO Consolidation (a)			Managed Investment Entities			Consol. Entries				Consolidated As Reported			Before CLO Consolidation (a)			Managed Investment Entities			Consol. Entries				Consolidated As Reported
Three months ended June 30, 2019
Three months ended March 31, 2020
Revenues:
Insurance net earned premiums	$	1,205		$	—		$	—			$	1,205		$	1,209		$	—		$	—			$	1,209
Net investment income	585			—			(5		)	(b)	580			508			—			36			(b)	544
Realized gains on securities	56			—			—				56
Realized gains (losses) on securities														(551		)	—			—				(551		)
Income (loss) of managed investment entities:
Investment income	—			70			—				70			—			59			—				59
Gain (loss) on change in fair value of assets/liabilities	—			(1		)	(1		)	(b)	(2		)	—			—			(43		)	(b)	(43		)
Other income	55			—			(4		)	(c)	51			61			—			(4		)	(c)	57
Total revenues	1,901			69			(10		)		1,960			1,227			59			(11		)		1,275
Costs and Expenses:
Insurance benefits and expenses	1,529			—			—				1,529			1,516			—			—				1,516
Expenses of managed investment entities	—			69			(10		)	(b)(c)	59			—			59			(11		)	(b)(c)	48
Interest charges on borrowed money and other expenses	113			—			—				113			99			—			—				99
Total costs and expenses	1,642			69			(10		)		1,701			1,615			59			(11		)		1,663
Earnings before income taxes	259			—			—				259
Provision for income taxes	50			—			—				50
Net earnings, including noncontrolling interests	209			—			—				209
Less: Net earnings (losses) attributable to noncontrolling interests	(1		)	—			—				(1		)
Net earnings attributable to shareholders	$	210		$	—		$	—			$	210
Earnings (loss) before income taxes														(388		)	—			—				(388		)
Provision (credit) for income taxes														(84		)	—			—				(84		)
Net earnings (loss), including noncontrolling interests														(304		)	—			—				(304		)
Less: Net earnings (loss) attributable to noncontrolling interests														(3		)	—			—				(3		)
Net earnings (loss) attributable to shareholders														$	(301	)	$	—		$	—			$	(301	)

Three months ended June 30, 2018
Three months ended March 31, 2019
Revenues:
Insurance net earned premiums	$	1,167		$	—		$	—			$	1,167		$	1,173		$	—		$	—			$	1,173
Net investment income	534			—			(4		)	(b)	530			553			—			(11		)	(b)	542
Realized gains on securities	31			—			—				31
Realized gains (losses) on securities														184			—			—				184
Income (loss) of managed investment entities:
Investment income	—			64			—				64			—			69			—				69
Gain (loss) on change in fair value of assets/liabilities	—			—			(2		)	(b)	(2		)	—			(5		)	5			(b)	—
Other income	47			—			(4		)	(c)	43			59			—			(3		)	(c)	56
Total revenues	1,779			64			(10		)		1,833			1,969			64			(9		)		2,024
Costs and Expenses:
Insurance benefits and expenses	1,414			—			—				1,414			1,430			—			—				1,430
Expenses of managed investment entities	—			64			(10		)	(b)(c)	54			—			64			(9		)	(b)(c)	55
Interest charges on borrowed money and other expenses	105			—			—				105			126			—			—				126
Total costs and expenses	1,519			64			(10		)		1,573			1,556			64			(9		)		1,611
Earnings before income taxes	260			—			—				260
Provision for income taxes	52			—			—				52
Net earnings, including noncontrolling interests	208			—			—				208
Less: Net earnings (losses) attributable to noncontrolling interests	(2		)	—			—				(2		)
Net earnings attributable to shareholders	$	210		$	—		$	—			$	210
Earnings (loss) before income taxes														413			—			—				413
Provision (credit) for income taxes														87			—			—				87
Net earnings (loss), including noncontrolling interests														326			—			—				326
Less: Net earnings (loss) attributable to noncontrolling interests														(3		)	—			—				(3		)
Net earnings (loss) attributable to shareholders														$	329		$	—		$	—			$	329

(a)

Includes ~~income~~losses of ~~$5 million and $4~~$36 million in the ~~second quarter~~first three months of ~~2019~~2020 and ~~2018, respectively,~~income of $11 million in the first three months of 2019, representing the change in fair value of AFG’s CLO investments plus $4 million and $3 million in ~~both~~ the ~~second quarter~~first three months of 2020 and 2019, ~~and 2018~~respectively, in CLO management fees earned.


(b)	Elimination of the change in fair value of AFG’s investments in the CLOs, including $7 million and $6 million in ~~both~~ the ~~second quarter~~first three months of 2020 and 2019, ~~and 2018~~respectively, in distributions recorded as interest expense by the CLOs.


(c)	Elimination of management fees earned by AFG.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~CONDENSED CONSOLIDATING STATEMENT OF EARNINGS~~

Before CLO
Consolidation (a)

Managed
Investment
Entities

Consol.
Entries

Consolidated
As Reported
Six months ended June 30, 2019
Revenues:
Insurance net earned premiums $ 2,384
$ —
$ —
$ 2,384
Net investment income 1,138
—
(16 ) (b) 1,122
Realized gains on securities 240
—
—
240
Income (loss) of managed investment entities:
Investment income —
139
—
139
Gain (loss) on change in fair value of assets/liabilities —
(6 ) 4
(b) (2 )
Other income 108
—
(7 ) (c) 101
Total revenues 3,870
133
(19 ) 3,984
Costs and Expenses:
Insurance benefits and expenses 2,968
—
—
2,968
Expenses of managed investment entities —
133
(19 ) (b)(c) 114
Interest charges on borrowed money and other expenses 230
—
—
230
Total costs and expenses 3,198
133
(19 ) 3,312
Earnings before income taxes 672
—
—
672
Provision for income taxes 137
—
—
137
Net earnings, including noncontrolling interests 535
—
—
535
Less: Net earnings (losses) attributable to noncontrolling interests (4 ) —
—
(4 )
Net earnings attributable to shareholders $ 539
$ —
$ —
$ 539

Six months ended June 30, 2018
Revenues:
Insurance net earned premiums $ 2,280
$ —
$ —
$ 2,280
Net investment income 1,032
—
(7 ) (b) 1,025
Realized losses on securities (62 ) —
—
(62 )
Income (loss) of managed investment entities:
Investment income —
122
—
122
Gain (loss) on change in fair value of assets/liabilities —
(1 ) (4 ) (b) (5 )
Other income 100
—
(8 ) (c) 92
Total revenues 3,350
121
(19 ) 3,452
Costs and Expenses:
Insurance benefits and expenses 2,711
—
—
2,711
Expenses of managed investment entities —
121
(19 ) (b)(c) 102
Interest charges on borrowed money and other expenses 205
—
—
205
Total costs and expenses 2,916
121
(19 ) 3,018
Earnings before income taxes 434
—
—
434
Provision for income taxes 85
—
—
85
Net earnings, including noncontrolling interests 349
—
—
349
Less: Net earnings (losses) attributable to noncontrolling interests (6 ) —
—
(6 )
Net earnings attributable to shareholders $ 355
$ —
$ —
$ 355


~~(a)~~	Includes income of $16 million and $7 million in the first six months of 2019 and 2018, respectively, representing the change in fair value of AFG’s CLO investments plus $7 million and $8 million in the first six months of 2019 and 2018, respectively, in CLO management fees earned.


~~(b)~~	Elimination of the change in fair value of AFG’s investments in the CLOs, including $12 million and $11 million in the first six months of 2019 and 2018, respectively, in distributions recorded as interest expense by the CLOs.


~~(c)~~	~~Elimination of management fees earned by AFG.~~

4743

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

RESULTS OF OPERATIONS

General

AFG’s net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. For example, core net operating earnings excludes realized gains (losses) on securities because such gains and losses are influenced significantly by financial markets, interest rates and the timing of sales. Similarly, significant gains and losses from the sale of real estate are excluded from core earnings as they are influenced by the timing of sales and realized gains (losses) and significant tax benefits (charges) related to subsidiaries are excluded because such gains and losses are largely the result of the changing business strategy and market opportunities. In addition, special charges related to coverage that AFG no longer writes, such as the Neon exited lines discussed below and for asbestos and environmental exposures, are excluded from core earnings.

Beginning prospectively with the second quarter of 2019, AFG’s core net operating earnings for its annuity segment excludes unlocking, the impact of changes in the fair value of derivatives related to fixed-indexed annuities (“FIAs”), and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs (“annuity non-core earnings (losses)”). Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of FIA liabilities that management believes can be inconsistent with the long-term economics of this growing portion of AFG’s annuity business. Management believes that separating these impacts as “non-core” will provide investors with a better view of the fundamental performance of the business, and a more comparable measure of the annuity segment’s business compared to the results identified as “core” by its peers. ~~Although prior period core~~Core net operating earnings for the annuity segment for the first quarter of 2019 and prior periods were not adjusted, so results for the three months ended March 31, 2020 are not directly comparable to the three months ended March 31, 2019. The impact of the items now considered annuity non-core earnings (losses) on prior periods is highlighted in the discussion following the reconciliation of net earnings (loss) attributable to shareholders to core net operating earnings.

In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off. Neon and its predecessor, Marketform, have failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008. Consistent with the treatment of other items that are not indicative of AFG’s ongoing operations (both favorable and unfavorable), beginning prospectively with the first quarter of 2020, AFG’s core net operating earnings for its property and casualty insurance segment excludes the run-off operations of Neon (“Neon exited lines”). The Neon exited lines impact is highlighted in the discussion following the reconciliation of net earnings (loss) attributable to shareholders to core net operating earnings.

4844

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The following table (in millions, except per share amounts) identifies non-core items and reconciles net earnings (loss) attributable to shareholders to core net operating earnings, a non-GAAP financial measure. AFG believes core net operating earnings is a useful tool for investors and analysts in analyzing ongoing operating trends and for management to evaluate financial performance against historical results because it believes this provides a more comparable measure of its continuing business.


	Three months ended June 30,						Six months ended June 30,						Three months ended March 31,
	2019			2018			2019			2018			2020			2019
Components of net earnings attributable to shareholders:
Components of net earnings (loss) attributable to shareholders:
Core operating earnings before income taxes	$	236		$	229		$	465		$	496		$	211		$	229
Pretax non-core items:
Realized gains (losses) on securities	56			31			240			(62		)	(551		)	184
Annuity non-core earnings (losses)(a)	(33		)	—			(33		)	—			(38		)	—
Earnings before income taxes	259			260			672			434
Neon exited lines (b)													(10		)	—
Earnings (loss) before income taxes													(388		)	413
Provision (credit) for income taxes:
Core operating earnings	45			46			93			98			40			48
Non-core items:
Realized gains (losses) on securities	11			6			50			(13		)	(116		)	39
Annuity non-core earnings (losses)	(6		)	—			(6		)	—
Annuity non-core earnings (losses) (a)													(8		)	—
Total provision for income taxes	50			52			137			85			(84		)	87
Net earnings, including noncontrolling interests	209			208			535			349
Less net earnings (losses) attributable to noncontrolling interests:
Core operating earnings (losses)	(1		)	(2		)	(4		)	(6		)
Total net earnings (losses) attributable to noncontrolling interests	(1		)	(2		)	(4		)	(6		)
Net earnings attributable to shareholders	$	210		$	210		$	539		$	355
Net earnings (loss), including noncontrolling interests													(304		)	326
Less net earnings (loss) attributable to noncontrolling interests:
Core operating earnings													—			(3		)
Neon exited lines (b)													(3		)	—
Total net earnings (loss) attributable to noncontrolling interests													(3		)	(3		)
Net earnings (loss) attributable to shareholders													$	(301	)	$	329

Net earnings:
Net earnings (loss):
Core net operating earnings	$	192		$	185		$	376		$	404		$	171		$	184
Realized gains (losses) on securities	45			25			190			(49		)	(435		)	145
Annuity non-core earnings (losses) (*)	(27		)	—			(27		)	—
Net earnings attributable to shareholders	$	210		$	210		$	539		$	355
Annuity non-core earnings (losses) (a)													(30		)	—
Neon exited lines (b)													(7		)	—
Net earnings (loss) attributable to shareholders													$	(301	)	$	329

Diluted per share amounts:
Core net operating earnings	$	2.12		$	2.04		$	4.14		$	4.46		$	1.88		$	2.02
Realized gains (losses) on securities	0.48			0.27			2.09			(0.54		)	(4.81		)	1.61
Annuity non-core earnings (losses) (*)	(0.29		)	—			(0.29		)	—
Net earnings attributable to shareholders	$	2.31		$	2.31		$	5.94		$	3.92
Annuity non-core earnings (losses) (a)													(0.34		)	—
Neon exited lines (b)													(0.07		)	—
Net earnings (loss) attributable to shareholders													$	(3.34	)	$	3.63

~~(*)~~(a)

As discussed ~~under~~ ~~“Results of Operations — General,”~~above, beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered annuity non-core earnings (losses).


(b)	As discussed above, beginning prospectively with the first quarter of 2020, the Neon run-off operations are considered property and casualty insurance non-core earnings (losses).

Because AFG’s limited partnerships and similar investments accounted for using the equity method are reported on a quarter lag, the second quarter returns will reflect March 31, 2020 valuations provided by third party sources and will incorporate the downturn in financial markets during the first quarter.

Net earnings (loss) attributable to shareholders was ~~$210~~a loss of $301 million in ~~both~~ the ~~second quarter~~first three months of 2020 compared to earnings of $329 million in the first three months of 2019 reflecting net realized losses on securities in the 2020 period

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and ~~the second quarter~~Analysis of ~~2018. Net earnings for the second quarter~~Financial Condition and Results of ~~2019 includes $45 million in after-tax~~Operations — Continued

compared to net realized gains ~~on securities compared to $25 million~~ in the ~~second quarter of 2018.~~2019 period, and lower core net operating earnings. In addition, net earnings (loss) attributable to shareholders includes after-tax losses of ~~$27 million and $11~~$30 million in the ~~second quarter~~first three months of ~~2019 and 2018, respectively,~~2020 from ~~unlocking (in the 2018 quarter),~~ the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs. As discussed above, this impact on the accounting for FIAs is considered non-core earnings (losses) beginning with the second quarter of 2019. Excluding the $11 million after-tax negative impact of these items on results for the second quarter of 2018, core net operating earnings for the second quarter of 2019 decreased $4 million compared to the second quarter of 2018 reflecting slightly lower earnings in the property and casualty insurance and annuity

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

segments, partially offset by improved results from AFG’s operations outside of those segments. Realized gains on securities in the second quarters of 2019 and 2018 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

Net earnings attributable to shareholders increased $184 million in the first six months of 2019 compared to the same period in 2018 due primarily to after-tax net realized gains on securities of $190 million in the 2019 period compared to after-tax net realized losses of $49 million in the first six months of 2018. In addition, net earnings attributable to shareholders includes an after-tax loss of $36 million for the first six months of 2019 ($9 million in the first quarter and $27 million in the second quarter) compared to after-tax income of $1 million in the first six months of 2018 from unlocking (in the first six months of 2018), the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs. As discussed above, this impact on the accounting for FIAs is considered non-core earnings (losses) prospectively beginning with the second quarter of 2019. Excluding the $9 million after-tax negative impact of these items on results for the first ~~quarter~~three months of 2019, ~~and the $1 million after-tax favorable impact of these items on results for the first six months of 2018,~~ core net operating earnings for the first ~~six~~three months of ~~2019~~2020 decreased ~~$18~~$22 million compared to the first ~~six~~three months of ~~2018~~2019 reflecting ~~lower earnings~~the negative impact of the COVID-19 pandemic on partnerships and similar investments and AFG-managed CLOs in both the property and casualty insurance and annuity ~~segments.~~segments, partially offset by lower holding company expenses. Realized gains (losses) on securities in the first ~~six~~three months of ~~2019~~2020 and ~~2018~~2019 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

RESULTS OF OPERATIONS — THREE MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2020 AND 2019 ~~AND 2018~~

Segmented Statement of Earnings

AFG reports its business as three segments: (i) Property and casualty insurance (“P&C”), (ii) Annuity and (iii) Other, which includes run-off long-term care and life, holding company costs and income and expenses related to the managed investment entities (“MIEs”).

AFG’s net earnings (loss) attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions):


							Other																					Other
	P&C			Annuity			Consol. MIEs			Holding Co., other and unallocated			Total			Non-core reclass			GAAP Total			P&C			Annuity			Consol. MIEs			Holding Co., other and unallocated			Total			Non-core reclass			Neon exited lines (c)			GAAP Total
Three months ended June 30, 2019
Three months ended March 31, 2020
Revenues:
Property and casualty insurance net earned premiums	$	1,200		$	—		$	—		$	—		$	1,200		$	—		$	1,200		$	1,138		$	—		$	—		$	—		$	1,138		$	—		$	71		$	1,209
Life, accident and health net earned premiums	—			—			—			5			5			—			5
Net investment income	124			451			(5		)	10			580			—			580			99			422			36			(7		)	550			—			(6		)	544
Realized gains on securities	—			—			—			—			—			56			56
Realized gains (losses) on securities																						—			—			—			—			—			(551		)	—			(551		)
Income (loss) of MIEs:
Investment income	—			—			70			—			70			—			70			—			—			59			—			59			—			—			59
Gain (loss) on change in fair value of assets/liabilities	—			—			(2		)	—			(2		)	—			(2		)	—			—			(43		)	—			(43		)	—			—			(43		)
Other income	2			27			(4		)	26			51			—			51			5			35			(4		)	21			57			—			—			57
Total revenues	1,326			478			59			41			1,904			56			1,960			1,242			457			48			14			1,761			(551		)	65			1,275

Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	723			—			—			—			723			—			723			667			—			—			—			667			—			40			707
Commissions and other underwriting expenses	418			—			—			8			426			—			426			383			—			—			5			388			—			32			420
Annuity benefits	—			272			—			—			272			67			339			—			287			—			(8		)	279			(3		)	—			276
Life, accident and health benefits	—			—			—			8			8			—			8
Annuity and supplemental insurance acquisition expenses	—			67			—			—			67			(34		)	33			—			71			—			1			72			41			—			113
Interest charges on borrowed money	—			—			—			17			17			—			17			—			—			—			17			17			—			—			17
Expenses of MIEs	—			—			59			—			59			—			59			—			—			48			—			48			—			—			48
Other expenses	11			35			—			50			96			—			96			11			32			—			36			79			—			3			82
Total costs and expenses	1,152			374			59			83			1,668			33			1,701			1,061			390			48			51			1,550			38			75			1,663
Earnings before income taxes	174			104			—			(42		)	236			23			259
Provision for income taxes	35			20			—			(10		)	45			5			50
Net earnings, including noncontrolling interests	139			84			—			(32		)	191			18			209
Less: Net earnings (losses) attributable to noncontrolling interests	(1		)	—			—			—			(1		)	—			(1		)
Core Net Operating Earnings	140			84			—			(32		)	192
Non-core earnings attributable to shareholders (a):
Realized gains on securities, net of tax	—			—			—			45			45			(45		)	—
Annuity non-core losses, net of tax (b)	—			(27		)	—			—			(27		)	27			—
Net Earnings Attributable to Shareholders	$	140		$	57		$	—		$	13		$	210		$	—		$	210
Earnings (loss) before income taxes																						181			67			—			(37		)	211			(589		)	(10		)	(388		)
Provision (credit) for income taxes																						38			14			—			(12		)	40			(124		)	—			(84		)
Net earnings (loss), including noncontrolling interests																						143			53			—			(25		)	171			(465		)	(10		)	(304		)
Less: Net earnings (loss) attributable to noncontrolling interests																						—			—			—			—			—			—			(3		)	(3		)
Core Net Operating Earnings (Loss)																						143			53			—			(25		)	171
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax																						—			—			—			(435		)	(435		)	435			—			—
Annuity non-core earnings (losses), net of tax (b)																						—			(30		)	—			—			(30		)	30			—			—
Neon exited lines (c)																						(7		)	—			—			—			(7		)	—			7			—
Net Earnings (Loss) Attributable to Shareholders																						$	136		$	23		$	—		$	(460	)	$	(301	)	$	—		$	—		$	(301	)

5147

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued


						Other																				Other
	P&C			Annuity		Consol. MIEs			Holding Co., other and unallocated			Total			Non-core reclass			GAAP Total			P&C			Annuity		Consol. MIEs			Holding Co., other and unallocated			Total			Non-core reclass				GAAP Total
Three months ended June 30, 2018
Three months ended March 31, 2019
Revenues:
Property and casualty insurance net earned premiums	$	1,161		$	—	$	—		$	—		$	1,161		$	—		$	1,161		$	1,173		$	—	$	—		$	—		$	1,173		$	—			$	1,173
Life, accident and health net earned premiums	—			—		—			6			6			—			6
Net investment income	115			412		(4		)	7			530			—			530			104			435		(11		)	14			542			—				542
Realized gains on securities	—			—		—			—			—			31			31
Realized gains (losses) on securities																					—			—		—			—			—			184				184
Income (loss) of MIEs:
Investment income	—			—		64			—			64			—			64			—			—		69			—			69			—				69
Gain (loss) on change in fair value of assets/liabilities	—			—		(2		)	—			(2		)	—			(2		)	—			—		—			—			—			—				—
Other income	2			27		(4		)	18			43			—			43			3			28		(3		)	28			56			—				56
Total revenues	1,278			439		54			31			1,802			31			1,833			1,280			463		55			42			1,840			184				2,024

Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	693			—		—			—			693			—			693			692			—		—			—			692			—				692
Commissions and other underwriting expenses	396			—		—			4			400			—			400			394			—		—			5			399			—				399
Annuity benefits	—			260		—			—			260			—			260			—			312		—			(1		)	311			—				311
Life, accident and health benefits	—			—		—			11			11			—			11
Annuity and supplemental insurance acquisition expenses	—			49		—			1			50			—			50			—			26		—			2			28			—				28
Interest charges on borrowed money	—			—		—			16			16			—			16			—			—		—			16			16			—				16
Expenses of MIEs	—			—		54			—			54			—			54			—			—		55			—			55			—				55
Other expenses	11			31		—			47			89			—			89			12			35		—			63			110			—				110
Total costs and expenses	1,100			340		54			79			1,573			—			1,573			1,098			373		55			85			1,611			—				1,611
Earnings before income taxes	178			99		—			(48		)	229			31			260
Provision for income taxes	37			21		—			(12		)	46			6			52
Net earnings, including noncontrolling interests	141			78		—			(36		)	183			25			208
Less: Net earnings (losses) attributable to noncontrolling interests	(2		)	—		—			—			(2		)	—			(2		)
Core Net Operating Earnings	143			78		—			(36		)	185
Non-core earnings attributable to shareholders (a):
Realized gains on securities, net of tax	—			—		—			25			25			(25		)	—
Net Earnings Attributable to Shareholders	$	143		$	78	$	—		$	(11	)	$	210		$	—		$	210
Earnings (loss) before income taxes																					182			90		—			(43		)	229			184				413
Provision (credit) for income taxes																					37			19		—			(8		)	48			39				87
Net earnings (loss), including noncontrolling interests																					145			71		—			(35		)	181			145				326
Less: Net earnings (loss) attributable to noncontrolling interests																					(3		)	—		—			—			(3		)	—			��	(3		)
Core Net Operating Earnings (Loss)																					148			71		—			(35		)	184
Non-core earnings (loss) attributable to shareholders (a):
Realized gains (losses) on securities, net of tax																					—			—		—			145			145			(145		)		—
Net Earnings (Loss) Attributable to Shareholders																					$	148		$	71	$	—		$	110		$	329		$	—			$	329


(a)	See the reconciliation of core earnings to GAAP net earnings under ~~“Results~~“Results of Operations — General” for details on the tax and noncontrolling interest impacts of these reconciling items.

(b)

As discussed under ~~“Results~~“Results of Operations — General,” beginning with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered annuity non-core earnings (losses).


(c)	As discussed under “Results of Operations — General,” beginning with the first quarter of 2020, the Neon run-off operations are considered property and casualty insurance non-core earnings (losses).

Property and Casualty Insurance Segment — Results of Operations

Performance measures such as underwriting profit or loss and related combined ratios are often used by property and casualty insurers to help users of their financial statements better understand the company’s performance. Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses and loss adjustment expenses, and commissions and other underwriting expenses to premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect net investment income, other income, other expenses or federal income taxes.

AFG’s property and casualty insurance operations contributed ~~$174~~$171 million in GAAP pretax earnings in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~$178~~$182 million in the ~~second quarter~~first three months of ~~2018,~~2019, a decrease of $4$11 million ~~(2%~~(6%). Property and casualty core pretax earnings were $181 million in the first three months of 2020 compared to $182 million in the first three months of 2019, a decrease of $1 million (1%). The decrease in both GAAP and core pretax earnings reflects lower net investment income in the first three months of 2020 compared to the first three months of 2019 due primarily to the impact of financial market disruption on earnings (losses) from partnerships and similar investments and AFG-managed CLOs.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~lower underwriting profit in the~~ ~~second~~ ~~quarter of 2019 compared to the second quarter of 2018, partially offset by higher net investment income.~~

The following table details AFG’s GAAP and core earnings before income taxes from its property and casualty insurance operations for the three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 (dollars in millions):


	Three months ended June 30,								Three months ended March 31,
	2019			2018			% Change		2020			2019			% Change
Gross written premiums	$	1,664		$	1,665		—	%	$	1,526		$	1,535		(1		%)
Reinsurance premiums ceded	(400		)	(408		)	(2	%)	(361		)	(388		)	(7		%)
Net written premiums	1,264			1,257			1	%	1,165			1,147			2		%
Change in unearned premiums	(64		)	(96		)	(33	%)	(27		)	26			(204		%)
Net earned premiums	1,200			1,161			3	%	1,138			1,173			(3		%)
Loss and loss adjustment expenses	723			693			4	%	667			692			(4		%)
Commissions and other underwriting expenses	418			396			6	%	383			394			(3		%)
Underwriting gain	59			72			(18	%)
Core underwriting gain									88			87			1		%

Net investment income	124			115			8	%	99			104			(5		%)
Other income and expenses, net	(9		)	(9		)	—	%	(6		)	(9		)	(33		%)
Earnings before income taxes	$	174		$	178		(2	%)
Core earnings before income taxes									181			182			(1		%)
Pretax non-core Neon exited lines (*)									(10		)	—			—		%
GAAP earnings before income taxes									$	171		$	182		(6		%)


(*) In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd. (“Neon”), into run-off. As discussed under “Results of Operations — General,” following the December 2019 decision to exit the Lloyd’s of London insurance market, the results from the Neon exited lines are being treated as non-core earnings (losses) prospectively beginning in 2020. Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the three months ended March 31, 2020 (in millions):									(*) In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd. (“Neon”), into run-off. As discussed under “Results of Operations — General,” following the December 2019 decision to exit the Lloyd’s of London insurance market, the results from the Neon exited lines are being treated as non-core earnings (losses) prospectively beginning in 2020. Each line item in the table above has been adjusted to remove the impact from the Neon run-off operations in 2020. The following table details the impact of the Neon exited lines to each component of earnings (loss) before income taxes in the property and casualty insurance operations for the three months ended March 31, 2020 (in millions):

									Three months ended March 31, 2020
									Excluding Neon exited lines			Neon exited lines			Total
Gross written premiums									$	1,526		$	56		$	1,582
Reinsurance premiums ceded									(361		)	(57		)	(418		)
Net written premiums									1,165			(1		)	1,164
Change in unearned premiums									(27		)	72			45
Net earned premiums									1,138			71			1,209
Loss and loss adjustment expenses									667			40			707
Commissions and other underwriting expenses									383			32			415
Underwriting gain (loss)									88			(1		)	87

Net investment income									99			(6		)	93
Other income and expenses, net									(6		)	(3		)	(9		)
Earnings (loss) before income taxes									$	181		$	(10	)	$	171


									Three months ended March 31,
									2020			2019			Change
Combined Ratios:
Specialty lines							Change
Loss and LAE ratio	60.2		%	59.7		%	0.5	%	58.5		%	58.9		%	(0.4		%)
Underwriting expense ratio	34.8		%	34.0		%	0.8	%	33.7		%	33.6		%	0.1		%
Combined ratio	95.0		%	93.7		%	1.3	%	92.2		%	92.5		%	(0.3		%)

Aggregate — including exited lines
Loss and LAE ratio	60.3		%	59.7		%	0.6	%	58.5		%	59.0		%	(0.5		%)
Underwriting expense ratio	34.8		%	34.0		%	0.8	%	34.3		%	33.6		%	0.7		%
Combined ratio	95.1		%	93.7		%	1.4	%	92.8		%	92.6		%	0.2		%

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

AFG reports the underwriting performance of its Specialty property and casualty insurance business in the following sub-segments: (i) Property and transportation, (ii) Specialty casualty and (iii) Specialty financial.

To understand the overall profitability of particular lines, the timing of claims payments and the related impact of investment income must be considered. Certain “short-tail” lines of business (primarily property coverages) generally have quick loss payouts, which reduce the time funds are held, thereby limiting investment income earned thereon. In contrast, “long-tail” lines of business (primarily liability coverages and workers’ compensation) generally have payouts that are either structured over many years or take many years to settle, thereby significantly increasing investment income earned on related premiums received.

Gross Written Premiums

Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $1.58 billion for the first three months of ~~$1.66~~2020 compared to $1.54 billion for the ~~second~~first ~~quarter~~three months of 2019 ~~compared to $1.67 billion the~~ ~~second~~ ~~quarter~~, an increase of ~~2018~~$47 million~~, a decrease of $1 million.~~ (3%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):


	Three months ended June 30,										Three months ended March 31,
	2019				2018						2020				2019
	GWP		%		GWP		%		% Change		GWP		%		GWP		%		% Change
Property and transportation	$	579	35	%	$	615	37	%	(6	%)	$	494	31	%	$	439	29	%	13	%
Specialty casualty	896		54	%	858		52	%	4	%	849		54	%	912		59	%	(7	%)
Specialty financial	189		11	%	192		11	%	(2	%)	183		11	%	184		12	%	(1	%)
	$	1,664	100	%	$	1,665	100	%	—	%
Total specialty											1,526		96	%	1,535		100	%	(1	%)
Neon exited lines											56		4	%	—		—	%	—	%
Aggregate											$	1,582	100	%	$	1,535	100	%	3	%

Reinsurance Premiums Ceded

Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 26% of gross written premiums for the first three months of 2020 compared to 25% of gross written premiums for the first three months of 2019, an increase of 1 percentage point. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):



	Three months ended March 31,
	2020					2019					Change in
	Ceded			% of GWP		Ceded			% of GWP		% of GWP
Property and transportation	$	(108	)	22	%	$	(95	)	22	%	—	%
Specialty casualty	(263		)	31	%	(286		)	31	%	—	%
Specialty financial	(34		)	19	%	(39		)	21	%	(2	%)
Other specialty	44					32
Total specialty	(361		)	24	%	(388		)	25	%	(1	%)
Neon exited lines	(57		)	102	%	—			—	%	102	%
Aggregate	$	(418	)	26	%	$	(388	)	25	%	1	%

5350

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~Reinsurance Premiums Ceded~~

~~Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were~~ ~~24%~~ ~~of gross written premiums for the~~ ~~second~~ ~~quarter of~~ ~~2019~~ ~~compared to 25% of gross written premiums for the~~ ~~second~~ ~~quarter of 2018, a decrease of 1 percentage point. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):~~

Three months ended June 30,
2019 2018 Change in
Ceded % of GWP Ceded % of GWP % of GWP
Property and transportation $ (157 ) 27 % $ (193 ) 31 % (4 %)
Specialty casualty (234 ) 26 % (219 ) 26 % — %
Specialty financial (40 ) 21 % (33 ) 17 % 4 %
Other specialty 31
37

$ (400 ) 24 % $ (408 ) 25 % (1 %)

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $~~1.26~~1.16 billion for the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~$1.26~~$1.15 billion ~~for the~~ ~~second~~ ~~quarter~~ three months of ~~2018~~2019, an increase of $717 million (1%(1%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):


	Three months ended June 30,										Three months ended March 31,
	2019				2018						2020					2019
	NWP		%		NWP		%		% Change		NWP			%		NWP		%		% Change
Property and transportation	$	422	33	%	$	422	33	%	—	%	$	386		33	%	$	344	30	%	12	%
Specialty casualty	662		52	%	639		51	%	4	%	586			50	%	626		55	%	(6	%)
Specialty financial	149		12	%	159		13	%	(6	%)	149			13	%	145		13	%	3	%
Other specialty	31		3	%	37		3	%	(16	%)	44			4	%	32		2	%	38	%
	$	1,264	100	%	$	1,257	100	%	1	%
Total specialty											1,165			100	%	1,147		100	%	2	%
Neon exited lines											(1		)	—	%	—		—	%	—	%
Aggregate											$	1,164		100	%	$	1,147	100	%	1	%

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were ~~$1.20~~$1.21 billion for the ~~second~~ ~~quarter~~first three months of ~~2019~~2020 compared to ~~$1.16~~$1.17 billion for the ~~second~~ ~~quarter~~first three months of ~~2018~~, 2019, an increase of ~~$39~~$36 million (3% (3%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):


	Three months ended June 30,										Three months ended March 31,
	2019				2018						2020				2019
	NEP		%		NEP		%		% Change		NEP		%		NEP		%		% Change
Property and transportation	$	379	32	%	$	374	32	%	1	%	$	386	32	%	$	361	31	%	7	%
Specialty casualty	634		53	%	595		51	%	7	%	556		46	%	629		54	%	(12	%)
Specialty financial	151		13	%	159		14	%	(5	%)	156		13	%	146		12	%	7	%
Other specialty	36		2	%	33		3	%	9	%	40		3	%	37		3	%	8	%
	$	1,200	100	%	$	1,161	100	%	3	%
Total specialty											1,138		94	%	1,173		100	%	(3	%)
Neon exited lines											71		6	%	—		—	%	—	%
Aggregate											$	1,209	100	%	$	1,173	100	%	3	%

~~The $1 million decrease in gross~~Gross written premiums for the ~~second~~first ~~quarter~~three months of ~~2019~~2020 increased $47 million compared to the ~~second~~first ~~quarter~~three months of ~~2018 reflects growth in the Specialty casualty sub-segment, offset by lower gross written premiums in the Property and transportation and Specialty financial sub-segments.~~2019. Overall average renewal rates increased approximately 3%7% in the ~~second~~first ~~quarter~~three months of ~~2019.~~2020. Excluding rate decreases in the workers’ compensation business, renewal pricing increased approximately 5%11%.

Property and transportation Gross written premiums ~~decreased $36~~increased $55 million ~~(6%~~(13%) in the ~~second quarter~~first three months of ~~2019~~2020 compared to the second quarter of 2018, due primarily to delayed acreage reporting from insureds as a result of excess moisture and late planting of corn and soybean crops. Management expects that the delayed crop premiums will be included in third quarter 2019 results. Excluding crop insurance, gross written premiums for the second quarterfirst three months of 2019, ~~grew by 12% when compared to the 2018 second quarter. This growth is~~due primarily ~~attributable~~ to new business opportunities in the transportation, property and inland marine and ocean marine businesses, as well as new premiums from the addition of the Atlas paratransit business, partially offset by declines in passenger transportation premiums caused by the COVID-19 pandemic. Average renewal rates increased approximately 6% for this group in the first three months of 2020. Reinsurance premiums ceded as a percentage of gross written premiums were comparable for the first three months of 2020 and the first three months of 2019.

Specialty casualtyGross written premiums decreased$63 million (7%) in the first three months of 2020 compared to the first three months of 2019 due primarily to the run-off of Neon. Excluding the impact of $159 million in gross written premiums from the Neon exited lines in the first three months of 2019, gross written premiums increased 13% in the first three months of 2020 compared to the first three months of 2019. This increase reflects growth in the excess and surplus lines and excess liability businesses, primarily the result of rate increases, new business opportunities, and higher retentions on renewal business. This growth was partially offset by lower premiums in the workers’ compensation businesses. Average renewal rates increased approximately 5%8% for this group in the ~~second quarter~~first three months of 2020. Excluding rate decreases in the workers’ compensation business, renewal rates for this group increased approximately 17%. Reinsurance premiums ceded as a percentage of gross written premiums were comparable for the first three months of 2020 and the first three months of 2019. ~~Reinsurance~~Excluding the impact of the Neon exited lines, reinsurance premiums ceded as a percentage of gross written premiums increased 6% in the first three months of 2020 compared to the first three months

5451

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~as a percentage of gross written premiums decreased 4 percentage points for the second quarter~~ of 2019 ~~compared to the second quarter of 2018~~ reflecting ~~a change in the mix of business.~~

~~Specialty casualty~~ ~~Gross written premiums~~ ~~increased$38 million~~ (4%~~) in the second quarter of 2019 compared to the second quarter of 2018 due primarily to the addition of premiums from ABA Insurance Services, as well as~~ growth in the excess and surplus ~~lines, executive~~and excess liability ~~and social services businesses. This growth was partially offset by lower~~businesses, which cede a larger percentage of premiums than the other businesses in the workers’ compensation businesses and at Neon. Average renewal rates increased approximately 3% for this group in the second quarter of 2019. Excluding rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 7%. Reinsurance premiums ceded as a percentage of gross written premiums was comparable in the second quarter of 2019 and the second quarter of 2018 reflecting lower cessions to AFG’s internal reinsurance program, which is included in Other specialty, offset by higher cessions to reinsurers.Specialty casualty sub-segment.

Specialty financial Gross written premiums decreased $31 million (2%1%) in the ~~second quarter~~first three months of ~~2019~~2020 compared to the ~~second quarter~~first three months of ~~2018~~2019 due primarily to lower premiums in the financial institutions business, partially offset by higher premiums in the surety business. Average renewal rates increased approximately 5% for this group ~~increased approximately 1%~~ in the ~~second quarter~~first three months of ~~2019.~~2020. Reinsurance premiums ceded as a percentage of gross written premiums ~~increased 4~~decreased 2 percentage points for the ~~second quarter~~first three months of ~~2019~~2020 compared to the ~~second quarter~~first three months of ~~2018,~~2019, reflecting ~~higher~~lower cessions in the financial institutions ~~business.~~business due to reduced gross written premiums in certain lines of business that are 100% reinsured.

Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed ~~decreased $6~~increased $12 million ~~(16%~~(38%) in the ~~second quarter~~first three months of ~~2019~~2020 compared to the ~~second quarter~~first three months of ~~2018,~~2019, reflecting ~~a decrease~~an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Combined Ratio

The table below (dollars in millions) details the components of the combined ratio for AFG’s property and casualty insurance segment:


	Three months ended June 30,						Three months ended June 30,				Three months ended March 31,						Three months ended March 31,
	2019		2018		Change		2019		2018		2020		2019		Change		2020		2019
Property and transportation
Loss and LAE ratio	68.4	%	63.8	%	4.6	%					61.4	%	62.2	%	(0.8	%)
Underwriting expense ratio	30.7	%	30.1	%	0.6	%					31.5	%	26.8	%	4.7	%
Combined ratio	99.1	%	93.9	%	5.2	%					92.9	%	89.0	%	3.9	%
Underwriting profit							$	4	$	23							$	27	$	39

Specialty casualty
Loss and LAE ratio	60.0	%	63.4	%	(3.4	%)					61.1	%	61.6	%	(0.5	%)
Underwriting expense ratio	32.5	%	31.7	%	0.8	%					29.6	%	32.6	%	(3.0	%)
Combined ratio	92.5	%	95.1	%	(2.6	%)	��				90.7	%	94.2	%	(3.5	%)
Underwriting profit							$	47	$	29							$	52	$	36

Specialty financial
Loss and LAE ratio	32.3	%	33.9	%	(1.6	%)					38.0	%	38.2	%	(0.2	%)
Underwriting expense ratio	53.3	%	51.7	%	1.6	%					51.1	%	53.2	%	(2.1	%)
Combined ratio	85.6	%	85.6	%	—	%					89.1	%	91.4	%	(2.3	%)
Underwriting profit							$	21	$	22							$	17	$	13

Total Specialty
Loss and LAE ratio	60.2	%	59.7	%	0.5	%					58.5	%	58.9	%	(0.4	%)
Underwriting expense ratio	34.8	%	34.0	%	0.8	%					33.7	%	33.6	%	0.1	%
Combined ratio	95.0	%	93.7	%	1.3	%					92.2	%	92.5	%	(0.3	%)
Underwriting profit							$	60	$	73							$	89	$	88

Aggregate — including exited lines
Loss and LAE ratio	60.3	%	59.7	%	0.6	%					58.5	%	59.0	%	(0.5	%)
Underwriting expense ratio	34.8	%	34.0	%	0.8	%					34.3	%	33.6	%	0.7	%
Combined ratio	95.1	%	93.7	%	1.4	%					92.8	%	92.6	%	0.2	%
Underwriting profit							$	59	$	72							$	87	$	87

The Specialty property and casualty insurance operations generated an underwriting profit of $6089 million in the ~~second quarter~~first three months of ~~2019~~2020 compared to ~~$73~~$88 million in the ~~second quarter~~first three months of ~~2018, a decrease~~2019, an increase of ~~$13~~$1 million ~~(18%~~(1%). The ~~lower~~higher underwriting profit in the ~~second quarter~~first three months of ~~2019~~2020 reflects ~~lower~~higher underwriting profits in the ~~Property and transportation~~Specialty casualty and Specialty financial sub-segments, partially offset by ~~higher~~lower underwriting profit in the ~~Specialty casualty~~Property and transportation sub-segment.

~~Property and transportation~~ Underwriting profit for this group was $4 million for the second quarter of 2019 compared to $23 million in the second quarter of 2018, a decrease of $19 million (83%). This decrease reflects lower favorable prior year reserve development in the transportation and agricultural businesses, as well as a larger year-over-year underwriting loss in the Singapore branch.

~~Specialty casualty~~ ~~Underwriting profit for this group was~~ ~~$47 million~~ for the second quarter of 2019 compared to $29 million for the second quarter of 2018, an increase of $18 million (62%). This increase reflects higher underwriting profitability in the workers’ compensation and public sector businesses, partially offset by lower underwriting profits in the excess and surplus lines businesses.

~~Specialty financial~~ ~~Underwriting profit for this group was~~ ~~$21 million~~ for the second quarter of 2019 compared to $22 million in the second quarter of 2018, a decrease of $1 million (5%). Higher underwriting profitability in the equipment leasing and surety businesses was more than offset by lower underwriting profitability in the financial institutions business.

5652

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Property and transportationUnderwriting profit for this group was $27 million for the first three months of 2020 compared to $39 million for the first three months of 2019, a decrease of $12 million (31%). This decrease reflects lower underwriting profit in the crop business.

Specialty casualty Underwriting profit for this group was $52 million for the first three months of 2020 compared to $36 million for the first three months of 2019, an increase of $16 million (44%). This increase reflects higher underwriting profits in the executive liability and workers’ compensation businesses, due primarily to higher net favorable reserve development, as well as the impact of $10 million of underwriting losses at Neon in the first three months of 2019. Higher net adverse reserve development in the excess and surplus lines and public sector businesses partially offset these results. Excluding the impact of the Neon exited lines, underwriting profit for the Specialty casualty sub-segment increased $6 million (13%) in the first three months of 2020 compared to the first three months of 2019.

Specialty financial Underwriting profit for this group was $17 million for the first three months of 2020 compared to $13 million in the first three months of 2019, an increase of $4 million (31%), reflecting higher underwriting profitability in the financial institutions business, partially offset by lower underwriting profitability in the fidelity business.

Other specialty This group reported an underwriting loss of ~~$12~~$7 million in the ~~second quarter~~first three months of ~~2019~~2020 compared to an underwriting profit of less than $1 million in the ~~second quarter~~first three months of ~~2018~~2019, reflecting higher losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the ~~second quarter~~first three months of ~~2019~~2020 compared to the ~~second quarter~~first three months of ~~2018.~~2019.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Losses and Loss Adjustment Expenses

AFG’s overall loss and LAE ratio was ~~60.3%~~58.5% for the ~~second~~first ~~quarter~~three months of 2020 compared to 59.0% for the first three months of 2019 ~~compared to 59.7% for the~~ ~~second~~ ~~quarter~~, a decrease of ~~2018, an increase of 0.6~~0.5 percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions):


	Three months ended June 30,												Three months ended March 31,
	Amount						Ratio				Change in		Amount						Ratio				Change in
	2019			2018			2019		2018		Ratio		2020			2019			2020		2019		Ratio
Property and transportation
Current year, excluding catastrophe losses	$	257		$	250		68.0	%	66.7	%	1.3	%	$	253		$	242		65.4	%	66.8	%	(1.4	%)
Prior accident years development	(6		)	(21		)	(1.6	%)	(5.6	%)	4.0	%	(24		)	(26		)	(6.2	%)	(7.2	%)	1.0	%
Current year catastrophe losses	8			10			2.0	%	2.7	%	(0.7	%)	8			9			2.2	%	2.6	%	(0.4	%)
Property and transportation losses and LAE and ratio	$	259		$	239		68.4	%	63.8	%	4.6	%	$	237		$	225		61.4	%	62.2	%	(0.8	%)

Specialty casualty
Current year, excluding catastrophe losses	$	410		$	392		64.6	%	65.8	%	(1.2	%)	$	364		$	400		65.4	%	63.7	%	1.7	%
Prior accident years development	(31		)	(15		)	(4.7	%)	(2.5	%)	(2.2	%)	(24		)	(13		)	(4.3	%)	(2.2	%)	(2.1	%)
Current year catastrophe losses	1			1			0.1	%	0.1	%	—	%	—			1			—	%	0.1	%	(0.1	%)
Specialty casualty losses and LAE and ratio	$	380		$	378		60.0	%	63.4	%	(3.4	%)	$	340		$	388		61.1	%	61.6	%	(0.5	%)

Specialty financial
Current year, excluding catastrophe losses	$	55		$	59		36.4	%	37.3	%	(0.9	%)	$	60		$	60		38.6	%	41.1	%	(2.5	%)
Prior accident years development	(9		)	(8		)	(5.9	%)	(5.4	%)	(0.5	%)	(2		)	(6		)	(1.2	%)	(4.3	%)	3.1	%
Current year catastrophe losses	3			3			1.8	%	2.0	%	(0.2	%)	1			2			0.6	%	1.4	%	(0.8	%)
Specialty financial losses and LAE and ratio	$	49		$	54		32.3	%	33.9	%	(1.6	%)	$	59		$	56		38.0	%	38.2	%	(0.2	%)

Total Specialty
Current year, excluding catastrophe losses	$	752		$	721		62.7	%	62.2	%	0.5	%	$	705		$	725		61.9	%	61.8	%	0.1	%
Prior accident years development	(42		)	(45		)	(3.4	%)	(3.9	%)	0.5	%	(48		)	(46		)	(4.2	%)	(4.0	%)	(0.2	%)
Current year catastrophe losses	12			16			0.9	%	1.4	%	(0.5	%)	9			12			0.8	%	1.1	%	(0.3	%)
Total Specialty losses and LAE and ratio	$	722		$	692		60.2	%	59.7	%	0.5	%	$	666		$	691		58.5	%	58.9	%	(0.4	%)

Aggregate — including exited lines
Current year, excluding catastrophe losses	$	752		$	721		62.7	%	62.2	%	0.5	%	$	740		$	725		61.2	%	61.8	%	(0.6	%)
Prior accident years development	(41		)	(44		)	(3.3	%)	(3.9	%)	0.6	%	(42		)	(45		)	(3.5	%)	(3.9	%)	0.4	%
Current year catastrophe losses	12			16			0.9	%	1.4	%	(0.5	%)	9			12			0.8	%	1.1	%	(0.3	%)
Aggregate losses and LAE and ratio	$	723		$	693		60.3	%	59.7	%	0.6	%	$	707		$	692		58.5	%	59.0	%	(0.5	%)

Current accident year losses and LAE, excluding catastrophe losses

The current accident year loss and LAE ratio, excluding catastrophe losses for AFG’s Specialty property and casualty insurance operations was ~~62.7%~~61.9% for the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~62.2%~~61.8% for the ~~second~~first ~~quarter~~three months of ~~2018~~2019, an increase of ~~0.5~~0.1 percentage points.

Property and transportation The ~~1.3~~1.4 percentage point decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio at National Interstate, due primarily to rate increases in the 2020 first quarter, and a decrease in the loss and LAE ratio in the Singapore branch for the first three months of 2020 compared to the first three months of 2019.

Specialty casualty The 1.7 percentage point increase in the loss and LAE ratio for the current year, excluding catastrophe losses reflects ~~an increase~~the impact of the Neon exited lines in the first three months of 2019, which have a lower loss and LAE ratio atthan many of the ~~Singapore branch for~~other businesses in the ~~second quarter~~Specialty casualty group. Excluding the impact of ~~2019 compared to~~ the ~~second quarter of 2018.~~Neon exited

5754

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

~~Specialty casualty~~ ~~The 1.2 percentage point decrease in~~lines, the loss and LAE ratio for the current year, excluding catastrophe losses ~~reflects a decrease~~is comparable in the ~~loss~~first three months of 2020 and ~~LAE ratio in several~~the first three months of ~~the workers’ compensation businesses and at Neon.~~2019.

Specialty financial The ~~0.9~~2.5 percentage point decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio of the financial institutions ~~business,~~and equipment leasing businesses, partially offset by an increase in the loss and LAE ratio of the ~~surety~~fidelity business.

Net prior year reserve development

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $4248 million in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~$45~~$46 million in the ~~second~~first ~~quarter~~three months of ~~2018, a decrease~~2019, an increase of $3$2 million ~~(7%~~(4%).

Property and transportation Net favorable reserve development of $624 million in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 reflects lower than expected losses in the crop business and lower than anticipated claim frequency and severity at National Interstate, partially offset by higher than expected claim severity in the property and inland marine business. Net favorable reserve development of ~~$21~~$26 million in the ~~second~~first ~~quarter~~three months of ~~2018~~2019 reflects lower than expected losses in the crop business and lower than expected claim frequency and severity in the transportation businesses.

Specialty casualty Net favorable reserve development of ~~$31~~$24 million in the ~~second~~first ~~quarter~~three months of 2020 reflects lower than anticipated claim severity in the workers’ compensation businesses and lower than anticipated claim frequency and severity in the executive liability business, partially offset by higher than expected claim frequency and severity in the excess and surplus lines businesses and higher than expected claim severity in the public sector business. Net favorable reserve development of $13 million in the first three months of 2019 reflects lower than anticipated claim severity in the workers’ compensation ~~businesses,~~business, partially offset by higher than expected claim severity in the ~~excess~~targeted markets businesses and ~~surplus lines businesses.~~higher than expected losses at Neon.

Specialty financialNet favorable reserve development was $2 million in the first three months of 2020. Net favorable reserve development of ~~$15~~$6 million in the ~~second~~first ~~quarter~~three months of ~~2018 includes lower than anticipated claim frequency and severity in the workers’ compensation business.~~

~~Specialty financial~~ ~~Net favorable reserve development of $9 million in the~~ ~~second~~ ~~quarter of~~ 2019 ~~reflects lower than expected claim frequency and severity in the surety and financial institutions businesses. Net favorable reserve development of $8 million in the~~ ~~second~~ ~~quarter of 2018~~ reflects lower than expected claim frequency and severity in the surety business and lower than anticipated claim severity in the ~~financial institutions~~fidelity business.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $4$2 million in the ~~second~~first ~~quarter~~three months of ~~2019 compared to~~2020 and net favorable reserve development of $1 million in the ~~second quarter~~first three months of ~~2018,~~2019, reflecting ~~$6 million of adverse reserve development associated with AFG’s internal reinsurance program in the 2019 period compared to $1 million in the second quarter of 2018. Both periods include~~ the amortization of the deferred gain on the retroactive insurance transaction entered into in connection with the sale of businesses in 1998 and ~~2001.~~2001 and reserve development associated with AFG’s internal reinsurance program.

Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes net adverse reserve development of $5 million in the first three months of 2020 from the Neon exited lines and net adverse reserve development of $1 million in both the ~~second~~first ~~quarter~~three months of ~~2019~~2020 and the ~~second~~first ~~quarter~~three months of ~~2018~~2019 related to other business outside of the Specialty group that AFG no longer writes.

Catastrophe losses

AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. Based on data available at December 31, ~~2018,~~2019, AFG’s exposure to a catastrophic earthquake or windstorm that industry models indicate should statistically occur once in every 100, 250 or 500 years as a percentage of AFG’s Shareholders’ Equity is shown below:



			~~Impact~~Approximate impact of modeled loss ~~on AFG’s~~
	Industry Model		on AFG’s Shareholders’ Equity
	100-year event		~~Less than~~ 1%
	250-year event		~~Less than 3%~~2%
	500-year event		~~Approximately~~ 6%

AFG maintains comprehensive catastrophe reinsurance coverage, including a $15 million per occurrence net retention for its U.S.-based property and casualty insurance operations for losses up to ~~$100~~$134 million. Neon’s excess of loss catastrophe reinsurance limits the maximum retained loss per event to $15 million for losses up to ~~$250 million.~~$145 million on direct business and $15 million for losses up to $45 million on assumed business. AFG’s property and casualty insurance operations further maintain supplemental fully collateralized reinsurance coverage up to 95% of $200 million for catastrophe losses in excess of $104 million of traditional catastrophe reinsurance through a catastrophe bond.

5855

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

operations further maintain supplemental fully collateralized reinsurance coverage up to 95% of $200 million for catastrophe losses in excess of $134 million of traditional catastrophe reinsurance through a catastrophe bond.

Catastrophe losses of ~~$12~~$9 million in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 resulted primarily from storms and tornadoes in multiple regions of the United States. Catastrophe losses of ~~$16~~$12 million in the ~~second quarter~~first three months of ~~2018~~2019 resulted primarily from winter storms ~~and flooding~~ in ~~several~~multiple regions of the United States.

Commissions and Other Underwriting Expenses

AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were ~~$418~~$415 million in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~$396~~$394 million for the ~~second~~first ~~quarter~~three months of ~~2018~~2019, an increase of $2221 million ~~(6%~~(5%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was ~~34.8%~~34.3% for the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~34.0%~~33.6% for the ~~second~~first ~~quarter~~three months of ~~2018~~2019, an increase of ~~0.8~~0.7 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):


	Three months ended June 30,										Three months ended March 31,
	2019				2018				Change in		2020				2019				Change in
	U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP		U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP
Property and transportation	$	116	30.7	%	$	112	30.1	%	0.6	%	$	122	31.5	%	$	97	26.8	%	4.7	%
Specialty casualty	207		32.5	%	188		31.7	%	0.8	%	164		29.6	%	205		32.6	%	(3.0	%)
Specialty financial	81		53.3	%	83		51.7	%	1.6	%	80		51.1	%	77		53.2	%	(2.1	%)
Other specialty	14		39.1	%	13		36.8	%	2.3	%	17		43.8	%	15		39.2	%	4.6	%
	$	418	34.8	%	$	396	34.0	%	0.8	%
Total specialty											383		33.7	%	394		33.6	%	0.1	%
Neon exited lines											32				—
Aggregate											$	415	34.3	%	$	394	33.6	%	0.7	%

Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums increased ~~0.6~~4.7 percentage points in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to the ~~second~~first ~~quarter~~three months of ~~2018~~2019 reflecting ~~higher underwriting expenses and~~ lower ~~ancillary services fees at National Interstate in the second quarter of 2019 compared to the second quarter of 2018, partially offset by higher~~ profitability-based ceding commissions received from reinsurers in the crop ~~business.~~business in the first three months of 2020 compared to the first three months of 2019.

Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums ~~increased 0.8~~decreased 3.0 percentage points in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to the ~~second~~first ~~quarter~~three months of ~~2018~~2019 ~~reflecting lower ceding commissions received from reinsurers~~due to the runoff of Neon. Neon has a higher expense ratio than many of the other businesses in the ~~excess and surplus~~Specialty casualty sub-segment. Excluding Neon exited lines, ~~businesses.~~the underwriting expense ratio is comparable between periods for this group.

Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums ~~increased1.6~~decreased 2.1 percentage points in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to the ~~second~~first ~~quarter~~three months of ~~2018~~2019 reflecting ~~higher~~lower profitability-based ~~commissions~~commission paid to agents in the financial institutions business.

Property and Casualty Net Investment Income

~~Net~~Excluding the Neon exited lines, net investment income in AFG’s property and casualty insurance operations was ~~$124~~$99 million in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to $~~115~~104 million in the ~~second~~first ~~quarter~~three months of ~~2018~~2019, ~~an increase~~a decrease of $95 million (8%5%). The average invested assets and overall yield earned on investments held by AFG’s property and casualty insurance operations are provided below (dollars in millions):


	Three months ended June 30,											Three months ended March 31,
	2019			2018			Change			% Change		2020			2019			Change			% Change
Net investment income	$	124		$	115		$	9		8	%	$	99		$	104		$	(5	)	(5	%)

Average invested assets (at amortized cost)	$	11,193		$	10,346		$	847		8	%	$	11,457		$	10,997		$	460		4	%

Yield (net investment income as a % of average invested assets)	4.43		%	4.45		%	(0.02		%)			3.46		%	3.78		%	(0.32		%)

Tax equivalent yield (*)	4.60		%	4.62		%	(0.02		%)			3.58		%	3.96		%	(0.38		%)

~~(*)~~


(*)	Adjusts the yield on equity securities and tax-exempt bonds to the fully taxable equivalent yield.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The property and casualty insurance segment’s ~~increase~~decrease in net investment income for the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to the ~~second~~first ~~quarter~~three months of ~~2018~~2019 ~~is due primarily to~~reflects lower earnings from partnerships and similar investments and AFG-managed CLOs in the first three months of 2020 as a result of the negative impact of the COVID-19 pandemic on financial markets, partially offset by growth in the property and casualty insurance segment. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was ~~4.43%~~3.46% for the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~4.45%~~3.78% for the ~~second~~first ~~quarter~~three months of ~~2018,~~2019, a decrease of ~~0.02~~0.32 percentage points. The decrease is due primarily to a lower yield on partnerships and similar investments in the second quarter of 2019 reflecting both additional investments and unusually strong earnings from these assets in the second quarter of 2018. AFG’s property and

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

casualty insurance operations recorded ~~$20~~$3 million in earnings from partnerships and similar investments and AFG-managed CLOs in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~$18~~$8 million in the ~~second~~first ~~quarter~~three months of ~~2018, an increase~~2019, a decrease of $2$5 million ~~(11%~~(63%). The annualized yield earned on these partnerships and similar investments and AFG-managed CLOs was ~~13.4%~~1.4% in the ~~second~~first ~~quarter~~three months of ~~2019~~2020 compared to ~~15.7%~~4.7% in the prior year period. Because the property and casualty segment’s partnerships and similar investments accounted for using the equity method are reported on a quarter lag, the second quarter 2020 returns on those investments will reflect the financial results and valuations for the quarter ended March 31, 2020, including the impact of the downturn in financial markets during the first quarter.

In addition to the property and casualty segment’s net investment income from ongoing operations discussed above, the Neon exited lines reported a $6 million loss in net investment income, primarily from changes in the fair value of equity securities.

Property and Casualty Other Income and Expenses, Net

Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $6 million for the first three months of 2020 compared to $9 million for ~~both~~ the ~~second quarter~~first three months of 2019, ~~and for the second quarter~~a decrease of ~~2018.~~$3 million (33%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions):


	Three months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Other income	$	2		$	2		$	5		$	3
Other expenses
Amortization of intangibles	3			2			3			3
Other	8			9			8			9
Total other expenses	11			11			11			12
Other income and expenses, net	$	(9	)	$	(9	)	$	(6	)	$	(9	)

In addition to the property and casualty segment’s other incomes and expenses from ongoing operations discussed above, the Neon exited lines incurred $3 million in other expenses during the first three months of 2020.

6057

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Annuity Segment — Results of Operations

AFG’s annuity operations contributed ~~$71~~$29 million in GAAP pretax earnings in the ~~second quarter~~first three months of ~~2019~~2020 compared to ~~$99~~$90 million in the ~~second quarter~~first three months of ~~2018,~~2019, a decrease of ~~$28~~$61 million ~~(28%~~(68%). This decrease in AFG’s GAAP annuity segment results for the ~~second quarter~~first three months of ~~2019~~2020 as compared to the ~~second quarter~~first three months of ~~2018~~2019 is due primarily to the ~~unfavorable~~negative impact of ~~significantly lower~~the significant decrease in both credit and equity markets on earnings (losses) from partnerships and similar investments and AFG-managed CLOs. The decrease in the financial markets also had a negative impact on liabilities for annuities with guaranteed withdrawal benefits and on the fair value of derivatives related to FIAs in the 2020 period compared to the impact of strong market performance in the 2019 period. This decrease was partially offset by the favorable impact of higher than anticipated interest rates on the fair value of derivatives related to FIAs in the ~~2019~~2020 period compared to ~~higher~~the unfavorable impact of lower than anticipated interest rates in the ~~2018~~2019 period ~~partially offset by the impact of an unlocking charge~~and growth in the ~~second quarter of 2018. AFG monitors the major actuarial assumptions underlying its~~ annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions in the fourth quarter of each year. If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter. AFG unlocked its assumptions for option costs and interest rates in the second quarter of 2018 due to continued higher FIA option costs (resulting primarily from higher than expected risk-free rates), resulting in a net charge to earnings of $27 million.business.

The following table details AFG’s GAAP and core earnings before income taxes from its annuity operations for the three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 (dollars in millions):


	Three months ended June 30,							Three months ended March 31,
	2019			2018		% Change		2020			2019		% Change
Revenues:
Net investment income	$	451		$	412	9	%	$	422		$	435	(3	%)
Other income:
Guaranteed withdrawal benefit fees	17			16		6	%	17			16		6	%
Policy charges and other miscellaneous income(a)	10			11		(9	%)	18			12		50	%
Total revenues	478			439		9	%	457			463		(1	%)

Costs and Expenses:
Annuity benefits (a)(b)	272			260		5	%	287			312		(8	%)
Acquisition expenses (a)	67			49		37	%	71			26		173	%
Other expenses	35			31		13	%	32			35		(9	%)
Total costs and expenses	374			340		10	%	390			373		5	%
Core earnings before income taxes	104			99		5	%	67			90		(26	%)
Pretax non-core losses (a)	(33		)	—		—	%
Pretax non-core earnings (losses) (a)								(38		)	—		—	%
GAAP earnings before income taxes	$	71		$	99	(28	%)	$	29		$	90	(68	%)

(a)

As discussed under “Results of Operations — General,” beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the ~~second quarter~~first three months of ~~2019,~~2020, annuity benefits ~~excludes $67~~exclude the $3 million ~~in pretax losses related to~~favorable impact of these items and acquisition expenses excludes the related ~~$34~~$41 million ~~favorable~~unfavorable impact on the amortization of deferred policy acquisition costs.


(b)	Details of the components of annuity benefits are provided below.

6158

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Annuity core earnings before income taxes were ~~$104~~$67 million in the ~~second quarter~~first three months of ~~2019~~2020 compared to ~~$99~~$90 million in the ~~second quarter~~first three months of ~~2018, an increase~~2019, a decrease of $5$23 million ~~(5%~~(26%). As discussed under “Results of Operations — General,” beginning prospectively with the second quarter of 2019, unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the ~~second quarter~~first three months of ~~2019,~~2020, the annuity segment’s core earnings before income taxes excludes ~~$33~~$38 million in pretax losses related to these items. Since annuity core earnings for ~~prior periods~~the first quarter of 2019 were not adjusted, the annuity segment’s core earnings before income taxes for the ~~second quarter~~first three months of ~~2018~~2019 includes the ~~$14~~$11 million negative impact from these items in that period. Excluding the ~~$14~~$11 million negative impact of these items on results for the ~~second quarter~~first three months of ~~2018,~~2019, annuity core net operating earnings were $67 million for the ~~second quarter~~first three months of 2020 compared to $101 million for the first three months of 2019, ~~decreased $9 million compared to~~reflecting the ~~second~~negative impact of the significant decrease in both the credit and equity markets on earnings (losses) from partnerships and similar investments and AFG-managed CLOs in the 2020 quarter, ~~of 2018 reflecting higher FIA renewal option costs and lower earnings from investments carried at fair value through net investment income,~~ partially offset by growth in the business. The table below highlights the impact of ~~unlocking,~~ changes in the fair value of derivatives and other impacts of the changes in the stock market and interest rates on annuity segment results (dollars in millions):


	Three months ended June 30,								Three months ended March 31,
	2019			2018			% Change		2020			2019			% Change
Earnings before income taxes — before the impact of unlocking, derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs	$	104		$	113		(8	%)
Unlocking	—			(27		)	(100	%)
Earnings before income taxes — before the impact of derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs									$	67		$	101		(34	%)
Impact of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs:
Change in fair value of derivatives related to FIAs	(103		)	8			(1,388	%)	13			(95		)	(114	%)
Accretion of guaranteed minimum FIA benefits	(102		)	(85		)	20	%	(105		)	(99		)	6	%
Other annuity benefits	(8		)	(16		)	(50	%)	(55		)	8			(788	%)
Less cost of equity options	146			122			20	%	150			141			6	%
Related impact on the amortization of deferred policy acquisition costs	34			(16		)	(313	%)	(41		)	34			(221	%)
Earnings before income taxes	$	71		$	99		(28	%)	$	29		$	90		(68	%)

Annuity benefits consisted of the following (dollars in millions):


	Three months ended June 30,																		Three months ended March 31,
	2019								2018								Total		2020								2019								Total
	Core		Non-core			Total			Core			Non-core		Total			% Change		Core		Non-core			Total			Core			Non-core		Total			% Change
Interest credited — fixed	$	98	$	—		$	98		$	88		$	—	$	88		11	%	$	103	$	—		$	103		$	95		$	—	$	95		8	%
Accretion of guaranteed minimum FIA benefits	—		102			102			85			—		85			20	%	—		105			105			99			—		99			6	%
Interest credited — fixed component of variable annuities	1		—			1			2			—		2			(50	%)	1		—			1			1			—		1			—	%
Cost of equity options	146		(146		)	—			—			—		—			—	%	150		(150		)	—			—			—		—			—	%
Other annuity benefits:
Change in expected death and annuitization reserve	3		—			3			4			—		4			(25	%)
Amortization of sales inducements	4		—			4			5			—		5			(20	%)	2		1			3			4			—		4			(25	%)
Change in guaranteed withdrawal benefit reserve:
Impact of the stock market and interest rates	—		(4		)	(4		)	—			—		—			—	%
Impact of change in the stock market and interest rates																			—		44			44			(12		)	—		(12		)	(467	%)
Accretion of benefits and other	20		—			20			19			—		19			5	%	25		—			25			19			—		19			32	%
Change in expected death and annuitization reserves and other																			6		—			6			7			—		7			(14	%)
Change in other benefit reserves — impact of changes in interest rates and the stock market	—		12			12			11			—		11			9	%	—		10			10			4			—		4			150	%
Unlocking	—		—			—			54			—		54			(100	%)
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market	—		251			251			82			—		82			206	%	—		(647		)	(647		)	462			—		462			(240	%)
Equity option mark-to-market	—		(148		)	(148		)	(90		)	—		(90		)	64	%	—		634			634			(367		)	—		(367		)	(273	%)
Impact of derivatives related to FIAs	—		103			103			(8		)	—		(8		)	(1,388	%)	—		(13		)	(13		)	95			—		95			(114	%)

Total annuity benefits	$	272	$	67		$	339		$	260		$	—	$	260		30	%	$	287	$	(3	)	$	284		$	312		$	—	$	312		(9	%)

6259

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Because fluctuations in interest rates and the stock market, among other factors, can cause volatility in annuity benefits expense related to FIAs that can be inconsistent with the long-term economics of the FIA business, management believes that including the actual cost of the equity options purchased in the FIA business and excluding unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs provides investors with a better view of the true cost of funds in the business and a more comparable measure compared to the cost of funds reported by its peers. The cost of the equity options included in AFG’s cost of funds is the net purchase price of the option contracts amortized on a straight-line basis over the life of the contracts, which is generally one year. The following table reconciles AFG’s non-GAAP cost of funds measure to total annuity benefits expense (in millions):

Three months ended June 30,
2019 2018
Interest credited — fixed $ 98
$ 88
Include cost of equity options 146
122
Cost of funds 244
210

Interest credited — fixed component of variable annuities 1
2
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs 27
23
272
235
Unlocking, changes in fair value of derivatives related to FIAs, and other impacts of the stock market and interest rates over or under option costs:
Unlocking —
54
Impact of derivatives related to FIAs 103
(8 )
Accretion of guaranteed minimum FIA benefits 102
85
Other annuity benefits — impact of the stock market and interest rates on FIAs 8
16
Less cost of equity options (included in cost of funds) (146 ) (122 )
Total annuity benefits expense $ 339
$ 260

~~See “Annuity Unlocking” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefit expense in the second quarter of 2018.~~



	Three months ended March 31,
	2020			2019
Interest credited — fixed	$	103		$	95
Include cost of equity options	150			141
Cost of funds	253			236

Interest credited — fixed component of variable annuities	1			1
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs	33			30
	287			267
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates over or under option costs:
Impact of derivatives related to FIAs	(13		)	95
Accretion of guaranteed minimum FIA benefits	105			99
Other annuity benefits — impact of the stock market and interest rates on FIAs	55			(8		)
Less cost of equity options (included in cost of funds)	(150		)	(141		)
Total annuity benefits expense	$	284		$	312

Net Spread on Fixed Annuities (excludes variable annuity earnings)

The profitability of a fixed annuity business is largely dependent on the ability of a company to earn income on the assets supporting the business in excess of the amounts credited to policyholder accounts plus expenses incurred (earning a “spread”). Performance measures such as net interest spread and net spread earned are often presented by annuity businesses to help users of their financial statements better understand the company’s performance.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

The table below (dollars in millions) details the components of these spreads for AFG’s fixed annuity operations (including fixed-indexed and variable-indexed annuities):


	Three months ended June 30,								Three months ended March 31,
	2019			2018			% Change		2020			2019			% Change
Average fixed annuity investments (at amortized cost)	$	37,907		$	33,935		12	%	$	40,073		$	36,991		8	%
Average fixed annuity benefits accumulated	38,202			34,165			12	%	40,139			37,078			8	%

As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments)	4.73		%	4.83		%			4.19		%	4.68		%
Cost of funds	(2.55		%)	(2.46		%)			(2.52		%)	(2.54		%)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*)	(0.10		%)	(0.09		%)			(0.14		%)	(0.14		%)
Net interest spread	2.08		%	2.28		%			1.53		%	2.00		%

Policy charges and other miscellaneous income	0.08		%	0.10		%
Policy charges and other miscellaneous income (*)									0.15		%	0.09		%
Acquisition expenses (*)	(0.68		%)	(0.69		%)			(0.67		%)	(0.65		%)
Other expenses	(0.37		%)	(0.35		%)			(0.32		%)	(0.36		%)
Net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on FIAs	1.11		%	1.34		%
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs	(0.35		%)	0.16		%
Unlocking	—		%	(0.32		%)
Net spread earned on fixed annuities excluding the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs									0.69		%	1.08		%
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs:
Included in core									—		%	(0.12		%)
Annuity non-core earnings (losses)									(0.38		%)	—		%
Net spread earned on fixed annuities	0.76		%	1.18		%			0.31		%	0.96		%


(*)	Excluding ~~unlocking,~~ the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on annuity benefits and the related impact ~~(acceleration/deceleration)~~ on the amortization of deferred policy acquisition costs.

Annuity Net Investment Income

Net investment income for the ~~second quarter~~first three months of ~~2019~~2020 was ~~$451~~$422 million compared to ~~$412~~$435 million for the ~~second quarter~~first three months of ~~2018, an increase~~2019, a decrease of ~~$39~~$13 million ~~(9%~~(3%). This ~~increase~~decrease reflects the impact of the significant decline in both credit and equity markets on the annuity segment’s earnings (losses) from partnerships and similar investments and AFG-managed CLOs, partially offset by growth in AFG’s annuity ~~business, partially offset by the impact of lower investment yields, including lower earnings from equity securities that are carried at fair value through net investment income.~~business. The overall yield earned on investments in AFG’s fixed annuity operations, calculated as net investment income divided by average investment balances (at amortized cost), decreased by ~~0.10~~0.49 percentage points to ~~4.73%~~4.19% from ~~4.83%~~4.68% in the ~~second quarter~~first three months of ~~2019~~2020 compared to the ~~second quarter~~first three months of ~~2018.~~2019. The decrease in the net investment yield between periods reflects the negative impact of lower ~~yields on~~earnings from partnerships and similar investments ~~accounted for under~~and AFG-managed CLOs in the ~~equity method and from equity securities carried at fair value through net investment income, as well as~~first quarter of 2020, along with the impact of the ~~reinvestment of proceeds from maturity and redemption~~run-off of higher yielding investments ~~at the lower yields available~~and higher cash balances. AFG’s annuity segment recorded $6 million in losses from partnerships and similar investments and AFG-managed CLOs in the ~~financial markets. For~~first three months of 2020 compared to $29 million in earnings in the ~~period from April 1, 2018, through June 30,~~first three months of 2019, ~~$6.2 billion in annuity segment~~a change of $35 million (121%). The annualized yield earned on these partnerships and similar investments ~~with an average~~and AFG-managed CLOs was a negative yield of ~~approximately 5.0% were redeemed or sold with~~1.9% in the ~~proceeds reinvested at an approximately 0.4% lower yield.~~first three months of 2020 compared to a positive yield of 10.9% in the prior year period. Because the annuity segment’s partnerships and similar investments accounted for using the equity method are reported on a quarter lag, the second quarter 2020 returns from those investments will reflect the financial results and valuations as of March 31, 2020, including the downturn in financial markets during the first quarter.

6461

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Annuity Cost of Funds

Cost of funds for the ~~second quarter~~first three months of ~~2019 were $244~~2020 was $253 million compared to ~~$210~~$236 million for the ~~second quarter~~first three months of ~~2018,~~2019, an increase of ~~$34~~$17 million ~~(16%~~(7%). This increase reflects ~~the impact of~~ growth in the annuity ~~business and higher renewal option costs.~~business. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, ~~increased~~decreased ~~0.09~~0.02 percentage points to ~~2.55%~~2.52% in the ~~second quarter~~first three months of 2020 from 2.54% in the first three months of 2019 ~~from 2.46% in the second quarter of 2018~~ reflecting ~~higher~~lower renewal option costs.

The following table provides details of AFG’s interest credited and other cost of funds (in millions):


	Three months ended June 30,				Three months ended March 31,
	2019		2018		2020		2019
Cost of equity options (FIAs)	$	146	$	122	$	150	$	141
Interest credited:
Traditional fixed annuities	61		58		63		59
Fixed component of fixed-indexed annuities	23		19		25		22
Immediate annuities	6		6		6		6
Pension risk transfer products	1		—		4		1
Federal Home Loan Bank advances	7		5		5		7
Total cost of funds	$	244	$	210	$	253	$	236

Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees

Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of the stock market and interest rates, for the ~~second quarter~~first three months of ~~2019~~2020 were ~~$10~~$16 million compared to $7$14 million for the ~~second quarter~~first three months of ~~2018,~~2019, an increase of $3$2 million ~~(43%~~(14%). As a percentage of average fixed annuity benefits accumulated, these net expenses ~~increased 0.01 percentage points to 0.10% from 0.09%~~were 0.14% in both the ~~second quarter~~first three months of ~~2019 compared to~~2020 and the ~~second quarter~~first three months of ~~2018.~~2019. In addition to interest credited to policyholders’ accounts and the change in fair value of derivatives related to fixed-indexed annuities, annuity benefits expense also includes the following expenses (in millions, net of guaranteed withdrawal benefit fees):


	Three months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements	$	4		$	5		$	2		$	4
Change in guaranteed withdrawal benefit reserve	20			19			25			19
Change in other benefit reserves	3			(1		)	6			7
Other annuity benefits	27			23			33			30
Offset guaranteed withdrawal benefit fees	(17		)	(16		)	(17		)	(16		)
Other annuity benefits excluding the impact of the stock market and interest rates, net	10			7			16			14
Other annuity benefits — impact of the stock market and interest rates	8			16			(55		)	8
Other annuity benefits, net	$	18		$	23		$	(39	)	$	22

As discussed under “Annuity Benefits Accumulated” in Note A — “~~Accounting Policies~~”“Accounting Policies” to the financial statements, guaranteed withdrawal benefit reserves are accrued for and modified using assumptions similar to those used in establishing and amortizing deferred policy acquisition costs. In addition, the guaranteed withdrawal benefit reserve related to FIAs can be inversely impacted by the calculated FIA embedded derivative reserve as the value to policyholders of the guaranteed withdrawal benefits ~~decreases~~increases when the benefit of stock market participation ~~increases.~~decreases. As shown in the table above, changes in the stock market and interest rates ~~increased~~decreased AFG’s guaranteed withdrawal benefit reserve by $55 million in the first three months of 2020 compared to an increase of $8 million in the ~~second quarter~~first three months of ~~2019 compared to $16~~2019. This $63 million ~~in the second quarter of 2018. This $8 million decrease (50%~~(788%) change was the primary cause of the $5$61 million overall ~~decrease~~change in other annuity benefits, net of guaranteed withdrawal fees in the ~~second quarter~~first three months of ~~2019~~2020 compared to the ~~second quarter~~first three months of ~~2018.~~

~~See “Annuity Unlocking~~” ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefits expense in the second quarter of 2018.~~2019.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Annuity Net Interest Spread

AFG’s net interest spread decreased ~~0.20~~0.47 percentage points to ~~2.08%~~1.53% from ~~2.28%~~2.00% in the ~~second quarter~~first three months of ~~2019~~2020 compared to the same period in ~~2018~~2019 due primarily to ~~higher renewal option costs~~the negative impact of the significant decline in credit and ~~lower investment yields.~~equity markets on earnings (losses) from partnerships and similar investments and AFG-managed CLOs in the first three months of 2020. Features included in current annuity product offerings allow AFG to achieve its desired profitability at a lower net interest spread than historical product offerings. As a result, AFG expects its net interest spread to narrow in the future.

Annuity Policy Charges and Other Miscellaneous Income

Annuity policy charges and other miscellaneous income, which consist primarily of surrender charges, amortization of deferred upfront policy charges (unearned revenue) and ~~income from sales of real estate~~equity index call option proceeds received at maturity that are not passed to policyholders through index credits due to surrenders, were ~~$10~~$18 million for the ~~second quarter~~first three months of 2019 compared to $11 million for the second quarter of 2018, a decrease of $1 million (9%). Excluding the impact of a $1 million unlocking charge related to unearned revenue in the second quarter of 2018, annuity policy charges and other miscellaneous income was $10 million in the second quarter of 20192020 compared to $12 million for the first three months of 2019, an increase of $6 million (50%), reflecting higher gains on equity index options in excess of policyholder index credits in the ~~second quarter~~first three months of ~~2018. Excluding~~2020 compared to the ~~impact~~first three months of ~~unlocking charges related to unearned revenue, annuity~~2019. Annuity policy charges and other miscellaneous income as a percentage of average fixed annuity benefits accumulated, ~~decreased 0.02~~increased 0.06 percentage points to ~~0.08%~~0.15% from ~~0.10%~~0.09% in the ~~second quarter~~first three months of ~~2019~~2020 compared to the ~~second quarter~~first three months of ~~2018.~~

~~See “Annuity Unlocking” below for a discussion~~2019, reflecting higher gains on equity index call options in excess of ~~the impact that the unlocking of actuarial assumptions had on annuity policy charges and other miscellaneous income in 2018.~~policyholder index credits.

Annuity Acquisition Expenses

~~In addition to the impact of unlocking, the~~The following table illustrates the acceleration/deceleration of the amortization of deferred policy acquisition costs (“DPAC”) resulting from changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs (in millions):


	Three months ended June 30,						Three months ended March 31,
	2019			2018			2020		2019
Annuity acquisition expenses before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates	$	67		$	60		$	71	$	60
Unlocking	—			(28		)
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates	(34		)	17			41		(34		)
Annuity acquisition expenses	$	33		$	49		$	112	$	26

Annuity acquisitions expenses before ~~unlocking and~~ the acceleration/deceleration of the amortization resulting from changes in the fair value of derivatives related to FIAs and other impacts onof changes in the stock market and interest rates on the accounting for FIAs over or under option costs were ~~$67~~$71 million for the ~~second quarter~~first three months of ~~2019~~2020 compared to $60 million for the ~~second quarter~~first three months of ~~2018,~~2019, an increase of $7$11 million ~~(12%~~(18%), reflecting ~~growth~~the impact of very strong investment income from fixed maturity securities and the negative impact of the significant decline in stock market performance on variable annuities in the ~~annuity business.~~first three months of 2020.

~~See “~~In the first~~Annuity Unlocking~~” ~~below for~~ quarter of 2020, the deceleration in the amortization of DPAC resulting from adverse changes in the fair value of derivatives and other liabilities related to FIAs on annuity acquisition expenses as a ~~discussion~~percentage of average fixed annuity benefits accumulated was more than offset by the unfavorable impact on DPAC amortization of poor stock market performance on projected future investment income generated by the investment of the ~~impact that~~projected net proceeds from the ~~unlocking of actuarial assumptions had on annuity~~call and ~~supplemental insurance acquisition expenses~~put options used in the second quarter of 2018. Unanticipated spread compression, decreases in the stock market, adverse mortality experience, and higher than expected lapse rates could lead to future write-offs of DPAC or the present value of future profits on business in force of companies acquired (“PVFP”).

FIA business. The negative impact of lower than anticipated interest rates during the ~~second quarter~~first three months of 2019 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC. In contrast, the positive impact of higher than anticipated interest rates during the second quarter of 2018 on the fair value of derivatives and other liabilities related to FIAs resulted in a partially offsetting acceleration of the amortization of DPAC.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

The table below illustrates ~~the impact of unlocking and~~ the estimated impact of changes in the fair value of derivatives related to fixed-indexed annuities and other impacts of changes in the stock market and interest rates on FIAs on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated:


	Three months ended June 30,				Three months ended March 31,
	2019		2018		2020		2019
Before unlocking, the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates	0.68	%	0.69	%
Unlocking	—	%	(0.33	%)
Before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates					0.67	%	0.65	%
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates	(0.36	%)	0.20	%	0.41	%	(0.37	%)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated	0.32	%	0.56	%	1.08	%	0.28	%

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Annuity Other Expenses

Annuity other expenses were $32 million for the first three months of 2020 compared to $35 million for the ~~second quarter~~first three months of 2019, ~~compared to $31~~a decrease of $3 million ~~for the second quarter of 2018, an increase of $4 million (13%~~(9%). Annuity other expenses represent primarily general and administrative expenses, as well as selling and issuance expenses that are not deferred. As a percentage of average fixed annuity benefits accumulated, these expenses ~~increased 0.02~~decreased 0.04 percentage points to ~~0.37%~~0.32% for the ~~second quarter~~first three months of ~~2019~~2020 from ~~0.35%~~0.36% in the ~~second quarter~~first three months of ~~2018~~2019 due primarily to growth in the annuity business.

Change in Fair Value of Derivatives Related to Fixed-Indexed (Including Variable-Indexed) Annuities and Other Impacts of Changes in the Stock Market and Interest Rates on FIAs

AFG’s fixed-indexed (including variable-indexed) annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG’s strategy is designed so that the net change in the fair value of the call option assets and put option liabilities will generally offset the economic change in the net liability from the index participation. Both the index-based component of the annuities (an embedded derivative) and the related call and put options are considered derivatives that must be adjusted for changes in fair value through earnings each period. The fair values of these derivatives are impacted by actual and expected stock market performance and interest rates as well as other factors. For a list of other factors impacting the fair value of the embedded derivative component of AFG’s annuity benefits accumulated, see Note D — “~~Fair~~“Fair Value ~~Measurements~~”Measurements” to the financial statements. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.

As discussed above under “Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit ~~Fees~~Fees” ”and “Annuity Acquisition Expenses,,” the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates. These impacts may be temporary in nature and not necessarily indicative of the long-term performance of the FIA business. The table below highlights the impact of changes in the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates ~~(excluding the impact of the 2018 unlocking charge)~~ over or under the cost of the equity index options (discussed above) on earnings before income taxes for the annuity segment (dollars in millions):


	Three months ended June 30,								Three months ended March 31,
	2019			2018			% Change		2020			2019			% Change
Change in the fair value of derivatives related to FIAs	$	(103	)	$	8		(1,388	%)	$	13		$	(95	)	(114	%)
Accretion of guaranteed minimum FIA benefits	(102		)	(85		)	20	%	(105		)	(99		)	6	%
Other annuity benefits	(8		)	(16		)	(50	%)	(55		)	8			(788	%)
Less cost of equity options	146			122			20	%	150			141			6	%
Related impact on the amortization of DPAC	34			(16		)	(313	%)	(41		)	34			(221	%)
Impact on annuity segment earnings before income taxes	$	(33	)	$	13		(354	%)	$	(38	)	$	(11	)	245	%

During the ~~second quarter~~first three months of ~~2019,~~2020, the negative impact of ~~significantly~~the significant decrease in stock market performance, partially offset by the favorable impact of higher than anticipated interest rates, reduced earnings before income taxes for the annuity segment by $38 million compared to the $11 million impact of the lower than anticipated interest rates partially offset by the positive impact of strong stock market performance, reduced the annuity segments’ earnings before income taxes by $33 million compared to the $13 million favorable impact of the stock market and interest rates (excluding unlocking) on annuity earnings before income taxes for the ~~second quarter~~first three months of ~~2018, a change~~2019, an increase of ~~$46~~$27 million ~~(354%~~(245%). ~~In the 2018 quarter, the~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~positive impact of higher than expected interest rates and strong stock market performance was partially offset by the negative impact of higher than expected option costs.~~ As a percentage of average fixed annuity benefits accumulated, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense of ~~0.35%~~0.38% in the ~~second quarter~~first three months of ~~2019~~2020 compared to ~~a net expense reduction of 0.16%~~0.12% in the ~~second quarter~~first three months of ~~2018.~~2019.

The following table provides analysis of the primary factors impacting the change in the fair value of derivatives related to FIAs and the other impacts of the stock market and interest rates ~~(excluding the impact of the 2018 unlocking charge)~~ on the accounting for FIAs over or under the cost of the equity index options discussed above. Each factor is presented net of the estimated related impact on amortization of DPAC (dollars in millions).


	Three months ended June 30,								Three months ended March 31,
	2019			2018			% Change		2020			2019			% Change
Changes in the stock market, including volatility	$	7		$	9		(22	%)	$	(64	)	$	33		(294	%)
Changes in interest rates higher (lower) than expected	(38		)	12			(417	%)	29			(45		)	(164	%)
Other	(2		)	(8		)	(75	%)	(3		)	1			(400	%)
Impact on annuity segment earnings before income taxes	$	(33	)	$	13		(354	%)	$	(38	)	$	(11	)	245	%

~~See “Annuity Unlocking” below for a discussion~~Table of ~~the impact that the unlocking~~Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of ~~actuarial assumptions had on the change in the fair value~~Financial Condition and Results of ~~the embedded derivative and other annuity liabilities in the second quarter of 2018.~~Operations — Continued

Annuity Net Spread Earned on Fixed Annuities

AFG’s net spread earned on fixed annuities excluding the impact of ~~unlocking,~~ changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates over or under option costs decreased ~~0.23~~0.39 percentage points to ~~1.11%~~0.69% in the ~~second quarter~~first three months of ~~2019~~2020 from ~~1.34%~~1.08% in the ~~second quarter~~first three months of ~~2018~~2019 due primarily to the ~~0.20~~0.47 percentage points decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities decreased ~~0.42~~0.65 percentage points to ~~0.76%~~0.31% in the ~~second quarter~~first three months of 2020 from 0.96% in the first three months of 2019 ~~from 1.18% in the second quarter of 2018~~ due to athe decrease in AFG’s net interest spread, ~~and~~ the impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates on the accounting for FIAs discussed ~~above and the impact of unlocking discussed below under~~ “~~Annuity Unlocking~~.”

~~Annuity Benefits Accumulated~~

Annuity premiums received and benefit payments are recorded as increases or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in this liability for interest credited and other benefits are charged to expense and decreases for surrender and other policy charges are credited to other income.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, excess benefits expected to be paid on future deaths and annuitizations (“EDAR”) and guaranteed withdrawal benefits. Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati. The following table is a progression of AFG’s annuity benefits accumulated liability for the three months ended ~~June 30, 2019~~ ~~and~~ ~~2018~~ ~~(in millions):~~

Three months ended June 30,
2019 2018
Beginning fixed annuity reserves $ 37,724
$ 33,652
Fixed annuity premiums (receipts) 1,343
1,393
Surrenders, benefits and other withdrawals (862 ) (706 )
Interest and other annuity benefit expenses:
Cost of funds 244
210
Embedded derivative mark-to-market 251
82
Change in other benefit reserves (20 ) (8 )
Unlocking —
55
Ending fixed annuity reserves $ 38,680
$ 34,678

Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above) $ 38,680
$ 34,678
Impact of unrealized investment related gains 192
32
Fixed component of variable annuities 172
176
Annuity benefits accumulated per balance sheet $ 39,044
$ 34,886

Annuity benefits accumulated includes a liability of $491 million at June 30, 2019 and $411 million at June 30, 2018 for guaranteed withdrawal benefits on annuities with features that allow the policyholder to take fixed periodic lifetime benefit payments that could exceed account value. As discussed above under “~~Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees~~” ~~and~~ “~~Annuity Acquisition Expenses~~,” ~~the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates.~~

~~Statutory Annuity Premiums~~

AFG’s annuity operations generated statutory premiums of $1.35 billion in the second quarter of 2019 compared to $1.40 billion in the second quarter of 2018, a decrease of $50 million (4%). The following table summarizes AFG’s annuity sales (dollars in millions):

Three months ended June 30,
2019 2018 % Change
Financial institutions single premium annuities — indexed $ 429
$ 448
(4 %)
Financial institutions single premium annuities — fixed 313
131
139 %
Retail single premium annuities — indexed 274
378
(28 %)
Retail single premium annuities — fixed 36
22
64 %
Broker dealer single premium annuities — indexed 189
355
(47 %)
Broker dealer single premium annuities — fixed 8
4
100 %
Pension risk transfer 50
1
4,900 %
Education market — fixed and indexed annuities 44
54
(19 %)
Total fixed annuity premiums 1,343
1,393
(4 %)
Variable annuities 6
6
— %
Total annuity premiums $ 1,349
$ 1,399
(4 %)

Management attributes the 4% decrease in annuity premiums in the second quarter of 2019 compared to the second quarter of 2018 to the recent lower market interest rate environment. In response to the continued drop in market interest rates during 2019, AFG recently lowered crediting rates on several products, which has begun to slow annuity sales compared to 2018 levels.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Unlocking~~

AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions in the fourth quarter of each year. If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter. Due to continued higher FIA option costs (resulting primarily from higher than expected risk-free interest rates), AFG unlocked its assumptions for option costs, interest rates and policyholder lapse behavior in the second quarter of 2018. AFG continues its practice of conducting detailed reviews of its assumptions (including option costs and interest rates) in the fourth quarter each year.

The unlocking of the major actuarial assumptions underlying AFG’s annuity operations in the second quarter of 2018 resulted in a net charge related to its annuity business of $27 million, which impacted AFG’s financial statements as follows (in millions):

Three months ended June 30,
2019 2018
Policy charges and other miscellaneous income:
Unearned revenue $ —
$ (1 )
Total revenues —
(1 )
Annuity benefits:
Fixed-indexed annuity embedded derivative —
44
Sales inducements —
(1 )
Other reserves —
11
Total annuity benefits —
54
Annuity and supplemental insurance acquisition expenses:
Deferred policy acquisition costs —
(28 )
Total costs and expenses —
26
Net charge $ —
$ (27 )

The net charge from unlocking annuity assumptions in the second quarter of 2018 is due primarily to the unfavorable impact of higher projected option costs, partially offset by the favorable impact of an increase in projected net interest spreads on in-force business (due primarily to higher than previously anticipated reinvestment rates). Reinvestment rate assumptions are based primarily on 7-year and 10-year corporate bond yields.

~~Annuity Earnings before Income Taxes Reconciliation~~

~~The following table reconciles the net spread earned on AFG’s fixed annuities to overall annuity pretax earnings for the three months ended~~ ~~June 30, 2019~~ ~~and~~ ~~2018~~ ~~(in millions):~~

Three months ended June 30,
2019 2018
Earnings on fixed annuity benefits accumulated $ 73
$ 101
Earnings impact of investments in excess of fixed annuity benefits accumulated (*) (3 ) (3 )
Variable annuity earnings 1
1
Earnings before income taxes $ 71
$ 99


~~(*)~~	~~Net investment income (as a % of investments) of~~ ~~4.73%~~ ~~and 4.83% for the three months ended~~ ~~June 30, 2019~~ ~~and~~ ~~2018, respectively, multiplied by the difference between average fixed annuity investments (at amortized cost) and average fixed annuity benefits accumulated in each period.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Holding Company, Other and Unallocated — Results of Operations~~ ~~AFG’s net pretax loss outside of its property and casualty insurance and annuity operations (excluding realized gains and losses) totaled $42 million in the~~ ~~second~~ ~~quarter of 2019 compared to $48 million in the~~ ~~second~~ ~~quarter of 2018, a decrease of $6 million (13%).~~

~~The following table details AFG’s loss before income taxes from operations outside of its property and casualty insurance and annuity operations for the three months ended~~ ~~June 30, 2019~~ ~~and~~ ~~2018~~ ~~(dollars in millions):~~

Three months ended June 30,
2019 2018 % Change
Revenues:
Life, accident and health net earned premiums $ 5
$ 6
(17 %)
Net investment income 10
7
43 %
Other income — P&C fees 20
15
33 %
Other income 6
3
100 %
Total revenues 41
31
32 %

Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses 8
4
100 %
Life, accident and health benefits 8
11
(27 %)
Life, accident and health acquisition expenses —
1
(100 %)
Other expense — expenses associated with P&C fees 12
11
9 %
Other expenses 38
36
6 %
Costs and expenses, excluding interest charges on borrowed money 66
63
5 %
Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money (25 ) (32 ) (22 %)
Interest charges on borrowed money 17
16
6 %
Loss before income taxes, excluding realized gains and losses $ (42 ) $ (48 ) (13 %)

~~Holding Company and Other — Life, Accident and Health Premiums, Benefits and Acquisition Expenses~~

~~AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $5 million and related benefits and acquisition expenses of $8 million in the~~ ~~second~~ ~~quarter of 2019 compared to net earned premiums of $6 million and related benefits and acquisition expenses of $12 million~~ ~~in the~~ ~~second~~ ~~quarter of 2018. The $3 million (27%) decrease in life, accident and health benefits reflects lower claims in the run-off life insurance business.~~

~~Holding Company and Other — Net Investment Income~~

~~AFG recorded net investment income on investments held outside of its property and casualty insurance and annuity operations of $10 million in the~~ ~~second~~ ~~quarter of 2019 compared to $7 million in the~~ ~~second~~ quarter of 2018, an increase of $3 million (43%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities increased in value by $3 million in the ~~second~~ ~~quarter of 2019 compared to a $1 million decrease in value in the~~ ~~second~~ ~~quarter of 2018.~~

~~Holding Company and Other — P&C Fees and Related Expenses~~

Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the ~~second~~ ~~quarter of 2019, AFG collected $20 million in fees for these services compared to $15 million in the~~ ~~second~~ ~~quarter of 2018. Management views this fee income, net of the $12 million in the~~ ~~second~~ ~~quarter of 2019 and $11 million in the~~ ~~second~~ ~~quarter of 2018, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. The increase in fee income for the~~ ~~second~~ ~~quarter of 2019 compared to the~~ ~~second~~ quarter of 2018 is due primarily to higher fee income at Neon. Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results.

~~Holding Company and Other — Other Income~~

~~Other income in the table above includes $4 million in both the~~ ~~second~~ ~~quarter of 2019 and the~~ ~~second~~ quarter of 2018, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under ~~“Results~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~of Operations —~~ ~~Segmented Statement of Earnings~~.” AFG recorded a $2 million loss on the disposal of equipment in the second quarter of 2018. Excluding amounts eliminated in consolidation and the loss on the disposal of equipment, AFG recorded other income outside of its property and casualty insurance and annuity operations of $2 million in the ~~second~~ ~~quarter of 2019 compared to $1 million in the~~ ~~second~~ ~~quarter of 2018.~~

~~Holding Company and Other — Other Expenses~~

~~AFG’s holding companies and other operations outside of its property and casualty insurance and annuity operations recorded other expenses of $38 million in the~~ ~~second~~ ~~quarter of 2019 compared to $36 million in the~~ ~~second~~ quarter of 2018, an increase of $2 million (6%). This increase reflects higher holding company expenses related to employee benefit plans that are tied to stock market performance and slightly higher other holding company expenses in the ~~second~~ ~~quarter of 2019 compared to the 2018 period, partially offset by the impact of a $5 million charge in the~~ ~~second~~ ~~quarter of 2018 to increase liabilities related to the environmental exposures of AFG’s former railroad and manufacturing operations.~~

~~Holding Company and Other — Interest Charges on Borrowed Money~~

~~AFG’s holding companies and other operations outside of its property and casualty insurance and annuity operations recorded interest expense of~~ ~~$17 million~~ ~~in the~~ ~~second~~ ~~quarter of 2019 compared to $16 million in the~~ ~~second~~ quarter of 2018, an increase of $1 million (6%). The following table details the principal amount of AFG’s long-term debt balances as of June 30, 2019 compared to June 30, 2018 (dollars in millions):

June 30,
2019 June 30,
2018
Direct obligations of AFG:
4.50% Senior Notes due June 2047 $ 590
$ 590
3.50% Senior Notes due August 2026 425
425
6-1/4% Subordinated Debentures due September 2054 150
150
6% Subordinated Debentures due November 2055 150
150
5.875% Subordinated Debentures due March 2059 125
—
Other 3
3
Total principal amount of Holding Company Debt $ 1,443
$ 1,318

Weighted Average Interest Rate 4.7 % 4.6 %

The increase in interest expense and the weighted average interest rate for the second quarter of 2019 as compared to the second quarter of 2018 reflects the issuance of $125 million of 5.875% Subordinated Debentures in March 2019.

~~Consolidated Realized Gains (Losses) on Securities~~ ~~AFG’s consolidated realized gains (losses) on securities, which are not allocated to segments, were net gains of $56 million in the second quarter of 2019 compared to $31 million in the~~ ~~second~~ ~~quarter of 2018, an increase of $25 million (81%). Realized gains (losses) on securities consisted of the following (in millions):~~

Three months ended June 30,
2019 2018
Realized gains (losses) before impairments:
Disposals $ 8
$ 5
Change in the fair value of equity securities (*) 44
23
Change in the fair value of derivatives 6
(1 )
Adjustments to annuity deferred policy acquisition costs and related items —
4
58
31
Impairment charges:
Securities (3 ) —
Adjustments to annuity deferred policy acquisition costs and related items 1
—
(2 ) —
Realized gains (losses) on securities $ 56
$ 31

~~(*)~~

~~As discussed in~~ ~~Note~~ A — “~~Accounting Policies~~ — ~~Investments~~,” beginning in January 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings. The 2019 quarter includes a $38 million net gain on securities that were still held at June 30, 2019 and the 2018 quarter includes a $16 million net gain on securities that were still held at June 30, 2018.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~The $44 million net realized gain from the change in the fair value of equity securities in the~~ ~~second~~ quarter of 2019 includes gains of $18 million on investments in banks and financing companies, $13 million on investments in communications companies, and $10 million on investment in asset management companies. The $23 million net realized gain from the change in the fair value of equity securities in the ~~second~~ quarter of 2018 includes gains of $10 million related to real estate investment trusts, $8 million on health care-related investments and losses of $7 million from investments in banks and financing companies.

~~Consolidated Income Taxes~~ ~~AFG’s consolidated provision for income taxes was $50 million for the~~ ~~second~~ ~~quarter of 2019 compared to $52 million for the~~ ~~second~~ ~~quarter of 2018, a decrease of $2 million (4%). See~~ ~~Note~~M ~~— “Income Taxes~~” ~~to the financial statements for an analysis of items affecting AFG’s effective tax rate.~~

~~Consolidated Noncontrolling Interests~~ ~~AFG’s consolidated net earnings (losses) attributable to noncontrolling interests was a net loss of $1 million for the~~ ~~second~~ ~~quarter of 2019 compared to $2 million for the~~ ~~second~~ ~~quarter of 2018. Both periods reflect losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~RESULTS OF OPERATIONS — SIX MONTHS ENDED 2019 AND~~ ~~2018~~

~~Segmented Statement of Earnings~~ AFG reports its business as three segments: (i) Property and casualty insurance (“P&C”), (ii) Annuity and (iii) Other, which includes run-off long-term care and life, holding company costs and income and expenses related to the managed investment entities (“MIEs”).

~~AFG’s net earnings attributable to shareholders, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2019~~ ~~and~~ ~~2018~~ identify such items by segment and reconcile net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions):

Other
P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Six months ended June 30, 2019
Revenues:
Property and casualty insurance net earned premiums $ 2,373
$ —
$ —
$ —
$ 2,373
$ —
$ 2,373
Life, accident and health net earned premiums —
—
—
11
11
—
11
Net investment income 228
886
(16 ) 24
1,122
—
1,122
Realized gains on securities —
—
—
—
—
240
240
Income (loss) of MIEs:
Investment income —
—
139
—
139
—
139
Gain (loss) on change in fair value of assets/liabilities —
—
(2 ) —
(2 ) —
(2 )
Other income 5
54
(7 ) 49
101
—
101
Total revenues 2,606
940
114
84
3,744
240
3,984

Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 1,415
—
—
—
1,415
—
1,415
Commissions and other underwriting expenses 812
—
—
13
825
—
825
Annuity benefits —
583
—
—
583
67
650
Life, accident and health benefits —
—
—
17
17
—
17
Annuity and supplemental insurance acquisition expenses —
93
—
2
95
(34 ) 61
Interest charges on borrowed money —
—
—
33
33
—
33
Expenses of MIEs —
—
114
—
114
—
114
Other expenses 23
70
—
104
197
—
197
Total costs and expenses 2,250
746
114
169
3,279
33
3,312
Earnings before income taxes 356
194
—
(85 ) 465
207
672
Provision for income taxes 72
39
—
(18 ) 93
44
137
Net earnings, including noncontrolling interests 284
155
—
(67 ) 372
163
535
Less: Net earnings (losses) attributable to noncontrolling interests (4 ) —
—
—
(4 ) —
(4 )
Core Net Operating Earnings 288
155
—
(67 ) 376

Non-core earnings attributable to shareholders (a):
Realized gains on securities, net of tax —
—
—
190
190
(190 ) —
Annuity non-core losses, net of tax (b) —
(27 ) —
—
(27 ) 27
—
Net Earnings Attributable to Shareholders $ 288
$ 128
$ —
$ 123
$ 539
$ —
$ 539

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Other
P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total
Six months ended June 30, 2018
Revenues:
Property and casualty insurance net earned premiums $ 2,268
$ —
$ —
$ —
$ 2,268
$ —
$ 2,268
Life, accident and health net earned premiums —
—
—
12
12
—
12
Net investment income 215
806
(7 ) 11
1,025
—
1,025
Realized losses on securities —
—
—
—
—
(62 ) (62 )
Income (loss) of MIEs:
Investment income —
—
122
—
122
—
122
Gain (loss) on change in fair value of assets/liabilities —
—
(5 ) —
(5 ) —
(5 )
Other income 4
53
(8 ) 43
92
—
92
Total revenues 2,487
859
102
66
3,514
(62 ) 3,452

Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 1,334
—
—
—
1,334
—
1,334
Commissions and other underwriting expenses 771
—
—
10
781
—
781
Annuity benefits —
442
—
—
442
—
442
Life, accident and health benefits —
—
—
22
22
—
22
Annuity and supplemental insurance acquisition expenses —
130
—
2
132
—
132
Interest charges on borrowed money —
—
—
31
31
—
31
Expenses of MIEs —
—
102
—
102
—
102
Other expenses 20
63
—
91
174
—
174
Total costs and expenses 2,125
635
102
156
3,018
—
3,018
Earnings before income taxes 362
224
—
(90 ) 496
(62 ) 434
Provision for income taxes 74
46
—
(22 ) 98
(13 ) 85
Net earnings, including noncontrolling interests 288
178
—
(68 ) 398
(49 ) 349
Less: Net earnings (losses) attributable to noncontrolling interests (6 ) —
—
—
(6 ) —
(6 )
Core Net Operating Earnings 294
178
—
(68 ) 404

Non-core earnings attributable to shareholders (a):
Realized losses on securities, net of tax —
—
—
(49 ) (49 ) 49
—
Net Earnings Attributable to Shareholders $ 294
$ 178
$ —
$ (117 ) $ 355
$ —
$ 355


~~(a)~~	~~See the reconciliation of core earnings to GAAP net earnings under~~ ~~“Results of Operations — General”~~ ~~for details on the tax and noncontrolling interest impacts of these reconciling items.~~

~~(b)~~

~~Property and Casualty Insurance Segment — Results of Operations~~ ~~AFG’s property and casualty insurance operations contributed $356 million in pretax earnings in the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to~~ ~~$362 million~~ ~~in the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~a decrease~~ of ~~$6 million~~ ~~(2%). The decrease in pretax earnings reflects lower underwriting profit in the first~~ ~~six~~ ~~months of 2019 compared to the same period in 2018, partially offset by higher net investment income.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~The following table details AFG’s earnings before income taxes from its property and casualty insurance operations for the six months ended~~ ~~June 30, 2019~~ ~~and~~ ~~2018~~ ~~(dollars in millions):~~

Six months ended June 30,
2019 2018 % Change
Gross written premiums $ 3,199
$ 3,123
2 %
Reinsurance premiums ceded (788 ) (764 ) 3 %
Net written premiums 2,411
2,359
2 %
Change in unearned premiums (38 ) (91 ) (58 %)
Net earned premiums 2,373
2,268
5 %
Loss and loss adjustment expenses 1,415
1,334
6 %
Commissions and other underwriting expenses 812
771
5 %
Underwriting gain 146
163
(10 %)

Net investment income 228
215
6 %
Other income and expenses, net (18 ) (16 ) 13 %
Earnings before income taxes $ 356
$ 362
(2 %)

Combined Ratios:
Specialty lines Change
Loss and LAE ratio 59.6 % 58.8 % 0.8 %
Underwriting expense ratio 34.2 % 34.0 % 0.2 %
Combined ratio 93.8 %
92.8 % 1.0 %

Aggregate — including exited lines
Loss and LAE ratio 59.7 % 58.8 % 0.9 %
Underwriting expense ratio 34.2 % 34.0 % 0.2 %
Combined ratio 93.9 % 92.8 % 1.1 %

~~Gross Written Premiums~~

~~Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were~~ ~~$3.20 billion~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to~~ ~~$3.12 billion~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~$76 million~~ (2%~~). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):~~

Six months ended June 30,
2019 2018
GWP % GWP % % Change
Property and transportation $ 1,018
32 % $ 1,041
33 % (2 %)
Specialty casualty 1,808
57 % 1,711
55 % 6 %
Specialty financial 373
11 % 371
12 % 1 %
$ 3,199
100 % $ 3,123
100 % 2 %

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Reinsurance Premiums Ceded~~

~~Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were~~ ~~25%~~ ~~of gross written premiums for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to 24% of gross written premiums for the first~~ ~~six~~ ~~months of~~ ~~2018, an increase of 1 percentage point. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):~~

Six months ended June 30,
2019 2018 Change in
Ceded % of GWP Ceded % of GWP % of GWP
Property and transportation $ (252 ) 25 % $ (295 ) 28 % (3 %)
Specialty casualty (520 ) 29 % (478 ) 28 % 1 %
Specialty financial (79 ) 21 % (64 ) 17 % 4 %
Other specialty 63
73

$ (788 ) 25 % $ (764 ) 24 % 1 %

~~Net Written Premiums~~

~~Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $2.41 billion for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to~~ ~~$2.36 billion~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~$52 million~~ (2%~~). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):~~

Six months ended June 30,
2019 2018
NWP % NWP % % Change
Property and transportation $ 766
32 % $ 746
32 % 3 %
Specialty casualty 1,288
53 % 1,233
52 % 4 %
Specialty financial 294
12 % 307
13 % (4 %)
Other specialty 63
3 % 73
3 % (14 %)
$ 2,411
100 % $ 2,359
100 % 2 %

~~Net Earned Premiums~~

~~Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were~~ ~~$2.37 billion~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to $2.27 billion for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~$105 million~~ (5%~~). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):~~

Six months ended June 30,
2019 2018
NEP % NEP % % Change
Property and transportation $ 740
31 % $ 724
32 % 2 %
Specialty casualty 1,263
53 % 1,174
52 % 8 %
Specialty financial 297
13 % 308
13 % (4 %)
Other specialty 73
3 % 62
3 % 18 %
$ 2,373
100 % $ 2,268
100 % 5 %

~~The~~ ~~$76 million~~ ~~(2%)~~ ~~increase~~ ~~in gross written premiums for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to the first~~ ~~six~~ ~~months of~~ ~~2018~~ reflects growth in the Specialty casualty and Specialty financial sub-segments, partially offset by lower gross written premiums in the Property and transportation sub-segment. Overall average renewal rates increased approximately 2% in the first ~~six~~ ~~months of~~ ~~2019. Excluding the workers’ compensation business, renewal pricing increased approximately 5%.~~

~~Property and transportation~~ ~~Gross written premiums~~ ~~decreased$23 million~~ (2%~~) in the first~~ ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ months of 2018, due primarily to delayed acreage reporting from insureds as a result of excess moisture and late planting of corn and soybean crops. Management expects that the delayed crop premiums will be included in third quarter 2019 results. Excluding crop insurance, gross written premiums for this group for the first ~~six~~ ~~months of 2019 grew by 8% when compared to the first~~ ~~six~~ ~~months of 2018. This growth is primarily attributable to new business opportunities in the transportation businesses. Average renewal rates increased approximately 4% for this group in the first~~ ~~six~~ ~~months of 2019. Reinsurance premiums ceded as a percentage of gross written premiums decreased 3 percentage points in the first~~ ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ ~~months of 2018, reflecting lower cessions in the crop insurance business.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Specialty casualty~~ ~~Gross written premiums~~ ~~increased$97 million~~ (6%~~) in the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to the first~~ ~~six~~ ~~months of~~ ~~2018~~ due primarily to the addition of premiums from ABA Insurance Services, improved pricing in the excess and surplus lines, executive liability and social service businesses and higher premiums within Neon, resulting from the growth of its portfolio in targeted classes of business. This growth was partially offset by lower premiums in the workers’ compensation businesses. Average renewal rates increased approximately 1% for this group in the first ~~six~~ months of 2019. Excluding rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 6%. Reinsurance premiums ceded as a percentage of gross written premiums increased 1 percentage point for the first ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ ~~months of 2018, reflecting higher cessions at Neon, partially offset by lower cessions to AFG’s internal reinsurance program, which is included in Other specialty.~~

~~Specialty financial~~ Gross written premiums increased $2 million (1%) in the first six months of 2019 compared to the first six months of 2018 due primarily to higher premiums in the fidelity, patent risk and international equipment leasing businesses, partially offset by lower premiums in the financial institutions business. Average renewal rates for this group increased approximately 2% in the first ~~six~~ months of 2019. Reinsurance premiums ceded as a percentage of gross written premiums increased 4 percentage points for the first six months of 2019 compared to the first six months of 2018, reflecting higher cessions in the financial institutions and equipment leasing businesses.

~~Other specialty~~ The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed decreased $10 million (14%) in the first six months of 2019 compared to the first six months of 2018, reflecting a decrease in premiums retained, primarily from businesses in the Specialty casualty sub-segment.

~~Combined Ratio~~

~~The table below (dollars in millions) details the components of the combined ratio for AFG’s property and casualty insurance segment:~~

Six months ended June 30, Six months ended June 30,
2019 2018 Change 2019 2018
Property and transportation
Loss and LAE ratio 65.4 % 63.4 % 2.0 %
Underwriting expense ratio 28.8 % 28.8 % — %
Combined ratio 94.2 % 92.2 % 2.0 %
Underwriting profit $ 43
$ 56

Specialty casualty
Loss and LAE ratio 60.8 % 61.5 % (0.7 %)
Underwriting expense ratio 32.6 % 32.5 % 0.1 %
Combined ratio 93.4 % 94.0 % (0.6 %)
Underwriting profit $ 83
$ 70

Specialty financial
Loss and LAE ratio 35.3 % 37.0 % (1.7 %)
Underwriting expense ratio 53.3 % 50.9 % 2.4 %
Combined ratio 88.6 % 87.9 % 0.7 %
Underwriting profit $ 34
$ 37

Total Specialty
Loss and LAE ratio 59.6 % 58.8 % 0.8 %
Underwriting expense ratio 34.2 % 34.0 % 0.2 %
Combined ratio 93.8 % 92.8 % 1.0 %
Underwriting profit $ 148
$ 165

Aggregate — including exited lines
Loss and LAE ratio 59.7 % 58.8 % 0.9 %
Underwriting expense ratio 34.2 % 34.0 % 0.2 %
Combined ratio 93.9 % 92.8 % 1.1 %
Underwriting profit $ 146
$ 163

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

The Specialty property and casualty insurance operations generated an underwriting profit of $148 million for the first six months of 2019 compared to $165 million for the first six months of 2018, a decrease of $17 million (10%). The lower underwriting profit in the first six months of 2019 reflects lower underwriting profits in the Property and transportation and Specialty financial sub-segments, partially offset by higher underwriting profit in the Specialty casualty sub-segment.

~~Property and transportation~~ ~~Underwriting profit for this group was $43 million for the first six months of 2019 compared to $56 million for the first~~ ~~six~~ ~~months of~~ ~~2018, a decrease of~~ ~~$13 million~~ (23%). Lower underwriting results in the agricultural and property and inland marine businesses, and a larger year-over-year underwriting loss in the Singapore branch, were partially offset by higher underwriting profit in the transportation businesses.

~~Specialty casualty~~ ~~Underwriting profit for this group was~~ ~~$83 million~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to~~ ~~$70 million~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~$13 million~~ (~~19%). Higher underwriting profits in the targeted markets and workers’ compensation businesses were partially offset by lower underwriting profits in the excess and surplus lines businesses.~~

~~Specialty financial~~ ~~Underwriting profit for this group was~~ ~~$34 million~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to $37 million for the first~~ ~~six~~ ~~months of~~ ~~2018, a decrease of $3 million (8%) due primarily to lower underwriting profitability in the financial institutions business.~~

~~Other specialty~~ ~~This group reported an underwriting loss of $12 million for the first six months of 2019 compared to an underwriting profit of $2 million in the first~~ ~~six~~ months of 2018, a change of $14 million (700%). This change reflects higher losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the first ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ ~~months of 2018.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Losses and Loss Adjustment Expenses~~

~~AFG’s overall loss and LAE ratio was~~ ~~59.7%~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to~~ ~~58.8%~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~0.9~~ ~~percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions):~~

Six months ended June 30,
Amount Ratio Change in
2019 2018 2019 2018 Ratio
Property and transportation
Current year, excluding catastrophe losses $ 499
$ 483
67.5 % 66.7 % 0.8 %
Prior accident years development (32 ) (39 ) (4.4 %) (5.4 %) 1.0 %
Current year catastrophe losses 17
15
2.3 % 2.1 % 0.2 %
Property and transportation losses and LAE and ratio $ 484
$ 459
65.4 % 63.4 % 2.0 %

Specialty casualty
Current year, excluding catastrophe losses $ 810
$ 767
64.2 % 65.2 % (1.0 %)
Prior accident years development (44 ) (50 ) (3.5 %) (4.2 %) 0.7 %
Current year catastrophe losses 2
6
0.1 % 0.5 % (0.4 %)
Specialty casualty losses and LAE and ratio $ 768
$ 723
60.8 % 61.5 % (0.7 %)

Specialty financial
Current year, excluding catastrophe losses $ 115
$ 119
38.8 % 38.7 % 0.1 %
Prior accident years development (15 ) (11 ) (5.1 %) (3.6 %) (1.5 %)
Current year catastrophe losses 5
6
1.6 % 1.9 % (0.3 %)
Specialty financial losses and LAE and ratio $ 105
$ 114
35.3 % 37.0 % (1.7 %)

Total Specialty
Current year, excluding catastrophe losses $ 1,477
$ 1,405
62.3 % 62.0 % 0.3 %
Prior accident years development (88 ) (102 ) (3.7 %) (4.5 %) 0.8 %
Current year catastrophe losses 24
29
1.0 % 1.3 % (0.3 %)
Total Specialty losses and LAE and ratio $ 1,413
$ 1,332
59.6 % 58.8 % 0.8 %

Aggregate — including exited lines
Current year, excluding catastrophe losses $ 1,477
$ 1,405
62.3 % 62.0 % 0.3 %
Prior accident years development (86 ) (100 ) (3.6 %) (4.5 %) 0.9 %
Current year catastrophe losses 24
29
1.0 % 1.3 % (0.3 %)
Aggregate losses and LAE and ratio $ 1,415
$ 1,334
59.7 % 58.8 % 0.9 %

~~Current accident year losses and LAE, excluding catastrophe losses~~

~~The current accident year loss and LAE ratio, excluding catastrophe losses for AFG’s Specialty property and casualty insurance operations was 62.3% for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to 62.0% for the first~~ ~~six~~ ~~months of~~ ~~2018, an increase of 0.3 percentage points.~~

~~Property and transportation~~ ~~The 0.8 percentage point increase in the loss and LAE ratio for the current year, excluding catastrophe losses reflects an increase in the loss and LAE ratio at the Singapore branch in the first~~ ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ ~~months of 2018.~~

~~Specialty casualty~~ The 1.0 percentage point decrease in the loss and LAE ratio for the current year, excluding catastrophe losses reflects a decrease in the loss and LAE ratio at Neon and in the general liability and professional liability businesses.

~~Specialty financial~~ ~~The loss and LAE ratio for the current year, excluding catastrophe losses is comparable in the first~~ ~~six~~ ~~months of 2019 and the first~~ ~~six~~ ~~months of 2018.~~

~~Net prior year reserve development~~

~~AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of~~ ~~$88 million~~ ~~in the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to $102 million in the first~~ ~~six~~ ~~months of 2018, a decrease of $14 million (14%).~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Property and transportation~~ ~~Net favorable reserve development of~~ ~~$32 million~~ ~~in the first~~ ~~six~~ ~~months of~~ ~~2019~~ reflects lower than expected losses in the crop business and lower than expected claim frequency and severity in the transportation businesses. Net favorable reserve development of $39 million in the first ~~six~~ ~~months of 2018 reflects lower than expected losses in the crop business and lower than expected claim severity in the transportation businesses.~~

~~Specialty casualty~~ ~~Net favorable reserve development of $44 million in the first~~ ~~six~~ months of 2019 reflects lower than anticipated claim severity in the workers’ compensation businesses, partially offset by higher than expected claim severity in the excess and surplus lines businesses and higher than expected losses at Neon. Net favorable reserve development of $50 million in the first ~~six~~ ~~months of 2018 reflects lower than anticipated claim frequency and severity in the workers’ compensation businesses.~~

~~Specialty financial~~ ~~Net favorable reserve development of $15 million in the first~~ ~~six~~ months of 2019 reflects lower than expected claim frequency and severity in the surety and financial institutions businesses and lower than anticipated claim severity in the fidelity business. Net favorable reserve development of $11 million in the first ~~six~~ ~~months of 2018 reflects lower than expected claim frequency and severity in the surety business and lower than expected claim severity in the fidelity business.~~

~~Other specialty~~ In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $3 million in the first six months of 2019 compared to net favorable reserve development of $2 million in the first six months of 2018. The adverse net reserve development in the first ~~six~~ months of 2019 reflects $6 million of adverse reserve development associated with AFG’s internal reinsurance program, partially offset by the amortization of the deferred gain on the retroactive insurance transaction entered into in connection with the sale of businesses in 1998 and 2001. The net favorable reserve development in the first six months of 2018 reflects amortization of the deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001, partially offset by adverse reserve development associated with AFG’s internal reinsurance program.

~~Aggregate~~ Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes net adverse reserve development of $2 million in both the first six months of 2019 and the first six months of 2018 related to business outside the Specialty group that AFG no longer writes.

~~Catastrophe losses~~

~~Catastrophe losses of $24 million in the first~~ ~~six~~ ~~months of 2019 resulted primarily from storms and tornadoes in multiple regions of the United States. Catastrophe losses of $29 million in the first~~ ~~six~~ ~~months of 2018 resulted primarily storms and flooding in several regions of the United States and mudslides in California.~~

~~Commissions and Other Underwriting Expenses~~

~~AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $812 million in the first~~ ~~six~~ ~~months of 2019 compared to $771 million for the first~~ ~~six~~ ~~months of 2018, an increase of $41 million (5%). AFG’s underwriting expense ratio was 34.2% for the first~~ ~~six~~ ~~months of 2019 compared to 34.0% for the first~~ ~~six~~ months of 2018, an increase of 0.2 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions):

Six months ended June 30,
2019 2018 Change in
U/W Exp % of NEP U/W Exp % of NEP % of NEP
Property and transportation $ 213
28.8 % $ 209
28.8 % — %
Specialty casualty 412
32.6 % 381
32.5 % 0.1 %
Specialty financial 158
53.3 % 157
50.9 % 2.4 %
Other specialty 29
39.1 % 24
38.0 % 1.1 %
Total Specialty $ 812
34.2 % $ 771
34.0 % 0.2 %

~~Property and transportation~~ ~~Commissions and other underwriting expenses as a percentage of net earned premiums was 28.8 percentage points in both the first~~ ~~six~~ ~~months of 2019 and the first~~ ~~six~~ months of 2018, reflecting higher profitability-based ceding commissions received from reinsurers in the crop business, offset by higher underwriting expenses and lower ancillary services fees at National Interstate in the first ~~six~~ ~~months of 2019 compared to the same period in 2018.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Specialty casualty~~ ~~Commissions and other underwriting expenses as a percentage of net earned premiums increased 0.1 percentage points in the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to the first~~ ~~six~~ ~~months of~~ ~~2018~~, reflecting lower ceding commissions received from reinsurers in the excess and surplus lines businesses, partially offset by lower underwriting expenses related to the exit of certain lines of business at Neon and the impact of higher net earned premiums at Neon.

~~Specialty financial~~ ~~Commissions and other underwriting expenses as a percentage of net earned premiums increased 2.4 percentage points in the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to the first~~ ~~six~~ ~~months of~~ ~~2018, reflecting higher profitability-based commissions paid to agents in the financial institutions business, partially offset by a lower underwriting expense ratio in the fidelity business.~~

~~Property and Casualty Net Investment Income~~

~~Net investment income in AFG’s property and casualty insurance operations was~~ ~~$228 million~~ ~~in the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to~~ ~~$215 million~~ ~~in the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ ~~of $13 million (6%). The average invested assets and overall yield earned on investments held by AFG’s property and casualty insurance operations are provided below (dollars in millions):~~

Six months ended June 30,
2019 2018 Change % Change
Net investment income $ 228
$ 215
$ 13
6 %

Average invested assets (at amortized cost) $ 11,084
$ 10,395
$ 689
7 %

Yield (net investment income as a % of average invested assets) 4.11 % 4.14 % (0.03 %)

Tax equivalent yield (*) 4.29 % 4.32 % (0.03 %)


(*)	~~Adjusts the yield on equity securities and tax-exempt bonds to the fully taxable equivalent yield.~~

~~The property and casualty insurance segment’s increase in net investment income for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~as compared to the first~~ ~~six~~ ~~months of~~ ~~2018~~ reflects growth in the property and casualty insurance segment. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was ~~4.11%~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to 4.14% for the first six months of~~ ~~2018~~, a decrease of 0.03 percentage points due primarily to lower income from partnerships and similar investments. AFG’s property and casualty insurance operations recorded $23 million in earnings from partnerships and similar investments and AFG-managed CLOs in the first ~~six~~ ~~months of 2019 compared to $35 million in the first~~ ~~six~~ ~~months of 2018, a decrease of $12 million (34%). The annualized yield earned on these investments was 7.9% in the first~~ ~~six~~ ~~months of 2019 compared to 14.3% in the prior year period.~~

~~Property and Casualty Other Income and Expenses, Net~~

~~Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $18 million for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to $16 million for the first~~ ~~six~~ ~~months of~~ ~~2018, an increase of $2 million (13%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions):~~

Six months ended June 30,
2019 2018
Other income $ 5
$ 4
Other expenses
Amortization of intangibles 6
4
Other 17
16
Total other expense 23
20
Other income and expenses, net $ (18 ) $ (16 )

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Segment — Results of Operations~~

~~AFG’s annuity operations contributed $161 million in GAAP pretax earnings in the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to $224 million in the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~a decrease~~ ~~of $63 million (28%). This decrease in AFG’s GAAP annuity segment results for the first~~ ~~six~~ ~~months of 2019 as compared to the first~~ ~~six~~ months of 2018 is due primarily to the unfavorable impact of significantly lower than anticipated interest rates on the fair value of derivatives related to FIAs in the 2019 period compared to higher than anticipated interest rates in the 2018 period, partially offset by the impact of strong stock market performance in the 2019 period and an unlocking charge in the first ~~six~~ months of 2018. AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year and conducts detailed reviews (“unlocking”) of its assumptions in the fourth quarter of each year. If changes in the economic environment or actual experience would cause material revisions to future estimates, these assumptions are updated (unlocked) in an interim quarter. AFG unlocked its assumptions for option costs and interest rates in the second quarter of 2018 due to continued higher FIA option costs (resulting primarily from higher than expected risk-free rates), resulting in a net charge to earnings of $27 million.

~~The following table details AFG’s GAAP and core earnings before income taxes from its annuity operations for the~~ ~~six~~ ~~months ended June 30, 2019 and 2018 (dollars in millions):~~

Six months ended June 30,
2019 2018 % Change
Revenues:
Net investment income $ 886
$ 806
10 %
Other income:
Guaranteed withdrawal benefit fees 33
32
3 %
Policy charges and other miscellaneous income 21
21
— %
Total revenues 940
859
9 %

Costs and Expenses:
Annuity benefits (a)(b) 583
442
32 %
Acquisition expenses (a) 93
130
(28 %)
Other expenses 70
63
11 %
Total costs and expenses 746
635
17 %
Core earnings before income taxes 194
224
(13 %)
Pretax non-core losses (a) (33 ) —
— %
GAAP earnings before income taxes $ 161
$ 224
(28 %)

~~(a)~~

~~As discussed under~~ ~~“Results of Operations — General,”~~ beginning prospectively with the second quarter of 2019, unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the first ~~six~~ months of 2019, annuity benefits excludes $67 million in pretax losses related to these items and acquisition expenses excludes the related $34 million favorable impact on the amortization of deferred policy acquisition costs.


~~(b)~~	~~Details of the components of annuity benefits are provided below.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity core earnings before income taxes were $194 million in the first~~ ~~six~~ ~~months of 2019 compared to $224 million in the first~~ ~~six~~ ~~months of 2018, a decrease of $30 million (13%). As discussed under~~ ~~“Results of Operations — General,”~~ beginning with the second quarter of 2019, unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs are considered non-core earnings (losses). For the first ~~six~~ months of 2019, the annuity segment’s GAAP earnings before income taxes includes $44 million in pretax losses related to these items (including $11 million in the first quarter). Since annuity core earnings for prior periods were not adjusted, the annuity segment’s core earnings before income taxes for the first ~~six~~ ~~months of 2019 includes the $11 million negative impact from these items in the first quarter of 2019 and the first~~ ~~six~~ months of 2018 includes the $1 million positive impact from these items in that period. Excluding the $11 million negative impact in the first quarter of 2019 and the $1 million positive impact of these items in the first six months of 2018, annuity core net operating earnings for the second quarter of 2019 decreased $18 million compared to the first six months of 2018 reflecting higher FIA renewal option costs, partially offset by growth in the business. The table below highlights the impact of unlocking, changes in the fair value of derivatives and other impacts of the changes in the stock market and interest rates on annuity segment results (dollars in millions):

Six months ended June 30,
2019 2018 % Change
Earnings before income taxes — before the impact of unlocking, derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs $ 205
$ 223
(8 %)
Unlocking —
(27 ) (100 %)
Impact of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs:
Change in fair value of derivatives related to FIAs (198 ) 33
(700 %)
Accretion of guaranteed minimum FIA benefits (201 ) (164 ) 23 %
Other annuity benefits —
(35 ) (100 %)
Less cost of equity options 287
233
23 %
Related impact on the amortization of deferred policy acquisition costs 68
(39 ) (274 %)
Earnings before income taxes $ 161
$ 224
(28 %)

~~Annuity benefits consisted of the following (dollars in millions):~~

Six months ended June 30,
2019 2018 Total
Core Non-core Total Core Non-core Total % Change
Interest credited — fixed $ 193
$ —
$ 193
$ 175
$ —
$ 175
10 %
Accretion of guaranteed minimum FIA benefits 99
102
201
164
—
164
23 %
Interest credited — fixed component of variable annuities 2
—
2
3
—
3
(33 %)
Cost of equity options 146
(146 ) —
—
—
—
— %
Other annuity benefits:
Change in expected death and annuitization reserve 8
—
8
8
—
8
— %
Amortization of sales inducements 7
—
7
10
—
10
(30 %)
Change in guaranteed withdrawal benefit reserve:

Impact of change in the stock market and interest rates (1 ) (4 ) (5 ) 9
—
9
(156 %)
Accretion of benefits and other 39
—
39
33
—
33
18 %
Change in other benefit reserves — impact of changes in interest rates and the stock market (5 ) 12
7
19
—
19
(63 %)
Unlocking —
—
—
54
—
54
(100 %)
Derivatives related to fixed-indexed annuities:

Embedded derivative mark-to-market 462
251
713
19
—
19
3,653 %
Equity option mark-to-market (367 ) (148 ) (515 ) (52 ) —
(52 ) 890 %
Impact of derivatives related to FIAs 95
103
198
(33 ) —
(33 ) (700 %)

Total annuity benefits $ 583
$ 67
$ 650
$ 442
$ —
$ 442
47 %

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Six months ended June 30,
2019 2018
Interest credited — fixed $ 193
$ 175
Include cost of equity options 287
233
Cost of funds 480
408

Interest credited — fixed component of variable annuities 2
3
Other annuity benefits, excluding the impact of interest rates and the stock market on FIAs 56
44
538
455
Unlocking, changes in fair value of derivatives related to FIAs, and other impacts of the stock market and interest rates over or under option costs:
Unlocking —
54
Impact of derivatives related to FIAs 198
(33 )
Accretion of guaranteed minimum FIA benefits 201
164
Other annuity benefits — impact of the stock market and interest rates on FIAs —
35
Less cost of equity options (included in cost of funds) (287 ) (233 )
Total annuity benefits expense $ 650
$ 442

~~See~~ “~~Annuity Unlocking~~” ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefit expense in 2018.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Net Spread on Fixed Annuities (excludes variable annuity earnings)~~

~~The table below (dollars in millions) details the components of the spreads for AFG’s fixed annuity operations (including fixed-indexed and variable-indexed annuities):~~

Six months ended June 30,
2019 2018 % Change
Average fixed annuity investments (at amortized cost) $ 37,449
$ 33,469
12 %
Average fixed annuity benefits accumulated 37,640
33,747
12 %

As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments) 4.71 % 4.79 %
Cost of funds (2.55 %) (2.42 %)
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees (*) (0.11 %) (0.07 %)
Net interest spread 2.05 % 2.30 %

Policy charges and other miscellaneous income 0.08 % 0.10 %
Acquisition expenses (*) (0.66 %) (0.69 %)
Other expenses (0.37 %) (0.36 %)
Net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on FIAs 1.10 % 1.35 %
Changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs:
Included in core (0.06 %) 0.17 %
Annuity non-core earnings (losses) (0.18 %) — %
Unlocking — % (0.16 %)
Net spread earned on fixed annuities 0.86 % 1.36 %


~~(*)~~	Excluding unlocking, the impact of changes in the fair value of derivatives related to FIAs, and other impacts of changes in the stock market and interest rates on annuity benefits and the related impact (acceleration/deceleration) on the amortization of deferred policy acquisition costs.

~~Annuity Net Investment Income~~

~~Net investment income for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~was~~ ~~$886 million~~ ~~compared to~~ ~~$806 million~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~$80 million~~ (~~10%~~). This increase reflects the growth in AFG’s annuity business, partially offset by the impact of lower investment yields, including lower earnings from equity securities that are carried at fair value through net investment income. The overall yield earned on investments in AFG’s fixed annuity operations, calculated as net investment income divided by average investment balances (at amortized cost), decreased by 0.08 percentage points to 4.71% from 4.79% for the first ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ months of 2018. The decrease in the net investment yield between periods reflects the lower yields on investments accounted for under the equity method and from equity securities carried at fair value through net investment income, as well as the impact of the reinvestment of proceeds from maturity and redemption of higher yielding investments at the lower yields available in the financial markets. For the period from April 1, 2018, through June 30, 2019, $6.2 billion in annuity segment investments with an average yield of 5.0% were redeemed or sold with the proceeds reinvested at an approximately 0.4% lower yield.

~~Annuity Cost of Funds~~

~~Cost of funds for the first~~ ~~six~~ ~~months of 2019 were $480 million compared to $408 million for the first~~ ~~six~~ months of 2018, an increase of $72 million (18%). This increase reflects the impact of growth in the annuity business and higher renewal option costs. The average cost of policyholder funds, calculated as cost of funds divided by average fixed annuity benefits accumulated, increased 0.13% percentage points to 2.55% from 2.42% in the first ~~six~~ ~~months of~~ ~~2019~~ ~~compared to the first~~ ~~six~~ ~~months of 2018 reflecting higher renewal option costs.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~The following table provides details of AFG’s interest credited and other cost of funds (in millions):~~

Six months ended June 30,
2019 2018
Cost of equity options (FIAs) $ 287
$ 233
Interest credited:
Traditional fixed annuities 120
117
Fixed component of fixed-indexed annuities 45
37
Immediate annuities 12
12
Pension risk transfer products 2
—
Federal Home Loan Bank advances 14
9
Total cost of funds $ 480
$ 408

~~Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees~~

~~Other annuity benefits, net of guaranteed withdrawal benefit fees excluding the impact of the stock market and interest rates for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~were~~ ~~$23 million~~ ~~compared to~~ ~~$12 million~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~$11 million~~ (~~92%). As a percentage of average fixed annuity benefits accumulated, these net expenses increased 0.04 percentage points to 0.11% from 0.07% in the first~~ ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ months of 2018. In addition to interest credited to policyholders’ accounts and the change in fair value of derivatives related to fixed-indexed annuities, annuity benefits expense also includes the following expenses (in millions, net of guaranteed withdrawal benefit fees):

Six months ended June 30,
2019 2018
Other annuity benefits, excluding the impact of the stock market and interest rates on FIAs:
Amortization of sales inducements $ 8
$ 10
Change in guaranteed withdrawal benefit reserve 39
33
Change in other benefit reserves 9
1
Other annuity benefits 56
44
Offset guaranteed withdrawal benefit fees (33 ) (32 )
Other annuity benefits excluding the impact of the stock market and interest rates, net 23

12
Other annuity benefits — impact of the stock market and interest rates —
35
Other annuity benefits, net $ 23
$ 47

~~As discussed under~~ ~~“Annuity Benefits Accumulated”~~ in ~~Note~~ A ~~— “Accounting Policies~~” to the financial statements, guaranteed withdrawal benefit reserves are accrued for and modified using assumptions similar to those used in establishing and amortizing deferred policy acquisition costs. In addition, the guaranteed withdrawal benefit reserve related to FIAs can be inversely impacted by the calculated FIA embedded derivative reserve as the value to policyholders of the guaranteed withdrawal benefits decreases when the benefit of stock market participation increases. As shown in the table above, changes in the stock market and interest rates decreased AFG’s guaranteed withdrawal benefit reserve by less than $1 million in the first ~~six~~ ~~months of 2019 and increased the guaranteed withdrawal benefit reserve by $35 million in the first~~ ~~six~~ ~~months of 2018. This $35 million change was the primary cause of the $24 million overall decrease in other annuity benefits, net of guaranteed withdrawal fees in the first~~ ~~six~~ ~~months of 2019 compared to the first~~ ~~six~~ ~~months of 2018.~~

~~See~~ “~~Annuity Unlocking~~” ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity benefit expense in 2018.~~

~~Annuity Net Interest Spread~~

~~AFG’s net interest spread decreased 0.25 percentage points to 2.05% from 2.30% in the first~~ ~~six~~ months of 2019 compared to the same period in 2018 due primarily to higher renewal option costs and lower investment yields. Features included in current annuity offerings allow AFG to achieve its desired profitability at a lower net interest spread than historical product offerings. As a result, AFG expects its net interest spread to narrow in the future.

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Policy Charges and Other Miscellaneous Income~~

Annuity policy charges and other miscellaneous income, which consist primarily of surrender charges, amortization of deferred upfront policy charges (unearned revenue) and income from sales of real estate, were $21 million for both the first ~~six~~ ~~months of 2019 and for the first~~ ~~six~~ months of 2018. Excluding the impact of a $1 million unlocking charge related to unearned revenue in the second quarter of 2018, annuity policy charges and other miscellaneous income were $21 million in 2019 compared to $22 million in 2018, a decrease of $1 million (5%). Excluding the impact of unlocking charges related to unearned revenue, annuity policy charges and other miscellaneous income as a percentage of average fixed annuity benefits accumulated decreased 0.02 percentage points to 0.08% from 0.10% in the first six months of 2019 compared to the first six months of 2018.

~~See~~ “~~Annuity Unlocking~~” ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity policy charges and other miscellaneous income in 2018.~~

~~Annuity Acquisition Expenses~~

~~In addition to the impact of unlocking, the following table illustrates the acceleration/deceleration of the amortization of~~

~~deferred policy acquisition costs (“DPAC”) resulting from changes in the fair value of derivatives related to FIAs and other~~

~~impacts of changes in the stock market and interest rates on the accounting for FIAs over or under option costs (in millions):~~

Six months ended June 30,
2019 2018
Annuity acquisition expenses before the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates $ 127
$ 118
Unlocking —
(28 )
Impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates:
Included in core (34 ) 40
Annuity non-core earnings (losses) (34 ) —
Annuity acquisition expenses $ 59
$ 130

~~Annuity acquisitions expenses before unlocking and the acceleration/deceleration of the amortization resulting from changes in~~

~~the fair value of derivatives related to FIAs and other impacts on changes in the stock market and interest rates on the~~

~~accounting for FIAs over or under option costs were $127 million for the first~~ ~~six~~ ~~months of 2019 compared to $118 million for the first~~ ~~six~~ ~~months of 2018, an increase of $9 million (8%), reflecting growth in the annuity business.~~

~~See~~ “~~Annuity Unlocking~~” below for a discussion of the impact that the unlocking of actuarial assumptions had on annuity and supplemental insurance acquisition expenses in 2018. Unanticipated spread compression, decreases in the stock market, adverse mortality experience, and higher than expected lapse rates could lead to write-offs of DPAC or present value of future profits on business in force of companies acquired (“PVFP”).

~~The negative impact of lower than anticipated interest rates during the first~~ ~~six~~ ~~months of 2019 on the fair value of derivatives~~

~~and other liabilities related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC. In contrast, the~~

~~positive impact of higher than anticipated interest rates during the first~~ ~~six~~ ~~months of 2018 on the fair value of derivatives and~~

~~other liabilities related to FIAs resulted in a partially offsetting acceleration of the amortization of DPAC.~~

~~The table below illustrates the impact of unlocking and the estimated impact of changes in the fair value of derivatives related~~

~~to fixed-indexed annuities and other impacts of changes in the stock market and interest rates on FIAs on annuity acquisition~~

~~expenses as a percentage of average fixed annuity benefits accumulated:~~

Six months ended June 30,
2019 2018
Before unlocking, the impact of changes in the fair value of derivatives related to FIAs and other impacts of the stock market and interest rates 0.66 % 0.69 %
Unlocking — % (0.16 %)
Impact of changes in fair value of derivatives and other impacts of the stock market and interest rates (0.36 %) 0.22 %
Annuity acquisition expenses as a % of fixed annuity benefits accumulated 0.30 % 0.75 %

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

~~Annuity Other Expenses~~

~~Annuity other expenses were $70 million for the first~~ ~~six~~ ~~months of~~ ~~2019~~ ~~compared to~~ ~~$63 million~~ ~~for the first~~ ~~six~~ ~~months of~~ ~~2018~~, ~~an increase~~ of ~~$7 million~~ (~~11%~~). Annuity other expenses represent primarily general and administrative expenses, as well as selling and issuance expenses that are not deferred. As a percentage of average fixed annuity benefits accumulated, these expenses increased 0.01 percentage points to 0.37% from 0.36% for the first ~~six~~ ~~months of~~ ~~2019~~ ~~compared to the first~~ ~~six~~ ~~months of~~ ~~2018~~ ~~due primarily to growth in the business.~~

~~Change in Fair Value of Derivatives Related to Fixed-Indexed (Including Variable-Indexed) Annuities and Other Impacts of Changes in the Stock Market and Interest Rates on FIAs~~

AFG’s fixed-indexed (including variable-indexed) annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase and sale of call and put options on the appropriate index. AFG’s strategy is designed so that the net change in the fair value of the call option assets and put option liabilities will generally offset the economic change in the net liability from the index participation. Both the index-based component of the annuities (an embedded derivative) and the related call and put options are considered derivatives that must be adjusted for changes in fair value through earnings each period. The fair values of these derivatives are impacted by actual and expected stock market performance and interest rates as well as other factors. For a list of other factors impacting the fair value of the embedded derivative component of AFG’s annuity benefits accumulated, see ~~Note~~ D ~~— “Fair Value Measurements~~” to the financial statements. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.

~~As discussed above under~~ ~~“Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees”~~ ~~and~~ ~~“Annuity Acquisition~~

~~Expenses,”~~ ~~the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes~~

~~in the stock market and interest rates. These impacts may be temporary in nature and not necessarily indicative of the long-term~~

~~performance of the FIA business. The table below highlights the impact of changes in the fair value of derivatives related to~~

FIAs and the other impacts of the stock market and interest rates (excluding the impact of the 2018 unlocking charge) over or under the cost of the equity index options (discussed above) on earnings before income taxes for the annuity segment (dollars in millions):

Six months ended June 30,
2019 2018 % Change
Change in the fair value of derivatives related to FIAs $ (198 ) $ 33
(700 %)
Accretion of guaranteed minimum FIA benefits (201 ) (164 ) 23 %
Other annuity benefits —
(35 ) (100 %)
Less cost of equity options 287
233
23 %
Related impact on the amortization of DPAC 68
(39 ) (274 %)
Impact on annuity segment earnings before income taxes $ (44 ) $ 28
(257 %)

~~During the first~~ ~~six~~ ~~months of 2019, the negative impact of significantly lower than anticipated interest rates, partially offset by~~

~~the positive impact of strong stock market performance, reduced the annuity segments’ earnings before income taxes by~~

~~$44 million compared to the $28 million favorable impact of the stock market and interest rates (excluding unlocking) on~~

~~annuity earnings before income taxes for the first~~ ~~six~~ ~~months of 2018, a change of $72 million (257%). In the first~~ ~~six~~ months of 2018, the impact of higher than expected interest rates and strong stock market performance was partially offset by the negative impact of higher than expected option costs. As a percentage of average fixed annuity benefits accumulated, the impact of changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the indexed-based component of those FIAs was a net expense of 0.24% in the first ~~six~~ ~~months of 2019 compared to a net expense reduction of 0.17% in the first~~ ~~six~~ ~~months of 2018.~~

~~The following table provides analysis of the primary factors impacting the fair value of derivatives related to FIAs and the other~~

~~impacts of the stock market and interest rates (excluding the impact of the 2018 unlocking charge) on the accounting for FIAs~~

~~over or under the cost of the equity index options discussed~~ above. ~~Each factor is presented net of the estimated related impact~~

~~on amortization of DPAC (dollars in millions).~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

Six months ended June 30,
2019 2018 % Change
Change in the stock market, including volatility $ 40
$ 6
567 %
Changes in interest rates higher (lower) than expected (83 ) 39
(313 %)
Other (1 ) (17 ) (94 %)
Impact on annuity segment earnings before income taxes $ (44 ) $ 28
(257 %)

~~See~~ “~~Annuity Unlocking~~” ~~below for a discussion of the impact that the unlocking of actuarial assumptions had on the change in the fair value of the embedded derivative and other annuity liabilities in 2018.~~

~~Annuity Net Spread Earned on Fixed Annuities~~

~~AFG’s net spread earned on fixed annuities excluding the impact of unlocking, changes in the fair value of derivatives related to~~

~~FIAs and other impacts of changes in the stock market and interest rates over or under option costs decreased 0.25 percentage~~

~~points to 1.10% in the first~~ ~~six~~ ~~months of 2019 from 1.35% in the first~~ ~~six~~ ~~months of 2018 due primarily to the 0.25 percentage~~

~~points decrease in AFG’s net interest spread discussed above. AFG’s overall net spread earned on fixed annuities decreased 0.50~~

~~percentage points to 0.86% in the first~~ ~~six~~ ~~months of 2019 from 1.36% in the first~~ ~~six~~ months of 2018 due to a decrease in AFG’s net interest spread and the impact of changes in the fair value of derivatives and other impacts of the stock market and interest rates on the accounting for FIAs discussed above and the impact of unlocking discussed below under “~~Annuity Unlocking~~.”

Annuity Benefits Accumulated

For certain products, annuity benefits accumulated also includes reserves for accrued persistency and premium bonuses, excess benefits expected to be paid on future deaths and annuitizations (“EDAR”) and guaranteed withdrawal benefits. Annuity benefits accumulated also includes amounts advanced from the Federal Home Loan Bank of Cincinnati. The following table is a progression of AFG’s annuity benefits accumulated liability for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 (in millions):


	Six months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Beginning fixed annuity reserves	$	36,431		$	33,005		$	40,018		$	36,431
Fixed annuity premiums (receipts)	2,733			2,534			1,205			1,390
Federal Home Loan Bank advances							200			—
Surrenders, benefits and other withdrawals	(1,623		)	(1,333		)	(794		)	(761		)
Interest and other annuity benefit expenses:
Cost of funds	480			408			253			236
Embedded derivative mark-to-market	713			19			(647		)	462
Change in other benefit reserves	(54		)	(10		)	25			(34		)
Unlocking	—			55
Ending fixed annuity reserves	$	38,680		$	34,678		$	40,260		$	37,724

Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above)	$	38,680		$	34,678		$	40,260		$	37,724
Impact of unrealized investment gains	192			32
Impact of unrealized investment related gains							38			108
Fixed component of variable annuities	172			176			165			174
Annuity benefits accumulated per balance sheet	$	39,044		$	34,886		$	40,463		$	38,006

Annuity benefits accumulated includes a liability of $690 million at March 31, 2020 and $478 million at March 31, 2019 for guaranteed withdrawal benefits on annuities with features that allow the policyholder to take fixed periodic lifetime benefit payments that could exceed account value. As discussed above under “Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees” and “Annuity Acquisition Expenses,” the periodic accounting for DPAC and guaranteed withdrawal benefits related to FIAs is also impacted by changes in the stock market and interest rates.

9065

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Statutory Annuity Premiums

AFG’s annuity operations generated statutory premiums of ~~$2.74~~$1.21 billion in the first ~~six~~three months of ~~2019~~2020 compared to ~~$2.55~~$1.40 billion in the first ~~six~~three months of ~~2018~~, ~~an increase~~2019, a decrease of ~~$197~~$185 million ~~(8%~~ (13%). The following table summarizes AFG’s annuity sales (dollars in millions):


	Six months ended June 30,						Three months ended March 31,
	2019		2018		% Change		2020		2019		% Change
Financial institutions single premium annuities — indexed	$	853	$	861	(1	%)	$	424	$	424	—	%
Financial institutions single premium annuities — fixed	657		236		178	%	287		344		(17	%)
Retail single premium annuities — indexed	575		672		(14	%)	172		301		(43	%)
Retail single premium annuities — fixed	65		43		51	%	25		29		(14	%)
Broker dealer single premium annuities — indexed	416		614		(32	%)	138		227		(39	%)
Broker dealer single premium annuities — fixed	14		7		100	%	17		6		183	%
Pension risk transfer	60		1		5,900	%	103		10		930	%
Education market — fixed and indexed annuities	93		100		(7	%)	39		49		(20	%)
Total fixed annuity premiums	2,733		2,534		8	%	1,205		1,390		(13	%)
Variable annuities	11		13		(15	%)	5		5		—	%
Total annuity premiums	$	2,744	$	2,547	8	%	$	1,210	$	1,395	(13	%)

Management attributes the ~~8% increase~~13% decrease in annuity premiums in the first ~~six~~three months of ~~2019~~2020 compared to the first ~~six~~three months of ~~2018~~2019 to the ~~introduction of new products and efforts to expand in the retail and broker dealer markets.~~lower market interest rate environment. In response to the continued drop in market interest rates during 2019 and 2020, AFG ~~recently~~ lowered crediting rates on several products, which has ~~begun to slow~~slowed annuity sales compared to ~~2018~~2019 levels. In addition, many of the restrictions from the COVID-19 pandemic impact the ability of agents to conduct business in the same manner as usual. As a result, management expects annuity premiums to be negatively impacted during the remainder of 2020.

Annuity ~~Unlocking~~

Inpremiums increased 6% in the ~~second~~first three months of 2020 compared to the fourth quarter of ~~2018, AFG recorded~~2019, reflecting a $27 million net charge related to its annuity business as a result of unlocking certain actuarial assumptions underlying its annuity operations, which impacted AFG’s financial statements as follows (in millions):

Six months ended June 30,
2019 2018
Policy charges and other miscellaneous income:
Unearned revenue $ —
$ (1 )
Total revenues —
(1 )
Annuity benefits:
Fixed-indexed annuities embedded derivative —
44
Sales inducements —
(1 )
Other reserves —
11
Total annuity benefits —
54
Annuity and supplemental insurance acquisition expenses:
Deferred policy acquisition costs —
(28 )
Total costs and expenses —
26
Net charge $ —
$ (27 )

~~See~~ ~~“Annuity Unlocking”~~ ~~under~~ ~~“Annuity Segment — Results of Operations”~~ ~~for the quarters ended June 30, 2019 and 2018 for a discussion~~sequential increase in all of the ~~charge from the unlocking of actuarial assumptions in the second quarter of 2018.~~

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued~~

annuity segment’s major channels.

Annuity Earnings before Income Taxes Reconciliation

The following table reconciles the net spread earned on AFG’s fixed annuities to overall annuity pretax earnings for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018~~2019 (in millions):


	Six months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Earnings on fixed annuity benefits accumulated	$	162		$	229		$	31		$	89
Earnings impact of investments in excess of fixed annuity benefits accumulated (*)	(4		)	(7		)	(1		)	(1		)
Variable annuity earnings	3			2
Variable annuity earnings (loss)							(1		)	2
Earnings before income taxes	$	161		$	224		$	29		$	90


(*)	Net investment income (as a % of investments) of ~~4.71%~~4.19% and ~~4.79%~~4.68% for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~2018,~~2019, respectively, multiplied by the difference between average fixed annuity investments (at amortized cost) and average fixed annuity benefits accumulated in each period.

~~Holding Company, Other and Unallocated — Results of Operations~~ AFG’s net pretax loss outside of its property and casualty insurance and annuity operations (excluding realized gains and losses) totaled $85 million in the first six months of 2019 compared to $90 million in the first six months of 2018, a decrease of $5 million (6%).

~~The following table details AFG’s loss before income taxes from operations outside of its property and casualty insurance and annuity operations for the~~ ~~six~~ ~~months ended~~ ~~June 30, 2019~~ ~~and~~ ~~2018~~ ~~(dollars in millions):~~

Six months ended June 30,
2019 2018 % Change
Revenues:
Life, accident and health net earned premiums $ 11
$ 12
(8 %)
Net investment income 24
11
118 %
Other income — P&C fees 35
32
9 %
Other income 14
11
27 %
Total revenues 84
66
27 %

Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses 13
10
30 %
Life, accident and health benefits 17
22
(23 %)
Life, accident and health acquisition expenses 2
2
— %
Other expense — expenses associated with P&C fees 22
22
— %
Other expenses 82
69
19 %
Costs and expenses, excluding interest charges on borrowed money 136
125
9 %
Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money (52 ) (59 ) (12 %)
Interest charges on borrowed money 33
31
6 %
Loss before income taxes, excluding realized gains and losses $ (85 ) $ (90 ) (6 %)

~~Holding Company and Other — Life, Accident and Health Premiums, Benefits and Acquisition Expenses~~

AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $11 million and related benefits and acquisition expenses of $19 million in the first six months of 2019 compared to net earned premiums of $12 million and related benefits and acquisition expenses of $24 million in the first six months of 2018. The $5 million (23%) decrease in life, accident and health benefits reflects lower claims in the run-off life insurance business.

9266

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Holding Company, Other and Unallocated — Results of Operations

AFG’s net pretax loss outside of its property and casualty insurance and annuity segments (excluding realized gains and losses) totaled $37 million in the first three months of 2020 compared to $43 million in the first three months of 2019, a decrease of $6 million (14%).

The following table details AFG’s loss before income taxes from operations outside of its property and casualty insurance and annuity segments for the three months ended March 31, 2020 and 2019 (dollars in millions):



	Three months ended March 31,
	2020			2019			% Change
Revenues:
Life, accident and health net earned premiums	$	5		$	6		(17	%)
Net investment income	(7		)	14			(150	%)
Other income — P&C fees	17			15			13	%
Reclassify annuity segment option gains	(8		)	(1		)	700	%
Other income	7			8			(13	%)
Total revenues	14			42			(67	%)

Costs and Expenses:
Property and casualty insurance — commissions and other underwriting expenses	5			5			—	%
Annuity — annuity benefits	(8		)	(1		)	700	%
Life, accident and health benefits	10			9			11	%
Life, accident and health acquisition expenses	1			2			(50	%)
Other expense — expenses associated with P&C fees	12			10			20	%
Other expenses	14			44			(68	%)
Costs and expenses, excluding interest charges on borrowed money	34			69			(51	%)
Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(20		)	(27		)	(26	%)
Interest charges on borrowed money	17			16			6	%
Loss before income taxes, excluding realized gains and losses	$	(37	)	$	(43	)	(14	%)

Holding Company and Other — Life, Accident and Health Premiums, Benefits and Acquisition Expenses

AFG’s run-off long-term care and life insurance operations recorded net earned premiums of $5 million and related benefits and acquisition expenses of $11 million in the first three months of 2020 compared to net earned premiums of $6 million and related benefits and acquisition expenses of $11 million in the first three months of 2019. The $1 million (11%) increase in life, accident and health benefits reflects higher claims in the run-off long-term care insurance business.

Holding Company and Other — Net Investment Income

AFG recorded a net investment ~~income~~loss on investments held outside of its property and casualty insurance and annuity ~~operations~~segments of ~~$24~~$7 million in the ~~first~~ ~~six~~first three months of ~~2019~~2020 compared to ~~$11~~net investment income of $14 million in the ~~first~~ ~~six~~first three months of ~~2018, an increase~~2019, a change of ~~$13~~$21 million ~~(118%~~(150%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities ~~increased~~decreased in value by $9$13 million in the ~~first~~ ~~six~~first three months of ~~2019~~2020 compared to ~~a decrease~~an increase in value ~~by $2~~of $6 million in the ~~first~~ ~~six~~first three months of ~~2018.~~2019.

Holding Company and Other — P&C Fees and Related Expenses

Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the first ~~six~~ three months of ~~2019,~~2020, AFG collected ~~$35~~$17 million in fees for these services compared to ~~$32~~$15 million in the first ~~six~~ three months of ~~2018.~~2019. Management views this fee income, net of the ~~$22~~$12 million in ~~both~~ the ~~first~~ ~~six~~first three months of ~~2019~~2020 and $10 million the first ~~six~~ three months of ~~2018,~~2019, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. ~~The increase in fee income for the first~~ ~~six~~ ~~months of 2019 compared to the first six months of 2018 is due primarily to higher fee income at Neon.~~ Consistent with internal management reporting, these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Holding Company and Other — Annuity Segment Option Gains

As discussed under “Annuity Segment — Results of Operations,” AFG purchases and sells equity index options to mitigate the risk in the index-based component of its FIAs. In evaluating the performance of the annuity business, management views the cost of the equity options as a better measurement of the true expenses of the Annuity segment as compared to the GAAP accounting for these options as derivatives because any proceeds at expiration from the options generally are passed to policyholders through index credits. On occasion, policyholders surrender their annuity prior to receiving the index credit, which results in any option exercise proceeds being retained by AFG. For internal management reporting, AFG views these “option gains” as miscellaneous (other) income rather than as a component of annuity benefits expense. Consistent with internal management reporting, these option gains are reclassified from annuity benefits to other income in AFG’s segmented results. In the first three months of 2020 and 2019, AFG had $8 million and $1 million, respectively, in such option gains.

Holding Company and Other — Other Income

Other income in the table above includes ~~$7 million and $8~~$4 million in the ~~first~~ ~~six~~first three months of 2020 and $3 million in the ~~2019~~first ~~and~~ ~~2018, respectively,~~three months of 2019, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under ~~“Results~~“Results of Operations — Segmented Statement of ~~Earnings~~Earnings.” .”Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance and annuity ~~operations~~segments of $7$3 million in the ~~first~~ ~~six~~first three months of ~~2019~~2020 compared to $3$5 million in the ~~first~~ ~~six~~first three months of ~~2018.~~2019.

Holding Company and Other — Other Expenses

AFG’s holding companies and other operations outside of its property and casualty insurance and annuity ~~operations~~segments recorded other expenses of ~~$82~~$14 million in the ~~first~~ ~~six~~first three months of 2020 compared to $44 million in the first three months of 2019, ~~compared to $69~~a decrease of $30 million ~~the first~~ ~~six~~ ~~months of 2018, an increase of $13 million (19%~~(68%). This ~~increase~~decrease reflects ~~a $3 million charitable donation in the first~~ ~~six~~ ~~months of 2019 and higher~~lower holding company expenses related to employee benefit plans that are tied to stock market performance and incentive compensation expense in the ~~first~~ ~~six~~first three months of ~~2019~~2020 compared to the ~~first~~ ~~six~~first three months of ~~2018, partially offset by a $5 million charge to increase liabilities related to the environmental exposures of AFG’s former railroad and manufacturing operations in the first six months of 2018.~~2019.

Holding Company and Other — Interest Charges on Borrowed Money

AFG’s holding companies and other operations outside of its property and casualty insurance and annuity ~~operations~~segments recorded interest expense of $3317 million in the ~~first~~ ~~six~~first three months of ~~2019~~2020 compared to ~~$31~~$16 million in the ~~first~~ ~~six~~first three months of ~~2018~~, 2019, an increase of $2$1 million (6% (6%). The following table details the principal amount of AFG’s long-term debt balances as of March 31, 2020 compared to March 31, 2019 (dollars in millions):



	March 31, 2020			March 31, 2019
Direct obligations of AFG:
4.50% Senior Notes due June 2047	$	590		$	590
3.50% Senior Notes due August 2026	425			425
5.125% Subordinated Debentures due December 2059	200			—
6% Subordinated Debentures due November 2055	150			150
5.875% Subordinated Debentures due March 2059	125			125
6-1/4% Subordinated Debentures due September 2054	—			150
Other	3			3
Total principal amount of Holding Company Debt	$	1,493		$	1,443

Weighted Average Interest Rate	4.6		%	4.7		%

The increase in interest expense for the first ~~six~~three months of ~~2019~~2020 as compared to the first ~~six~~three months of ~~2018~~2019 reflects the ~~issuance of~~following financial transactions completed by AFG between January 1, 2019 and March 31, 2020:

Issued $125 million of 5.875% Subordinated Debentures onin March ~~18, 2019.~~2019

Issued $200 million of 5.125% Subordinated Debentures in December 2019

Redeemed $150 million of 6-1/4% Subordinated Debentures in December 2019

9368

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

Consolidated Realized Gains (Losses) on Securities

AFG’s consolidated realized gains (losses) on securities, which are not allocated to segments, were net ~~gains~~losses of ~~$240~~$551 million in the first ~~six~~three months of ~~2019~~2020 compared to a net ~~loss~~gains of ~~$62~~$184 million in the ~~first~~ ~~six~~first three months of ~~2018~~,2019, a change of ~~$302~~$735 million (~~487%~~ (399%). Realized gains (losses) on securities consisted of the following (in millions):


	Six months ended June 30,						Three months ended March 31,
	2019			2018			2020			2019
Realized gains (losses) before impairments:
Disposals	$	5		$	9		$	29		$	(3	)
Change in the fair value of equity securities (*)	226			(72		)
Change in the fair value of equity securities							(535		)	182
Change in the fair value of derivatives	12			(6		)	4			6
Adjustments to annuity deferred policy acquisition costs and related items	1			8			(3		)	1
	244			(61		)	(505		)	186
Impairment charges:
Securities	(6		)	(1		)	(61		)	(3		)
Adjustments to annuity deferred policy acquisition costs and related items	2			—			15			1
	(4		)	(1		)	(46		)	(2		)
Realized gains (losses) on securities	$	240		$	(62	)	$	(551	)	$	184

~~(*)~~

~~As discussed in~~ ~~Note~~ A ~~— “Accounting Policies~~ — ~~Investments~~,” beginning in January 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings. These amounts include a $193 million net gain on securities that were still held at June 30, 2019 and a $71 million net loss on securities that were still held at June 30, 2018.

The ~~$226~~$535 million net realized loss from the change in the fair value of equity securities in the first three months of 2020 includes losses of $139 million on investments in banks and financing companies, $110 million on investments in media companies, $83 million on investments in natural gas companies, $46 million on investments in energy companies and $42 million on real estate investment trusts. The $182 million net realized gain from the change in the fair value of equity securities in the ~~first~~ ~~six~~first three months of 2019 includes gains of ~~$70~~$52 million on investments in banks and financing companies, ~~$35~~$29 million from investments in media companies ~~$23 million on investments in asset management companies~~ and $17 million on ~~insurance companies. The $72 million net realized loss from the change in fair value of equity securities in the first~~ ~~six~~ months of 2018 includes losses of $15 million on investments in real estate investment trusts, $31 million on investments in banks and financing companies and $15 million on investments in media companies.energy-related investments.

The $61 million of impairment charges in the first three months of 2020 include $24 million in charges related to corporate bonds and other fixed maturities, $17 million on third-party collateralized loan obligations and $14 million on other asset-backed securities.

Consolidated Income Taxes

AFG’s consolidated provision (credit) for income taxes was ~~$137~~a credit of $84 million for the first ~~six~~ three months of 2020 compared to a provision of $87 million for the first three months of 2019, ~~compared to $85~~a change of $171 million ~~for the first six months of 2018, an increase of $52 million (61%~~(197%). See Note ML — “~~Income Taxes~~”“Income Taxes” to the financial statements for an analysis of items affecting AFG’s effective tax rate.

Consolidated Noncontrolling Interests

AFG’s consolidated net earnings ~~(losses)~~(loss) attributable to noncontrolling interests was a net loss of $4$3 million for both the ~~first~~ ~~six~~first three months of 2020 and the ~~2019~~first ~~compared to $6 million for the first~~ ~~six~~three months of ~~2018~~.2019. Both periods reflect losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer.

RECENTLY ADOPTED ACCOUNTING STANDARDS

See Note A — “Accounting Policies — Credit Losses on Financial Instruments” ~~— “Accounting Policies~~ — ~~Investments~~” to the financial statements for a discussion of accounting guidance adopted on January 1, 2018, which, among other things, requires equity investments that are not accounted for under the equity method of accounting to be measured at fair value with changes in fair value recognized in net earnings.

~~See~~ ~~Note~~ A ~~— “Accounting Policies~~ — ~~Leases~~” ~~and~~ ~~Note~~ K ~~— “Leases~~” to the financial statements for a discussion of accounting guidance adopted on January 1, 2019, which requires entities that lease assets for terms longer than one year to recognize the assets and liabilities for the rights and obligations created by those leases on the balance sheet based on the present value of cash flows.

~~ACCOUNTING STANDARDS TO BE ADOPTED~~

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,~~2020, which provides a new credit loss model for determining credit-related impairments for financial instruments measured at amortized cost ~~(e.g. mortgage~~(mortgage loans, orpremiums receivable and reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. ~~The estimate of expected credit losses considers~~

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued

historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent increases or decreases in such losses, will be recorded immediately through realized gains (losses) as an allowance that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the balance sheet at the amount expected to be collected. The updated guidance also amends the current other-than-temporary impairment model for available for sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. Subsequent increases or decreases in expected credit losses will be recorded immediately in the income statement through realized gains (losses). AFG will be required to adopt this guidance effective January 1, 2020. AFG cannot estimate the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is adopted.ACCOUNTING STANDARDS TO BE ADOPTED

In August 2018, the FASB issued ASU 2018-12, Financial Services – Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts, which changes the assumptions used to measure the liability for future policy benefits for traditional and limited pay contracts (e.g. life, accident and health benefits) from being locked in at inception to being updated at least annually and standardizes the liability discount rate to be used and updated each reporting period, requires the measurement of market risk benefits associated with deposit contracts (e.g. annuities) to be recorded at fair value, simplifies the amortization of deferred policy acquisition costs to a constant level basis over the expected life of the related contracts and requires enhanced disclosures. AFG will be required to adopt this guidance effective January 1, ~~2021. In July 2019, the FASB voted to expose a proposal to delay the effective date for public companies by one year.~~2022. AFG cannot estimate the impact that the updated guidance will have on its results of operations, financial position or liquidity until the updated guidance is ~~adopted.~~closer to adoption.

9570

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 3

3. Quantitative and Qualitative Disclosure about Market Risk

As of ~~June 30, 2019~~March 31, 2020, there were no material changes to the information provided in Item 7A — Quantitative and Qualitative Disclosures about Market Risk of AFG’s ~~2018~~2019 Form 10-K.

ITEM 4

4. Controls and Procedures

AFG’s management, with participation of its Co-Chief Executive Officers and its Chief Financial Officer, has evaluated AFG’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based on that evaluation, AFG’s Co-CEOs and CFO concluded that the controls and procedures are effective. There have been no changes in AFG’s internal control over financial reporting during the ~~second~~first fiscal quarter of ~~2019~~2020 that materially affected, or are reasonably likely to materially affect, AFG’s internal control over financial reporting.

In the ordinary course of business, AFG and its subsidiaries routinely enhance their information systems by either upgrading current systems or implementing new ~~systems such as the new investment accounting software system implemented in the second quarter of 2019.~~systems. There has been no change in AFG’s business processes and procedures during the ~~second~~first fiscal quarter of ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, AFG’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1A. Risk Factors

For a discussion of AFG’s potential risks or uncertainties, please see “Part I — Item 1A — Risk Factors” and “Part II — Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in AFG’s 2019 Annual Report on Form 10-K filed with the SEC, and “Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q, in each case as updated by AFG’s periodic filings with the SEC. Other than as described below, there have been no material changes to the risk factors disclosed in Part I — Item 1A of the Company’s 2019 Annual Report on Form 10-K.

The impact of COVID-19 and related risks could materially affect AFG’s results of operations, financial position and liquidity.

The global COVID-19 pandemic has resulted in, and is expected to continue to result in, significant disruptions in economic activity and financial markets. COVID-19 has directly and indirectly adversely affected AFG and will likely continue to do so for an uncertain period of time. The cumulative effects of COVID-19 on AFG cannot be predicted at this time, but could include, without limitation:

Continued volatility and further disruption in financial markets which could result in additional significant declines in the fair value of AFG’s investments and could lead to investment losses due to creditor defaults and bankruptcies;

Declining interest rates which could reduce future investment results;

A negative impact on premium volumes and annuity sales due to the impact of COVID-19 on general economic activity;

Negative impact on the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumption and overall economic output;

Reduced cash flows from policyholders delaying premium payments and increased surrenders and annuitizations of in-force annuities;

Increased claims, including annuity and life insurance death claims, losses, litigation and related expenses;

Legislative, regulatory, and judicial actions in response to COVID-19, including, but not limited to: actions prohibiting AFG from canceling insurance policies in accordance with policy terms; requiring AFG to cover losses when its policies specifically excluded coverage or did not provide coverage; ordering AFG to provide premium refunds; granting extended grace periods for payment of premiums; and providing for extended periods of time to pay past due premiums; and

Policyholder losses from COVID-19-related claims could be greater than AFG’s reserves for those losses.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

AFG’s results of operations could be adversely impacted by catastrophes, both natural and man-made, pandemics or severe weather conditions or climate change.

Catastrophes can be caused by unpredictable natural events such as hurricanes, windstorms, severe storms, tornadoes, floods, hailstorms, severe winter weather, earthquakes, explosions and fire, and by other events, such as terrorist attacks, as well as pandemics and other similar outbreaks in many parts of the world, including the recent outbreak of COVID-19. These events may have a material adverse effect on our workforce and business operations as well as the workforce and operations of our customers and independent agents. Some of the assets in our investment portfolio may be adversely affected by declines in the financial markets, changes in interest rates, reduced liquidity and economic activity caused by large-scale catastrophes, pandemics, terrorist attacks or similar events which could have a material adverse effect on our revenue, liquidity and operating results.

While not considered a catastrophe by insurance industry standards, droughts can have a significant adverse impact on AFG’s crop insurance results. In addition, extreme weather events that are linked to rising temperatures, changing global weather patterns and fluctuating rain, snow and sea levels (climate change) could result in increased occurrence and severity of catastrophes. The extent of gross losses for our insurance operations from a catastrophe event is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event, potentially mitigated by any reinsurance coverage purchased by AFG’s insurance subsidiaries. In addition, certain catastrophes could result in both property and non-property claims from the same event. A severe catastrophe or a series of catastrophes could result in losses exceeding AFG’s reinsurance protection and may have a material adverse impact on its results of operations or financial condition.

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities AFG ~~did not repurchase any~~repurchased shares of its Common Stock during ~~the first~~ ~~six~~ ~~months of~~ ~~2019. As of June 30, 2019, there were 5,000,000 remaining shares that may be repurchased under the Plans authorized by AFG’s Board of Directors in February 2016 and February 2019.~~2020 as follows:



	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (*)
First Quarter:
January	—	—		—	5,000,000
February	103,679	$	95.29	103,679	4,896,321
March	722,604	71.27		722,604	4,173,717
Total	826,283	$	74.28	826,283


(*)	Represents the remaining shares that may be repurchased under the Plans authorized by AFG’s Board of Directors in February 2016 and February 2019.

In addition, AFG acquired ~~43,470 shares of its Common Stock (at an average of $99.11 per share) in the first quarter of 2019, 6 shares (at $96.64 per share) in April 2019, 3,190~~1,105 shares (at an average of ~~$97.99~~$110.19 per share) in ~~May 2019~~January 2020 and ~~323~~94,749 shares (at an average of ~~$102.99~~$110.81 per share) in ~~June 2019~~February 2020 in connection with its stock incentive plans.

Table of Contents

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 6

Exhibits



Number		Exhibit Description
31(a)		Certification of Co-Chief Executive Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
31(b)		Certification of Co-Chief Executive Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
31(c)		Certification of Chief Financial Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002.
32		Certification of Co-Chief Executive Officers and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase ~~Document~~Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase ~~Document~~Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

~~Table of Contents~~

~~AMERICAN FINANCIAL GROUP, INC. 10-Q~~

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	American Financial Group, Inc.

~~August 8, 2019~~May 11, 2020	By:	/s/ Joseph E. (Jeff) Consolino
		Joseph E. (Jeff) Consolino
		Executive Vice President and Chief Financial Officer

9773




	Page
Part I — Financial Information
Item 1 — Financial Statements:
Consolidated Balance Sheet	2
Consolidated Statement of Earnings	3
Consolidated Statement of Comprehensive Income	4
Consolidated Statement of Changes in Equity	5
Consolidated Statement of Cash Flows	76
Notes to Consolidated Financial Statements	87
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	3632
Item 3 — Quantitative and Qualitative Disclosure about Market Risk	9671
Item 4 — Controls and Procedures	9671

Part II — Other Information
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	9672
Item 6 — Exhibits	9673
Signature	9773



	Three months ended		Six months ended
	June 30, 2019		June 30, 2019
Lease expense:
Operating leases	$	11	$	22
Short-term leases	1		1
Total lease expense	$	12	$	23

Other operating lease information:
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows			$	24
Right-of-use assets obtained in exchange for new lease liabilities			8

Weighted-average remaining lease term			5.8 years
Weighted-average discount rate			4.1		%



	June 30, 2019
Operating lease payments:
Remainder of 2019	$	24
2020	43
2021	37
2022	29
2023	24
Thereafter	52
Total lease payments	209
Impact of discounting	(24		)
Operating lease liability	$	185



	% of Reserves
	June 30,	December 31,
GMIR	2019	2018	2017
1 — 1.99%	80%	79%	76%
2 — 2.99%	4%	4%	5%
3 — 3.99%	7%	8%	10%
4.00% and above	9%	9%	9%

Annuity benefits accumulated (in millions)	$39,044	$36,616	$33,316



	June 30, 2019			June 30, 2018
Direct obligations of AFG:
4.50% Senior Notes due June 2047	$	590		$	590
3.50% Senior Notes due August 2026	425			425
6-1/4% Subordinated Debentures due September 2054	150			150
6% Subordinated Debentures due November 2055	150			150
5.875% Subordinated Debentures due March 2059	125			—
Other	3			3
Total principal amount of Holding Company Debt	$	1,443		$	1,318

Weighted Average Interest Rate	4.7		%	4.6		%