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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 March 31, 2022
or
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

afg-20220331_g1.jpg
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
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
5.875% Subordinated Debentures due March 30, 2059 AFGB New York Stock Exchange
5.625% Subordinated Debentures due June 1, 2060 AFGD New York Stock Exchange
5.125% Subordinated Debentures due December 15, 2059 AFGC New York Stock Exchange
4.50% Subordinated Debentures due September 15, 2060 AFGE New York Stock Exchange
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 
As of May 1, 2022, there were 85,102,026 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.


AMERICAN FINANCIAL GROUP, INC. 10-Q
TABLE OF CONTENTS
 


AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
ITEM 1. — FINANCIAL STATEMENTS
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in Millions)
March 31,
2022
December 31,
2021
Assets:
Cash and cash equivalents $ 1,181  $ 2,131 
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $10,954 and $10,193; allowance for expected credit losses of $7 and $9)
10,809  10,357 
Fixed maturities, trading at fair value 30  28 
Equity securities, at fair value 1,022  1,042 
Investments accounted for using the equity method 1,619  1,517 
Mortgage loans 784  520 
Real estate and other investments 156  150 
Total cash and investments 15,601  15,745 
Recoverables from reinsurers 3,478  3,519 
Prepaid reinsurance premiums 933  834 
Agents’ balances and premiums receivable 1,391  1,265 
Deferred policy acquisition costs 271  267 
Assets of managed investment entities 5,231  5,296 
Other receivables 645  857 
Other assets 966  902 
Goodwill 246  246 
Total assets $ 28,762  $ 28,931 
Liabilities and Equity:
Unpaid losses and loss adjustment expenses $ 10,986  $ 11,074 
Unearned premiums 3,206  3,041 
Payable to reinsurers 910  920 
Liabilities of managed investment entities 5,112  5,220 
Long-term debt 1,917  1,964 
Other liabilities 1,796  1,700 
Total liabilities 23,927  23,919 
Shareholders’ equity:
Common Stock, no par value
       — 200,000,000 shares authorized
       — 85,102,829 and 84,920,965 shares outstanding
85  85 
Capital surplus 1,340  1,330 
Retained earnings 3,541  3,478 
Accumulated other comprehensive income (loss), net of tax (131) 119 
Total shareholders’ equity 4,835  5,012 
Total liabilities and shareholders’ equity $ 28,762  $ 28,931 
2

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 March 31,
2022 2021
Revenues:
Property and casualty insurance net earned premiums $ 1,302  $ 1,173 
Net investment income 230  188 
Realized gains (losses) on securities
(15) 77 
Income of managed investment entities:
Investment income 46  46 
Gain (loss) on change in fair value of assets/liabilities
(5)
Other income 30  23 
Total revenues 1,588  1,509 
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses 693  667 
Commissions and other underwriting expenses 414  380 
Interest charges on borrowed money 23  24 
Expenses of managed investment entities 39  39 
Other expenses 58  64 
Total costs and expenses 1,227  1,174 
Earnings from continuing operations before income taxes
361  335 
Provision for income taxes
71  68 
Net earnings from continuing operations
290  267 
Net earnings from discontinued operations
—  152 
Net Earnings
$ 290  $ 419 
Earnings per Basic Common Share:
Continuing operations $ 3.41  $ 3.11 
Discontinued operations —  1.77 
Total basic earnings $ 3.41  $ 4.88 
Earnings per Diluted Common Share:
Continuing operations $ 3.40  $ 3.08 
Discontinued operations —  1.76 
Total diluted earnings $ 3.40  $ 4.84 
Average number of Common Shares:
Basic 85.0  85.9 
Diluted 85.2  86.6 
3

AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(In Millions)
 
Three months ended March 31,
2022 2021
Net earnings $ 290  $ 419 
Other comprehensive loss, net of tax:
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period
(247) (281)
Reclassification adjustment for realized (gains) losses included in net earnings
(11)
Total net unrealized losses on securities
(245) (292)
Net unrealized losses on cash flow hedges
(4) (14)
Foreign currency translation adjustments (1) — 
Other comprehensive loss, net of tax
(250) (306)
Comprehensive income
$ 40  $ 113 
4

AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)
(Dollars in Millions)
  Shareholders’ Equity
Common Common Stock
and Capital
Retained Accumulated
Other Comp.
 
Shares Surplus Earnings Income (Loss) Total
Balance at December 31, 2021 84,920,965  $ 1,415  $ 3,478  $ 119  $ 5,012 
Net earnings
—  —  290  —  290 
Other comprehensive loss
—  —  —  (250) (250)
Dividends ($2.56 per share)
—  —  (217) —  (217)
Shares issued:
Exercise of stock options 105,404  —  — 
Restricted stock awards 151,080  —  —  —  — 
Other benefit plans 10,607  —  — 
Dividend reinvestment plan 6,282  —  — 
Stock-based compensation expense —  —  — 
Shares acquired and retired (35,201) (1) (4) —  (5)
Shares exchanged — benefit plans (47,909) (1) (6) —  (7)
Forfeitures of restricted stock (8,399) —  —  —  — 
Balance at March 31, 2022 85,102,829  $ 1,425  $ 3,541  $ (131) $ 4,835 
Balance at December 31, 2020 86,345,246  $ 1,367  $ 4,149  $ 1,273  $ 6,789 
Net earnings
—  —  419  —  419 
Other comprehensive loss
—  —  —  (306) (306)
Dividends ($0.50 per share)
—  —  (43) —  (43)
Shares issued:
Exercise of stock options 403,012  19  —  —  19 
Restricted stock awards 207,020  —  —  —  — 
Other benefit plans 15,632  —  — 
Dividend reinvestment plan 2,306  —  —  —  — 
Stock-based compensation expense —  —  — 
Shares acquired and retired (1,757,702) (28) (164) —  (192)
Shares exchanged — benefit plans (76,984) (1) (7) —  (8)
Forfeitures of restricted stock (12,468) —  —  —  — 
Balance at March 31, 2021 85,126,062  $ 1,364  $ 4,354  $ 967  $ 6,685 
5

AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Millions)
Three months ended March 31,
2022 2021
Operating Activities:
Net earnings $ 290  $ 419 
Adjustments:
Depreciation and amortization 26  99 
Annuity benefits —  161 
Realized (gains) losses on investing activities 15  (158)
Net purchases of trading securities (1) (3)
Deferred annuity and life policy acquisition costs —  (49)
Change in:
Reinsurance and other receivables 39  275 
Other assets 164 
Insurance claims and reserves 77 
Payable to reinsurers (10) (54)
Other liabilities 18  (25)
Managed investment entities’ assets/liabilities 172  (38)
Other operating activities, net (124) (169)
Net cash provided by operating activities
503  627 
Investing Activities:
Purchases of:
Fixed maturities (1,682) (3,443)
Equity securities (45) (41)
Mortgage loans (265) (35)
Equity index options and other investments (47) (164)
Real estate, property and equipment (23) (13)
Proceeds from:
Maturities and redemptions of fixed maturities 959  1,947 
Repayments of mortgage loans 12 
Sales of fixed maturities 17  147 
Sales of equity securities 60  350 
Sales and settlements of equity index options and other investments
59  269 
Sales of real estate, property and equipment —  — 
Managed investment entities:
Purchases of investments (357) (527)
Proceeds from sales and redemptions of investments 217  557 
Other investing activities, net (5)
Net cash used in investing activities
(1,111) (938)
Financing Activities:
Reductions of long-term debt (50) — 
Issuances of Common Stock 20 
Repurchases of Common Stock (5) (192)
Cash dividends paid on Common Stock (216) (43)
Annuity receipts —  1,179 
Ceded annuity receipts —  (207)
Annuity surrenders, benefits and withdrawals —  (1,148)
Ceded annuity surrenders, benefits and withdrawals —  167 
Net transfers from variable annuity assets —  25 
Issuances of managed investment entities’ liabilities 60  752 
Retirements of managed investment entities’ liabilities (136) (725)
Net cash used in financing activities
(342) (172)
Net Change in Cash and Cash Equivalents (950) (483)
Cash and cash equivalents at beginning of period 2,131  2,810 
Cash and cash equivalents at end of period 1,181  2,327 
Less: cash and cash equivalents at end of period from discontinued operations —  636 
Cash and cash equivalents at end of period from continuing operations $ 1,181  $ 1,691 
6

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
INDEX TO NOTES
A.
Accounting Policies
H.
Goodwill and Other Intangibles
B. Discontinued Operations I.
Long-Term Debt
C.
Acquisition and Sale of Businesses
J.
Shareholders’ Equity
D.
Segments of Operations
K.
Income Taxes
E.
Fair Value Measurements
L.
Contingencies
F.
Investments
M.
Insurance
G.
Managed Investment Entities
N.
Subsequent Events

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 March 31, 2022, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

Unless otherwise stated, the information in the Notes to the Consolidated Financial Statements relates to AFG’s continuing operations.

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.

Discontinued Operations   Disposals of components of an entity that represent a strategic shift and that have a major effect on a reporting entity’s operations and financial results are reported as discontinued operations.

Fair Value Measurements   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 three months of 2022.

Investments   Equity securities other than those accounted for under the equity method are reported at fair value with holding gains and losses generally recorded in realized gains (losses) on securities. However, AFG records holding gains and losses on its portfolio of limited partnerships and similar investments, which do not qualify for equity method accounting and are 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 accumulated other comprehensive income (“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 loans (net of any allowance) are carried primarily at the aggregate unpaid balance.

7

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 it is 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.

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 an available for sale fixed maturity is considered to be other-than-temporary at the balance sheet date, an allowance for credit losses (impairment), including any write-off of accrued interest, is charged to earnings (included in realized gains (losses) on securities). If management can assert that it does not intend to sell the security and it is not more likely than not that it will have to sell it before recovery of its amortized cost basis (net of allowance), then the impairment is separated into two components: (i) the allowance 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 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 charge. 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 is recorded in earnings to reduce the amortized cost (net of allowance) of that security to fair value. The allowance is limited to the difference between a security’s amortized cost basis and its fair value. Subsequent increases or decreases in expected credit losses are recorded immediately in net earnings through realized gains (losses).

Credit Losses on Financial Instruments Measured at Amortized Cost   Credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) reflect estimated 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.

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 components of certain fixed maturity securities (primarily interest-only and principal only MBS).

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 is evaluated at the inception date and over the life of the derivative.

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. 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 used 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.

Goodwill   Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net assets at the date of acquisition. 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 reports as assets (i) the estimated reinsurance recoverable on paid and
8

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
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 under contracts to fund ceded losses as they become due. AFG also assumes reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

Deferred Policy Acquisition Costs (“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 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.

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 G — “Managed Investment 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.

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.

At March 31, 2022, assets and liabilities of managed investment entities included $167 million in assets and $137 million in liabilities of a temporary warehousing entity that was established in connection with the formation of a new CLO that is expected to close in May 2022. At closing, all warehoused assets will be transferred to the new CLO and the liabilities will be repaid.

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 and reasonable.

9

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Debt Issuance Costs   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.

Leases   Leases for terms of longer than one year are recognized as 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.

At March 31, 2022 AFG has a $127 million lease liability included in other liabilities and a lease right-of-use asset of $111 million included in other assets compared to $136 million and $118 million, respectively, at December 31, 2021.

Premium Recognition   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.

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.

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 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: first three months of 2022 and 2021 — 0.2 million and 0.7 million.

There were no anti-dilutive potential common shares for the first three months of 2022 or 2021.

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. 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.

10

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
B.    Discontinued Operations

Annuity Business   Effective May 31, 2021, AFG completed the sale of its Annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”). MassMutual acquired Great American Life Insurance Company (“GALIC”) and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. In addition to AFG’s annuity operations, these subsidiaries included AFG’s run-off life and long-term care operations. Proceeds from the sale were $3.57 billion (including $34 million in post-closing adjustments) and AFG realized a $656 million net gain on the sale in the first six months of 2021. The sale continues to be subject to tax-related post-closing adjustments, which are not expected to be material and are expected to be completed in 2022.

Details of the assets and liabilities of the Annuity subsidiaries sold were as follows (in millions):
May 31, 2021
Assets of businesses sold:
Cash and cash equivalents $ 2,060 
Investments 38,323 
Recoverables from reinsurers 6,748 
Other assets
2,152 
Total assets of discontinued annuity operations 49,283 
Liabilities of businesses sold:
Annuity benefits accumulated 43,690 
Other liabilities 1,813 
Total liabilities of discontinued annuity operations 45,503 
Reclassify AOCI (913)
Net investment in annuity businesses sold, excluding AOCI $ 2,867 

Details of the results of operations for the discontinued annuity operations were (in millions):
Three months ended March 31, 2021
Net investment income $ 447 
Realized gains on securities 81 
Other income 32 
Total revenues 560 
Annuity benefits 161 
Annuity and supplemental insurance acquisition expenses 112 
Other expenses 46 
Total costs and expenses 319 
Earnings before income taxes from discontinued operations 241 
Provision for income taxes on discontinued operations 48 
Tax liabilities triggered by pending sale 41 
Net earnings from discontinued operations $ 152 


11

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
The impact of the sale of the annuity business is shown below (in millions):
May 31, 2021
Cash proceeds $ 3,571 
Sale related expenses (8)
Total net proceeds 3,563 
Net investment in annuity businesses sold, excluding AOCI 2,867 
Reclassify net deferred tax asset (199)
Pretax gain on sale 895 
Income tax expense:
Reclassify net deferred tax asset 199 
Tax liabilities triggered by pending sale in the first quarter of 2021 41 
Other (1)
Total income tax expense 239 
Net gain on sale $ 656 

Summarized cash flows for the discontinued annuity operations were (in millions):
Three months ended March 31, 2021
Net cash provided by operating activities $ 209 
Net cash used in investing activities (734)
Net cash provided by financing activities 16 

Derivatives   The vast majority of AFG’s derivatives that do not qualify for hedge accounting were held by the sold annuity subsidiaries. The following table summarizes the gains (losses) included in net earnings from discontinued operations for changes in the fair value of derivatives that do not qualify for hedge accounting for the first three months of 2021 (in millions):
Derivative Three months ended March 31, 2021
MBS with embedded derivatives $ — 
Fixed-indexed and variable-indexed annuities (embedded derivative) (40)
Equity index call options 114 
Equity index put options
Reinsurance contract (embedded derivative)
$ 77 

C.    Acquisition and Sale of Businesses

Verikai   In December 2021, AFG acquired Verikai, Inc., a machine learning and artificial intelligence company that utilizes a predictive risk tool for assessing insurance risk for $120 million using cash on hand at the parent. Verikai will continue to operate as a stand-alone company to service its insurance clients. AFG expects to benefit from Verikai’s predictive risk tool and unique Marketplace solution as it enters the medical stop loss insurance business, with a primary focus on small and underserved risks. AFG may pay up to $50 million in contingent consideration based on performance measures over a multiple year period.

Expenses related to the acquisition were approximately $1 million and were expensed as incurred. The purchase price was allocated to the acquired assets and liabilities of Verikai based on management’s best estimate of fair value as of the acquisition date. While no adjustments were made during the first three months of 2022 and management does not expect significant adjustments, the purchase price allocation continues to be subject to refinement during 2022.

Annuity Operations   See Note B — “Discontinued Operations,” for information on the 2021 sale of AFG’s annuity operations.

12

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
D.    Segments of Operations

Subsequent to the sale of its annuity operations, see Note B — “Discontinued Operations,” AFG manages its business as two segments: Property and casualty insurance and Other, which includes holding company costs 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 and other specialty transportation niches, 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 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 reportable segments and their components were determined based primarily upon similar economic characteristics, products and services.

The following tables (in millions) show AFG’s revenues and earnings from continuing operations before income taxes by segment and sub-segment.
Three months ended March 31,
2022 2021
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation $ 443  $ 394 
Specialty casualty 639  571 
Specialty financial 163  157 
Other specialty 57  51 
Total premiums earned 1,302  1,173 
Net investment income 223  159 
Other income
Total property and casualty insurance 1,529  1,336 
Other 74  67 
Real estate-related entities (*) —  29 
Total revenues before realized gains (losses) 1,603  1,432 
Realized gains (losses) on securities
(15) 77 
Total revenues $ 1,588  $ 1,509 
(*)Represents investment income from the real estate and real estate-related entities acquired from AFG’s discontinued annuity operations while they were held by those operations. Subsequent to the sale of the annuity operations, this income is included in the segment of the acquirer.
13

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Three months ended March 31,
2022 2021
Earnings From Continuing Operations Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation $ 62  $ 56 
Specialty casualty 124  56 
Specialty financial 29  25 
Other specialty (7) (3)
Other lines (1) — 
Total underwriting 207  134 
Investment and other income, net 215  154 
Total property and casualty insurance 422  288 
Other (a) (46) (59)
Real estate-related entities (b) —  29 
Total earnings from continuing operations before realized gains (losses) and income taxes
376  258 
Realized gains (losses) on securities
(15) 77 
Total earnings from continuing operations before income taxes
$ 361  $ 335 
(a)Includes holding company interest and expenses, including a $2 million loss on retirement of debt in the first three months of 2022.
(b)Represents investment income from the real estate and real estate-related entities acquired from AFG’s discontinued annuity operations while they were held by those operations. Subsequent to the sale of the annuity operations, this income is included in the segment of the acquirer.

14

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
E.    Fair Value Measurements

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

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

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

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

The contingent consideration liability (included in other liabilities in AFG’s Balance Sheet) relates to AFG’s December 2021 acquisition of Verikai discussed in Note C — “Acquisition and Sale of Businesses.” The liability is remeasured at fair value at each balance sheet date with changes in fair value recognized in net earnings. To estimate the fair value of the contingent consideration liability, AFG uses a weighted probability-based income approach which includes significant unobservable inputs and is classified as Level 3. There was no change to the estimated fair value of this liability during the first three months of 2022.

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

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

15

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
March 31, 2022
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies $ 208  $ $ —  $ 209 
States, municipalities and political subdivisions —  1,624  33  1,657 
Foreign government —  257  —  257 
Residential MBS —  1,520  11  1,531 
Commercial MBS —  100  —  100 
Collateralized loan obligations —  1,894  —  1,894 
Other asset-backed securities —  2,320  337  2,657 
Corporate and other 10  2,250  244  2,504 
Total AFS fixed maturities 218  9,966  625  10,809 
Trading fixed maturities —  30  —  30 
Equity securities 617  44  361  1,022 
Assets of managed investment entities (“MIE”) 191  5,028  12  5,231 
Total assets accounted for at fair value $ 1,026  $ 15,068  $ 998  $ 17,092 
Liabilities:
Contingent consideration — acquisitions $ —  $ —  $ 23  $ 23 
Liabilities of managed investment entities 187  4,914  11  5,112 
Other liabilities — derivatives —  — 
Total liabilities accounted for at fair value $ 187  $ 4,919  $ 34  $ 5,140 
December 31, 2021
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies $ 215  $ $ —  $ 216 
States, municipalities and political subdivisions —  1,791  41  1,832 
Foreign government —  246  —  246 
Residential MBS —  946  14  960 
Commercial MBS —  104  —  104 
Collateralized loan obligations —  1,643  —  1,643 
Other asset-backed securities —  2,398  278  2,676 
Corporate and other 11  2,402  267  2,680 
Total AFS fixed maturities 226  9,531  600  10,357 
Trading fixed maturities —  28  —  28 
Equity securities 679  50  313  1,042 
Assets of managed investment entities 390  4,893  13  5,296 
Total assets accounted for at fair value $ 1,295  $ 14,502  $ 926  $ 16,723 
Liabilities:
Contingent consideration — acquisitions $ —  $ —  $ 23  $ 23 
Liabilities of managed investment entities 384  4,823  13  5,220 
Total liabilities accounted for at fair value $ 384  $ 4,823  $ 36  $ 5,243 

Approximately 6% of the total assets carried at fair value at March 31, 2022, were Level 3 assets. Approximately 16% ($164 million) of those Level 3 assets were priced using non-binding broker quotes, for which there is a lack of transparency as to the inputs used to determine fair value. Details as to the quantitative inputs are neither provided by the brokers nor otherwise reasonably obtainable by AFG. Approximately $58 million (6%) of the Level 3 assets were priced by pricing services where either a single price was not corroborated, prices varied enough among the providers, or other market factors led management to determine these securities be classified as Level 3 assets. Approximately 19% ($186 million) of the Level 3 assets were equity investments in limited partnerships and similar investments that do not qualify for equity method accounting whose prices were determined based on financial information provided by the limited partnerships.
16

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Internally developed fixed maturities are priced using a variety of inputs, including appropriate credit spreads over the treasury yield (of a similar duration), trade information and prices of comparable securities and other security specific features (such as optional early redemption). Internally developed Level 3 asset fair values represent approximately $590 million (59%) of the total fair value of Level 3 assets at March 31, 2022. Approximately 61% ($361 million) of these internally developed Level 3 assets are priced using a pricing model that uses a discounted cash flow approach to estimate the fair value of fixed maturity securities. The credit spread applied by management is the significant unobservable input of the pricing model. In instances where the pricing model suggests a price in excess of 100% and the security is currently callable at 100%, management caps the fair value at 100%. Approximately 28% ($168 million) of these internally developed Level 3 assets are equity securities which are priced primarily using broker quotes and internal models with some inputs that are not market observable. Management believes that any justifiable changes in unobservable inputs used to determine internally developed fair values would not have resulted in a material change in AFG’s financial position.
Changes in balances of Level 3 financial assets and liabilities carried at fair value during the first three months of 2022 and 2021 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period.
Total realized/unrealized
gains (losses) included in
Balance at December 31, 2021 Net
earnings (loss)
Other
comprehensive
income (loss)
Purchases
and
issuances
Sales and
settlements
Transfer
into
Level 3
Transfer
out of
Level 3
Balance at March 31, 2022
AFS fixed maturities:
U.S. government agency
$ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
State and municipal 41  —  (2) —  (1) —  (5) 33 
Residential MBS 14  —  —  —  (1) —  (2) 11 
Commercial MBS —  —  —  —  —  —  —  — 
Collateralized loan obligations —  —  —  —  —  —  —  — 
Other asset-backed securities
278  (9) 47  (15) 34  —  337 
Corporate and other 267  —  (10) 28  (7) —  (34) 244 
Total AFS fixed maturities 600  (21) 75  (24) 34  (41) 625 
Equity securities 313  22  —  30  (3) (4) 361 
Assets of MIE 13  (1) —  —  —  —  —  12 
Total Level 3 assets $ 926  $ 23  $ (21) $ 105  $ (27) $ 37  $ (45) $ 998 
Contingent consideration — acquisitions $ (23) $ —  $ —  $ —  $ —  $ —  $ —  $ (23)
Total Level 3 liabilities $ (23) $ —  $ —  $ —  $ —  $ —  $ —  $ (23)
17

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Total realized/unrealized
gains (losses) included in
Balance at December 31, 2020 Net
earnings (loss)
Other
comprehensive
income (loss)
Purchases
and
issuances
Sales and
settlements
Transfer
into
Level 3
Transfer
out of
Level 3
Balance at March 31, 2021
AFS fixed maturities:
U.S. government agency
$ —  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
State and municipal 39  —  —  —  —  —  —  39 
Residential MBS 38  (3) —  —  (17) 27 
Commercial MBS —  —  —  —  —  (2) — 
Collateralized loan obligations 16  (1) —  (1) —  (9)
Other asset-backed securities
305  —  —  52  (23) 14  (22) 326 
Corporate and other 138  (1) 84  (18) (2) 204 
Total AFS fixed maturities
538  (1) (2) 142  (42) 19  (52) 602 
Equity securities 176  53  —  12  (14) —  —  227 
Assets of MIE 21  —  —  —  (12) 14 
Assets of discontinued annuity operations 2,971  70  (43) 196  (191) 32  (229) 2,806 
Total Level 3 assets $ 3,706  $ 126  $ (45) $ 351  $ (247) $ 51  $ (293) $ 3,649 
Liabilities of discontinued annuity operations $ (3,933) $ (40) $ —  $ (74) $ 93  $ —  $ —  $ (3,954)
Total Level 3 liabilities $ (3,933) $ (40) $ —  $ (74) $ 93  $ —  $ —  $ (3,954)

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
Value Total Level 1 Level 2 Level 3
March 31, 2022
Financial assets:
Cash and cash equivalents $ 1,181  $ 1,181  $ 1,181  $ —  $ — 
Mortgage loans 784  768  —  —  768 
Total financial assets not accounted for at fair value
$ 1,965  $ 1,949  $ 1,181  $ —  $ 768 
Long-term debt $ 1,917  $ 1,979  $ —  $ 1,976  $
Total financial liabilities not accounted for at fair value
$ 1,917  $ 1,979  $ —  $ 1,976  $
December 31, 2021
Financial assets:
Cash and cash equivalents $ 2,131  $ 2,131  $ 2,131  $ —  $ — 
Mortgage loans 520  533  —  —  533 
Total financial assets not accounted for at fair value
$ 2,651  $ 2,664  $ 2,131  $ —  $ 533 
Long-term debt $ 1,964  $ 2,261  $ —  $ 2,258  $
Total financial liabilities not accounted for at fair value
$ 1,964  $ 2,261  $ —  $ 2,258  $

18

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
F.    Investments

Available for sale fixed maturities at March 31, 2022 and December 31, 2021, consisted of the following (in millions):
Amortized
Cost
Allowance for Expected Credit Losses Gross Unrealized Net
Unrealized
Fair
Value
Gains Losses
March 31, 2022
Fixed maturities:
U.S. Government and government agencies
$ 216  $ —  $ $ (8) $ (7) $ 209 
States, municipalities and political subdivisions
1,648  —  22  (13) 1,657 
Foreign government
266  —  —  (9) (9) 257 
Residential MBS
1,550  —  36  (55) (19) 1,531 
Commercial MBS
100  —  —  —  —  100 
Collateralized loan obligations
1,907  (14) (12) 1,894 
Other asset-backed securities
2,725  (68) (63) 2,657 
Corporate and other
2,542  16  (53) (37) 2,504 
Total fixed maturities $ 10,954  $ $ 82  $ (220) $ (138) $ 10,809 
December 31, 2021
Fixed maturities:
U.S. Government and government agencies
$ 216  $ —  $ $ (2) $ —  $ 216 
States, municipalities and political subdivisions
1,758  —  74  —  74  1,832 
Foreign government
248  —  —  (2) (2) 246 
Residential MBS
915  —  48  (3) 45  960 
Commercial MBS
102  —  —  104 
Collateralized loan obligations
1,643  (2) 1,643 
Other asset-backed securities
2,677  17  (11) 2,676 
Corporate and other
2,634  55  (8) 47  2,680 
Total fixed maturities $ 10,193  $ $ 201  $ (28) $ 173  $ 10,357 

Equity securities which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at March 31, 2022 and December 31, 2021 (in millions):
March 31, 2022 December 31, 2021
Actual Cost Fair Value Actual Cost Fair Value
Fair Value  over Cost Fair Value over Cost
Common stocks $ 496  $ 578  $ 82  $ 491  $ 586  $ 95 
Perpetual preferred stocks 407  444  37  403  456  53 
Total equity securities carried at fair value
$ 903  $ 1,022  $ 119  $ 894  $ 1,042  $ 148 

Investments accounted for using the equity method held by AFG’s continuing operations, by category, carrying value and net investment income are as follows (in millions):
Net Investment Income
Carrying Value Three months ended March 31,
March 31, 2022 December 31, 2021 2022 2021
Real estate-related investments (*) $ 1,195  $ 1,130  $ 100  $ 54 
Private equity 391  352  33  21 
Private debt 33  35  — 
Total investments accounted for using the equity method $ 1,619  $ 1,517  $ 133  $ 78 
(*)Includes 88% with underlying investments in multi-family properties, 1% in single family properties and 11% in other property types as of both March 31, 2022 and December 31, 2021.

The earnings (losses) from these investments are generally reported on a quarter lag due to the timing required to obtain the necessary information from the funds. AFG regularly reviews and discusses fund performance with the fund managers
19

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
to corroborate the reasonableness of the underlying reported asset values and to assess whether any events have occurred within the lag period that may materially affect the valuation of these investments.

With respect to partnerships and similar investments, AFG had unfunded commitments of $354 million and $366 million as of March 31, 2022 and December 31, 2021, respectively.

The following table shows gross unrealized losses (dollars in millions) on available for sale fixed maturities by investment category and length of time that individual securities have been in a continuous unrealized loss position at the following balance sheet dates.
Less Than Twelve Months Twelve Months or More
Unrealized
Loss
Fair
Value
Fair Value as
% of Cost
Unrealized
Loss
Fair
Value
Fair Value as
% of Cost
March 31, 2022
Fixed maturities:
U.S. Government and government agencies
$ (3) $ 114  97  % $ (5) $ 61  92  %
States, municipalities and political subdivisions
(12) 444  97  % (1) 12  92  %
Foreign government (9) 241  96  % —  —  —  %
Residential MBS (55) 1,213  96  % —  11  100  %
Commercial MBS —  52  100  % —  —  —  %
Collateralized loan obligations (12) 1,302  99  % (2) 78  98  %
Other asset-backed securities (63) 2,053  97  % (5) 82  94  %
Corporate and other (49) 1,226  96  % (4) 68  94  %
Total fixed maturities $ (203) $ 6,645  97  % $ (17) $ 312  95  %
December 31, 2021
Fixed maturities:
U.S. Government and government agencies
$ (1) $ 92  99  % $ (1) $ 22  96  %
States, municipalities and political subdivisions
—  100  % —  13  100  %
Foreign government (2) 160  99  % —  —  —  %
Residential MBS (3) 419  99  % —  100  %
Commercial MBS —  34  100  % —  —  —  %
Collateralized loan obligations (1) 806  100  % (1) 77  99  %
Other asset-backed securities (8) 1,250  99  % (3) 81  96  %
Corporate and other (8) 500  98  % —  26  100  %
Total fixed maturities $ (23) $ 3,270  99  % $ (5) $ 226  98  %

At March 31, 2022, the gross unrealized losses on fixed maturities of $220 million relate to 1,128 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 94% of the gross unrealized loss and 95% 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 expected credit losses (impairment) each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan to collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data.

Management believes AFG will recover its cost basis (net of any allowance) in the securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at March 31, 2022.

20

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Credit losses on available for sale fixed maturities are measured based on the present value of expected future cash flows compared to amortized cost. Impairment losses are recognized through an allowance and recoveries of previously impaired amounts are recorded as an immediate reversal of all or a portion of the allowance. In addition, the allowance on available for sale fixed maturities cannot cause the amortized cost net of the allowance to be below fair value. Accordingly, future changes in the fair value of an impaired security (when the allowance was limited by the fair value) due to reasons other than issuer credit (e.g. changes in market interest rates) result in increases or decreases in the allowance, which are recorded through realized gains (losses) on securities. A progression of the allowance for expected credit losses on fixed maturity securities held by AFG’s continuing operations is shown below (in millions):
Structured
Securities (*)
Corporate and Other Total
Balance at January 1, 2022 $ $ $
Initial allowance for purchased securities with credit deterioration —  —  — 
Provision for expected credit losses on securities with no previous allowance —  —  — 
Additions (reductions) to previously recognized expected credit losses (2) —  (2)
Reductions due to sales or redemptions —  —  — 
Balance at March 31, 2022 $ $ $
Balance at January 1, 2021 $ 10  $ $ 12 
Initial allowance for purchased securities with credit deterioration —  —  — 
Provision for expected credit losses on securities with no previous allowance —  —  — 
Additions (reductions) to previously recognized expected credit losses (1) —  (1)
Reductions due to sales or redemptions —  (1) (1)
Balance at March 31, 2021 $ $ $ 10 
(*)Includes mortgage-backed securities, collateralized loan obligations and other asset-backed securities.

In the first three months of 2022 and 2021, AFG did not purchase any securities with expected credit losses.

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturities as of March 31, 2022 (dollars in millions). Securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers.
Amortized Fair Value
Cost, net (*) Amount %
Maturity
One year or less $ 923  $ 930  %
After one year through five years 2,572  2,539  23  %
After five years through ten years 825  816  %
After ten years 351  342  %
4,671  4,627  43  %
Collateralized loan obligations and other ABS (average life of approximately 3 years)
4,626  4,551  42  %
MBS (average life of approximately 5 years)
1,650  1,631  15  %
Total $ 10,947  $ 10,809  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 March 31, 2022 or December 31, 2021.

21

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Net Investment Income   The following table shows (in millions) investment income earned and investment expenses incurred in AFG’s continuing operations.
Three months ended March 31,
2022 2021
Investment income:
Fixed maturities $ 80  $ 72 
Equity securities:
Dividends
Change in fair value (*) 26 
Equity in earnings of partnerships and similar investments
133  78 
Other
Gross investment income 234  190 
Investment expenses (4) (2)
Net investment income $ 230  $ 188 
(*)Although the change in the fair value of the majority of AFG’s equity securities is recorded in realized gains (losses) on securities, AFG records holding gains and losses in net investment income on its portfolio of limited partnerships and similar investments that do not qualify for equity method accounting and certain other securities classified at purchase as “fair value through net investment income.”
Realized gains (losses) and changes in unrealized appreciation (depreciation) from continuing operations included in AOCI related to fixed maturity securities are summarized as follows (in millions):
Three months ended March 31, 2022 Three months ended March 31, 2021
Realized gains (losses) Realized gains (losses)
Before Impairments Impairment Allowance Total Change in Unrealized Before Impairments Impairment Allowance Total Change in Unrealized
Fixed maturities $ (4) $ $ (2) $ (311) $ (1) $ $ —  $ (44)
Equity securities (13) —  (13) —  77  —  77  — 
Mortgage loans and other investments
—  —  —  —  —  —  —  — 
Total pretax (17) (15) (311) 76  77  (44)
Tax effects —  66  (16) —  (16)
Net of tax
$ (14) $ $ (12) $ (245) $ 60  $ $ 61  $ (35)

All equity securities other than those accounted for under the equity method are carried at fair value through net earnings. AFG recorded net holding gains (losses) on equity securities from continuing operations during the first three months of 2022 and 2021 on securities that were still owned at March 31, 2022 and March 31, 2021 as follows (in millions):
Three months ended March 31,
2022 2021
Included in realized gains (losses) $ (13) $ 67 
Included in net investment income 26 
$ (9) $ 93 

Gross realized gains and losses (excluding changes in impairment allowance and mark-to-market of derivatives) on available for sale fixed maturity investment transactions from continuing operations consisted of the following (in millions):
Three months ended March 31,
2022 2021
Gross gains $ $
Gross losses —  (1)

Derivatives Designated and Qualifying as Cash Flow Hedges   As of March 31, 2022, AFG has five 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.
22

AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

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 January 2025 and July 2027) 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 $408 million at March 31, 2022, all of which were entered into in the first three months of 2022. The fair value of the interest rate swaps, all of which were in a liability position and included in other liabilities at March 31, 2022, was $5 million. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of deferred taxes. The amount reclassified from AOCI (before taxes) to net earnings was income of $1 million for the first three months of 2022. A collateral receivable supporting these swaps of $15 million at March 31, 2022 is included in other assets in AFG’s Balance Sheet.

G.    Managed Investment Entities

AFG is the investment manager and it has investments ranging from 7.4% to 82.7% of the most subordinate debt tranche of thirteen active collateralized loan obligation entities (“CLOs”), which are considered variable interest entities. AFG also owns portions of the senior debt tranches of certain of these CLOs. Upon formation between 2012 and 2021, 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 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 $119 million (including $98 million invested in the most subordinate tranches) at March 31, 2022, and $76 million at December 31, 2021.

The following table shows a progression of the fair value of AFG's investment in CLO tranches held by continuing operations (in millions):
Three months ended March 31,
2022 2021