10-Q

______________________________________________________________________________________________________

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, 2018

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 þ No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes þ No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  þ                        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 þ

As of August 1, 2018, there were 89,087,663 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

TABLE OF CONTENTS

	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	6
Notes to Consolidated Financial Statements	7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3 — Quantitative and Qualitative Disclosure about Market Risk	89
Item 4 — Controls and Procedures	89
Part II — Other Information
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	89
Item 5 — Other Information	89
Item 6 — Exhibits	90
Signature	90

AMERICAN FINANCIAL GROUP, INC. 10-Q

PART I

ITEM I — FINANCIAL STATEMENTS

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

(Dollars in Millions)

	June 30, 2018		December 31, 2017
Assets:
Cash and cash equivalents	$	1,810	$	2,338
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $39,244 and $37,038)	39,648		38,379
Fixed maturities, trading at fair value	137		348
Equity securities, at fair value	1,777		1,662
Investments accounted for using the equity method	1,194		999
Mortgage loans	1,147		1,125
Policy loans	179		184
Equity index call options	615		701
Real estate and other investments	272		312
Total cash and investments	46,779		46,048
Recoverables from reinsurers	3,073		3,369
Prepaid reinsurance premiums	645		600
Agents’ balances and premiums receivable	1,266		1,146
Deferred policy acquisition costs	1,582		1,216
Assets of managed investment entities	5,032		4,902
Other receivables	1,048		1,030
Variable annuity assets (separate accounts)	636		644
Other assets	1,574		1,504
Goodwill	199		199
Total assets	$	61,834	$	60,658
Liabilities and Equity:
Unpaid losses and loss adjustment expenses	$	9,093	$	9,678
Unearned premiums	2,539		2,410
Annuity benefits accumulated	34,886		33,316
Life, accident and health reserves	647		658
Payable to reinsurers	721		743
Liabilities of managed investment entities	4,840		4,687
Long-term debt	1,301		1,301
Variable annuity liabilities (separate accounts)	636		644
Other liabilities	2,087		1,887
Total liabilities	56,750		55,324
Redeemable noncontrolling interests	—		3
Shareholders’ equity:
Common Stock, no par value        — 200,000,000 shares authorized        — 89,072,114 and 88,275,460 shares outstanding	89		88
Capital surplus	1,220		1,181
Retained earnings	3,628		3,248
Accumulated other comprehensive income, net of tax	147		813
Total shareholders’ equity	5,084		5,330
Noncontrolling interests	—		1
Total equity	5,084		5,331
Total liabilities and equity	$	61,834	$	60,658

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 June 30,						Six months ended June 30,
	2018			2017			2018			2017
Revenues:
Property and casualty insurance net earned premiums	$	1,161		$	1,065		$	2,268		$	2,087
Life, accident and health net earned premiums	6			5			12			11
Net investment income	530			460			1,025			895
Realized gains (losses) on securities (*)	31			8			(62		)	11
Income (loss) of managed investment entities:
Investment income	64			50			122			101
Gain (loss) on change in fair value of assets/liabilities	(2		)	11			(5		)	11
Other income	43			47			92			106
Total revenues	1,833			1,646			3,452			3,222
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	693			635			1,334			1,244
Commissions and other underwriting expenses	400			366			781			705
Annuity benefits	260			224			442			420
Life, accident and health benefits	11			6			22			15
Annuity and supplemental insurance acquisition expenses	50			48			132			101
Interest charges on borrowed money	16			23			31			44
Expenses of managed investment entities	54			51			102			92
Other expenses	89			88			174			173
Total costs and expenses	1,573			1,441			3,018			2,794
Earnings before income taxes	260			205			434			428
Provision for income taxes	52			60			85			128
Net earnings, including noncontrolling interests	208			145			349			300
Less: Net earnings (losses) attributable to noncontrolling interests	(2		)	—			(6		)	2
Net Earnings Attributable to Shareholders	$	210		$	145		$	355		$	298
Earnings Attributable to Shareholders per Common Share:
Basic	$	2.36		$	1.64		$	3.99		$	3.40
Diluted	$	2.31		$	1.61		$	3.92		$	3.32
Average number of Common Shares:
Basic	89.0			87.8			88.8			87.5
Diluted	90.7			89.8			90.5			89.6
Cash dividends per Common Share	$	1.85		$	1.8125		$	2.20		$	2.125
________________________________________
(*) Consists of the following:
Realized gains (losses) before impairments	$	31		$	17		$	(61	)	$	26
Losses on securities with impairment	—			(10		)	(1		)	(16		)
Non-credit portion recognized in other comprehensive income (loss)	—			1			—			1
Impairment charges recognized in earnings	—			(9		)	(1		)	(15		)
Total realized gains (losses) on securities	$	31		$	8		$	(62	)	$	11

3

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,
	2018			2017			2018			2017
Net earnings, including noncontrolling interests	$	208		$	145		$	349		$	300
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	(148		)	115			(427		)	240
Reclassification adjustment for realized gains included in net earnings	(3		)	(5		)	(1		)	(5		)
Total net unrealized gains (losses) on securities	(151		)	110			(428		)	235
Net unrealized gains (losses) on cash flow hedges	(3		)	2			(14		)	1
Foreign currency translation adjustments	(4		)	4			(3		)	4
Other comprehensive income (loss), net of tax	(158		)	116			(445		)	240
Total comprehensive income (loss), net of tax	50			261			(96		)	540
Less: Comprehensive income (loss) attributable to noncontrolling interests	(2		)	—			(6		)	2
Comprehensive income (loss) attributable to shareholders	$	52		$	261		$	(90	)	$	538

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																	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 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 on Common Stock	—		—		(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 December 31, 2016	86,924,399		$	1,198	$	3,343		$	375		$	4,916		$	3		$	4,919		$	—
Net earnings	—		—		298			—			298			2			300			—
Other comprehensive income	—		—		—			240			240			—			240			—
Dividends on Common Stock	—		—		(187		)	—			(187		)	—			(187		)	—
Shares issued:
Exercise of stock options	792,288		26		—			—			26			—			26			—
Restricted stock awards	232,250		—		—			—			—			—			—			—
Other benefit plans	75,381		7		—			—			7			—			7			—
Dividend reinvestment plan	19,516		2		—			—			2			—			2			—
Stock-based compensation expense	—		13		—			—			13			—			13			—
Shares exchanged — benefit plans	(32,509	)	—		(3		)	—			(3		)	—			(3		)	—
Forfeitures of restricted stock	(4,073	)	—		—			—			—			—			—			—
Other	—		—		—			—			—			(5		)	(5		)	—
Balance at June 30, 2017	88,007,252		$	1,246	$	3,451		$	615		$	5,312		$	—		$	5,312		$	—

5

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,
	2018			2017
Operating Activities:
Net earnings, including noncontrolling interests	$	349		$	300
Adjustments:
Depreciation and amortization	106			69
Annuity benefits	442			420
Realized (gains) losses on investing activities	64			(28		)
Net sales of trading securities	83			31
Deferred annuity and life policy acquisition costs	(127		)	(133		)
Change in:
Reinsurance and other receivables	72			(291		)
Other assets	(16		)	(8		)
Insurance claims and reserves	(268		)	275
Payable to reinsurers	(22		)	47
Other liabilities	55			(32		)
Managed investment entities’ assets/liabilities	138			(72		)
Other operating activities, net	(53		)	(4		)
Net cash provided by operating activities	823			574
Investing Activities:
Purchases of:
Fixed maturities	(4,549		)	(5,387		)
Equity securities	(248		)	(44		)
Mortgage loans	(90		)	(146		)
Equity index options and other investments	(446		)	(360		)
Real estate, property and equipment	(44		)	(30		)
Proceeds from:
Maturities and redemptions of fixed maturities	2,283			3,285
Repayments of mortgage loans	68			110
Sales of fixed maturities	203			150
Sales of equity securities	106			50
Sales and settlements of equity index options and other investments	446			360
Sales of real estate, property and equipment	1			53
Managed investment entities:
Purchases of investments	(1,261		)	(1,780		)
Proceeds from sales and redemptions of investments	1,035			1,738
Other investing activities, net	11			7
Net cash used in investing activities	(2,485		)	(1,994		)
Financing Activities:
Annuity receipts	2,547			2,556
Annuity surrenders, benefits and withdrawals	(1,372		)	(1,161		)
Net transfers from variable annuity assets	21			30
Additional long-term borrowings	—			345
Reductions of long-term debt	—			(230		)
Issuances of managed investment entities’ liabilities	1,572			977
Retirements of managed investment entities’ liabilities	(1,461		)	(835		)
Issuances of Common Stock	21			27
Cash dividends paid on Common Stock	(194		)	(185		)
Other financing activities, net	—			(4		)
Net cash provided by financing activities	1,134			1,520
Net Change in Cash and Cash Equivalents	(528		)	100
Cash and cash equivalents at beginning of period	2,338			2,107
Cash and cash equivalents at end of period	$	1,810		$	2,207

6

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO NOTES
A.	Accounting Policies	H.	Goodwill and Other Intangibles
B.	Segments of Operations	I.	Long-Term Debt
C.	Fair Value Measurements	J.	Redeemable Noncontrolling Interests
D.	Investments	K.	Shareholders’ Equity
E.	Derivatives	L.	Income Taxes
F.	Deferred Policy Acquisition Costs	M.	Contingencies
G.	Managed Investment Entities	N.	Insurance

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, 2018, 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.

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 significant nonrecurring fair value measurements in the first six months of 2018.

Investments On January 1, 2018, AFG adopted Accounting Standards Update (“ASU”) 2016-01, which 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 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 under ASU 2016-01 are generally recorded in realized gains (losses) on securities. However, prior to the adoption of the new guidance, AFG classified a small portion of its equity securities as “trading” and reported those investments at fair value with holding gains and losses recognized in net investment income. These investments consisted primarily of equity securities held to offset the impact of changes in the stock market on employee benefit plans that are impacted by stock market performance and totaled $62 million at December 31, 2017. Following the adoption of the new guidance, AFG continues to record holding gains and losses on these securities, as well as its small portfolio of limited partnerships and similar investments carried at fair value under the new guidance and certain other securities classified at purchase as “fair value through net investment income” in net investment income.

7

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Under the new guidance, AFG recorded holding losses of $57 million on equity securities in net earnings during the first six months of 2018 on securities that were still owned at June 30, 2018. Under the prior guidance, these holding losses would have been recorded in AOCI (with the exception of any impairment charge that may have been recorded). Because almost all of the equity securities impacted by the new guidance were carried at fair value through AOCI under the prior guidance, the adoption of the new guidance did not have a material impact on AFG’s financial position.

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.

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 or losses on fixed maturity securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment 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 security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment 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 to reduce the amortized cost of that security to fair value.

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 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.

For derivatives that are designated and qualify as highly effective fair value hedges, changes in the fair value of the derivative, along with changes in the fair value of the hedged item attributable to the hedged risk, are recognized in current period earnings.

8

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 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 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 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” 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.

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Managed Investment EntitiesA 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 the 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.

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 expense and decreases for annuity policy charges are recorded in other income.

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.

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

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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).

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.

Debt Issuance CostsDebt 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.

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

Noncontrolling Interests   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).

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 uses the Black Scholes pricing model to measure the fair value of employee stock options. See Note K — “Shareholders’ Equity” for further information.

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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 of 2018 and 2017 — 1.7 million and 2.0 million; first six months of 2018 and 2017 — 1.7 million and 2.1 million, respectively.

There were no anti-dilutive potential common shares in the second quarter or first six months of 2018 or 2017.

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 and property and equipment. “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.

Revenue Recognition Guidance Effective in 2018 On January 1, 2018, AFG adopted ASU 2014-09, which provides guidance on recognizing revenue when (or as) performance obligations under the contract are satisfied. The new guidance also updates the accounting for certain costs associated with obtaining and fulfilling contracts with customers and requires certain new disclosures. Because revenue recognition for insurance contracts and financial instruments (AFG’s primary sources of revenue) were excluded from the scope of the new guidance, the adoption of ASU 2014-09 did not have a material impact on AFG’s results of operations or financial position.

B.    Segments of Operations

AFG manages its business as three 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, 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, trucks and recreational vehicles, inland and ocean marine, agricultural-related products and other property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, general liability, executive liability, professional liability, umbrella and excess liability, specialty coverage 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 leasing and financing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), surety and fidelity 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 markets traditional fixed, fixed-indexed and variable-indexed annuities in the retail, financial institutions, registered investment advisor and education markets. AFG’s reportable segments and their components were determined based primarily upon similar economic characteristics, products and services. Effective January 1, 2018, the results of AFG’s run-off long-term care and life businesses are included in the “Other” segment instead of as a separate reportable segment based on the immaterial size of the remaining operations. Prior period amounts were reclassified for consistent presentation.

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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,
	2018		2017		2018			2017
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	374	$	357	$	724		$	699
Specialty casualty	595		537		1,174			1,045
Specialty financial	159		146		308			293
Other specialty	33		25		62			50
Total premiums earned	1,161		1,065		2,268			2,087
Net investment income	115		96		215			182
Other income (a)	2		4		4			20
Total property and casualty insurance	1,278		1,165		2,487			2,289
Annuity:
Net investment income	412		360		806			707
Other income	27		26		53			53
Total annuity	439		386		859			760
Other	85		87		168			162
Total revenues before realized gains (losses)	1,802		1,638		3,514			3,211
Realized gains (losses) on securities	31		8		(62		)	11
Total revenues	$	1,833	$	1,646	$	3,452		$	3,222

Earnings Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	23		$	21		$	56		$	64
Specialty casualty	29			29			70			44
Specialty financial	22			23			37			45
Other specialty	(1		)	—			2			(1		)
Other lines	(1		)	(1		)	(2		)	(2		)
Total underwriting	72			72			163			150
Investment and other income, net (a)	106			91			199			184
Total property and casualty insurance	178			163			362			334
Annuity	99			85			224			181
Other (b)	(48		)	(51		)	(90		)	(98		)
Total earnings before realized gains (losses) and income taxes	229			197			496			417
Realized gains (losses) on securities	31			8			(62		)	11
Total earnings before income taxes	$	260		$	205		$	434		$	428

(a) Includes income of $13 million (before noncontrolling interest) from the sale of a hotel in the first quarter of 2017.

(b) Includes holding company interest and expenses, including a $7 million loss on retirement of debt in the second quarter of 2017.

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C.    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”), non-affiliated common stocks, equity index call 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 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.

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 25 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.

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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
June 30, 2018
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	140	$	92	$	8	$	240
States, municipalities and political subdivisions	—		6,852		61		6,913
Foreign government	—		129		—		129
Residential MBS	—		2,739		147		2,886
Commercial MBS	—		878		56		934
Asset-backed securities	—		7,931		1,004		8,935
Corporate and other	29		18,174		1,408		19,611
Total AFS fixed maturities	169		36,795		2,684		39,648
Trading fixed maturities	38		99		—		137
Equity securities	1,471		76		230		1,777
Equity index call options	—		615		—		615
Assets of managed investment entities (“MIE”)	229		4,780		23		5,032
Variable annuity assets (separate accounts) (*)	—		636		—		636
Total assets accounted for at fair value	$	1,907	$	43,001	$	2,937	$	47,845
Liabilities:
Liabilities of managed investment entities	$	220	$	4,598	$	22	$	4,840
Derivatives in annuity benefits accumulated	—		—		2,776		2,776
Other liabilities — derivatives	—		72		—		72
Total liabilities accounted for at fair value	$	220	$	4,670	$	2,798	$	7,688
December 31, 2017
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	122	$	112	$	8	$	242
States, municipalities and political subdivisions	—		6,975		148		7,123
Foreign government	—		127		—		127
Residential MBS	—		3,105		122		3,227
Commercial MBS	—		926		36		962
Asset-backed securities	—		7,218		744		7,962
Corporate and other	30		17,662		1,044		18,736
Total AFS fixed maturities	152		36,125		2,102		38,379
Trading fixed maturities	44		304		—		348
Equity securities	1,411		86		165		1,662
Equity index call options	—		701		—		701
Assets of managed investment entities	307		4,572		23		4,902
Variable annuity assets (separate accounts) (*)	—		644		—		644
Total assets accounted for at fair value	$	1,914	$	42,432	$	2,290	$	46,636
Liabilities:
Liabilities of managed investment entities	$	293	$	4,372	$	22	$	4,687
Derivatives in annuity benefits accumulated	—		—		2,542		2,542
Other liabilities — derivatives	—		35		—		35
Total liabilities accounted for at fair value	$	293	$	4,407	$	2,564	$	7,264

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

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Transfers between Level 1 and Level 2 for all periods presented were a result of increases or decreases in observable trade activity.

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. During the second quarter and first six months of 2017, there were two preferred stocks with an aggregate fair value of $16 million that transferred from Level 2 to Level 1.

Approximately 6% of the total assets carried at fair value at June 30, 2018, were Level 3 assets. Approximately 73% ($2.14 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. Since internally developed Level 3 asset fair values represent approximately 14% of AFG’s Shareholders’ Equity, any justifiable changes in unobservable inputs used to determine internally developed fair values would not have a material impact on AFG’s financial position.

The only significant Level 3 assets or liabilities carried at fair value in the financial statements that were not measured using broker quotes are the derivatives embedded in AFG’s fixed-indexed and variable-indexed annuity liabilities, which are measured using a discounted cash flow approach and had a fair value of $2.78 billion at June 30, 2018. The following table presents information about the unobservable inputs used by management in determining fair value of these embedded derivatives. See Note E — “Derivatives.”

Unobservable Input	Range
Adjustment for insurance subsidiary’s credit risk	0.4% – 1.7% over the risk free rate
Risk margin for uncertainty in cash flows	0.70% reduction in the discount rate
Surrenders	3% – 23% of indexed account value
Partial surrenders	2% – 9% of indexed account value
Annuitizations	0.1% – 1% of indexed account value
Deaths	1.6% – 8.0% of indexed account value
Budgeted option costs	2.5% – 3.5% of indexed account value

The range of adjustments for insurance subsidiary’s credit risk 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% in the majority of future calendar years (3% to 23% 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.

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Changes in balances of Level 3 financial assets and liabilities carried at fair value during the second quarter and first six months of 2018 and 2017 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.” 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, 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
Asset-backed securities	912			—			(6		)	136			(20		)	—		(18		)	1,004
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	)

				Total realized/unrealized gains (losses) included in
	Balance at March 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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	143			—			1		—			(1		)	—		—			143
Residential MBS	175			(3		)	2		—			(23		)	13		(11		)	153
Commercial MBS	29			1			—		15			—			—		—			45
Asset-backed securities	594			—			2		—			(25		)	19		(92		)	498
Corporate and other	828			4			4		168			(27		)	—		(24		)	953
Total AFS fixed maturities	1,777			2			9		183			(76		)	32		(127		)	1,800
Equity securities	173			(10		)	6		8			(3		)	—		(6		)	168
Assets of MIE	26			(5		)	—		2			—			—		—			23
Total Level 3 assets	$	1,976		$	(13	)	$	15	$	193		$	(79	)	$	32	$	(133	)	$	1,991
Embedded derivatives	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)

(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.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

				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
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(1		)	—		(84		)	61
Residential MBS	122			(7		)	—			—			(11		)	57		(14		)	147
Commercial MBS	36			(1		)	—			21			—			—		—			56
Asset-backed securities	744			(2		)	(3		)	340			(57		)	—		(18		)	1,004
Corporate and other	1,044			2			(18		)	472			(79		)	—		(13		)	1,408
Total AFS fixed maturities	2,102			(8		)	(23		)	833			(148		)	57		(129		)	2,684
Equity securities	165			14			—			25			(4		)	30		—			230
Assets of MIE	23			(5		)	—			5			—			—		—			23
Total Level 3 assets	$	2,290		$	1		$	(23	)	$	863		$	(152	)	$	87	$	(129	)	$	2,937
Embedded derivatives (a)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2016			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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	140			—			4		—			(1		)	—		—			143
Residential MBS	190			(2		)	2		1			(31		)	20		(27		)	153
Commercial MBS	25			1			—		15			—			4		—			45
Asset-backed securities	484			—			2		104			(36		)	36		(92		)	498
Corporate and other	712			5			8		288			(65		)	29		(24		)	953
Total AFS fixed maturities	1,559			4			16		408			(133		)	89		(143		)	1,800
Equity securities	174			(16		)	13		20			(3		)	—		(20		)	168
Assets of MIE	29			(6		)	—		4			—			—		(4		)	23
Total Level 3 assets	$	1,762		$	(18	)	$	29	$	432		$	(136	)	$	89	$	(167	)	$	1,991
Embedded derivatives	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)

(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.

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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
	Value		Total		Level 1		Level 2		Level 3
June 30, 2018
Financial assets:
Cash and cash equivalents	$	1,810	$	1,810	$	1,810	$	—	$	—
Mortgage loans	1,147		1,136		—		—		1,136
Policy loans	179		179		—		—		179
Total financial assets not accounted for at fair value	$	3,136	$	3,125	$	1,810	$	—	$	1,315
Financial liabilities:
Annuity benefits accumulated (*)	$	34,673	$	33,204	$	—	$	—	$	33,204
Long-term debt	1,301		1,265		—		1,262		3
Total financial liabilities not accounted for at fair value	$	35,974	$	34,469	$	—	$	1,262	$	33,207
December 31, 2017
Financial assets:
Cash and cash equivalents	$	2,338	$	2,338	$	2,338	$	—	$	—
Mortgage loans	1,125		1,119		—		—		1,119
Policy loans	184		184		—		—		184
Total financial assets not accounted for at fair value	$	3,647	$	3,641	$	2,338	$	—	$	1,303
Financial liabilities:
Annuity benefits accumulated (*)	$	33,110	$	32,461	$	—	$	—	$	32,461
Long-term debt	1,301		1,354		—		1,351		3
Total financial liabilities not accounted for at fair value	$	34,411	$	33,815	$	—	$	1,351	$	32,464

(*) Excludes $213 million and $206 million of life contingent annuities in the payout phase at June 30, 2018 and December 31, 2017, 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.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

D.    Investments

Available for sale fixed maturities at June 30, 2018 and December 31, 2017, consisted of the following (in millions):

	June 30, 2018												December 31, 2017
	Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value		Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value
			Gains		Losses										Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	243	$	1	$	(4	)	$	(3	)	$	240	$	244	$	1	$	(3	)	$	(2	)	$	242
States, municipalities and political subdivisions	6,804		162		(53		)	109			6,913		6,887		254		(18		)	236			7,123
Foreign government	127		2		—			2			129		124		3		—			3			127
Residential MBS	2,564		329		(7		)	322			2,886		2,884		349		(6		)	343			3,227
Commercial MBS	920		18		(4		)	14			934		927		36		(1		)	35			962
Asset-backed securities	8,849		132		(46		)	86			8,935		7,836		142		(16		)	126			7,962
Corporate and other	19,737		198		(324		)	(126		)	19,611		18,136		638		(38		)	600			18,736
Total fixed maturities	$	39,244	$	842	$	(438	)	$	404		$	39,648	$	37,038	$	1,423	$	(82	)	$	1,341		$	38,379

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, 2018 and December 31, 2017 were $149 million and $158 million, respectively. Gross unrealized gains on such securities at June 30, 2018 and December 31, 2017 were $135 million and $137 million, respectively. Gross unrealized losses on such securities at both June 30, 2018 and December 31, 2017 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.

As discussed in Note A — “Accounting Policies — Investments,” beginning on January 1, 2018, AFG implemented new accounting guidance, which required all equity securities previously classified as “available for sale” to be reported at fair value, with holding gains and losses recognized in net earnings. Equity securities reported at fair value consisted of the following at June 30, 2018 (in millions):

					Fair Value in
	Actual Cost		Fair Value		excess of Cost
Common stocks	$	1,066	$	1,180	$	114
Perpetual preferred stocks	603		597		(6		)
Total equity securities carried at fair value	$	1,669	$	1,777	$	108

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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 and equity securities 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
June 30, 2018
Fixed maturities:
U.S. Government and government agencies	$	(1	)	$	102	99	%	$	(3	)	$	99	97	%
States, municipalities and political subdivisions	(36		)	1,957		98	%	(17		)	451		96	%
Foreign government	—			26		100	%	—			—		—	%
Residential MBS	(2		)	157		99	%	(5		)	110		96	%
Commercial MBS	(4		)	215		98	%	—			—		—	%
Asset-backed securities	(36		)	3,738		99	%	(10		)	256		96	%
Corporate and other	(281		)	10,673		97	%	(43		)	651		94	%
Total fixed maturities	$	(360	)	$	16,868	98	%	$	(78	)	$	1,567	95	%
December 31, 2017
Fixed maturities:
U.S. Government and government agencies	$	—		$	55	100	%	$	(3	)	$	123	98	%
States, municipalities and political subdivisions	(8		)	825		99	%	(10		)	431		98	%
Foreign government	—			4		100	%	—			—		—	%
Residential MBS	(1		)	118		99	%	(5		)	118		96	%
Commercial MBS	(1		)	67		99	%	—			—		—	%
Asset-backed securities	(7		)	1,195		99	%	(9		)	299		97	%
Corporate and other	(20		)	2,031		99	%	(18		)	603		97	%
Total fixed maturities	$	(37	)	$	4,295	99	%	$	(45	)	$	1,574	97	%
Equity securities:
Common stocks	$	(22	)	$	117	84	%	$	—		$	—	—	%
Perpetual preferred stocks	—			41		100	%	(1		)	13		93	%
Total equity securities	$	(22	)	$	158	88	%	$	(1	)	$	13	93	%

At June 30, 2018, the gross unrealized losses on fixed maturities of $438 million relate to 2,043 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 93% of the gross unrealized loss and 96% of the fair value.

AFG analyzes its MBS securities for other-than-temporary 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 the first six months of 2018, AFG recorded less than $1 million in other-than-temporary impairment charges related to its residential MBS.

In the first six months of 2018, AFG recorded less than $1 million in other-than-temporary impairment charges related to corporate bonds and other fixed maturities.

Management believes AFG will recover its cost basis 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, 2018. As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities previously classified as “available for sale” are required to be carried at fair value through net earnings instead of accumulated other comprehensive income and therefore are no longer evaluated for other-than-temporary impairment.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

A progression of the credit portion of other-than-temporary impairments 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):

	2018			2017
Balance at March 31	$	144		$	146
Additional credit impairments on:
Previously impaired securities	—			1
Securities without prior impairments	1			—
Reductions due to sales or redemptions	(1		)	(2		)
Balance at June 30	$	144		$	145
Balance at January 1	$	145		$	153
Additional credit impairments on:
Previously impaired securities	—			1
Securities without prior impairments	1			—
Reductions due to sales or redemptions	(2		)	(9		)
Balance at June 30	$	144		$	145

The table below sets forth the scheduled maturities of available for sale fixed maturities as of June 30, 2018 (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		Amount		%
Maturity
One year or less	$	994	$	1,003	3	%
After one year through five years	7,703		7,764		20	%
After five years through ten years	13,386		13,285		33	%
After ten years	4,828		4,841		12	%
	26,911		26,893		68	%
ABS (average life of approximately 4-1/2 years)	8,849		8,935		22	%
MBS (average life of approximately 4-1/2 years)	3,484		3,820		10	%
Total	$	39,244	$	39,648	100	%

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, 2018 or December 31, 2017.

22

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 and equity 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
June 30, 2018
Net unrealized gain on:
Fixed maturities — annuity segment (a)	$	310		$	(65	)	$	245
Fixed maturities — all other	94			(20		)	74
Total fixed maturities	404			(85		)	319
Deferred policy acquisition costs — annuity segment	(124		)	26			(98		)
Annuity benefits accumulated	(41		)	9			(32		)
Unearned revenue	3			(1		)	2
Total net unrealized gain on marketable securities	$	242		$	(51	)	$	191
December 31, 2017
Net unrealized gain on:
Fixed maturities — annuity segment (a)	$	1,082		$	(227	)	$	855
Fixed maturities — all other	259			(55		)	204
Total fixed maturities	1,341			(282		)	1,059
Equity securities (b)	279			(58		)	221
Total investments	1,620			(340		)	1,280
Deferred policy acquisition costs — annuity segment	(433		)	91			(342		)
Annuity benefits accumulated	(137		)	29			(108		)
Unearned revenue	13			(3		)	10
Total net unrealized gain on marketable securities	$	1,063		$	(223	)	$	840

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

(b) As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings.

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,
	2018			2017			2018			2017
Investment income:
Fixed maturities	$	431		$	397		$	843		$	786
Equity securities:
Dividends	20			17			40			36
Change in fair value (*)	15			2			14			4
Equity in earnings of partnerships and similar investments	41			21			87			31
Other	28			27			51			47
Gross investment income	535			464			1,035			904
Investment expenses	(5		)	(4		)	(10		)	(9		)
Net investment income	$	530		$	460		$	1,025		$	895

(*) As discussed in Note A — “Accounting Policies — Investments,” AFG adopted guidance in January 2018 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. 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

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

securities classified as “trading” under the previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.

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

	Three months ended June 30, 2018												Three months ended June 30, 2017
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	4		$	—		$	4		$	(338	)	$	11		$	(1	)	$	10		$	262
Equity securities	23			—			23			—			8			(11		)	(3		)	20
Mortgage loans and other investments	—			—			—			—			—			—			—			—
Other (*)	4			—			4			147			(2		)	3			1			(112		)
Total pretax	31			—			31			(191		)	17			(9		)	8			170
Tax effects	(6		)	—			(6		)	40			(6		)	3			(3		)	(60		)
Net of tax	$	25		$	—		$	25		$	(151	)	$	11		$	(6	)	$	5		$	110
	Six months ended June 30, 2018												Six months ended June 30, 2017
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	3		$	(1	)	$	2		$	(937	)	$	16		$	(1	)	$	15		$	464
Equity securities	(72		)	—			(72		)	—			10			(20		)	(10		)	92
Mortgage loans and other investments	—			—			—			—			3			—			3			—
Other (*)	8			—			8			395			(3		)	6			3			(195		)
Total pretax	(61		)	(1		)	(62		)	(542		)	26			(15		)	11			361
Tax effects	13			—			13			114			(9		)	5			(4		)	(126		)
Net of tax	$	(48	)	$	(1	)	$	(49	)	$	(428	)	$	17		$	(10	)	$	7		$	235

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

As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, 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 second quarter and first six months of 2018 on securities that were still owned at June 30, 2018 as follows (in millions):

	Three months ended		Six months ended
	June 30, 2018		June 30, 2018
Included in realized gains (losses)	$	16	$	(71	)
Included in net investment income	15		14
	$	31	$	(57	)

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,
	2018			2017
Fixed maturities:
Gross gains	$	16		$	21
Gross losses	(8		)	(2		)

In the first six months of 2017, AFG recorded gross gains of $15 million and gross losses of $5 million on available for sale equity securities.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

E.    Derivatives

As discussed under “Derivatives” in Note A — “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, 2018				December 31, 2017
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	115	$	—	$	105	$	—
Public company warrants	Equity securities	3		—		4		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		2,776		—		2,542
Equity index call options	Equity index call options	615		—		701		—
Equity index put options	Other liabilities	—		—		—		—
Reinsurance contracts (embedded derivative)	Other liabilities	—		2		—		4
		$	733	$	2,778	$	810	$	2,546

The MBS with embedded derivatives consist primarily of interest-only MBS with interest rates that float inversely with short-term rates. 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.

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 ($353 million at June 30, 2018 and $389 million at December 31, 2017) 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 change in the fair value of the call and put options will generally offset the economic change in the liabilities from the index participation. Both the index-based component of the annuities and the related call and put options are considered derivatives. Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products.

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

25

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 months of 2018 and 2017 (in millions):

		Three months ended June 30,						Six months ended June 30,
Derivative	Statement of Earnings Line	2018			2017			2018			2017
MBS with embedded derivatives	Realized gains (losses) on securities	$	(1	)	$	(3	)	$	(5	)	$	(3	)
Public company warrants	Realized gains (losses) on securities	—			—			(1		)	—
Fixed-indexed and variable-indexed annuities (embedded derivative) (*)	Annuity benefits	(126		)	(112		)	(63		)	(259		)
Equity index call options	Annuity benefits	90			81			52			222
Equity index put options	Annuity benefits	—			—			—			—
Reinsurance contract (embedded derivative)	Net investment income	1			(1		)	2			(2		)
		$	(36	)	$	(35	)	$	(15	)	$	(42	)

(*) The change in fair value of the embedded derivative includes losses related to unlocking of actuarial assumptions of $44 million in both the second quarter and first six months of 2018.

Derivatives Designated and Qualifying as Cash Flow Hedges   As of June 30, 2018, AFG has entered into eleven 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 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 $1.64 billion at June 30, 2018 compared to $1.58 billion at December 31, 2017, reflecting a new swap with an aggregate notional amount at issuance of $130 million entered into in the first quarter of 2018, partially offset by the scheduled amortization discussed above. The fair value of the effective portion of the interest rate swaps in an asset position and included in other assets was zero at June 30, 2018 and less than $1 million at December 31, 2017. The fair value of the effective portion of the interest rate swaps in a liability position and included in other liabilities was $70 million at June 30, 2018 and $31 million at December 31, 2017. 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 losses of $2 million and $1 million during the second quarter and first six months of 2018 as compared to income of $1 million and $3 million in the second quarter and first six months of 2017, respectively. There was no ineffectiveness recorded in net earnings during these periods. A collateral receivable supporting these swaps of $116 million at June 30, 2018 and $70 million at December 31, 2017 is included in other assets in AFG’s Balance Sheet.

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F.    Deferred Policy Acquisition Costs

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

	P&C			Annuity and Other
	Deferred			Deferred			Sales															Consolidated
	Costs			Costs			Inducements			PVFP			Subtotal			Unrealized (*)			Total			Total
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, 2017	$	243		$	1,137		$	105		$	44		$	1,286		$	(324	)	$	962		$	1,205
Additions	151			66			1			—			67			—			67			218
Amortization:
Periodic amortization	(136		)	(36		)	(4		)	(2		)	(42		)	—			(42		)	(178		)
Included in realized gains	—			—			1			—			1			—			1			1
Foreign currency translation	—			—			—			—			—			—			—			—
Change in unrealized	—			—			—			—			—			(90		)	(90		)	(90		)
Balance at June 30, 2017	$	258		$	1,167		$	103		$	42		$	1,312		$	(414	)	$	898		$	1,156
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 December 31, 2016	$	238		$	1,110		$	110		$	46		$	1,266		$	(265	)	$	1,001		$	1,239
Additions	290			133			2			—			135			—			135			425
Amortization:
Periodic amortization	(271		)	(78		)	(10		)	(4		)	(92		)	—			(92		)	(363		)
Included in realized gains	—			2			1			—			3			—			3			3
Foreign currency translation	1			—			—			—			—			—			—			1
Change in unrealized	—			—			—			—			—			(149		)	(149		)	(149		)
Balance at June 30, 2017	$	258		$	1,167		$	103		$	42		$	1,312		$	(414	)	$	898		$	1,156

(*) Unrealized adjustments to DPAC includes net unrealized gains/losses on securities and net unrealized gains/losses on cash flow hedges.

The present value of future profits (“PVFP”) amounts in the table above are net of $145 million and $141 million of accumulated amortization at June 30, 2018 and December 31, 2017, respectively.

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G.    Managed Investment Entities

AFG is the investment manager and its subsidiaries have investments ranging from 15.0% to 60.9% of the most subordinate debt tranche of sixteen collateralized loan obligation entities or “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 2004 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 its CLOs is limited to its investment in the CLOs, which had an aggregate fair value of $192 million (including $134 million invested in the most subordinate tranches) at June 30, 2018, and $215 million at December 31, 2017.

In March 2018 and March 2017, AFG formed new CLOs, which issued $463 million and $408 million face amount of liabilities, respectively (including $31 million and $24 million face amount purchased by subsidiaries of AFG). During the first six months of 2017, AFG subsidiaries also purchased $29 million face amount of senior debt and subordinate tranches of existing CLOs for $29 million. During the first six months of 2018 and 2017, AFG subsidiaries received $45 million and $64 million, respectively, in sale and redemption proceeds from its CLO investments. During both the first six months of 2018 and 2017, one AFG CLO was substantially liquidated, as permitted by the CLO indentures.

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,
	2018			2017			2018			2017
Investment in CLO tranches at end of period	$	192		$	188		$	192		$	188
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	(29		)	(9		)	(15		)	(4		)
Liabilities	27			20			10			15
Management fees paid to AFG	4			5			8			9
CLO earnings (losses) attributable to AFG shareholders (b)	4			5			7			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 $62 million and $55 million at June 30, 2018 and December 31, 2017, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by $167 million and $118 million at those dates. The CLO assets include loans with an aggregate fair value of $1 million at both June 30, 2018 and December 31, 2017, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of $8 million at both those dates).

H.    Goodwill and Other Intangibles

There were no changes in the goodwill balance of $199 million during the first six months of 2018. Included in other assets in AFG’s Balance Sheet is $34 million at June 30, 2018 and $26 million at December 31, 2017 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of $34 million and $30 million, respectively. Amortization of intangibles was $2 million in both the second quarters of 2018 and 2017 and $4 million in both the first six months of 2018 and 2017.

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I.    Long-Term Debt

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

	June 30, 2018							December 31, 2017
	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		(5		)	420		425		(5		)	420
Other	3		—			3		3		—			3
	1,018		(7		)	1,011		1,018		(7		)	1,011
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
	300		(10		)	290		300		(10		)	290
	$	1,318	$	(17	)	$	1,301	$	1,318	$	(17	)	$	1,301

AFG has no scheduled principal payments on its long-term debt for the balance of 2018 or in the subsequent five years.

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. No amounts were borrowed under this facility at June 30, 2018 or December 31, 2017.

J.     Redeemable Noncontrolling Interests

Neon Lloyd’s Business   On December 29, 2017, AFG completed the sale of an indirect noncontrolling interest in Neon, its United Kingdom-based Lloyd’s insurer, to certain Neon executives for cash equal to the fair value of the interest sold as determined by a third-party valuation firm. This noncontrolling interest is redeemable at the option of the holder and is presented separately in the mezzanine section of the balance sheet, as discussed in Note A — “Accounting Policies — Noncontrolling Interests.”

K.    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.

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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, 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
Quarter ended June 30, 2017
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	178		$	(63	)	$	115		$	—	$	115
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(8		)	3			(5		)	—		(5		)
Total net unrealized gains on securities	$	529		170			(60		)	110			—		110			$	—		$	639
Net unrealized gains (losses) on cash flow hedges	(8		)	4			(2		)	2			—		2			—			(6		)
Foreign currency translation adjustments	(15		)	3			1			4			—		4			—			(11		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—		—			—			(7		)
Total	$	499		$	177		$	(61	)	$	116		$	—	$	116		$	—		$	615
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
Six months ended June 30, 2017
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	369		$	(129	)	$	240		$	—	$	240
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(8		)	3			(5		)	—		(5		)
Total net unrealized gains on securities	$	404		361			(126		)	235			—		235			$	—		$	639
Net unrealized gains (losses) on cash flow hedges	(7		)	2			(1		)	1			—		1			—			(6		)
Foreign currency translation adjustments	(15		)	3			1			4			—		4			—			(11		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—		—			—			(7		)
Total	$	375		$	366		$	(126	)	$	240		$	—	$	240		$	—		$	615

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(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 for income taxes

(b) Includes net unrealized gains of $67 million at June 30, 2018 and $68 million at both March 31, 2018 and December 31, 2017 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 months of 2018, AFG issued 200,625 shares of restricted Common Stock (fair value of $112.86 per share) under the Stock Incentive Plan. In addition, AFG issued 45,804 shares of Common Stock (fair value of $115.49 per share) in the first quarter of 2018 under the Equity Bonus Plan. AFG did not grant any stock options in the first six months of 2018.

Total compensation expense related to stock incentive plans of AFG and its subsidiaries was $6 million in both the second quarters of 2018 and 2017 and $11 million and $17 million in the first six months of 2018 and 2017, respectively.

L.    Income Taxes

The following is a reconciliation of income taxes at the statutory rate (21% in 2018 and 35% in 2017) 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,
	2018					2017					2018					2017
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	260				$	205				$	434				$	428
Income taxes at statutory rate	$	54		21	%	$	72		35	%	$	91		21	%	$	150		35	%
Effect of:
Stock-based compensation	(2		)	(1	%)	(7		)	(3	%)	(7		)	(2	%)	(13		)	(3	%)
Tax exempt interest	(4		)	(2	%)	(6		)	(3	%)	(7		)	(2	%)	(12		)	(3	%)
Dividends received deduction	(1		)	—	%	(2		)	(1	%)	(2		)	—	%	(4		)	(1	%)
Employee Stock Ownership Plan dividends paid deduction	(1		)	—	%	(2		)	(1	%)	(1		)	—	%	(2		)	—	%
Foreign operations	—			—	%	—			—	%	3			1	%	6			1	%
Nondeductible expenses	2			1	%	1			—	%	4			1	%	3			1	%
Change in valuation allowance	2			1	%	2			1	%	2			—	%	—			—	%
Other	2			—	%	2			1	%	2			1	%	—			—	%
Provision for income taxes as shown in the statement of earnings	$	52		20	%	$	60		29	%	$	85		20	%	$	128		30	%

The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was enacted on December 22, 2017, lowered the U.S corporate tax rate to 21% and made other widespread changes to the U.S. tax code effective in 2018. Because the TCJA was enacted in December 2017, AFG recorded the $83 million decrease in its net deferred tax asset resulting from the changes in the tax code (primarily the lower corporate tax rate applicable to 2018 and future years) in the fourth quarter of 2017.

The TCJA is subject to further clarification and interpretation by the U.S. Treasury Department and the Internal Revenue Service. For example, the TCJA changes the way that companies calculate their insurance claims and reserves for tax purposes,

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including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that have not been published. The resulting transitional deferred tax liability (taxes payable over eight years under the TCJA) and offsetting increase in AFG’s insurance claims and reserves deferred tax assets, were recorded at December 31, 2017 using reasonable estimates based on available information and should be considered provisional in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”). Because the established transition liability was completely offset by an increase in related deferred tax assets, any adjustment to the provisional amount will not impact AFG’s effective tax rate. In accordance with SAB 118, the insurance claims and reserves transitional deferred tax liability (and offsetting adjustment to the related deferred tax assets) and any other changes in deferred taxes resulting from clarification and interpretation of the TCJA provided during 2018 (none through June 30, 2018) will be recorded in the period in which the guidance is published.

The favorable impact of stock-based compensation on AFG’s effective tax rate in the second quarters and first six months of 2018 and 2017 reflects the high volume of employee stock option exercises during that period and the increase in the market price of AFG Common Stock.

Approximately $19 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, 2018. 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.

M.     Contingencies

There have been no significant changes to the matters discussed and referred to in Note M — “Contingencies” of AFG’s 2017 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.

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 months of 2018 and 2017 (in millions):

	Six months ended June 30,
	2018			2017
Balance at beginning of year	$	9,678		$	8,563
Less reinsurance recoverables, net of allowance	2,957			2,302
Net liability at beginning of year	6,721			6,261
Provision for losses and LAE occurring in the current period	1,434			1,294
Net increase (decrease) in the provision for claims of prior years	(100		)	(50		)
Total losses and LAE incurred	1,334			1,244
Payments for losses and LAE of:
Current year	(294		)	(253		)
Prior years	(975		)	(953		)
Total payments	(1,269		)	(1,206		)
Reserves of business disposed (*)	(319		)	—
Foreign currency translation and other	(4		)	24
Net liability at end of period	6,463			6,323
Add back reinsurance recoverables, net of allowance	2,630			2,407
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,093		$	8,730

(*) Reflects the reinsurance to close transaction at Neon discussed below.

The net decrease in the provision for claims of prior years during the first six months of 2018 reflects (i) lower than expected losses in the crop business 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

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(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).

The net decrease in the provision for claims of prior years during the first six months of 2017 reflects (i) lower than expected losses in the crop and equine operations and lower than expected claim severity in the property and inland marine business (all within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses and at Neon (all within the Specialty casualty sub-segment) and (iii) lower than anticipated claim severity in the fidelity business and lower than expected claim frequency and severity in the surety business (all within the Specialty financial sub-segment). This favorable development was partially offset by (i) higher than expected claim severity in the ocean marine business (within the Property and transportation sub-segment), (ii) higher than anticipated claim severity in the targeted markets and general liability business (all within the Specialty casualty sub-segment) and (iii) an adjustment to the deferred gain on the retroactive reinsurance transaction entered into in connection with the sale of businesses in 1998 (included in Other specialty 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 (the transaction settled in early 2018). In the Lloyd’s market, a reinsurance to close transaction transfers the responsibility for discharging all 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 for a premium. This transaction provided Neon with finality on its legacy business.

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AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 2

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

INDEX TO MD&A
	Page		Page
Forward-Looking Statements	34	Results of Operations — Second Quarter	48
Overview	35	Segmented Statement of Earnings	48
Critical Accounting Policies	35	Property and Casualty Insurance	49
Liquidity and Capital Resources	36	Annuity	58
Ratios	36	Holding Company, Other and Unallocated	66
Condensed Consolidated Cash Flows	36	Results of Operations — First Six Months	69
Parent and Subsidiary Liquidity	37	Segmented Statement of Earnings	69
Investments	38	Property and Casualty Insurance	70
Uncertainties	42	Annuity	78
Managed Investment Entities	42	Holding Company, Other and Unallocated	85
Results of Operations	46	Recent and Pending Accounting Standards	87
General	46

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 call options used in the fixed-indexed and variable-indexed annuity business;

• 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;

• regulatory actions (including changes in statutory accounting rules);

• 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;

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

• 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 (including those associated with the United Kingdom’s expected withdrawal from the European Union, or “Brexit”) 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.

34

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 annuities in the retail, financial institutions, broker-dealer, registered investment advisor and education markets.

Net earnings attributable to AFG’s shareholders for the second quarter and first six months of 2018 were $210 million ($2.31 per share, diluted) and $355 million ($3.92 per share, diluted), respectively, compared to $145 million ($1.61 per share, diluted) and $298 million ($3.32 per share, diluted) reported in the same periods of 2017, reflecting:

• higher earnings in the annuity segment,

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

• higher underwriting profit in the property and casualty insurance segment in the first six months of 2018 compared to the first six months of 2017,

• lower interest charges on borrowed money,

• a lower corporate income tax rate,

• realized losses on securities in the first six months of 2018 compared to realized gains in the first six months of 2017 and higher realized gains on securities in the second quarter of 2018 compared to the second quarter of 2017. Both periods in 2018 reflect the change in the fair value of equity securities that are required to be carried at fair value through net earnings under new accounting guidance adopted on January 1, 2018, and

• lower income from the sale of real estate in the first six months of 2018 compared to the first six months of 2017.

CRITICAL ACCOUNTING POLICIES

Significant accounting policies are summarized in Note A— “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 of deferred acquisition costs,

• 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 2017 Form 10-K.

35

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

LIQUIDITY AND CAPITAL RESOURCES

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

	June 30, 2018			December 31,
				2017			2016
Principal amount of long-term debt	$	1,318		$	1,318		$	1,308
Total capital	6,211			6,033			5,921
Ratio of debt to total capital:
Including subordinated debt	21.2		%	21.8		%	22.1		%
Excluding subordinated debt	16.4		%	16.9		%	17.0		%

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) on fixed maturity investments).

AFG’s ratio of earnings to fixed charges, including annuity benefits as a fixed charge, was 1.82 for the six months ended June 30, 2018 and 1.72 for the year ended December 31, 2017. Excluding annuity benefits, this ratio was 10.40 and 7.67, respectively. Although the ratio excluding annuity benefits is not required or encouraged to be disclosed under Securities and Exchange Commission rules, it is presented because interest credited to annuity policyholder accounts is not always considered a borrowing cost for an insurance company.

Condensed Consolidated Cash FlowsAFG’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,
	2018			2017
Net cash provided by operating activities	$	823		$	574
Net cash used in investing activities	(2,485		)	(1,994		)
Net cash provided by financing activities	1,134			1,520
Net change in cash and cash equivalents	$	(528	)	$	100

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 increased cash flows from operating activities by $138 million during the first six months of 2018 and reduced cash flows from operating activities by $72 million in the first six months of 2017, accounting for a $210 millionincrease in cash flows from operating activities in the 2018 period compared to the 2017 period. As discussed in Note A — “Accounting Policies — Managed Investment 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 $685 million in the first six months of 2018 compared to $646 million in the first six months of 2017, an increase of $39 million.

36

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 $2.49 billion for the first six months of 2018 compared to $1.99 billion in the first six months of 2017, an increase of $491 million. While the $229 million decrease in net cash flows from annuity policyholders in the first six months of 2018 as compared to the 2017 period (discussed below under net cash provided by financing activities) reduced the amount of cash available for investment in the first six months of 2018 compared to the same 2017 period, this reduction was more than offset by the investment of AFG’s overall cash held at December 31, 2017 during the first six months of 2018. In addition to the investment of funds provided by the insurance operations, investing activities also include the purchase 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 $226 millionuse of cash in the first six months of 2018 compared to a $42 millionuse of cash in the 2017 period, accounting for a $184 millionincrease in net cash used in investing activities in the first six months of 2018 compared to the same 2017 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note G — “Managed Investment 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, repurchases of common stock and dividend payments. Net cash provided by financing activities was $1.13 billion for the first six months of 2018 compared to $1.52 billion in the first six months of 2017, a decrease of $386 million. Annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $1.20 billion in the first six months of 2018 compared to $1.43 billion in the first six months of 2017, accounting for a $229 million decrease in net cash provided by financing activities in the 2018 period compared to the 2017 period. In June 2017, AFG issued $350 million of 4.50% Senior Notes due 2047, the net proceeds of which contributed $345 million to net cash provided by financing activities in the first six months of 2017. Redemptions of long-term debt were a $230 million use of cash in the first six months of 2017. 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. Issuances of managed investment entity liabilities exceeded retirements by $111 million in the first six months of 2018 compared to $142 million in the first six months of 2017, accounting for a $31 milliondecrease in net cash provided by financing activities in the 2018 period compared to the 2017 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note G — “Managed Investment 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 2017 or the first six months of 2018.

In May 2018, AFG paid a special cash dividend of $1.50 per share of AFG Common Stock totaling $134 million. In 2017, AFG paid special cash dividends of $3.50 per share of AFG Common Stock ($1.50 per share in May and $2.00 per share in November) totaling approximately $308 million.

In June 2017, AFG issued $350 million of 4.50% Senior Notes due June 2047. Net proceeds from the offering were used to redeem AFG’s $230 million outstanding principal amount of 6-3/8% Senior Notes due June 2042, at par value in June 2017 and AFG’s $125 million outstanding principal amount of 5-3/4% Senior Notes due August 2042 at par value in August 2017.

In November 2017, AFG issued an additional $240 million of 4.50% Senior Notes due in 2047 and $125 million of 3.50% Senior Notes due in 2026. The net proceeds of the offering were used to redeem AFG’s $350 million outstanding principal amount of 9-7/8% Senior Notes due in June 2019 for $388 million (including a make-whole premium of $38 million) in December 2017.

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.

37

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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, 2018, GALIC had $871 million in outstanding advances from the FHLB (included in annuity benefits accumulated), bearing interest at rates ranging from 0.03% to 0.22% over LIBOR (average rate of 2.25% at June 30, 2018). While these advances must be repaid between 2018 and 2021 ($40 million in 2018, $345 million in 2019, $150 million in 2020 and $336 million in 2021), GALIC has the option to prepay all or a portion 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, 2018, GALIC estimated that it had additional borrowing capacity of approximately $300 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”). AFG began selling policies with GMIRs below 2% in 2003; almost all new business since late 2010 has been issued with a 1% GMIR. At June 30, 2018, AFG could reduce the average crediting rate on approximately $27 billion of traditional fixed annuities and fixed-indexed and variable-indexed annuities without guaranteed withdrawal benefits by approximately 109 basis points (on a weighted average basis). Annuity policies are subject to GMIRs at policy issuance. 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	2018	2017	2016
1 — 1.99%	78%	76%	72%
2 — 2.99%	4%	5%	6%
3 — 3.99%	9%	10%	12%
4.00% and above	9%	9%	10%
Annuity benefits accumulated (in millions)	$34,886	$33,316	$29,907

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. 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   AFG’s investment portfolio at June 30, 2018, includes $39.65 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 and $137 million in fixed maturities classified as trading with changes in unrealized holding gains or losses included in net investment income. In addition, AFG’s investment portfolio includes $1.62 billion in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and $160 million in equity securities carried at fair value with unrealized 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

38

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

published closing prices. For mortgage-backed securities (“MBS”), which comprise approximately 10% of AFG’s fixed maturities, prices for each security are generally obtained from both pricing services and broker quotes. For the remainder of AFG’s fixed maturity portfolio, approximately 73% are priced using pricing services and the balance is 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 MBS are estimates of the rate of future prepayments and defaults of principal over the 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, 2018 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional.

Fair value of fixed maturity portfolio	$	39,785
Percentage impact on fair value of 100 bps increase in interest rates	(4.5		%)
Pretax impact on fair value of fixed maturity portfolio	$	(1,790	)
Offsetting adjustments to deferred policy acquisition costs and other balance sheet amounts	750
Estimated pretax impact on accumulated other comprehensive income	(1,040		)
Deferred income tax	218
Estimated after-tax impact on accumulated other comprehensive income	$	(822	)

Approximately 90% of the fixed maturities held by AFG at June 30, 2018, 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 investment portfolio should generate a stable and predictable investment return.

MBS are subject to significant prepayment risk due to the fact that, 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 of AFG’s non-agency residential MBS portfolio.

39

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, 2018, 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 4-1/2 years and 5 years, respectively.

	Amortized Cost		Fair Value		Fair Value as % of Cost		Unrealized Gain (Loss)			% Rated Investment Grade
Collateral type
Residential:
Agency-backed	$	189	$	185	98	%	$	(4	)	100	%
Non-agency prime	1,076		1,231		114	%	155			28	%
Alt-A	891		1,015		114	%	124			14	%
Subprime	410		457		111	%	47			28	%
Commercial	920		934		102	%	14			94	%
	$	3,486	$	3,822	110	%	$	336		44	%

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, 2018, 97% (based on statutory carrying value of $3.44 billion) of AFG’s MBS had an NAIC designation of 1.

Municipal bonds represented approximately 17% of AFG’s fixed maturity portfolio at June 30, 2018. 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, 2018, approximately 77% of the municipal bond portfolio was held in revenue bonds, with the remaining 23% 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, 2018, is shown in the following table (dollars in millions). Approximately $607 million of available for sale fixed maturity securities had no unrealized gains or losses at June 30, 2018.

	Securities With Unrealized Gains			Securities With Unrealized Losses
Available for Sale Fixed Maturities
Fair value of securities	$	20,606		$	18,435
Amortized cost of securities	$	19,764		$	18,873
Gross unrealized gain (loss)	$	842		$	(438	)
Fair value as % of amortized cost	104		%	98		%
Number of security positions	3,212			2,043
Number individually exceeding $2 million gain or loss	53			6
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):
Mortgage-backed securities	$	347		$	(11	)
States and municipalities	162			(53		)
Asset-backed securities	132			(46		)
Banks, savings and credit institutions	43			(87		)
Manufacturing	32			(53		)
Insurance companies	20			(40		)
Percentage rated investment grade	86		%	96		%

40

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, 2018, 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	22	%	17	%
After five years through ten years	24	%	45	%
After ten years	12	%	13	%
	62	%	76	%
Asset-backed securities (average life of approximately 4-1/2 years)	22	%	22	%
Mortgage-backed securities (average life of approximately 4-1/2 years)	16	%	2	%
	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, 2018
Securities with unrealized gains:
Exceeding $500,000 (457 securities)	$	5,797	$	534		110	%
$500,000 or less (2,755 securities)	14,809		308			102	%
	$	20,606	$	842		104	%
Securities with unrealized losses:
Exceeding $500,000 (235 securities)	$	4,529	$	(213	)	96	%
$500,000 or less (1,808 securities)	13,906		(225		)	98	%
	$	18,435	$	(438	)	98	%

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, 2018
Investment grade fixed maturities with losses for:
Less than one year (1,649 securities)	$	16,260	$	(344	)	98	%
One year or longer (249 securities)	1,353		(63		)	96	%
	$	17,613	$	(407	)	98	%
Non-investment grade fixed maturities with losses for:
Less than one year (95 securities)	$	608	$	(16	)	97	%
One year or longer (50 securities)	214		(15		)	93	%
	$	822	$	(31	)	96	%

When a decline in the value of a specific investment is considered to be other-than-temporary, a provision for 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 2017 Form 10-K under Management’s Discussion and Analysis — “Investments.”

41

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 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, 2018. Although AFG has the ability to continue holding its 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 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   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” in AFG’s 2017 Form 10-K. In addition to its ongoing internal monitoring of asbestos and environmental exposures, AFG has periodically conducted comprehensive external studies of its asbestos and environmental reserves relating to the run-off operations of its property and casualty insurance segment and exposures related to its former railroad and manufacturing operations with the aid of specialty actuarial, engineering and consulting firms and outside counsel, generally every two years, with an in-depth internal review during the intervening years. AFG has scheduled its 2018 internal review of these liabilities to be completed in the third quarter of 2018.

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 Policies— Managed Investment Entities” and Note G— “Managed Investment 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.

42

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
June 30, 2018
Assets:
Cash and investments	$	46,970	$	—	$	(191	)	(a)	$	46,779
Assets of managed investment entities	—		5,032		—				5,032
Other assets	10,024		—		(1		)	(a)	10,023
Total assets	$	56,994	$	5,032	$	(192	)		$	61,834
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	11,632	$	—	$	—			$	11,632
Annuity, life, accident and health benefits and reserves	35,533		—		—				35,533
Liabilities of managed investment entities	—		5,032		(192		)	(a)	4,840
Long-term debt and other liabilities	4,745		—		—				4,745
Total liabilities	51,910		5,032		(192		)		56,750
Redeemable noncontrolling interests	—		—		—				—
Shareholders’ equity:
Common Stock and Capital surplus	1,309		—		—				1,309
Retained earnings	3,628		—		—				3,628
Accumulated other comprehensive income, net of tax	147		—		—				147
Total shareholders’ equity	5,084		—		—				5,084
Noncontrolling interests	—		—		—				—
Total equity	5,084		—		—				5,084
Total liabilities and equity	$	56,994	$	5,032	$	(192	)		$	61,834
December 31, 2017
Assets:
Cash and investments	$	46,262	$	—	$	(214	)	(a)	$	46,048
Assets of managed investment entities	—		4,902		—				4,902
Other assets	9,709		—		(1		)	(a)	9,708
Total assets	$	55,971	$	4,902	$	(215	)		$	60,658
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	12,088	$	—	$	—			$	12,088
Annuity, life, accident and health benefits and reserves	33,974		—		—				33,974
Liabilities of managed investment entities	—		4,902		(215		)	(a)	4,687
Long-term debt and other liabilities	4,575		—		—				4,575
Total liabilities	50,637		4,902		(215		)		55,324
Redeemable noncontrolling interests	3		—		—				3
Shareholders’ equity:
Common Stock and Capital surplus	1,269		—		—				1,269
Retained earnings	3,248		—		—				3,248
Accumulated other comprehensive income, net of tax	813		—		—				813
Total shareholders’ equity	5,330		—		—				5,330
Noncontrolling interests	1		—		—				1
Total equity	5,331		—		—				5,331
Total liabilities and equity	$	55,971	$	4,902	$	(215	)		$	60,658

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

43

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
Three months ended June 30, 2018
Revenues:
Insurance net earned premiums	$	1,167		$	—	$	—			$	1,167
Net investment income	534			—		(4		)	(b)	530
Realized gains on securities	31			—		—				31
Income (loss) of managed investment entities:
Investment income	—			64		—				64
Gain (loss) on change in fair value of assets/liabilities	—			—		(2		)	(b)	(2		)
Other income	47			—		(4		)	(c)	43
Total revenues	1,779			64		(10		)		1,833
Costs and Expenses:
Insurance benefits and expenses	1,414			—		—				1,414
Expenses of managed investment entities	—			64		(10		)	(b)(c)	54
Interest charges on borrowed money and other expenses	105			—		—				105
Total costs and expenses	1,519			64		(10		)		1,573
Earnings before income taxes	260			—		—				260
Provision for income taxes	52			—		—				52
Net earnings, including noncontrolling interests	208			—		—				208
Less: Net earnings (loss) attributable to noncontrolling interests	(2		)	—		—				(2		)
Net earnings attributable to shareholders	$	210		$	—	$	—			$	210
Three months ended June 30, 2017
Revenues:
Insurance net earned premiums	$	1,070		$	—	$	—			$	1,070
Net investment income	465			—		(5		)	(b)	460
Realized gains on securities	8			—		—				8
Income (loss) of managed investment entities:
Investment income	—			50		—				50
Gain (loss) on change in fair value of assets/liabilities	—			21		(10		)	(b)	11
Other income	52			—		(5		)	(c)	47
Total revenues	1,595			71		(20		)		1,646
Costs and Expenses:
Insurance benefits and expenses	1,279			—		—				1,279
Expenses of managed investment entities	—			71		(20		)	(b)(c)	51
Interest charges on borrowed money and other expenses	111			—		—				111
Total costs and expenses	1,390			71		(20		)		1,441
Earnings before income taxes	205			—		—				205
Provision for income taxes	60			—		—				60
Net earnings, including noncontrolling interests	145			—		—				145
Less: Net earnings (loss) attributable to noncontrolling interests	—			—		—				—
Net earnings attributable to shareholders	$	145		$	—	$	—			$	145

(a) Includes income of $4 million and $5 million in the secondquarter of 2018 and 2017, respectively, representing the change in fair value of AFG’s CLO investments plus $4 million and $5 million in the secondquarter of 2018 and 2017, respectively, in CLO management fees earned.

(b) Elimination of the change in fair value of AFG’s investments in the CLOs, including $6 million and $15 million in the secondquarter of 2018 and 2017, respectively, in distributions recorded as interest expense by the CLOs.

(c) Elimination of management fees earned by AFG.

44

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, 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 (loss) attributable to noncontrolling interests	(6		)	—			—				(6		)
Net earnings attributable to shareholders	$	355		$	—		$	—			$	355
Six months ended June 30, 2017
Revenues:
Insurance net earned premiums	$	2,098		$	—		$	—			$	2,098
Net investment income	906			—			(11		)	(b)	895
Realized gains on securities	11			—			—				11
Income (loss) of managed investment entities:
Investment income	—			101			—				101
Gain (loss) on change in fair value of assets/liabilities	—			21			(10		)	(b)	11
Other income	115			—			(9		)	(c)	106
Total revenues	3,130			122			(30		)		3,222
Costs and Expenses:
Insurance benefits and expenses	2,485			—			—				2,485
Expenses of managed investment entities	—			122			(30		)	(b)(c)	92
Interest charges on borrowed money and other expenses	217			—			—				217
Total costs and expenses	2,702			122			(30		)		2,794
Earnings before income taxes	428			—			—				428
Provision for income taxes	128			—			—				128
Net earnings, including noncontrolling interests	300			—			—				300
Less: Net earnings (loss) attributable to noncontrolling interests	2			—			—				2
Net earnings attributable to shareholders	$	298		$	—		$	—			$	298

(a) Includes income of $7 million and $11 million in the first six months of 2018 and 2017, respectively, representing the change in fair value of AFG’s CLO investments plus $8 million and $9 million in the first six months of 2018 and 2017, respectively, in CLO management fees earned.

(b) Elimination of the change in fair value of AFG’s investments in the CLOs, including $11 million and $21 million in the first six months of 2018 and 2017, respectively, in distributions recorded as interest expense by the CLOs.

(c) Elimination of management fees earned by AFG.

45

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) on 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 for asbestos and environmental exposures are excluded from core earnings. The following table (in millions, except per share amounts) identifies non-core items and reconciles net earnings 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,
	2018			2017			2018			2017
Components of net earnings attributable to shareholders:
Core operating earnings before income taxes	$	229		$	204		$	496		$	424
Pretax non-core items:
Realized gains (losses) on securities	31			8			(62		)	11
Loss on retirement of debt	—			(7		)	—			(7		)
Earnings before income taxes	260			205			434			428
Provision (credit) for income taxes:
Core operating earnings	46			59			98			126
Non-core items	6			1			(13		)	2
Total provision for income taxes	52			60			85			128
Net earnings, including noncontrolling interests	208			145			349			300
Less net earnings (losses) attributable to noncontrolling interests:
Core operating earnings (losses)	(2		)	—			(6		)	2
Non-core items	—			—			—			—
Total net earnings (losses) attributable to noncontrolling interests	(2		)	—			(6		)	2
Net earnings attributable to shareholders	$	210		$	145		$	355		$	298
Net earnings:
Core net operating earnings	$	185		$	145		$	404		$	296
Non-core items	25			—			(49		)	2
Net earnings attributable to shareholders	$	210		$	145		$	355		$	298
Diluted per share amounts:
Core net operating earnings	$	2.04		$	1.61		$	4.46		$	3.29
Realized gains (losses) on securities	0.27			0.05			(0.54		)	0.08
Loss on retirement of debt	—			(0.05		)	—			(0.05		)
Net earnings attributable to shareholders	$	2.31		$	1.61		$	3.92		$	3.32

Net earnings attributable to shareholders increased$65 million in the secondquarter of 2018 compared to the same period in 2017 due to higher core net operating earnings, higher net realized gains on securities in the 2018 period compared to the 2017 period and a loss on retirement of debt in the second quarter of 2017. Core net operating earnings increased$40 million in the secondquarter of 2018 compared to the same period in 2017, reflecting higher earnings in the annuity segment, higher net investment income in the property and casualty segment, lower interest charges on borrowed money and a lower corporate income tax rate. Realized gains on securities in the secondquarter of 2018 includes the increase in fair value of equity securities that are required to be carried at fair value through net earnings under new accounting guidance adopted on January 1, 2018.

46

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Net earnings attributable to shareholders increased $57 million in the first six months of 2018 compared to the same period in 2017 due primarily to higher core net operating earnings in the 2018 period and a loss on retirement of debt in the 2017 period, partially offset by net realized losses on securities in the 2018 period compared to net realized gains on securities in the 2017 period. Core net operating earnings increased $108 million in the first six months of 2018 compared to the same period in 2017, reflecting higher earnings in the annuity segment, higher underwriting profit and net investment income in the property and casualty insurance segment, lower interest charges on borrowed money and a lower corporate income tax rate. Realized losses on securities in the first six months of 2018 includes the decline in fair value of equity securities that are required to be carried at fair value through net earnings under new accounting guidance adopted on January 1, 2018.

47

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

RESULTS OF OPERATIONS — QUARTERS ENDED JUNE 30, 2018 AND 2017

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”).

Effective January 1, 2018, the results of AFG’s run-off long-term care and life businesses are included in the “Other” segment instead of as a separate reportable segment based on the immaterial size of the remaining operations. Prior periods amounts were reclassified for consistent presentation.

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 three months ended June 30, 2018 and 2017 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
Three months ended June 30, 2018
Revenues:
Property and casualty insurance net earned premiums	$	1,161		$	—	$	—		$	—		$	1,161		$	—		$	1,161
Life, accident and health net earned premiums	—			—		—			6			6			—			6
Net investment income	115			412		(4		)	7			530			—			530
Realized gains on securities	—			—		—			—			—			31			31
Income (loss) of MIEs:
Investment income	—			—		64			—			64			—			64
Gain (loss) on change in fair value of assets/liabilities	—			—		(2		)	—			(2		)	—			(2		)
Other income	2			27		(4		)	18			43			—			43
Total revenues	1,278			439		54			31			1,802			31			1,833
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	693			—		—			—			693			—			693
Commissions and other underwriting expenses	396			—		—			4			400			—			400
Annuity benefits	—			260		—			—			260			—			260
Life, accident and health benefits	—			—		—			11			11			—			11
Annuity and supplemental insurance acquisition expenses	—			49		—			1			50			—			50
Interest charges on borrowed money	—			—		—			16			16			—			16
Expenses of MIEs	—			—		54			—			54			—			54
Other expenses	11			31		—			47			89			—			89
Total costs and expenses	1,100			340		54			79			1,573			—			1,573
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 (loss) 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

48

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
Three months ended June 30, 2017
Revenues:
Property and casualty insurance net earned premiums	$	1,065	$	—	$	—		$	—		$	1,065		$	—		$	1,065
Life, accident and health net earned premiums	—		—		—			5			5			—			5
Net investment income	96		360		(5		)	9			460			—			460
Realized gains on securities	—		—		—			—			—			8			8
Income (loss) of MIEs:
Investment income	—		—		50			—			50			—			50
Gain (loss) on change in fair value of assets/liabilities	—		—		11			—			11			—			11
Other income	4		26		(5		)	22			47			—			47
Total revenues	1,165		386		51			36			1,638			8			1,646
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	635		—		—			—			635			—			635
Commissions and other underwriting expenses	358		—		—			8			366			—			366
Annuity benefits	—		224		—			—			224			—			224
Life, accident and health benefits	—		—		—			6			6			—			6
Annuity and supplemental insurance acquisition expenses	—		47		—			1			48			—			48
Interest charges on borrowed money	—		—		—			23			23			—			23
Expenses of MIEs	—		—		51			—			51			—			51
Other expenses	9		30		—			42			81			7			88
Total costs and expenses	1,002		301		51			80			1,434			7			1,441
Earnings before income taxes	163		85		—			(44		)	204			1			205
Provision for income taxes	52		30		—			(23		)	59			1			60
Net earnings, including noncontrolling interests	111		55		—			(21		)	145			—			145
Less: Net earnings attributable to noncontrolling interests	—		—		—			—			—			—			—
Core Net Operating Earnings	111		55		—			(21		)	145
Non-core earnings attributable to shareholders (a):
Realized gains on securities, net of tax	—		—		—			5			5			(5		)	—
Loss on retirement of debt, net of tax	—		—		—			(5		)	(5		)	5			—
Net Earnings Attributable to Shareholders	$	111	$	55	$	—		$	(21	)	$	145		$	—		$	145

(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.

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 $178 million in pretax earnings in the secondquarter of 2018 compared to $163 million in the secondquarter of 2017, an increase of $15 million (9%). The increase in pretax earnings reflects higher net investment income due primarily to higher earnings from limited partnerships and similar investments. These high returns should not necessarily be expected to repeat in future periods.

49

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 three months ended June 30, 2018 and 2017 (dollars in millions):

	Three months ended June 30,
	2018			2017			% Change
Gross written premiums	$	1,665		$	1,503		11	%
Reinsurance premiums ceded	(408		)	(373		)	9	%
Net written premiums	1,257			1,130			11	%
Change in unearned premiums	(96		)	(65		)	48	%
Net earned premiums	1,161			1,065			9	%
Loss and loss adjustment expenses	693			635			9	%
Commissions and other underwriting expenses	396			358			11	%
Underwriting gain	72			72			—	%
Net investment income	115			96			20	%
Other income and expenses, net	(9		)	(5		)	80	%
Earnings before income taxes	$	178		$	163		9	%
Combined Ratios:
Specialty lines							Change
Loss and LAE ratio	59.7		%	59.5		%	0.2	%
Underwriting expense ratio	34.0		%	33.7		%	0.3	%
Combined ratio	93.7		%	93.2		%	0.5	%
Aggregate — including exited lines
Loss and LAE ratio	59.7		%	59.7		%	—	%
Underwriting expense ratio	34.0		%	33.7		%	0.3	%
Combined ratio	93.7		%	93.4		%	0.3	%

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 $1.67 billion for the secondquarter of 2018 compared to $1.50 billion for the secondquarter of 2017, an increase of $162 million (11%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):

	Three months ended June 30,
	2018				2017
	GWP		%		GWP		%		% Change
Property and transportation	$	615	37	%	$	573	38	%	7	%
Specialty casualty	858		52	%	756		50	%	13	%
Specialty financial	192		11	%	174		12	%	10	%
	$	1,665	100	%	$	1,503	100	%	11	%

50

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 both the secondquarter of 2018 and the secondquarter of 2017. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):

	Three months ended June 30,
	2018					2017					Change in
	Ceded			% of GWP		Ceded			% of GWP		% of GWP
Property and transportation	$	(193	)	31	%	$	(180	)	31	%	—	%
Specialty casualty	(219		)	26	%	(195		)	26	%	—	%
Specialty financial	(33		)	17	%	(25		)	14	%	3	%
Other specialty	37					27
	$	(408	)	25	%	$	(373	)	25	%	—	%

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $1.26 billion for the secondquarter of 2018 compared to $1.13 billion for the secondquarter of 2017, an increase of $127 million (11%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):

	Three months ended June 30,
	2018				2017
	NWP		%		NWP		%		% Change
Property and transportation	$	422	33	%	$	393	35	%	7	%
Specialty casualty	639		51	%	561		50	%	14	%
Specialty financial	159		13	%	149		13	%	7	%
Other specialty	37		3	%	27		2	%	37	%
	$	1,257	100	%	$	1,130	100	%	11	%

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $1.16 billion for the secondquarter of 2018 compared to $1.07 billion for the secondquarter of 2017, an increase of $96 million (9%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):

	Three months ended June 30,
	2018				2017
	NEP		%		NEP		%		% Change
Property and transportation	$	374	32	%	$	357	34	%	5	%
Specialty casualty	595		51	%	537		50	%	11	%
Specialty financial	159		14	%	146		14	%	9	%
Other specialty	33		3	%	25		2	%	32	%
	$	1,161	100	%	$	1,065	100	%	9	%

The $162 million (11%) increase in gross written premiums for the secondquarter of 2018 compared to the secondquarter of 2017 reflects growth in each of the Specialty property and casualty insurance sub-segments. Overall average renewal rates increased approximately 1% in the secondquarter of 2018. Excluding the workers’ compensation business, renewal pricing increased approximately 3%.

Property and transportation Gross written premiums increased$42 million (7%) in the secondquarter of 2018 compared to the secondquarter of 2017. This increase was the result of new business opportunities in the property and inland marine business and higher premiums in the transportation businesses, which included a 5% average renewal rate increase in National Interstate’s business. Average renewal rates increased approximately 4% for this group in the secondquarter of 2018. Reinsurance premiums ceded as a percentage of gross written premiums are comparable between periods.

51

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$102 million (13%) in the secondquarter of 2018 compared to the secondquarter of 2017 due primarily to growth at Neon. Higher gross written premiums in the general liability, executive liability and excess and surplus lines businesses also contributed to the year-over-year growth, partially offset by lower gross written premiums in the workers’ compensation businesses. Average renewal rates were flat for this group in the secondquarter of 2018. Excluding rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 3%. Reinsurance premiums ceded as a percentage of gross written premiums reflect higher cessions to AFG’s internal reinsurance program, which is included in Other specialty, offset by lower cessions at Neon.

Specialty financial Gross written premiums increased$18 million (10%) in the secondquarter of 2018 compared to the secondquarter of 2017 due primarily to higher premiums in the financial institutions business. Average renewal rates for this group increased approximately 5% in the secondquarter of 2018. Reinsurance premiums ceded as a percentage of gross written premiums increased3 percentage points for the secondquarter of 2018 compared to the secondquarter of 2017, 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 increased $10 million (37%) in the secondquarter of 2018 compared to the secondquarter of 2017, reflecting an increase 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 segment:

	Three months ended June 30,						Three months ended June 30,
	2018		2017		Change		2018		2017
Property and transportation
Loss and LAE ratio	63.8	%	64.9	%	(1.1	%)
Underwriting expense ratio	30.1	%	29.3	%	0.8	%
Combined ratio	93.9	%	94.2	%	(0.3	%)
Underwriting profit							$	23	$	21
Specialty casualty
Loss and LAE ratio	63.4	%	63.1	%	0.3	%
Underwriting expense ratio	31.7	%	31.6	%	0.1	%
Combined ratio	95.1	%	94.7	%	0.4	%
Underwriting profit							$	29	$	29
Specialty financial
Loss and LAE ratio	33.9	%	33.1	%	0.8	%
Underwriting expense ratio	51.7	%	51.3	%	0.4	%
Combined ratio	85.6	%	84.4	%	1.2	%
Underwriting profit							$	22	$	23
Total Specialty
Loss and LAE ratio	59.7	%	59.5	%	0.2	%
Underwriting expense ratio	34.0	%	33.7	%	0.3	%
Combined ratio	93.7	%	93.2	%	0.5	%
Underwriting profit							$	73	$	73
Aggregate — including exited lines
Loss and LAE ratio	59.7	%	59.7	%	—	%
Underwriting expense ratio	34.0	%	33.7	%	0.3	%
Combined ratio	93.7	%	93.4	%	0.3	%
Underwriting profit							$	72	$	72

52

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 $73 million in both the secondquarter of 2018 and the secondquarter of 2017, reflecting strong results in both periods. Higher underwriting profit in the Property and transportation sub-segment was offset by lower underwriting profits in the Specialty financial sub-segment.

Property and transportation Underwriting profit for this group was $23 million for the secondquarter of 2018 compared to $21 million in the secondquarter of 2017, an increase of $2 million (10%). These results include higher year-over-year underwriting profits in the transportation businesses and improved results in the ocean marine operations and lower underwriting profitability in the property and inland marine and equine businesses.

Specialty casualty Underwriting profit for this group was $29 million for both the secondquarter of 2018 and the secondquarter of 2017. Higher underwriting profitability in the targeted markets businesses was offset by lower profitability in the excess and surplus lines businesses.

Specialty financial Underwriting profit for this group was $22 million for the secondquarter of 2018 compared to $23 million in the secondquarter of 2017, a decrease of $1 million (4%). Lower underwriting profits in the fidelity and surety businesses were offset by higher underwriting profits in the financial institutions business.

Other specialty This group reported an underwriting loss of $1 million in the secondquarter of 2018 compared to an underwriting profit of less than $1 million in the secondquarter of 2017.

53

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 both the secondquarter of 2018 and the secondquarter of 2017. 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,
	Amount						Ratio				Change in
	2018			2017			2018		2017		Ratio
Property and transportation
Current year, excluding catastrophe losses	$	250		$	232		66.7	%	65.0	%	1.7	%
Prior accident years development	(21		)	(11		)	(5.6	%)	(3.1	%)	(2.5	%)
Current year catastrophe losses	10			11			2.7	%	3.0	%	(0.3	%)
Property and transportation losses and LAE and ratio	$	239		$	232		63.8	%	64.9	%	(1.1	%)
Specialty casualty
Current year, excluding catastrophe losses	$	392		$	342		65.8	%	63.6	%	2.2	%
Prior accident years development	(15		)	(5		)	(2.5	%)	(0.9	%)	(1.6	%)
Current year catastrophe losses	1			2			0.1	%	0.4	%	(0.3	%)
Specialty casualty losses and LAE and ratio	$	378		$	339		63.4	%	63.1	%	0.3	%
Specialty financial
Current year, excluding catastrophe losses	$	59		$	52		37.3	%	35.2	%	2.1	%
Prior accident years development	(8		)	(8		)	(5.4	%)	(5.4	%)	—	%
Current year catastrophe losses	3			5			2.0	%	3.3	%	(1.3	%)
Specialty financial losses and LAE and ratio	$	54		$	49		33.9	%	33.1	%	0.8	%
Total Specialty
Current year, excluding catastrophe losses	$	721		$	639		62.2	%	60.0	%	2.2	%
Prior accident years development	(45		)	(23		)	(3.9	%)	(2.2	%)	(1.7	%)
Current year catastrophe losses	16			18			1.4	%	1.7	%	(0.3	%)
Total Specialty losses and LAE and ratio	$	692		$	634		59.7	%	59.5	%	0.2	%
Aggregate — including exited lines
Current year, excluding catastrophe losses	$	721		$	639		62.2	%	60.0	%	2.2	%
Prior accident years development	(44		)	(22		)	(3.9	%)	(2.0	%)	(1.9	%)
Current year catastrophe losses	16			18			1.4	%	1.7	%	(0.3	%)
Aggregate losses and LAE and ratio	$	693		$	635		59.7	%	59.7	%	—	%

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 62.2% for the secondquarter of 2018 compared to 60.0% for the secondquarter of 2017, an increase of 2.2 percentage points.

Property and transportation   The 1.7 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 in the property and inland marine and equine businesses for the secondquarter of 2018 compared to the secondquarter of 2017.

Specialty casualty   The 2.2 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 in the excess and surplus, workers’ compensation and targeted markets businesses.

54

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Specialty financial The 2.1 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 of the financial institutions and trade credit businesses.

Net prior year reserve development

AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $45 million in the secondquarter of 2018 compared to $23 million in the secondquarter of 2017, an increase of $22 million (96%).

Property and transportation Net favorable reserve development of $21 million in the secondquarter of 2018 reflects lower than expected losses in the crop business and lower than expected claim severity in the transportation businesses. Net favorable reserve development of $11 million in the secondquarter of 2017 reflects lower than expected losses in the crop and equine businesses and lower than expected claim severity in the property and inland marine businesses, partially offset by higher than expected claim severity in the ocean marine business.

Specialty casualty Net favorable reserve development of $15 million in the secondquarter of 2018 includes lower than anticipated claim frequency and severity in workers’ compensation business. Net favorable reserve development of $5 million in the secondquarter of 2017 reflects lower than anticipated claim severity in the workers’ compensation businesses and at Neon, partially offset by higher than anticipated claim severity in the targeted markets and general liability businesses.

Specialty financial Net favorable reserve development of $8 million in the secondquarter of 2018 reflects lower than expected claim frequency and severity in the surety business and lower than anticipated claim severity in the financial institutions business. Net favorable reserve development of $8 million in the secondquarter of 2017 reflects lower than anticipated claim severity in the fidelity business and lower than expected claim frequency and severity in the surety business.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net favorable reserve development of $1 million in the secondquarter of 2018 and net adverse reserve development of $1 million in the secondquarter of 2017, reflecting amortization of the deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 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 $1 million in both the second quarters of 2018 and 2017 related to business outside of the Specialty insurance 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, 2017, 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 of modeled loss on AFG’s
Industry Model	Shareholders’ Equity
100-year event	Less than 1%
250-year event	Less than 2%
500-year event	Less than 4%

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 million and a separate $15 million per occurrence retention for Neon for losses up to $200 million ($225 million for U.S. catastrophe events). 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 $100 million of traditional catastrophe reinsurance through a catastrophe bond.

Catastrophe losses of $16 million in the secondquarter of 2018 resulted primarily from storms and flooding in several regions of the United States. Catastrophe losses of $18 million in the secondquarter of 2017 resulted primarily from storms and tornadoes in several regions of the United States.

55

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Commissions and Other Underwriting Expenses

AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $396 million in the secondquarter of 2018 compared to $358 million for the secondquarter of 2017, an increase of $38 million (11%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 34.0% for the secondquarter of 2018 compared to 33.7% for the secondquarter of 2017, an increase of 0.3 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,
	2018				2017				Change in
	U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP
Property and transportation	$	112	30.1	%	$	104	29.3	%	0.8	%
Specialty casualty	188		31.7	%	169		31.6	%	0.1	%
Specialty financial	83		51.7	%	74		51.3	%	0.4	%
Other specialty	13		36.8	%	11		36.3	%	0.5	%
	$	396	34.0	%	$	358	33.7	%	0.3	%

Property and transportation   Commissions and other underwriting expenses as a percentage of net earned premiums increased0.8 percentage points in the secondquarter of 2018 compared to the secondquarter of 2017, reflecting a change in the mix of business.

Specialty casualty   Commissions and other underwriting expenses as a percentage of net earned premiums increased0.1 percentage points in the secondquarter of 2018 compared to the secondquarter of 2017, reflecting growth at Neon, which has a higher expense ratio than AFG’s overall Specialty casualty group.

Specialty financial   Commissions and other underwriting expenses as a percentage of net earned premiums increased0.4 percentage points in the secondquarter of 2018 compared to the secondquarter of 2017, reflecting higher profitability-based commissions paid to agents in the financial institutions business.

Property and Casualty Net Investment Income

Net investment income in AFG’s property and casualty insurance operations was $115 million in the secondquarter of 2018 compared to $96 million in the secondquarter of 2017, an increase of $19 million (20%). 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,
	2018			2017			Change			% Change
Net investment income	$	115		$	96		$	19		20	%
Average invested assets (at amortized cost)	$	10,346		$	9,947		$	399		4	%
Yield (net investment income as a % of average invested assets)	4.45		%	3.86		%	0.59		%
Tax equivalent yield (*)	4.62		%	4.32		%	0.30		%

(*)   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 secondquarter of 2018 as compared to the secondquarter of 2017 reflects growth in the property and casualty insurance segment and very strong earnings from limited partnerships and similar investments. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 4.45% for the secondquarter of 2018 compared to 3.86% for the secondquarter of 2017, an increase of 0.59 percentage points, due primarily to the higher earnings from limited partnerships and similar investments.

56

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 $9 million for the secondquarter of 2018 compared to $5 million in the secondquarter of 2017, an increase of $4 million (80%). 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,
	2018			2017
Other income
Income from the sale of real estate	$	—		$	3
Other	2			1
Total other income	2			4
Other expenses
Amortization of intangibles	2			2
Other	9			7
Total other expenses	11			9
Other income and expenses, net	$	(9	)	$	(5	)

57

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 $99 million in pretax earnings in the secondquarter of 2018 compared to $85 million in the secondquarter of 2017, an increase of $14 million (16%). AFG’s annuity segment results for the secondquarter of 2018 as compared to the secondquarter of 2017 reflect a 10% increase in average investments (at amortized cost), higher earnings from limited partnerships and similar investments and the favorable impact of fair value accounting for derivatives related to fixed-indexed annuities (“FIAs”), partially offset by an unlocking charge in the secondquarter of 2018 and the impact of lower investment yields due to the run-off of higher yielding investments. The high returns on limited partnerships and similar investments should not necessarily be expected to repeat in future periods. The fair value of derivatives related to FIAs was favorably impacted by higher than anticipated interest rates in the secondquarter of 2018 compared to the negative impact of lower than anticipated interest rates in the secondquarter of 2017, partially offset in the 2018 period by the negative impacts of higher interest on the embedded derivative (from growth in the FIA business and higher interest rates) and higher than expected option costs. 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 of 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 rates), AFG unlocked its assumptions for option costs and interest rates in the second quarter of 2018, resulting in a net charge to earnings of $27 million.

The following table details AFG’s earnings before income taxes from its annuity operations for the three months ended June 30, 2018 and 2017 (dollars in millions):

	Three months ended June 30,
	2018		2017		% Change
Revenues:
Net investment income	$	412	$	360	14	%
Other income:
Guaranteed withdrawal benefit fees	16		14		14	%
Policy charges and other miscellaneous income	11		12		(8	%)
Total revenues	439		386		14	%
Costs and Expenses:
Annuity benefits (*)	260		224		16	%
Acquisition expenses	49		47		4	%
Other expenses	31		30		3	%
Total costs and expenses	340		301		13	%
Earnings before income taxes	$	99	$	85	16	%

Detail of annuity earnings before income taxes (dollars in millions):

	Three months ended June 30,
	2018			2017			% Change
Earnings before income taxes — before the impact of unlocking and derivatives related to FIAs	$	123		$	101		22	%
Unlocking	(27		)	—			—	%
Impact of derivatives related to FIAs	3			(16		)	(119	%)
Earnings before income taxes	$	99		$	85		16	%

58

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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

	Three months ended June 30,
	2018			2017			% Change
Interest credited — fixed	$	173		$	157		10	%
Interest credited — fixed component of variable annuities	2			2			—	%
Other annuity benefits:
Change in expected death and annuitization reserve	4			4			—	%
Amortization of sales inducements	5			4			25	%
Change in guaranteed withdrawal benefit reserve	19			17			12	%
Change in other benefit reserves	11			9			22	%
Total other annuity benefits	39			34			15	%
Total before impact of derivatives related to FIAs and unlocking	214			193			11	%
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market	82			112			(27	%)
Equity option mark-to-market	(90		)	(81		)	11	%
Impact of derivatives related to FIAs	(8		)	31			(126	%)
Unlocking	54			—			—	%
Total annuity benefits	$	260		$	224		16	%

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

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.

Net Spread on Fixed Annuities (excludes variable annuity earnings)

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,
	2018			2017			% Change
Average fixed annuity investments (at amortized cost)	$	33,935		$	30,988		10	%
Average fixed annuity benefits accumulated	34,165			31,212			9	%
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments)	4.83		%	4.62		%
Interest credited — fixed	(2.02		%)	(2.01		%)
Net interest spread	2.81		%	2.61		%
Policy charges and other miscellaneous income	0.10		%	0.12		%
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees	(0.27		%)	(0.27		%)
Acquisition expenses	(0.89		%)	(0.58		%)
Other expenses	(0.35		%)	(0.38		%)
Change in fair value of derivatives related to fixed-indexed annuities	0.10		%	(0.39		%)
Unlocking	(0.32		%)	—		%
Net spread earned on fixed annuities	1.18		%	1.11		%

59

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 fair value accounting for derivatives related to fixed-indexed annuities on the annuity segment’s net spread earned on fixed annuities:

	Three months ended June 30,
	2018		2017
Net spread earned on fixed annuities — before the impact of unlocking and derivatives related to FIAs	1.46	%	1.32	%
Unlocking	(0.32	%)	—	%
Impact of derivatives related to fixed-indexed annuities:
Change in fair value of derivatives	0.10	%	(0.39	%)
Related impact on amortization of deferred policy acquisition costs (*)	(0.06	%)	0.18	%
Related impact on amortization of deferred sales inducements (*)	—	%	—	%
Net spread earned on fixed annuities	1.18	%	1.11	%

(*) An estimate of the related acceleration/deceleration of the amortization of deferred policy acquisition costs and deferred sales inducements.

Annuity Net Investment Income

Net investment income for the secondquarter of 2018 was $412 million compared to $360 million for the secondquarter of 2017, an increase of $52 million (14%). This increase reflects the growth in AFG’s annuity business and higher earnings from limited partnerships and similar investments, partially offset by the impact of lower investment yields. 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), increased by 0.21 percentage points to 4.83% from 4.62% in the secondquarter of 2018 compared to the secondquarter of 2017. This increase in net investment yield reflects higher earnings from limited partnerships and similar investments, partially offset by (i) the investment of new premium dollars at lower yields as compared to the existing investment portfolio and (ii) the impact of the reinvestment of proceeds from maturity and redemption of higher yielding investments at the lower yields available in the financial markets. During 2017, $4.9 billion in annuity segment investments with an average yield of 5.14% were redeemed or sold while the investments purchased during 2017 (with new premium dollars and the redemption/sale proceeds) had an average yield at purchase of 3.94%.

Annuity Interest Credited — Fixed

Interest credited — fixed for the secondquarter of 2018 was $173 million compared to $157 million for the secondquarter of 2017, an increase of $16 million (10%). This increase reflects the impact of growth in the annuity business. The average interest rate credited to policyholders, calculated as interest credited divided by average fixed annuity benefits accumulated, increased0.01 percentage points to 2.02% in the secondquarter of 2018 from 2.01% in the secondquarter of 2017.

Annuity Net Interest Spread

AFG’s net interest spread increased0.20 percentage points to 2.81% from 2.61% in the secondquarter of 2018 compared to the same period in 2017 due primarily to higher earnings from limited partnerships and similar investments, partially offset by lower investment yields. 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 were $11 million for the secondquarter of 2018 compared to $12 million for the secondquarter of 2017, a decrease of $1 million (8%). Excluding the impact of a $1 million unlocking charge related to unearned revenue in the secondquarter of 2018, annuity policy charges and other miscellaneous income were $12 million for both the secondquarter of 2018 and the secondquarter of 2017. 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, decreased0.02 percentage points to 0.10% from 0.12% in the secondquarter of 2018 compared to the secondquarter of 2017.

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.

60

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees

Other annuity benefits, net of guaranteed withdrawal benefit fees (excluding the impact of unlocking), for the secondquarter of 2018 were $23 million compared to $20 million for the secondquarter of 2017, an increase of $3 million (15%). As a percentage of average fixed annuity benefits accumulated, these net expenses were 0.27% in both the secondquarter of 2018 and the secondquarter of 2017. 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,
	2018			2017
Change in expected death and annuitization reserve	$	4		$	4
Amortization of sales inducements	5			4
Change in guaranteed withdrawal benefit reserve	19			17
Change in other benefit reserves	11			9
Other annuity benefits	39			34
Offset guaranteed withdrawal benefit fees	(16		)	(14		)
Other annuity benefits, net	$	23		$	20

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. 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.

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

Annuity Acquisition Expenses

Annuity acquisition expenses for the secondquarter of 2018 were $49 million compared to $47 million for the secondquarter of 2017, an increase of $2 million (4%). Excluding the $28 million favorable impact on amortization of DPAC from the unlocking recorded in the secondquarter of 2018, annuity acquisition expenses were $77 million for the secondquarter of 2018, an increase of $30 million (64%) compared to the secondquarter of 2017, reflecting the acceleration/deceleration of DPAC amortization related to changes in the fair value of derivatives related to FIAs and growth in the business. Excluding the impact of the 2018 unlocking charge, AFG’s amortization of deferred policy acquisition costs (“DPAC”) and commission expenses as a percentage of average fixed annuity benefits accumulated was 0.89% for the secondquarter of 2018 compared to 0.58% for the secondquarter of 2017 and has generally ranged between 0.75% and 0.85%. Variances from the general range relate primarily to the impact of (i) material changes in interest rates or the stock market on AFG’s fixed-indexed annuity business, and (ii) differences in actual experience from actuarially projected estimates and assumptions. For example, the positive impact of higher than anticipated interest rates during the secondquarter of 2018 on the fair value of derivatives related to FIAs (discussed below) resulted in a partially offsetting acceleration of the amortization of DPAC. In contrast, the negative impact of lower than anticipated interest rates during the secondquarter of 2017 on the fair value of derivatives related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC.

The table below illustrates the estimated impact of fair value accounting for derivatives related to fixed-indexed annuities on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated (excluding the impact of unlocking):

	Three months ended June 30,
	2018		2017
Before the impact of changes in the fair value of derivatives related to FIAs on the amortization of DPAC	0.83	%	0.76	%
Impact of changes in fair value of derivatives related to FIAs on amortization of DPAC (*)	0.06	%	(0.18	%)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated	0.89	%	0.58	%

(*) An estimate of the acceleration/deceleration of the amortization of deferred policy acquisition costs resulting from fair value accounting for derivatives related to fixed-indexed annuities.

61

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 the secondquarter 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”).

Annuity Other Expenses

Annuity other expenses were $31 million for the secondquarter of 2018 compared to $30 million for the secondquarter of 2017, an increase of $1 million (3%). 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 were 0.35% for the secondquarter of 2018 and 0.38% for the secondquarter of 2017. This decrease in annuity other expenses as a percentage of average fixed annuity benefits accumulated is due primarily to growth in the business.

Change in Fair Value of Derivatives Related to Fixed-Indexed (Including Variable-Indexed) Annuities

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 index-based component (embedded derivative) of AFG’s annuity benefits accumulated, see Note C — “Fair Value Measurements” to the financial statements.

Excluding the impact of the 2018 unlocking charge, the net change in fair value of derivatives related to fixed-indexed annuities decreased annuity benefits by $8 million in the secondquarter of 2018 and increased annuity benefits by $31 million in the secondquarter of 2017. During the secondquarter of 2018, the positive impact of higher than expected interest rates and strong market performance on the fair value of these derivatives was partially offset by the negative impact of higher than expected option costs. During the secondquarter of 2017, the positive impact of strong stock market performance on the fair value of these derivatives was more than offset by the negative impact of lower than expected interest rates. As a percentage of average fixed annuity benefits accumulated, this net expense improved 0.49 percentage points to a net expense reduction of 0.10% in the secondquarter of 2018 from a net expense of 0.39% in the secondquarter of 2017.

Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products. The table below illustrates the impact of fair value accounting for derivatives related to fixed-indexed annuities on the annuity segment’s earnings before income taxes (dollars in millions):

	Three months ended June 30,
	2018			2017			% Change
Earnings before income taxes — before unlocking and change in fair value of derivatives related to FIAs	$	123		$	101		22	%
Unlocking	(27		)	—			—	%
Impact of derivatives related to fixed-indexed annuities:
Change in fair value of derivatives related to FIAs	8			(31		)	(126	%)
Related impact on amortization of DPAC (*)	(5		)	15			(133	%)
Earnings before income taxes	$	99		$	85		16	%

(*) An estimate of the related acceleration/deceleration of the amortization of deferred sales inducements and deferred policy acquisition costs.

As illustrated in the table above, the change in fair value of derivatives related to fixed-indexed annuities, including the related impact on amortization of DPAC, increased the annuity segment’s earnings before income taxes by $3 million in the secondquarter of 2018 and decreased the annuity segment’s earnings before income taxes by $16 million in the secondquarter of 2017.

62

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

The following table provides analysis of the primary factors impacting the change in the fair value of derivatives related to FIAs. Each factor is presented net of the estimated related impact on amortization of DPAC (dollars in millions).

	Three months ended June 30,
	2018			2017			% Change
Interest on the embedded derivative liability	$	(8	)	$	(4	)	100	%
Changes in interest rates higher (lower) than expected	12			(17		)	(171	%)
Change in the stock market, including volatility	6			5			20	%
Renewal option costs lower (higher) than expected	(3		)	1			(400	%)
Other, including the impact of actual versus expected lapses	(4		)	(1		)	300	%
Impact of derivatives related to FIAs	$	3		$	(16	)	(119	%)

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 liability in the secondquarter of 2018.

Annuity Net Spread Earned on Fixed Annuities

AFG’s net spread earned on fixed annuities increased0.07 percentage points to 1.18% from 1.11% in the secondquarter of 2018 compared to the same period in 2017 due primarily to the net impact of changes in the fair value of derivatives and related DPAC amortization offset discussed above and the 0.20 percentage points increase in AFG’s net interest spread, partially offset by the unlocking of actuarial assumptions discussed below.

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.

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, 2018 and 2017 (in millions):

	Three months ended June 30,
	2018			2017
Beginning fixed annuity reserves	$	33,652		$	30,719
Fixed annuity premiums (receipts)	1,393			1,258
Surrenders, benefits and other withdrawals	(706		)	(571		)
Interest and other annuity benefit expenses:
Interest credited	173			157
Embedded derivative mark-to-market	82			112
Change in other benefit reserves	29			29
Unlocking	55			—
Ending fixed annuity reserves	$	34,678		$	31,704
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above)	$	34,678		$	31,704
Impact of unrealized investment related gains	32			128
Fixed component of variable annuities	176			182
Annuity benefits accumulated per balance sheet	$	34,886		$	32,014

63

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 $1.40 billion in the secondquarter of 2018 compared to $1.27 billion in the secondquarter of 2017, an increase of $133 million (11%). The following table summarizes AFG’s annuity sales (dollars in millions):

	Three months ended June 30,
	2018		2017		% Change
Financial institutions single premium annuities — indexed	$	448	$	500	(10	%)
Financial institutions single premium annuities — fixed	131		215		(39	%)
Retail single premium annuities — indexed	378		265		43	%
Retail single premium annuities — fixed	23		19		21	%
Broker dealer single premium annuities — indexed	355		209		70	%
Broker dealer single premium annuities — fixed	4		3		33	%
Education market — fixed and indexed annuities	54		47		15	%
Total fixed annuity premiums	1,393		1,258		11	%
Variable annuities	6		8		(25	%)
Total annuity premiums	$	1,399	$	1,266	11	%

Management attributes the 11% increase in annuity premiums in the secondquarter of 2018 compared to the secondquarter of 2017 to the introduction of new products and an improving interest rate environment in the first half of 2018.

On June 21, 2018, the United States Fifth Circuit Court of Appeals (“Fifth Circuit”) issued a mandate of its decision vacating the Department of Labor (“DOL”) Fiduciary Rule in its entirety. The Fifth Circuit’s order to vacate the DOL Fiduciary Rule applies nationwide. The law regarding fiduciary status is once again the law in effect prior to the DOL Fiduciary Rule.

On April 18, 2018, the U.S. Securities and Exchange Commission released a package of regulatory proposals to enhance standards of conduct, including a proposal to enhance the standard of conduct owed by broker-dealers to their clients known as Regulation Best Interest. If adopted as proposed, the Regulation Best Interest would heighten the standard that registered representatives need to meet when making a recommendation by requiring them to act in the best interest of the retail customer at the time of the recommendation. Regulation Best Interest further proposes that satisfying this duty would require (i) disclosing to the customer the key facts about the relationship, (ii) exercising reasonable diligence, care, skill and prudence in recommending a product that is in the client’s best interest, and (iii) disclosing, mitigating or eliminating conflicts of interests arising from financial incentives and disclosing other conflicts.

Although approximately 70-75% of AFG’s premiums come through registered representatives associated with broker-dealers, neither traditional fixed annuities nor fixed-indexed annuities are securities. Based on AFG’s initial assessment, if the proposals are adopted as is, the new requirements would not be expected to have a material impact on AFG’s premiums.

64

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 will continue its practice of conducting detailed reviews of its assumptions (including option costs and interest rates) in the fourth quarter each year, including 2018.

The unlocking of the major actuarial assumptions underlying AFG’s annuity operations in the secondquarter 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,
	2018			2017
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 secondquarter 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. For the 2018 unlocking, AFG assumed a net reinvestment rate (net of default and expense assumptions) of 4.44% in the second half of 2018, grading up ratably to an ultimate net reinvestment rate of 5.55% in 2022 and beyond.

The table below compares the reinvestment rate assumed on assets purchased to directly support “fixed annuity benefits accumulated” in AFG’s fourth quarter unlockings for the next calendar year to the actual reinvestment rate achieved in that period (both net of investment expenses):

	First
Unlocking	Investment	Reinvestment Rate
Year	Period	Assumed (a)		Achieved
2014	2015	3.75	%	4.27	%
2015	2016	4.05	%	4.27	%
2016	2017	4.42	%	3.95	%
2017	2018 (b)	4.17	%	4.43	%
2018	July 2018	4.62	%	n/a

(a) Assumed reinvestment rates exclude default rates of 0.18% in each period.

(b) Reinvestment rate achieved is for the six months ended June 30, 2018.

Management believes that these results over the last several years demonstrate that AFG’s investment rate assumptions are reasonable and prudent. During 2017, long-term interest rates were lower than anticipated and credit spreads narrowed, resulting in a lower achieved reinvestment rate than assumed in the 2016 unlocking. In addition to the reinvestment rates above, actual default rates in the first six months of 2018 and in 2017, 2016 and 2015 were lower than the long-term default rates of 0.18% assumed in the unlocking in each of the periods above.

65

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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, 2018 and 2017 (in millions):

	Three months ended June 30,
	2018			2017
Earnings on fixed annuity benefits accumulated	$	101		$	87
Earnings impact of investments in excess of fixed annuity benefits accumulated (*)	(3		)	(3		)
Variable annuity earnings	1			1
Earnings before income taxes	$	99		$	85

(*) Net investment income (as a % of investments) of 4.83% and 4.62% for the three months ended June 30, 2018 and 2017, 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 GAAP pretax loss outside of its property and casualty insurance and annuity operations (excluding realized gains and losses) totaled $48 million in the secondquarter of 2018 compared to $51 million in the secondquarter of 2017, a decrease of $3 million (6%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity operations (excluding realized gains and losses) totaled $48 million in the secondquarter of 2018 compared to $44 million in the secondquarter of 2017, an increase of $4 million (9%).

The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance and annuity operations for the three months ended June 30, 2018 and 2017 (dollars in millions):

	Three months ended June 30,
	2018			2017			% Change
Revenues:
Life, accident and health net earned premiums	$	6		$	5		20	%
Net investment income	7			9			(22	%)
Other income — P&C fees	15			15			—	%
Other income	3			7			(57	%)
Total revenues	31			36			(14	%)
Costs and Expenses, excluding interest charges on borrowed money
Property and casualty insurance — commissions and other underwriting expenses	4			8			(50	%)
Life, accident and health benefits	11			6			83	%
Life, accident and health acquisition expenses	1			1			—	%
Other expense — expenses associated with P&C fees	11			7			57	%
Other expenses (*)	36			35			3	%
Costs and expenses, excluding interest charges on borrowed money	63			57			11	%
Core loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(32		)	(21		)	52	%
Interest charges on borrowed money	16			23			(30	%)
Core loss before income taxes, excluding realized gains and losses	(48		)	(44		)	9	%
Pretax non-core loss on retirement of debt	—			(7		)	(100	%)
GAAP loss before income taxes, excluding realized gains and losses	$	(48	)	$	(51	)	(6	%)

(*) Excludes a pretax non-core loss on retirement of debt of $7 million in the second quarter of 2017.

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 $6 million and related benefits and acquisition expenses of $12 million in the secondquarter of 2018 compared to net earned premiums of $5 million and related benefits and acquisition expenses of $7 million in the secondquarter of 2017. The $5 million (83%) increase in life, accident and health benefits reflects higher claims in the run-off life business.

66

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 $7 million in the secondquarter of 2018 compared to $9 million in the secondquarter of 2017, a decrease of $2 million (22%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities decreased in value by $1 million in the secondquarter of 2018 compared to an increase in value by $1 million in the secondquarter of 2017.

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 both the secondquarter of 2018 and 2017, AFG collected $15 million in fees for these services. Management views this fee income, net of the $11 million in the secondquarter of 2018 and $7 million in the secondquarter of 2017, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. 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 the secondquarter of 2018 and $5 million in the secondquarter of 2017, 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 of Operations — Segmented Statement of Earnings.” AFG recorded a $2 million loss on the disposal of equipment in the secondquarter 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 $1 million in the secondquarter of 2018 compared to $2 million in the secondquarter of 2017.

Holding Company and Other — Other Expenses

Excluding the non-core loss on retirement of debt discussed below, AFG’s holding companies and other operations outside of its property and casualty insurance and annuity operations recorded other expenses of $36 million in the secondquarter of 2018 compared to $35 million in the secondquarter of 2017, an increase of $1 million (3%). The second quarter of 2018 reflects lower holding company expenses related to employee benefit plans that are tied to stock market performance, offset by a $5 million charge 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 $16 million in the secondquarter of 2018 compared to $23 million in the secondquarter of 2017, a decrease of $7 million (30%) due primarily to a lower weighted average interest rate on AFG’s outstanding debt. The following table details the principal amount of AFG’s long-term debt balances as of April 1, 2018 compared to April 1, 2017 (dollars in millions):

	April 1, 2018			April 1, 2017
Direct obligations of AFG:
4.50% Senior Notes due June 2047	$	590		$	—
3.50% Senior Notes due August 2026	425			300
9-7/8% Senior Notes due June 2019	—			350
6-3/8% Senior Notes due June 2042	—			230
5-3/4% Senior Notes due August 2042	—			125
6-1/4% Subordinated Debentures due September 2054	150			150
6% Subordinated Debentures due November 2055	150			150
Other	3			3
Total principal amount of Holding Company Debt	$	1,318		$	1,308
Weighted Average Interest Rate	4.6		%	6.5		%

67

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

The decrease in the weighted average interest rate for the secondquarter of 2018 as compared to the secondquarter of 2017 reflects the following financing transactions completed by AFG between April 1, 2017 and December 31, 2017:

• Issued $350 million of 4.50% Senior Notes on June 2, 2017

• Redeemed $230 million of 6-3/8% Senior Notes on June 26, 2017

• Redeemed $125 million of 5-3/4% Senior Notes on August 25, 2017

• Issued an additional $125 million of 3.50% Senior Notes on November 9, 2017

• Issued an additional $240 million of 4.50% Senior Notes on November 9, 2017

• Redeemed $350 million of 9-7/8% Senior Notes on December 11, 2017

Holding Company and Other — Loss on Retirement of Debt

AFG wrote off unamortized debt issuance costs of $7 million related to the redemption of its $230 million outstanding 6-3/8% Senior Notes due 2042 at par value in June 2017.

Consolidated Realized Gains (Losses) on Securities AFG’s consolidated realized gains (losses) on securities, which are not allocated to segments, were a net gain of $31 million in the secondquarter of 2018 compared to $8 million in the secondquarter of 2017, an increase of $23 million (288%). Realized gains (losses) on securities consisted of the following (in millions):

	Three months ended June 30,
	2018			2017
Realized gains (losses) before impairments:
Disposals	$	5		$	22
Change in the fair value of equity securities (*)	23			—
Change in the fair value of derivatives	(1		)	(3		)
Adjustments to annuity deferred policy acquisition costs and related items	4			(2		)
	31			17
Impairment charges:
Securities	—			(12		)
Adjustments to annuity deferred policy acquisition costs and related items	—			3
	—			(9		)
Realized gains on securities	$	31		$	8

(*) 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. This amount includes a $16 million net gain on securities that were still held at June 30, 2018.

The $23 million net realized gain from the change in the fair value of equity securities in the secondquarter of 2018 includes gains of $10 million on real estate investment trusts, $8 million on health care-related investments and losses of $7 million from investments in banks and financing companies. AFG’s $12 million in impairment charges for the secondquarter of 2017 related primarily to equity security investments in a pharmaceutical company and an energy-related business.

Consolidated Income Taxes   AFG’s consolidated provision for income taxes was $52 million for the secondquarter of 2018 compared to $60 million for the secondquarter of 2017, a decrease of $8 million (13%). See NoteL — “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 $2 million for the secondquarter of 2018 related to losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer.

68

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

RESULTS OF OPERATIONS — SIX MONTHS ENDEDJUNE 30, 2018 AND 2017

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”).

Effective January 1, 2018, the results of AFG’s run-off long-term care and life businesses are included in the “Other” segment instead of as a separate reportable segment based on the immaterial size of the remaining operations. Prior periods amounts were reclassified for consistent presentation.

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, 2018 and 2017 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, 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 (loss) 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

69

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, 2017
Revenues:
Property and casualty insurance net earned premiums	$	2,087	$	—	$	—		$	—		$	2,087		$	—		$	2,087
Life, accident and health net earned premiums	—		—		—			11			11			—			11
Net investment income	182		707		(11		)	17			895			—			895
Realized gains on securities	—		—		—			—			—			11			11
Income of MIEs:
Investment income	—		—		101			—			101			—			101
Gain on change in fair value of assets/liabilities	—		—		11			—			11			—			11
Other income	20		53		(9		)	42			106			—			106
Total revenues	2,289		760		92			70			3,211			11			3,222
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	1,244		—		—			—			1,244			—			1,244
Commissions and other underwriting expenses	693		—		—			12			705			—			705
Annuity benefits	—		420		—			—			420			—			420
Life, accident and health benefits	—		—		—			15			15			—			15
Annuity and supplemental insurance acquisition expenses	—		99		—			2			101			—			101
Interest charges on borrowed money	—		—		—			44			44			—			44
Expenses of MIEs	—		—		92			—			92			—			92
Other expenses	18		60		—			88			166			7			173
Total costs and expenses	1,955		579		92			161			2,787			7			2,794
Earnings before income taxes	334		181		—			(91		)	424			4			428
Provision for income taxes	107		62		—			(43		)	126			2			128
Net earnings, including noncontrolling interests	227		119		—			(48		)	298			2			300
Less: Net earnings attributable to noncontrolling interests	2		—		—			—			2			—			2
Core Net Operating Earnings	225		119		—			(48		)	296
Non-core earnings attributable to shareholders (a):
Realized gains on securities, net of tax	—		—		—			7			7			(7		)	—
Loss on retirement of debt, net of tax	—		—		—			(5		)	(5		)	5			—
Net Earnings Attributable to Shareholders	$	225	$	119	$	—		$	(46	)	$	298		$	—		$	298

(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.

Property and Casualty Insurance Segment — Results of Operations   AFG’s property and casualty insurance operations contributed $362 million in pretax earnings in the first six months of 2018 compared to $334 million in the first six months of 2017, an increase of $28 million (8%). The increase in pretax earnings reflects higher underwriting profit in the Specialty casualty insurance sub-segment and higher net investment income, due primarily to higher earnings from limited partnerships and similar investments, partially offset by lower underwriting profits in the Property and transportation and Specialty financial insurance sub-segments and lower income from the sale of real estate in the first six months of 2018 compared to the first six months of 2017. The high returns on limited partnerships and similar investments should not necessarily be expected to repeat in future periods.

70

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, 2018 and 2017 (dollars in millions):

	Six months ended June 30,
	2018			2017			% Change
Gross written premiums	$	3,123		$	2,827		10	%
Reinsurance premiums ceded	(764		)	(670		)	14	%
Net written premiums	2,359			2,157			9	%
Change in unearned premiums	(91		)	(70		)	30	%
Net earned premiums	2,268			2,087			9	%
Loss and loss adjustment expenses	1,334			1,244			7	%
Commissions and other underwriting expenses	771			693			11	%
Underwriting gain	163			150			9	%
Net investment income	215			182			18	%
Other income and expenses, net	(16		)	2			(900	%)
Earnings before income taxes	$	362		$	334		8	%
Combined Ratios:
Specialty lines							Change
Loss and LAE ratio	58.8		%	59.5		%	(0.7	%)
Underwriting expense ratio	34.0		%	33.2		%	0.8	%
Combined ratio	92.8		%	92.7		%	0.1	%
Aggregate — including exited lines
Loss and LAE ratio	58.8		%	59.6		%	(0.8	%)
Underwriting expense ratio	34.0		%	33.2		%	0.8	%
Combined ratio	92.8		%	92.8		%	—	%

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.

Gross Written Premiums

Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $3.12 billion for the first six months of 2018 compared to $2.83 billion for the first six months of 2017, an increase of $296 million (10%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions):

	Six months ended June 30,
	2018				2017
	GWP		%		GWP		%		% Change
Property and transportation	$	1,041	33	%	$	989	35	%	5	%
Specialty casualty	1,711		55	%	1,500		53	%	14	%
Specialty financial	371		12	%	338		12	%	10	%
	$	3,123	100	%	$	2,827	100	%	10	%

71

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 both the first six months of 2018 and the first six months of 2017. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions):

	Six months ended June 30,
	2018					2017					Change in
	Ceded			% of GWP		Ceded			% of GWP		% of GWP
Property and transportation	$	(295	)	28	%	$	(272	)	28	%	—	%
Specialty casualty	(478		)	28	%	(399		)	27	%	1	%
Specialty financial	(64		)	17	%	(48		)	14	%	3	%
Other specialty	73					49
	$	(764	)	24	%	$	(670	)	24	%	—	%

Net Written Premiums

Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $2.36 billion for the first six months of 2018 compared to $2.16 billion for the first six months of 2017, an increase of $202 million (9%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions):

	Six months ended June 30,
	2018				2017
	NWP		%		NWP		%		% Change
Property and transportation	$	746	32	%	$	717	33	%	4	%
Specialty casualty	1,233		52	%	1,101		51	%	12	%
Specialty financial	307		13	%	290		13	%	6	%
Other specialty	73		3	%	49		3	%	49	%
	$	2,359	100	%	$	2,157	100	%	9	%

Net Earned Premiums

Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $2.27 billion for the first six months of 2018 compared to $2.09 billion for the first six months of 2017, an increase of $181 million (9%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions):

	Six months ended June 30,
	2018				2017
	NEP		%		NEP		%		% Change
Property and transportation	$	724	32	%	$	699	33	%	4	%
Specialty casualty	1,174		52	%	1,045		50	%	12	%
Specialty financial	308		13	%	293		14	%	5	%
Other specialty	62		3	%	50		3	%	24	%
	$	2,268	100	%	$	2,087	100	%	9	%

The $296 million (10%) increase in gross written premiums for the first six months of 2018 compared to the first six months of 2017 reflects growth in each of the Specialty property and casualty insurance sub-segments. Overall average renewal rates increased approximately 1% in the first six months of 2018. Excluding the workers’ compensation business, renewal pricing increased approximately 3%.

Property and transportation Gross written premiums increased$52 million (5%) in the first six months of 2018 compared to the first six months of 2017. This increase was the result of new business opportunities in the property and inland marine businesses and higher premiums in the transportation businesses, which included a 5% average renewal rate increase in National Interstate’s business. Average renewal rates increased approximately 4% for this group in the first six months of 2018. Reinsurance premiums ceded as a percentage of gross written premiums are comparable between periods.

Specialty casualty Gross written premiums increased$211 million (14%) in the first six months of 2018 compared to the first six months of 2017 due primarily to growth at Neon. Higher gross written premiums in the general liability, executive liability and excess and surplus lines businesses also contributed to the year-over-year growth. Average renewal rates decreased

72

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

approximately 1% for this group in the first six months of 2018. Excluding rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 2%. Reinsurance premiums ceded as a percentage of gross written premiums increased 1 percentage point for the first six months of 2018 compared to the first six months of 2017, reflecting higher cessions to AFG’s internal reinsurance program, which is included in Other specialty.

Specialty financial Gross written premiums increased$33 million (10%) in the first six months of 2018 compared to the first six months of 2017 due primarily to higher premiums in the financial institutions and equipment leasing businesses. Average renewal rates for this group increased approximately 4% in the first six months of 2018. Reinsurance premiums ceded as a percentage of gross written premiums increased 3 percentage points for the first six months of 2018 compared to the first six months of 2017, 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 increased $24 million (49%) in the first six months of 2018 compared to the first six months of 2017, reflecting an increase 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 segment:

	Six months ended June 30,						Six months ended June 30,
	2018		2017		Change		2018		2017
Property and transportation
Loss and LAE ratio	63.4	%	62.8	%	0.6	%
Underwriting expense ratio	28.8	%	27.9	%	0.9	%
Combined ratio	92.2	%	90.7	%	1.5	%
Underwriting profit							$	56	$	64
Specialty casualty
Loss and LAE ratio	61.5	%	64.1	%	(2.6	%)
Underwriting expense ratio	32.5	%	31.7	%	0.8	%
Combined ratio	94.0	%	95.8	%	(1.8	%)
Underwriting profit							$	70	$	44
Specialty financial
Loss and LAE ratio	37.0	%	34.4	%	2.6	%
Underwriting expense ratio	50.9	%	50.4	%	0.5	%
Combined ratio	87.9	%	84.8	%	3.1	%
Underwriting profit							$	37	$	45
Total Specialty
Loss and LAE ratio	58.8	%	59.5	%	(0.7	%)
Underwriting expense ratio	34.0	%	33.2	%	0.8	%
Combined ratio	92.8	%	92.7	%	0.1	%
Underwriting profit							$	165	$	152
Aggregate — including exited lines
Loss and LAE ratio	58.8	%	59.6	%	(0.8	%)
Underwriting expense ratio	34.0	%	33.2	%	0.8	%
Combined ratio	92.8	%	92.8	%	—	%
Underwriting profit							$	163	$	150

The Specialty property and casualty insurance operations generated an underwriting profit of $165 million for the first six months of 2018 compared to $152 million for the first six months of 2017, an increase of $13 million (9%). Higher underwriting profit in the Specialty casualty insurance sub-segment was partially offset by lower underwriting profits in the Property and transportation and Specialty financial insurance sub-segments.

Property and transportation Underwriting profit for this group was $56 million for the first six months of 2018 compared to $64 million for the first six months of 2017, a decrease of $8 million (13%). Higher underwriting profit in the crop business and

73

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

improved results in the ocean marine operations were more than offset by lower underwriting profits in the property and inland marine and equine businesses.

Specialty casualty Underwriting profit for this group was $70 million for the first six months of 2018 compared to $44 million for the first six months of 2017, an increase of $26 million (59%). Higher underwriting profits in the workers’ compensation businesses due primarily to higher favorable prior year reserve development and improved results in the targeted markets businesses were partially offset by higher underwriting losses at Neon.

Specialty financial Underwriting profit for this group was $37 million for the first six months of 2018 compared to $45 million for the first six months of 2017, a decrease of $8 million (18%) due primarily to lower underwriting profitability in the fidelity and surety businesses.

Other specialty This group reported an underwriting profit of $2 million for the first six months of 2018 compared to an underwriting loss of $1 million in the first six months of 2017, a change of $3 million (300%). This improvement is due primarily to a $6 million charge recorded in 2017 to adjust the deferred gain on the retroactive reinsurance transaction entered into in connection with the sale of businesses in 1998, partially offset by adverse prior year reserve development 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 2018 compared to favorable reserve development in the first six months of 2017.

Losses and Loss Adjustment Expenses

AFG’s overall loss and LAE ratio was 58.8% for the first six months of 2018 compared to 59.6% for the first six months of 2017, a decrease of 0.8 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
	2018			2017			2018		2017		Ratio
Property and transportation
Current year, excluding catastrophe losses	$	483		$	452		66.7	%	64.6	%	2.1	%
Prior accident years development	(39		)	(28		)	(5.4	%)	(4.0	%)	(1.4	%)
Current year catastrophe losses	15			16			2.1	%	2.2	%	(0.1	%)
Property and transportation losses and LAE and ratio	$	459		$	440		63.4	%	62.8	%	0.6	%
Specialty casualty
Current year, excluding catastrophe losses	$	767		$	678		65.2	%	64.8	%	0.4	%
Prior accident years development	(50		)	(11		)	(4.2	%)	(1.0	%)	(3.2	%)
Current year catastrophe losses	6			3			0.5	%	0.3	%	0.2	%
Specialty casualty losses and LAE and ratio	$	723		$	670		61.5	%	64.1	%	(2.6	%)
Specialty financial
Current year, excluding catastrophe losses	$	119		$	112		38.7	%	38.2	%	0.5	%
Prior accident years development	(11		)	(17		)	(3.6	%)	(5.8	%)	2.2	%
Current year catastrophe losses	6			6			1.9	%	2.0	%	(0.1	%)
Specialty financial losses and LAE and ratio	$	114		$	101		37.0	%	34.4	%	2.6	%
Total Specialty
Current year, excluding catastrophe losses	$	1,405		$	1,269		62.0	%	60.8	%	1.2	%
Prior accident years development	(102		)	(52		)	(4.5	%)	(2.5	%)	(2.0	%)
Current year catastrophe losses	29			25			1.3	%	1.2	%	0.1	%
Total Specialty losses and LAE and ratio	$	1,332		$	1,242		58.8	%	59.5	%	(0.7	%)
Aggregate — including exited lines
Current year, excluding catastrophe losses	$	1,405		$	1,269		62.0	%	60.8	%	1.2	%
Prior accident years development	(100		)	(50		)	(4.5	%)	(2.4	%)	(2.1	%)
Current year catastrophe losses	29			25			1.3	%	1.2	%	0.1	%
Aggregate losses and LAE and ratio	$	1,334		$	1,244		58.8	%	59.6	%	(0.8	%)

74

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 62.0% for the first six months of 2018 compared to 60.8% for the first six months of 2017, an increase of 1.2 percentage points.

Property and transportation   The 2.1 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 of the property and inland marine and equine businesses in the first six months of 2018 compared to the first six months of 2017.

Specialty casualty   The 0.4 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 of the targeted markets businesses.

Specialty financial   The 0.5 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 of the trade credit 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 $102 million in the first six months of 2018 compared to $52 million in the first six months of 2017, an increase of $50 million (96%).

Property and transportation 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. Net favorable reserve development of $28 million in the first six months of 2017 reflects lower than expected losses in the crop and equine businesses and lower than expected claim severity in the property and inland marine business, partially offset by higher than expected claim severity in the ocean marine business.

Specialty casualty 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. Net favorable reserve development of $11 million in the first six months of 2017 reflects lower than expected claim severity in the workers’ compensation businesses and at Neon, partially offset by higher than expected claim severity in the targeted markets and general liability businesses.

Specialty financial 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. Net favorable reserve development of $17 million in the first six months of 2017 reflects lower than anticipated claim severity in the fidelity business and lower than expected claim frequency and severity in the surety business.

Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net favorable reserve development of $2 million in the first six months of 2018 and net adverse reserve development of $4 million in the first six months of 2017. The favorable 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. The adverse reserve development in the first six months of 2017 reflects a $6 million charge to adjust the deferred gain on the retroactive reinsurance transaction entered into in connection with the sale of businesses in 1998, partially offset by the amortization of deferred gains on retroactive reinsurance and favorable 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 2018 and the first six months of 2017 related to business outside the Specialty group that AFG no longer writes.

Catastrophe losses

Catastrophe losses of $29 million in the first six months of 2018 resulted primarily from storms and flooding in several regions of the United States and mudslides in California. Catastrophe losses of $25 million in the first six months of 2017 resulted primarily from storms and tornadoes in several regions of the United States.

75

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Commissions and Other Underwriting Expenses

AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $771 million in the first six months of 2018 compared to $693 million for the first six months of 2017, an increase of $78 million (11%). AFG’s underwriting expense ratio was 34.0% for the first six months of 2018 compared to 33.2% for the first six months of 2017, an increase of 0.8 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,
	2018				2017				Change in
	U/W Exp		% of NEP		U/W Exp		% of NEP		% of NEP
Property and transportation	$	209	28.8	%	$	195	27.9	%	0.9	%
Specialty casualty	381		32.5	%	331		31.7	%	0.8	%
Specialty financial	157		50.9	%	147		50.4	%	0.5	%
Other specialty	24		38.0	%	20		37.1	%	0.9	%
Total Specialty	$	771	34.0	%	$	693	33.2	%	0.8	%

Property and transportation   Commissions and other underwriting expenses as a percentage of net earned premiums increased0.9 percentage points in the first six months of 2018 compared to the first six months of 2017, reflecting a change in the mix of business, partially offset by higher profitability-based commissions received from reinsurers in the crop business.

Specialty casualty   Commissions and other underwriting expenses as a percentage of net earned premiums increased0.8 percentage points in the first six months of 2018 compared to the first six months of 2017, reflecting growth at Neon, which has a higher expense ratio than AFG’s overall Specialty casualty group.

Specialty financial   Commissions and other underwriting expenses as a percentage of net earned premiums increased0.5 percentage points in the first six months of 2018 compared to the first six months of 2017, reflecting higher profitability-based commissions paid to agents in the financial institutions business.

Property and Casualty Net Investment Income

Net investment income in AFG’s property and casualty insurance operations was $215 million in the first six months of 2018 compared to $182 million in the first six months of 2017, an increase of $33 million (18%). 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,
	2018			2017			Change			% Change
Net investment income	$	215		$	182		$	33		18	%
Average invested assets (at amortized cost)	$	10,395		$	9,872		$	523		5	%
Yield (net investment income as a % of average invested assets)	4.14		%	3.69		%	0.45		%
Tax equivalent yield (*)	4.32		%	4.16		%	0.16		%

(*) 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 2018 as compared to the first six months of 2017 reflects growth in the property and casualty insurance segment and very strong earnings from limited partnerships and similar investments. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 4.14% for the first six months of 2018 compared to 3.69% for the first six months of 2017, an increase of 0.45 percentage points due primarily to the higher earnings from limited partnerships and similar investments.

76

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 $16 million for the first six months of 2018 compared to net earnings of $2 million for the first six months of 2017, a change of $18 million (900%). 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,
	2018			2017
Other income
Income from the sale of real estate	$	—		$	16
Other	4			4
Total other income	4			20
Other expenses
Amortization of intangibles	4			4
Other	16			14
Total other expense	20			18
Other income and expenses, net	$	(16	)	$	2

Income from the sale of real estate includes $13 million related to the sale of a hotel property in 2017.

77

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 $224 million in pretax earnings in the first six months of 2018 compared to $181 million in the first six months of 2017, an increase of $43 million (24%). AFG’s annuity segment results for the first six months of 2018 compared to the first six months of 2017 reflect a 10% increase in average annuity investments (at amortized cost), higher earnings from limited partnerships and similar investments and the favorable impact of fair value accounting for derivatives related to fixed-indexed annuities (“FIAs”), partially offset by an unlocking charge in the first six months of 2018 and the impact of lower investment yields due to the run-off of higher yielding investments. The high returns on limited partnerships and similar investments should not necessarily be expected to repeat in future periods. The fair value of derivatives related to FIAs was favorably impacted by higher than anticipated interest rates in the first six months of 2018 compared to the negative impact of lower than anticipated interest rates in the first six months of 2017, partially offset in the 2018 period by the negative impacts of higher interest on the embedded derivative (from growth in the FIA business and higher interest rates) and higher than expected option costs. 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 of 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 rates), AFG unlocked its assumptions for option costs and interest rates in the second quarter of 2018, resulting in a net charge to earnings of $27 million.

The following table details AFG’s earnings before income taxes from its annuity operations for the six months ended June 30, 2018 and 2017 (dollars in millions).

	Six months ended June 30,
	2018		2017		% Change
Revenues:
Net investment income	$	806	$	707	14	%
Other income:
Guaranteed withdrawal benefit fees	32		28		14	%
Policy charges and other miscellaneous income	21		25		(16	%)
Total revenues	859		760		13	%
Costs and Expenses:
Annuity benefits (*)	442		420		5	%
Acquisition expenses	130		99		31	%
Other expenses	63		60		5	%
Total costs and expenses	635		579		10	%
Earnings before income taxes	$	224	$	181	24	%

Detail of annuity earnings before income taxes (dollars in millions):

	Six months ended June 30,
	2018			2017			% Change
Earnings before income taxes — before the impact of unlocking and derivatives related to FIAs	$	235		$	199		18	%
Unlocking	(27		)	—			—	%
Impact of derivatives related to FIAs	16			(18		)	(189	%)
Earnings before income taxes	$	224		$	181		24	%

78

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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

	Six months ended June 30,
	2018			2017			% Change
Interest credited — fixed	$	339		$	309		10	%
Interest credited — fixed component of variable annuities	3			3			—	%
Other annuity benefits:
Change in expected death and annuitization reserve	8			8			—	%
Amortization of sales inducements	10			10			—	%
Change in guaranteed withdrawal benefit reserve	42			33			27	%
Change in other benefit reserves	19			20			(5	%)
Total other annuity benefits	79			71			11	%
Total before impact of derivatives related to FIAs and unlocking	421			383			10	%
Derivatives related to fixed-indexed annuities:
Embedded derivative mark-to-market	19			259			(93	%)
Equity option mark-to-market	(52		)	(222		)	(77	%)
Impact of derivatives related to FIAs	(33		)	37			(189	%)
Unlocking	54			—			—	%
Total annuity benefits	$	442		$	420		5	%

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

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,
	2018			2017			% Change
Average fixed annuity investments (at amortized cost)	$	33,469		$	30,522		10	%
Average fixed annuity benefits accumulated	33,747			30,698			10	%
As % of fixed annuity benefits accumulated (except as noted):
Net investment income (as % of fixed annuity investments)	4.79		%	4.60		%
Interest credited — fixed	(2.01		%)	(2.01		%)
Net interest spread	2.78		%	2.59		%
Policy charges and other miscellaneous income	0.10		%	0.13		%
Other annuity benefit expenses, net of guaranteed withdrawal benefit fees	(0.28		%)	(0.29		%)
Acquisition expenses	(0.91		%)	(0.62		%)
Other expenses	(0.36		%)	(0.38		%)
Change in fair value of derivatives related to fixed-indexed annuities	0.19		%	(0.24		%)
Unlocking	(0.16		%)	—		%
Net spread earned on fixed annuities	1.36		%	1.19		%

79

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 fair value accounting for derivatives related to fixed-indexed annuities on the annuity segment’s net spread earned on fixed annuities:

	Six months ended June 30,
	2018		2017
Net spread earned on fixed annuities — before the impact of unlocking and derivatives related to FIAs	1.43	%	1.31	%
Unlocking	(0.16	%)	—	%
Impact of derivatives related to fixed-indexed annuities:
Change in fair value of derivatives	0.19	%	(0.24	%)
Related impact on amortization of deferred policy acquisition costs (*)	(0.10	%)	0.12	%
Related impact on amortization of deferred sales inducements (*)	—	%	—	%
Net spread earned on fixed annuities	1.36	%	1.19	%

(*) An estimate of the related acceleration/deceleration of the amortization of deferred policy acquisition costs and deferred sales inducements.

Annuity Net Investment Income

Net investment income for the first six months of 2018 was $806 million compared to $707 million for the first six months of 2017, an increase of $99 million (14%). This increase reflects the growth in AFG’s annuity business and higher earnings from limited partnerships and similar investments, partially offset by the impact of lower investment yields. 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), increased by 0.19 percentage points to 4.79% from 4.60% for the first six months of 2018 compared to the first six months of 2017. This increase in net investment yield reflects higher earnings from limited partnerships and similar investments, partially offset by (i) the investment of new premium dollars at lower yields as compared to the existing investment portfolio and (ii) the impact of the reinvestment of proceeds from maturity and redemption of higher yielding investments at the lower yields available in the financial markets. During 2017, $4.9 billion in annuity segment investments with an average yield of 5.14% were redeemed or sold while the investments purchased during 2017 (with new premium dollars and the redemption/sale proceeds) had an average yield at purchase of 3.94%.

Annuity Interest Credited — Fixed

Interest credited — fixed for the first six months of 2018 was $339 million compared to $309 million for the first six months of 2017, an increase of $30 million (10%). This increase reflects the impact of growth in the annuity business. The average interest rate credited to policyholders, calculated as interest credited divided by average fixed annuity benefits accumulated, was 2.01% in both the first six months of 2018 and the first six months of 2017.

Annuity Net Interest Spread

AFG’s net interest spread increased0.19 percentage points to 2.78% from 2.59% in the first six months of 2018 compared to the same period in 2017 due primarily to higher earnings from limited partnerships and similar investments, partially offset by 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.

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 the first six months of 2018 compared to $25 million for the first six months of 2017, a decrease of $4 million (16%). 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 $22 million in 2018 compared to $25 million in 2017, a decrease of $3 million (12%). The first six months of 2017 includes $1 million from the sale of real estate. As a percentage of average fixed annuity benefits accumulated, excluding the impact of unlocking charges related to unearned revenue, annuity policy charges and other miscellaneous income decreased0.03 percentage points to 0.10% from 0.13% in the first six months of 2018 compared to the first six months of 2017.

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.

80

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

Other Annuity Benefits, Net of Guaranteed Withdrawal Benefit Fees

Other annuity benefits, net of guaranteed withdrawal benefit fees (excluding the impact of unlocking), for the first six months of 2018 were $47 million compared to $43 million for the first six months of 2017, an increase of $4 million (9%). As a percentage of average fixed annuity benefits accumulated, these net expenses decreased 0.01 percentage points to 0.28% from 0.29% in the first six months of 2018 compared to the first six months of 2017. 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,
	2018			2017
Change in expected death and annuitization reserve	$	8		$	8
Amortization of sales inducements	10			10
Change in guaranteed withdrawal benefit reserve	42			33
Change in other benefit reserves	19			20
Other annuity benefits	79			71
Offset guaranteed withdrawal benefit fees	(32		)	(28		)
Other annuity benefits, net	$	47		$	43

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. 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.

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

Annuity Acquisition Expenses

Annuity acquisition expenses for the first six months of 2018 were $130 million compared to $99 million for the first six months of 2017, an increase of $31 million (31%). Excluding the $28 million favorable impact on amortization of DPAC from the unlocking recorded in the second quarter of 2018, annuity acquisition expenses were $158 million for the first six months of 2018, an increase of $59 million (60%) compared to the first six months of 2017, reflecting the acceleration/deceleration of DPAC amortization related to changes in the fair value of derivatives related to FIAs and growth in the business. Excluding the impact of the 2018 unlocking charge, AFG’s amortization of DPAC and commission expenses as a percentage of average fixed annuity benefits accumulated was 0.91% for the first six months of 2018 compared to 0.62% for the first six months of 2017 and has generally ranged between 0.75% and 0.85%. Variances from the general range relate primarily to the impact of (i) material changes in interest rates or the stock market on AFG’s fixed-indexed annuity business, and (ii) differences in actual experience from actuarially projected estimates and assumptions. For example, the positive impact of higher than anticipated interest rates during the first six months of 2018 on the fair value of derivatives related to FIAs (discussed below) resulted in a partially offsetting acceleration of the amortization of DPAC. In contrast, the negative impact of lower than anticipated interest rates during the first six months of 2017 on the fair value of derivatives related to FIAs resulted in a partially offsetting deceleration of the amortization of DPAC.

The table below illustrates the estimated impact of fair value accounting for derivatives related to fixed-indexed annuities on annuity acquisition expenses as a percentage of average fixed annuity benefits accumulated (excluding the impact of unlocking):

	Six months ended June 30,
	2018		2017
Before the impact of changes in the fair value of derivatives related to FIAs on the amortization of DPAC	0.81	%	0.74	%
Impact of changes in fair value of derivatives related to FIAs on amortization of DPAC (*)	0.10	%	(0.12	%)
Annuity acquisition expenses as a % of fixed annuity benefits accumulated	0.91	%	0.62	%

(*) An estimate of the acceleration/deceleration of the amortization of deferred policy acquisition costs resulting from fair value accounting for derivatives related to fixed-indexed annuities.

81

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 PVFP in the future.

Annuity Other Expenses

Annuity other expenses were $63 million for the first six months of 2018 compared to $60 million for the first six months of 2017, an increase of $3 million (5%). 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 were 0.36% for the first six months of 2018 and 0.38% for the first six months of 2017. This decrease in annuity other expenses as a percentage of average fixed annuity benefits accumulated is due primarily to growth in the business.

Change in Fair Value of Derivatives Related to Fixed-Indexed (Including Variable-Indexed) Annuities

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 index-based component (embedded derivative) of AFG’s annuity benefits accumulated, see Note C — “Fair Value Measurements” to the financial statements.

Excluding the impact of the 2018 unlocking charge, the net change in fair value of derivatives related to fixed-indexed annuities decreased annuity benefits by $33 million in the first six months of 2018 and increased annuity benefits by $37 million in the first six months of 2017. During the first six months of 2018, the positive impact of higher than expected interest rates on the fair value of these derivatives was partially offset by the negative impact of higher than expected option costs. During the first six months of 2017, the positive impact of strong market performance on the fair value of these derivatives was more than offset by the negative impact of lower than anticipated interest rates. As a percentage of average fixed annuity benefits accumulated, this net expense improved 0.43 percentage points to a net expense reduction of 0.19% in the first six months of 2018 from a net expense of 0.24% in the first six months of 2017.

Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products. The table below illustrates the impact of fair value accounting for derivatives related to fixed-indexed annuities on the annuity segment’s earnings before income taxes (dollars in millions):

	Six months ended June 30,
	2018			2017			% Change
Earnings before income taxes — before unlocking and change in fair value of derivatives related to fixed-indexed annuities	$	235		$	199		18	%
Unlocking	(27		)	—			—	%
Impact of derivatives related to fixed-indexed annuities:
Change in fair value of derivatives related to fixed-indexed annuities	33			(37		)	(189	%)
Related impact on amortization of DPAC (*)	(17		)	19			(189	%)
Earnings before income taxes	$	224		$	181		24	%

(*) An estimate of the related acceleration/deceleration of amortization of deferred sales inducements and deferred policy acquisition costs.

82

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

As illustrated in the table above, the change in fair value of derivatives related to fixed-indexed annuities, including the related impact on amortization of DPAC increased the annuity segment’s earnings before income taxes by $16 million in the first six months of 2018 and decreased the annuity segment’s earnings before income taxes by $18 million in the first six months of 2017. The following table provides analysis of the primary factors impacting the change in the fair value of derivatives related to FIAs. Each factor is presented net of the estimated related impact on amortization of DPAC (dollars in millions).

	Six months ended June 30,
	2018			2017			% Change
Interest on the embedded derivative liability	$	(15	)	$	(7	)	114	%
Changes in interest rates higher (lower) than expected	39			(28		)	(239	%)
Change in the stock market, including volatility	4			14			(71	%)
Renewal option costs lower (higher) than expected	(7		)	3			(333	%)
Other, including the impact of actual versus expected lapses	(5		)	—			—	%
Impact of derivatives related to FIAs	$	16		$	(18	)	(189	%)

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 liability in 2018.

Annuity Net Spread Earned on Fixed Annuities

AFG’s net spread earned on fixed annuities increased0.17 percentage points to 1.36% from 1.19% in the first six months of 2018 compared to the same period in 2017 due primarily to the net impact of changes in the fair value of derivatives and related DPAC amortization offset discussed above and the 0.19 percentage points increase in AFG’s net interest spread, partially offset by the impact of the unlocking of actuarial assumptions discussed below.

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.

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 months ended June 30, 2018 and 2017 (in millions):

	Six months ended June 30,
	2018			2017
Beginning fixed annuity reserves	$	33,005		$	29,647
Fixed annuity premiums (receipts)	2,534			2,541
Surrenders, benefits and other withdrawals	(1,333		)	(1,110		)
Interest and other annuity benefit expenses:
Interest credited	339			309
Embedded derivative mark-to-market	19			259
Change in other benefit reserves	59			58
Unlocking	55			—
Ending fixed annuity reserves	$	34,678		$	31,704
Reconciliation to annuity benefits accumulated per balance sheet:
Ending fixed annuity reserves (from above)	$	34,678		$	31,704
Impact of unrealized investment gains	32			128
Fixed component of variable annuities	176			182
Annuity benefits accumulated per balance sheet	$	34,886		$	32,014

83

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 $2.55 billion in the first six months of 2018 compared to $2.56 billion in the first six months of 2017, a decrease of $9 million. The following table summarizes AFG’s annuity sales (dollars in millions):

	Six months ended June 30,
	2018		2017		% Change
Financial institutions single premium annuities — indexed	$	861	$	987	(13	%)
Financial institutions single premium annuities — fixed	236		477		(51	%)
Retail single premium annuities — indexed	672		532		26	%
Retail single premium annuities — fixed	44		37		19	%
Broker dealer single premium annuities — indexed	614		411		49	%
Broker dealer single premium annuities — fixed	7		5		40	%
Education market — fixed and indexed annuities	100		92		9	%
Total fixed annuity premiums	2,534		2,541		—	%
Variable annuities	13		15		(13	%)
Total annuity premiums	$	2,547	$	2,556	—	%

While annuity premiums were comparable in the first six months of 2018 and the first six months of 2017, annuity premiums in the second quarter of 2018 represent an increase of 22% compared to the first quarter of 2018, reflecting growth in all fixed annuity product lines and channels.

Annuity Unlocking

In the second quarter of 2018, AFG recorded 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,
	2018			2017
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, 2018 and 2017 for a discussion of the charge from the unlocking of actuarial assumptions in the second quarter of 2018.

84

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 months ended June 30, 2018 and 2017 (in millions):

	Six months ended June 30,
	2018			2017
Earnings on fixed annuity benefits accumulated	$	229		$	183
Earnings impact of investments in excess of fixed annuity benefits accumulated (*)	(7		)	(4		)
Variable annuity earnings	2			2
Earnings before income taxes	$	224		$	181

(*) Net investment income (as a % of investments) of 4.79% and 4.60% for the six months ended June 30, 2018 and 2017, 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 GAAP pretax loss outside of its property and casualty insurance and annuity operations (excluding realized gains and losses) totaled $90 million in the first six months of 2018 compared to $98 million in the first six months of 2017, a decrease of $8 million (8%). AFG’s net core pretax loss outside of its property and casualty insurance and annuity operations (excluding realized gain and losses) totaled $90 million in the first six months of 2018 compared to $91 million in the first six months of 2017, a decrease of $1 million (1%).

The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance and annuity operations for the six months ended June 30, 2018 and 2017 (dollars in millions):

	Six months ended June 30,
	2018			2017			% Change
Revenues:
Life, accident and health net earned premiums	$	12		$	11		9	%
Net investment income	11			17			(35	%)
Other income — P&C fees	32			29			10	%
Other income	11			13			(15	%)
Total revenues	66			70			(6	%)
Costs and Expenses, excluding interest charges on borrowed money:
Property and casualty insurance — commissions and other underwriting expenses	10			12			(17	%)
Life, accident and health benefits	22			15			47	%
Life, accident and health acquisition expenses	2			2			—	%
Other expense — expenses associated with P&C fees	22			17			29	%
Other expenses (*)	69			71			(3	%)
Costs and expenses, excluding interest charges on borrowed money	125			117			7	%
Core loss before income taxes, excluding realized gains and losses and interest charges on borrowed money	(59		)	(47		)	26	%
Interest charges on borrowed money	31			44			(30	%)
Core loss before income taxes, excluding realized gains and losses	(90		)	(91		)	(1	%)
Pretax non-core loss on retirement of debt	—			(7		)	(100	%)
GAAP loss before income taxes, excluding realized gains and losses	$	(90	)	$	(98	)	(8	%)

(*) Excludes a pretax non-core loss on retirement of debt of $7 million in the second quarter of 2017.

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 $12 million and related benefits and acquisition expenses of $24 million in the first six months of 2018 compared to net earned premiums of $11 million and related benefits and acquisition expenses of $17 million in the first six months of 2017. The $7 million (47%) increase in life, accident and health benefits reflects higher claims in the run-off life business.

85

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

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 $11 million in the first six months of 2018 compared to $17 million in the first six months of 2017, a decrease of $6 million (35%). The parent company holds a small portfolio of securities that are carried at fair value through net investment income. These securities decreased in value by $2 million in the first six months of 2018 compared to an increase in value by $3 million in the first six months of 2017.

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 months of 2018, AFG collected $32 million in fees for these services compared to $29 million in the first six months of 2017. Management views this fee income, net of the $22 million in the first six months of 2018 and $17 million in the first six months of 2017, in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. 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 $8 million and $9 million in the first six months of 2018 and 2017, respectively, 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 of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance and annuity operations of $3 million in the first six months of 2018 and $4 million the first six months of 2017.

Holding Company and Other — Other Expenses

Excluding the non-core loss on retirement of debt discussed below, AFG’s holding companies and other operations outside of its property and casualty insurance and annuity operations recorded other expenses of $69 million in the first six months of 2018 compared to $71 million in the first six months of 2017, a decrease of $2 million (3%). This decrease reflects the impact of lower holding company expenses related to certain incentive compensation plans and employee benefit plans that are tied to stock market performance in the first six months of 2018 compared to the first six months of 2017, 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.

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 $31 million in the first six months of 2018 compared to $44 million in the first six months of 2017, a decrease of $13 million (30%), due primarily to a lower weighted average interest rate on AFG’s outstanding debt.

The decrease in the weighted average interest rate for the first six months of 2018 as compared to the first six months of 2017 reflects the following financing transactions completed by AFG between April 1, 2017 and December 31, 2017:

• Issued $350 million of 4.50% Senior Notes on June 2, 2017

• Redeemed $230 million of 6-3/8% Senior Notes on June 26, 2017

• Redeemed $125 million of 5-3/4% Senior Notes on August 25, 2017

• Issued an additional $125 million of 3.50% Senior Notes on November 9, 2017

• Issued an additional $240 million of 4.50% Senior Notes on November 9, 2017

• Redeemed $350 million of 9-7/8% Senior Notes on December 11, 2017

Holding Company and Other — Loss on Retirement of Debt

AFG wrote off unamortized debt issuance costs of $7 million related to the redemption of its $230 million outstanding 6-3/8% Senior Notes due 2042 at par value in June 2017.

86

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 a net loss of $62 million in the first six months of 2018 compared to a net gain of $11 million in the first six months of 2017, a decrease of $73 million (664%). Realized gains (losses) on securities consisted of the following (in millions):

	Six months ended June 30,
	2018			2017
Realized gains (losses) before impairments:
Disposals	$	9		$	32
Change in the fair value of equity securities (*)	(72		)	—
Change in the fair value of derivatives	(6		)	(3		)
Adjustments to annuity deferred policy acquisition costs and related items	8			(3		)
	(61		)	26
Impairment charges:
Securities	(1		)	(21		)
Adjustments to annuity deferred policy acquisition costs and related items	—			6
	(1		)	(15		)
Realized gains (losses) on securities	$	(62	)	$	11

(*) 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. This amount includes a $71 million net loss on securities that were still held at June 30, 2018.

The $72 million net realized loss from the change in the 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 related to banks and financing companies and $15 million on investments in media companies. AFG’s $21 million in impairment charges for the first six months of 2017 consist of $20 million on equity securities and $1 million on fixed maturities. Approximately $10 million in impairment charges in the first six months of 2017 are related to pharmaceutical companies and $5 million are on energy-related investments.

Consolidated Income Taxes   AFG’s consolidated provision for income taxes was $85 million for the first six months of 2018 compared to $128 million for the first six months of 2017, a decrease of $43 million (34%). See NoteL — “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 $6 million for the first six months of 2018 compared to net earnings of $2 million for the first six months of 2017. Losses attributable to noncontrolling interests for the first six months of 2018 are related to losses at Neon, AFG’s United Kingdom-based Lloyd’s insurer. Earnings attributable to noncontrolling interests in the first six months of 2017 are related to the gain on the sale of a hotel property, which was owned by an 80%-owned subsidiary of Great American Insurance.

RECENTLY ADOPTED ACCOUNTING STANDARDS

Effective December 31, 2017, AFG adopted ASU 2018-02, which allowed the reclassification of amounts stranded in accumulated other comprehensive income from accounting for the Tax Cuts and Jobs Act of 2017 to retained earnings.

See Note A — “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, clarifies that the need for a valuation allowance on a deferred tax asset related to available for sale securities should be evaluated with other deferred tax assets and modifies disclosure requirements for financial instruments.

ACCOUNTING STANDARDS TO BE ADOPTED

In February 2016, the FASB issued ASU 2016-02, Leases, 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. Qualitative and quantitative disclosures of the amount, timing and uncertainty of cash flows arising from leases will also be required. Although the guidance allows for early adoption, AFG expects to adopt the updated

87

AMERICAN FINANCIAL GROUP, INC. 10-Q

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

guidance effective January 1, 2019 (when it is required). Although the guidance will result in higher assets and higher liabilities from the recognition of assets and liabilities related to operating leases, it does not change the manner in which lease expense is recognized in the statement of earnings. Although management is currently evaluating the impact of this guidance, AFG does not expect it to have a material effect on its results of operations or financial position.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides a new credit loss model for determining credit-related impairments for financial instruments measured at amortized cost (e.g. mortgage loans or 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 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.

88

AMERICAN FINANCIAL GROUP, INC. 10-Q

ITEM 3

Quantitative and Qualitative Disclosure about Market Risk

As of June 30, 2018, there were no material changes to the information provided in Item 7A — Quantitative and Qualitative Disclosures about Market Risk of AFG’s 2017 Form 10-K.

ITEM 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 fiscal quarter of 2018 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. There has been no change in AFG’s business processes and procedures during the second fiscal quarter of 2018 that has materially affected, or is reasonably likely to materially affect, AFG’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities   AFG did not repurchase any shares of its Common Stock during the first six months of 2018. There are 4,132,838 remaining shares that may be repurchased under the Plans authorized by AFG’s Board of Directors in December 2014 and February 2016.

AFG acquired 23,882 shares of its Common Stock (at an average of $112.04 per share) in the first quarter of 2018, 32 shares (at $111.83 per share) in May 2018 and 396 shares (at $107.23 per share) in June 2018 in connection with its stock incentive plans.

ITEM 5

Other Information

Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934   Section 13(r) of the Securities Exchange Act of 1934, as amended (“Section 13(r)”), requires a registrant to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities, transactions or dealings related to Iran during the period covered by the report. Many of the activities, transactions and dealings that are required to be reported under Section 13(r) were previously subject to U.S. sanctions or prohibited by applicable local law. On January 16, 2016, the United States and the European Union eased sanctions against Iran pursuant to the Joint Comprehensive Plan of Action, and many of the reportable activities, transactions and dealings under Section 13(r) are no longer subject to U.S. sanctions and no longer prohibited by applicable local law.

Certain of the Company’s subsidiaries located outside the United States subscribe to insurance policies that provide insurance coverage to vessels owned by international shipping and marine entities with vessels that travel worldwide. As a result, the insurance policies may be called upon to respond to claims involving or that have exposure to Iranian petroleum resources, refined petroleum, and petrochemical industries. For example, certain of the Company’s non-U.S. subsidiaries participate in global marine hull and war policies that provide coverage for damage to vessels navigating into and out of ports worldwide, which could include Iran.

For the six months ended June 30, 2018, the Company is not aware of any additional premium with respect to underwriting insurance or reinsurance activities reportable under Section 13(r). Should any such risks have entered into the stream of

89

AMERICAN FINANCIAL GROUP, INC. 10-Q

commerce covered by these insurance or reinsurance activities, the Company believes that the premiums associated with such business would be immaterial.

ITEM 6

Exhibits

Number	Exhibit Description
12	Computation of ratios of earnings to fixed charges.
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	The following financial information from American Financial Group’s Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL (Extensible Business Reporting Language):
	(i) Consolidated Balance Sheet
	(ii) Consolidated Statement of Earnings
	(iii) Consolidated Statement of Comprehensive Income
	(iv) Consolidated Statement of Changes in Equity
	(v) Consolidated Statement of Cash Flows
	(vi) Notes to Consolidated Financial Statements

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 3, 2018	By:	/s/ Joseph E. (Jeff) Consolino
		Joseph E. (Jeff) Consolino
		Executive Vice President and Chief Financial Officer

90

EX-12

Exhibit 12

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES

(Dollars in Millions)

	Six months ended June 30, 2018			Year ended December 31, 2017
Earnings before income taxes	$	434		$	724
Undistributed equity in earnings of investees	(39		)	(4		)
Fixed charges:
Interest on annuities	442			892
Interest expense	30			84
Debt discount, expense and other fixed charges	1			1
Portion of rentals representing interest	11			23
EARNINGS	$	879		$	1,720
Fixed charges:
Interest on annuities	$	442		$	892
Interest expense	30			84
Debt discount, expense and other fixed charges	1			1
Portion of rentals representing interest	11			23
FIXED CHARGES	$	484		$	1,000
Ratio of Earnings to Fixed Charges	1.82			1.72
Earnings in Excess of Fixed Charges	$	395		$	720

E-1

EX-31.A

Exhibit 31(a)

AMERICAN FINANCIAL GROUP, INC. 10-Q

SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS

I, Carl H. Lindner III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 3, 2018	By:	/s/ Carl H. Lindner III
		Carl H. Lindner III
		Co-Chief Executive Officer

E-2

EX-31.B

Exhibit 31(b)

AMERICAN FINANCIAL GROUP, INC. 10-Q

SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS

I, S. Craig Lindner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 3, 2018	By:	/s/ S. Craig Lindner
		S. Craig Lindner
		Co-Chief Executive Officer

E-3

EX-31.C

Exhibit 31(c)

AMERICAN FINANCIAL GROUP, INC. 10-Q

SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS

I, Joseph E. (Jeff) Consolino, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 3, 2018	By:	/s/ Joseph E. (Jeff) Consolino
		Joseph E. (Jeff) Consolino
		Executive Vice President and Chief Financial Officer

E-4

EX-32

Exhibit 32

AMERICAN FINANCIAL GROUP, INC. 10-Q

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002

In connection with the filing with the Securities and Exchange Commission of the Quarterly Report of American Financial Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2018 (the “Report”), the undersigned officers of the Company, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 3, 2018	By:	/s/ S. Craig Lindner
Date		S. Craig Lindner
		Co-Chief Executive Officer
August 3, 2018	By:	/s/ Carl H. Lindner III
Date		Carl H. Lindner III
		Co-Chief Executive Officer
August 3, 2018	By:	/s/ Joseph E. (Jeff) Consolino
Date		Joseph E. (Jeff) Consolino
		Executive Vice President and Chief Financial Officer

A signed original of this written statement will be retained by the Registrant and

furnished to the Securities and Exchange Commission or its staff upon request.

E-5

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2018	Aug. 01, 2018
Document and Entity Information [Abstract]
Entity Registrant Name	AMERICAN FINANCIAL GROUP INC
Entity Central Index Key	0001042046
Document Type	10-Q
Document Period End Date	Jun. 30, 2018
Amendment Flag	false
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		89,087,663

XML

Consolidated Balance Sheet (Unaudited) - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Assets:
Cash and cash equivalents	$ 1,810	$ 2,338
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $39,244 and $37,038)	39,648	38,379
Fixed maturities, trading at fair value	137	348
Equity securities, at fair value	1,777	1,662
Investments accounted for using the equity method	1,194	999
Mortgage loans	1,147	1,125
Policy loans	179	184
Equity index call options	615	701
Real estate and other investments	272	312
Total cash and investments	46,779	46,048
Recoverables from reinsurers	3,073	3,369
Prepaid reinsurance premiums	645	600
Agents’ balances and premiums receivable	1,266	1,146
Deferred policy acquisition costs	1,582	1,216
Assets of managed investment entities	5,032	4,902
Other receivables	1,048	1,030
Variable annuity assets (separate accounts)	636	644
Other assets	1,574	1,504
Goodwill	199	199
Total assets	61,834	60,658
Liabilities and Equity:
Unpaid losses and loss adjustment expenses	9,093	9,678
Unearned premiums	2,539	2,410
Annuity benefits accumulated	34,886	33,316
Life, accident and health reserves	647	658
Payable to reinsurers	721	743
Liabilities of managed investment entities	4,840	4,687
Long-term debt	1,301	1,301
Variable annuity liabilities (separate accounts)	636	644
Other liabilities	2,087	1,887
Total liabilities	56,750	55,324
Temporary equity
Redeemable noncontrolling interests	0	3
Shareholders’ equity:
Common Stock, no par value — 200,000,000 shares authorized — 89,072,114 and 88,275,460 shares outstanding	89	88
Capital surplus	1,220	1,181
Retained earnings	3,628	3,248
Accumulated other comprehensive income, net of tax	147	813
Total shareholders’ equity	5,084	5,330
Noncontrolling interests	0	1
Total equity	5,084	5,331
Total liabilities and equity	$ 61,834	$ 60,658

XML

Consolidated Balance Sheet (Unaudited) (Parenthetical) - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Statement of Financial Position [Abstract]
Fixed maturities, available for sale at amortized cost	$ 39,244	$ 37,038
Common Stock, par value (USD per share)	$ 0	$ 0
Common Stock, shares authorized	200,000,000	200,000,000
Common Stock, shares outstanding	89,072,114	88,275,460

XML

Consolidated Statement of Earnings (Unaudited) - USD ($) shares in Millions, $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Revenues:
Property and casualty insurance net earned premiums	$ 1,161	$ 1,065	$ 2,268	$ 2,087
Life, accident and health net earned premiums	6	5	12	11
Net investment income	530	460	1,025	895
Realized gains (losses) on:
Realized gains (losses) on securities	31	8	(62)	11
Income (loss) of managed investment entities:
Investment income	64	50	122	101
Gain (loss) on change in fair value of assets/liabilities	(2)	11	(5)	11
Other income	43	47	92	106
Total revenues	1,833	1,646	3,452	3,222
Costs and Expenses:
Property and casualty insurance: Losses and loss adjustment expenses	693	635	1,334	1,244
Property and casualty insurance: Commissions and other underwriting expenses	400	366	781	705
Annuity benefits	260	224	442	420
Life, accident and health benefits	11	6	22	15
Annuity and supplemental insurance acquisition expenses	50	48	132	101
Interest charges on borrowed money	16	23	31	44
Expenses of managed investment entities	54	51	102	92
Other expenses	89	88	174	173
Total costs and expenses	1,573	1,441	3,018	2,794
Earnings before income taxes	260	205	434	428
Provision for income taxes	52	60	85	128
Net earnings, including noncontrolling interests	208	145	349	300
Less: Net earnings (losses) attributable to noncontrolling interests	(2)	0	(6)	2
Net Earnings Attributable to Shareholders	$ 210	$ 145	$ 355	$ 298
Earnings Attributable to Shareholders per Common Share:
Basic (USD per share)	$ 2.36	$ 1.64	$ 3.99	$ 3.40
Diluted (USD per share)	$ 2.31	$ 1.61	$ 3.92	$ 3.32
Average number of Common Shares:
Basic (shares)	89.0	87.8	88.8	87.5
Diluted (shares)	90.7	89.8	90.5	89.6
Cash dividends per Common Share (USD per share)	$ 1.85	$ 1.8125	$ 2.20	$ 2.125
Supplemental disclosure of Realized gains on securities:
Realized gains (losses) before impairments	$ 31	$ 17	$ (61)	$ 26
Losses on securities with impairment	0	(10)	(1)	(16)
Non-credit portion recognized in other comprehensive income (loss)	0	1	0	1
Impairment charges recognized in earnings	0	(9)	(1)	(15)
Total realized gains (losses) on securities	$ 31	$ 8	$ (62)	$ 11

XML

Consolidated Statement of Comprehensive Income (Unaudited) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Statement of Comprehensive Income [Abstract]
Net earnings, including noncontrolling interests	$ 208	$ 145	$ 349	$ 300
Net unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period	(148)	115	(427)	240
Reclassification adjustment for realized gains included in net earnings	(3)	(5)	(1)	(5)
Total net unrealized gains (losses) on securities	(151)	110	(428)	235
Net unrealized gains (losses) on cash flow hedges	(3)	2	(14)	1
Foreign currency translation adjustments	(4)	4	(3)	4
Other comprehensive income (loss), net of tax	(158)	116	(445)	240
Total comprehensive income (loss), net of tax	50	261	(96)	540
Less: Comprehensive income (loss) attributable to noncontrolling interests	(2)	0	(6)	2
Comprehensive income (loss) attributable to shareholders	$ 52	$ 261	$ (90)	$ 538

XML

Consolidated Statement of Changes in Equity (Unaudited) - USD ($) $ in Millions		Total	Total	Common Shares	Common Stock and Capital Surplus	Retained Earnings	Accumulated Other Comp. Income (Loss)	Noncontrolling interests
Beginning Balance, shares at Dec. 31, 2016				86,924,399
Beginning Balance at Dec. 31, 2016		$ 4,919	$ 4,916		$ 1,198	$ 3,343	$ 375	$ 3
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net earnings (losses) attributable to parent		298	298			298
Net earnings (losses) including portion attributable to nonredeemable noncontrolling interest		300						2
Other comprehensive income (loss)		240	240				240	0
Dividends on Common Stock		(187)	(187)			(187)
Shares issued:
Exercise of stock options, shares				792,288
Exercise of stock options		26	26		26
Restricted stock awards, shares				232,250
Restricted stock awards		0	0		0
Other benefit plans, shares				75,381
Other benefit plans		7	7		7
Dividend reinvestment plan, shares				19,516
Dividend reinvestment plan		2	2		2
Stock-based compensation expense		13	13		13
Shares exchanged — benefit plans, shares				(32,509)
Shares exchanged — benefit plans		(3)	(3)		0	(3)
Forfeitures of restricted stock, shares				(4,073)
Forfeitures of restricted stock		0	0		0
Other		(5)						(5)
Ending Balance, shares at Jun. 30, 2017				88,007,252
Ending Balance at Jun. 30, 2017		5,312	5,312		1,246	3,451	615	0
Beginning Balance, Redeemable Noncontrolling Interests at Dec. 31, 2016		0
Ending Balance, Redeemable Noncontrolling Interests at Jun. 30, 2017		0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cumulative effect of accounting change	[1]						0
Cumulative effect of accounting change		$ 4	4			225	(221)
Beginning Balance, shares at Dec. 31, 2017		88,275,460		88,275,460
Beginning Balance at Dec. 31, 2017		$ 5,331	5,330		1,269	3,248	813	1
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net earnings (losses) attributable to parent		355	355			355
Net earnings (losses) including portion attributable to nonredeemable noncontrolling interest		354						(1)
Other comprehensive income (loss)		(445)	(445)				(445)	0
Dividends on Common Stock		(196)	(196)			(196)
Shares issued:
Exercise of stock options, shares				531,726
Exercise of stock options		19	19		19
Restricted stock awards, shares				200,625
Restricted stock awards		0	0		0
Other benefit plans, shares				73,676
Other benefit plans		8	8		8
Dividend reinvestment plan, shares				18,006
Dividend reinvestment plan		2	2		2
Stock-based compensation expense		11	11		11
Shares exchanged — benefit plans, shares				(24,310)
Shares exchanged — benefit plans		(2)	(2)		0	(2)
Forfeitures of restricted stock, shares				(3,069)
Forfeitures of restricted stock		0	0		0
Other		$ (2)	(2)			(2)		0
Ending Balance, shares at Jun. 30, 2018		89,072,114		89,072,114
Ending Balance at Jun. 30, 2018		$ 5,084	$ 5,084		$ 1,309	$ 3,628	147	$ 0
Beginning Balance, Redeemable Noncontrolling Interests at Dec. 31, 2017		3
Redeemable Noncontrolling Interest, Equity, Carrying Amount [Abstract]
Net earnings attributable to redeemable noncontrolling interests		(5)
Other		2
Ending Balance, Redeemable Noncontrolling Interests at Jun. 30, 2018		$ 0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Cumulative effect of accounting change	[1]						$ 0

[1] 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.

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Consolidated Statement of Cash Flows (Unaudited) - USD ($) $ in Millions	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Operating Activities:
Net earnings, including noncontrolling interests	$ 349	$ 300
Adjustments:
Depreciation and amortization	106	69
Annuity benefits	442	420
Realized (gains) losses on investing activities	64	(28)
Net sales of trading securities	83	31
Deferred annuity and life policy acquisition costs	(127)	(133)
Change in:
Reinsurance and other receivables	72	(291)
Other assets	(16)	(8)
Insurance claims and reserves	(268)	275
Payable to reinsurers	(22)	47
Other liabilities	55	(32)
Managed investment entities’ assets/liabilities	138	(72)
Other operating activities, net	(53)	(4)
Net cash provided by operating activities	823	574
Investing Activities:
Purchases of fixed maturities	(4,549)	(5,387)
Purchases of equity securities	(248)	(44)
Purchases of mortgage loans	(90)	(146)
Purchases of equity index call options and other investments	(446)	(360)
Purchases of real estate, property and equipment	(44)	(30)
Proceeds from maturities and redemptions of fixed maturities	2,283	3,285
Proceeds from repayments of mortgage loans	68	110
Proceeds from sales of fixed maturities	203	150
Proceeds from sales of equity securities	106	50
Proceeds from sales and settlements of equity index call options and other investments	446	360
Proceeds from sales of real estate, property and equipment	1	53
Managed investment entities:
Purchases of investments	(1,261)	(1,780)
Proceeds from sales and redemptions of investments	1,035	1,738
Other investing activities, net	11	7
Net cash used in investing activities	(2,485)	(1,994)
Financing Activities:
Annuity receipts	2,547	2,556
Annuity surrenders, benefits and withdrawals	(1,372)	(1,161)
Net transfers from variable annuity assets	21	30
Additional long-term borrowings	0	345
Reductions of long-term debt	0	(230)
Issuances of managed investment entities’ liabilities	1,572	977
Retirements of managed investment entities’ liabilities	(1,461)	(835)
Issuances of Common Stock	21	27
Cash dividends paid on Common Stock	(194)	(185)
Other financing activities, net	0	(4)
Net cash provided by financing activities	1,134	1,520
Net Change in Cash and Cash Equivalents	(528)	100
Cash and cash equivalents at beginning of period	2,338	2,107
Cash and cash equivalents at end of period	$ 1,810	$ 2,207

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Accounting Policies

6 Months Ended

Jun. 30, 2018

Accounting Policies [Abstract]

Accounting Policies

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, 2018, 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.

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 significant nonrecurring fair value measurements in the first six months of 2018.

Investments On January 1, 2018, AFG adopted Accounting Standards Update (“ASU”) 2016-01, which 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 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 under ASU 2016-01 are generally recorded in realized gains (losses) on securities. However, prior to the adoption of the new guidance, AFG classified a small portion of its equity securities as “trading” and reported those investments at fair value with holding gains and losses recognized in net investment income. These investments consisted primarily of equity securities held to offset the impact of changes in the stock market on employee benefit plans that are impacted by stock market performance and totaled $62 million at December 31, 2017. Following the adoption of the new guidance, AFG continues to record holding gains and losses on these securities, as well as its small portfolio of limited partnerships and similar investments carried at fair value under the new guidance and certain other securities classified at purchase as “fair value through net investment income” in net investment income.

Under the new guidance, AFG recorded holding losses of $57 million on equity securities in net earnings during the first six months of 2018 on securities that were still owned at June 30, 2018. Under the prior guidance, these holding losses would have been recorded in AOCI (with the exception of any impairment charge that may have been recorded). Because almost all of the equity securities impacted by the new guidance were carried at fair value through AOCI under the prior guidance, the adoption of the new guidance did not have a material impact on AFG’s financial position.

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.

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 or losses on fixed maturity securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment 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 security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment 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 to reduce the amortized cost of that security to fair value.

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 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.

For derivatives that are designated and qualify as highly effective fair value hedges, changes in the fair value of the derivative, along with changes in the fair value of the hedged item attributable to the hedged risk, are recognized in current period earnings.

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 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 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 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” 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.

Managed Investment EntitiesA 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 the 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.

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 expense and decreases for annuity policy charges are recorded in other income.

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.

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).

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.

Debt Issuance CostsDebt 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.

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

Noncontrolling Interests   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).

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 uses the Black Scholes pricing model to measure the fair value of employee stock options. See Note K — “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 of 2018 and 2017 — 1.7 million and 2.0 million; first six months of 2018 and 2017 — 1.7 million and 2.1 million, respectively.

There were no anti-dilutive potential common shares in the second quarter or first six months of 2018 or 2017.

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 and property and equipment. “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.

Revenue Recognition Guidance Effective in 2018 On January 1, 2018, AFG adopted ASU 2014-09, which provides guidance on recognizing revenue when (or as) performance obligations under the contract are satisfied. The new guidance also updates the accounting for certain costs associated with obtaining and fulfilling contracts with customers and requires certain new disclosures. Because revenue recognition for insurance contracts and financial instruments (AFG’s primary sources of revenue) were excluded from the scope of the new guidance, the adoption of ASU 2014-09 did not have a material impact on AFG’s results of operations or financial position.

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Segments of Operations

6 Months Ended

Jun. 30, 2018

Segment Reporting [Abstract]

Segments of Operations

Segments of Operations

AFG manages its business as three 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, 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, trucks and recreational vehicles, inland and ocean marine, agricultural-related products and other property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, general liability, executive liability, professional liability, umbrella and excess liability, specialty coverage 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 leasing and financing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), surety and fidelity 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 markets traditional fixed, fixed-indexed and variable-indexed annuities in the retail, financial institutions, registered investment advisor and education markets. AFG’s reportable segments and their components were determined based primarily upon similar economic characteristics, products and services. Effective January 1, 2018, the results of AFG’s run-off long-term care and life businesses are included in the “Other” segment instead of as a separate reportable segment based on the immaterial size of the remaining operations. Prior period amounts were reclassified for consistent presentation.

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,
	2018		2017		2018			2017
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	374	$	357	$	724		$	699
Specialty casualty	595		537		1,174			1,045
Specialty financial	159		146		308			293
Other specialty	33		25		62			50
Total premiums earned	1,161		1,065		2,268			2,087
Net investment income	115		96		215			182
Other income (a)	2		4		4			20
Total property and casualty insurance	1,278		1,165		2,487			2,289
Annuity:
Net investment income	412		360		806			707
Other income	27		26		53			53
Total annuity	439		386		859			760
Other	85		87		168			162
Total revenues before realized gains (losses)	1,802		1,638		3,514			3,211
Realized gains (losses) on securities	31		8		(62		)	11
Total revenues	$	1,833	$	1,646	$	3,452		$	3,222

Earnings Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	23		$	21		$	56		$	64
Specialty casualty	29			29			70			44
Specialty financial	22			23			37			45
Other specialty	(1		)	—			2			(1		)
Other lines	(1		)	(1		)	(2		)	(2		)
Total underwriting	72			72			163			150
Investment and other income, net (a)	106			91			199			184
Total property and casualty insurance	178			163			362			334
Annuity	99			85			224			181
Other (b)	(48		)	(51		)	(90		)	(98		)
Total earnings before realized gains (losses) and income taxes	229			197			496			417
Realized gains (losses) on securities	31			8			(62		)	11
Total earnings before income taxes	$	260		$	205		$	434		$	428

(a) Includes income of $13 million (before noncontrolling interest) from the sale of a hotel in the first quarter of 2017.

(b) Includes holding company interest and expenses, including a $7 million loss on retirement of debt in the second quarter of 2017.

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Fair Value Measurements

6 Months Ended

Jun. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

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

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

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. AFG’s Level 2 financial instruments include separate account assets, corporate and municipal fixed maturity securities, asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), non-affiliated common stocks, equity index call 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 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.

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 25 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.

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
June 30, 2018
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	140	$	92	$	8	$	240
States, municipalities and political subdivisions	—		6,852		61		6,913
Foreign government	—		129		—		129
Residential MBS	—		2,739		147		2,886
Commercial MBS	—		878		56		934
Asset-backed securities	—		7,931		1,004		8,935
Corporate and other	29		18,174		1,408		19,611
Total AFS fixed maturities	169		36,795		2,684		39,648
Trading fixed maturities	38		99		—		137
Equity securities	1,471		76		230		1,777
Equity index call options	—		615		—		615
Assets of managed investment entities (“MIE”)	229		4,780		23		5,032
Variable annuity assets (separate accounts) (*)	—		636		—		636
Total assets accounted for at fair value	$	1,907	$	43,001	$	2,937	$	47,845
Liabilities:
Liabilities of managed investment entities	$	220	$	4,598	$	22	$	4,840
Derivatives in annuity benefits accumulated	—		—		2,776		2,776
Other liabilities — derivatives	—		72		—		72
Total liabilities accounted for at fair value	$	220	$	4,670	$	2,798	$	7,688
December 31, 2017
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	122	$	112	$	8	$	242
States, municipalities and political subdivisions	—		6,975		148		7,123
Foreign government	—		127		—		127
Residential MBS	—		3,105		122		3,227
Commercial MBS	—		926		36		962
Asset-backed securities	—		7,218		744		7,962
Corporate and other	30		17,662		1,044		18,736
Total AFS fixed maturities	152		36,125		2,102		38,379
Trading fixed maturities	44		304		—		348
Equity securities	1,411		86		165		1,662
Equity index call options	—		701		—		701
Assets of managed investment entities	307		4,572		23		4,902
Variable annuity assets (separate accounts) (*)	—		644		—		644
Total assets accounted for at fair value	$	1,914	$	42,432	$	2,290	$	46,636
Liabilities:
Liabilities of managed investment entities	$	293	$	4,372	$	22	$	4,687
Derivatives in annuity benefits accumulated	—		—		2,542		2,542
Other liabilities — derivatives	—		35		—		35
Total liabilities accounted for at fair value	$	293	$	4,407	$	2,564	$	7,264

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

Transfers between Level 1 and Level 2 for all periods presented were a result of increases or decreases in observable trade activity.

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. During the second quarter and first six months of 2017, there were two preferred stocks with an aggregate fair value of $16 million that transferred from Level 2 to Level 1.

Approximately 6% of the total assets carried at fair value at June 30, 2018, were Level 3 assets. Approximately 73% ($2.14 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. Since internally developed Level 3 asset fair values represent approximately 14% of AFG’s Shareholders’ Equity, any justifiable changes in unobservable inputs used to determine internally developed fair values would not have a material impact on AFG’s financial position.

The only significant Level 3 assets or liabilities carried at fair value in the financial statements that were not measured using broker quotes are the derivatives embedded in AFG’s fixed-indexed and variable-indexed annuity liabilities, which are measured using a discounted cash flow approach and had a fair value of $2.78 billion at June 30, 2018. The following table presents information about the unobservable inputs used by management in determining fair value of these embedded derivatives. See Note E — “Derivatives.”

Unobservable Input	Range
Adjustment for insurance subsidiary’s credit risk	0.4% – 1.7% over the risk free rate
Risk margin for uncertainty in cash flows	0.70% reduction in the discount rate
Surrenders	3% – 23% of indexed account value
Partial surrenders	2% – 9% of indexed account value
Annuitizations	0.1% – 1% of indexed account value
Deaths	1.6% – 8.0% of indexed account value
Budgeted option costs	2.5% – 3.5% of indexed account value

The range of adjustments for insurance subsidiary’s credit risk 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% in the majority of future calendar years (3% to 23% 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.

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the second quarter and first six months of 2018 and 2017 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.” 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, 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
Asset-backed securities	912			—			(6		)	136			(20		)	—		(18		)	1,004
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	)

				Total realized/unrealized gains (losses) included in
	Balance at March 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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	143			—			1		—			(1		)	—		—			143
Residential MBS	175			(3		)	2		—			(23		)	13		(11		)	153
Commercial MBS	29			1			—		15			—			—		—			45
Asset-backed securities	594			—			2		—			(25		)	19		(92		)	498
Corporate and other	828			4			4		168			(27		)	—		(24		)	953
Total AFS fixed maturities	1,777			2			9		183			(76		)	32		(127		)	1,800
Equity securities	173			(10		)	6		8			(3		)	—		(6		)	168
Assets of MIE	26			(5		)	—		2			—			—		—			23
Total Level 3 assets	$	1,976		$	(13	)	$	15	$	193		$	(79	)	$	32	$	(133	)	$	1,991
Embedded derivatives	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)

(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.

				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
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(1		)	—		(84		)	61
Residential MBS	122			(7		)	—			—			(11		)	57		(14		)	147
Commercial MBS	36			(1		)	—			21			—			—		—			56
Asset-backed securities	744			(2		)	(3		)	340			(57		)	—		(18		)	1,004
Corporate and other	1,044			2			(18		)	472			(79		)	—		(13		)	1,408
Total AFS fixed maturities	2,102			(8		)	(23		)	833			(148		)	57		(129		)	2,684
Equity securities	165			14			—			25			(4		)	30		—			230
Assets of MIE	23			(5		)	—			5			—			—		—			23
Total Level 3 assets	$	2,290		$	1		$	(23	)	$	863		$	(152	)	$	87	$	(129	)	$	2,937
Embedded derivatives (a)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2016			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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	140			—			4		—			(1		)	—		—			143
Residential MBS	190			(2		)	2		1			(31		)	20		(27		)	153
Commercial MBS	25			1			—		15			—			4		—			45
Asset-backed securities	484			—			2		104			(36		)	36		(92		)	498
Corporate and other	712			5			8		288			(65		)	29		(24		)	953
Total AFS fixed maturities	1,559			4			16		408			(133		)	89		(143		)	1,800
Equity securities	174			(16		)	13		20			(3		)	—		(20		)	168
Assets of MIE	29			(6		)	—		4			—			—		(4		)	23
Total Level 3 assets	$	1,762		$	(18	)	$	29	$	432		$	(136	)	$	89	$	(167	)	$	1,991
Embedded derivatives	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)

(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.

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
June 30, 2018
Financial assets:
Cash and cash equivalents	$	1,810	$	1,810	$	1,810	$	—	$	—
Mortgage loans	1,147		1,136		—		—		1,136
Policy loans	179		179		—		—		179
Total financial assets not accounted for at fair value	$	3,136	$	3,125	$	1,810	$	—	$	1,315
Financial liabilities:
Annuity benefits accumulated (*)	$	34,673	$	33,204	$	—	$	—	$	33,204
Long-term debt	1,301		1,265		—		1,262		3
Total financial liabilities not accounted for at fair value	$	35,974	$	34,469	$	—	$	1,262	$	33,207
December 31, 2017
Financial assets:
Cash and cash equivalents	$	2,338	$	2,338	$	2,338	$	—	$	—
Mortgage loans	1,125		1,119		—		—		1,119
Policy loans	184		184		—		—		184
Total financial assets not accounted for at fair value	$	3,647	$	3,641	$	2,338	$	—	$	1,303
Financial liabilities:
Annuity benefits accumulated (*)	$	33,110	$	32,461	$	—	$	—	$	32,461
Long-term debt	1,301		1,354		—		1,351		3
Total financial liabilities not accounted for at fair value	$	34,411	$	33,815	$	—	$	1,351	$	32,464

(*) Excludes $213 million and $206 million of life contingent annuities in the payout phase at June 30, 2018 and December 31, 2017, 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.

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Investments

6 Months Ended

Jun. 30, 2018

Investments, Debt and Equity Securities [Abstract]

Investments

Investments

Available for sale fixed maturities at June 30, 2018 and December 31, 2017, consisted of the following (in millions):

	June 30, 2018												December 31, 2017
	Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value		Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value
			Gains		Losses										Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	243	$	1	$	(4	)	$	(3	)	$	240	$	244	$	1	$	(3	)	$	(2	)	$	242
States, municipalities and political subdivisions	6,804		162		(53		)	109			6,913		6,887		254		(18		)	236			7,123
Foreign government	127		2		—			2			129		124		3		—			3			127
Residential MBS	2,564		329		(7		)	322			2,886		2,884		349		(6		)	343			3,227
Commercial MBS	920		18		(4		)	14			934		927		36		(1		)	35			962
Asset-backed securities	8,849		132		(46		)	86			8,935		7,836		142		(16		)	126			7,962
Corporate and other	19,737		198		(324		)	(126		)	19,611		18,136		638		(38		)	600			18,736
Total fixed maturities	$	39,244	$	842	$	(438	)	$	404		$	39,648	$	37,038	$	1,423	$	(82	)	$	1,341		$	38,379

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, 2018 and December 31, 2017 were $149 million and $158 million, respectively. Gross unrealized gains on such securities at June 30, 2018 and December 31, 2017 were $135 million and $137 million, respectively. Gross unrealized losses on such securities at both June 30, 2018 and December 31, 2017 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.

As discussed in Note A — “Accounting Policies — Investments,” beginning on January 1, 2018, AFG implemented new accounting guidance, which required all equity securities previously classified as “available for sale” to be reported at fair value, with holding gains and losses recognized in net earnings. Equity securities reported at fair value consisted of the following at June 30, 2018 (in millions):

					Fair Value in
	Actual Cost		Fair Value		excess of Cost
Common stocks	$	1,066	$	1,180	$	114
Perpetual preferred stocks	603		597		(6		)
Total equity securities carried at fair value	$	1,669	$	1,777	$	108

The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities and equity securities 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
June 30, 2018
Fixed maturities:
U.S. Government and government agencies	$	(1	)	$	102	99	%	$	(3	)	$	99	97	%
States, municipalities and political subdivisions	(36		)	1,957		98	%	(17		)	451		96	%
Foreign government	—			26		100	%	—			—		—	%
Residential MBS	(2		)	157		99	%	(5		)	110		96	%
Commercial MBS	(4		)	215		98	%	—			—		—	%
Asset-backed securities	(36		)	3,738		99	%	(10		)	256		96	%
Corporate and other	(281		)	10,673		97	%	(43		)	651		94	%
Total fixed maturities	$	(360	)	$	16,868	98	%	$	(78	)	$	1,567	95	%
December 31, 2017
Fixed maturities:
U.S. Government and government agencies	$	—		$	55	100	%	$	(3	)	$	123	98	%
States, municipalities and political subdivisions	(8		)	825		99	%	(10		)	431		98	%
Foreign government	—			4		100	%	—			—		—	%
Residential MBS	(1		)	118		99	%	(5		)	118		96	%
Commercial MBS	(1		)	67		99	%	—			—		—	%
Asset-backed securities	(7		)	1,195		99	%	(9		)	299		97	%
Corporate and other	(20		)	2,031		99	%	(18		)	603		97	%
Total fixed maturities	$	(37	)	$	4,295	99	%	$	(45	)	$	1,574	97	%
Equity securities:
Common stocks	$	(22	)	$	117	84	%	$	—		$	—	—	%
Perpetual preferred stocks	—			41		100	%	(1		)	13		93	%
Total equity securities	$	(22	)	$	158	88	%	$	(1	)	$	13	93	%

At June 30, 2018, the gross unrealized losses on fixed maturities of $438 million relate to 2,043 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 93% of the gross unrealized loss and 96% of the fair value.

AFG analyzes its MBS securities for other-than-temporary 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 the first six months of 2018, AFG recorded less than $1 million in other-than-temporary impairment charges related to its residential MBS.

In the first six months of 2018, AFG recorded less than $1 million in other-than-temporary impairment charges related to corporate bonds and other fixed maturities.

Management believes AFG will recover its cost basis 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, 2018. As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities previously classified as “available for sale” are required to be carried at fair value through net earnings instead of accumulated other comprehensive income and therefore are no longer evaluated for other-than-temporary impairment.

A progression of the credit portion of other-than-temporary impairments 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):

	2018			2017
Balance at March 31	$	144		$	146
Additional credit impairments on:
Previously impaired securities	—			1
Securities without prior impairments	1			—
Reductions due to sales or redemptions	(1		)	(2		)
Balance at June 30	$	144		$	145
Balance at January 1	$	145		$	153
Additional credit impairments on:
Previously impaired securities	—			1
Securities without prior impairments	1			—
Reductions due to sales or redemptions	(2		)	(9		)
Balance at June 30	$	144		$	145

The table below sets forth the scheduled maturities of available for sale fixed maturities as of June 30, 2018 (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		Amount		%
Maturity
One year or less	$	994	$	1,003	3	%
After one year through five years	7,703		7,764		20	%
After five years through ten years	13,386		13,285		33	%
After ten years	4,828		4,841		12	%
	26,911		26,893		68	%
ABS (average life of approximately 4-1/2 years)	8,849		8,935		22	%
MBS (average life of approximately 4-1/2 years)	3,484		3,820		10	%
Total	$	39,244	$	39,648	100	%

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, 2018 or December 31, 2017.

Net Unrealized Gain on Marketable Securities   In addition to adjusting fixed maturity securities and equity 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
June 30, 2018
Net unrealized gain on:
Fixed maturities — annuity segment (a)	$	310		$	(65	)	$	245
Fixed maturities — all other	94			(20		)	74
Total fixed maturities	404			(85		)	319
Deferred policy acquisition costs — annuity segment	(124		)	26			(98		)
Annuity benefits accumulated	(41		)	9			(32		)
Unearned revenue	3			(1		)	2
Total net unrealized gain on marketable securities	$	242		$	(51	)	$	191
December 31, 2017
Net unrealized gain on:
Fixed maturities — annuity segment (a)	$	1,082		$	(227	)	$	855
Fixed maturities — all other	259			(55		)	204
Total fixed maturities	1,341			(282		)	1,059
Equity securities (b)	279			(58		)	221
Total investments	1,620			(340		)	1,280
Deferred policy acquisition costs — annuity segment	(433		)	91			(342		)
Annuity benefits accumulated	(137		)	29			(108		)
Unearned revenue	13			(3		)	10
Total net unrealized gain on marketable securities	$	1,063		$	(223	)	$	840

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

(b) As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings.

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,
	2018			2017			2018			2017
Investment income:
Fixed maturities	$	431		$	397		$	843		$	786
Equity securities:
Dividends	20			17			40			36
Change in fair value (*)	15			2			14			4
Equity in earnings of partnerships and similar investments	41			21			87			31
Other	28			27			51			47
Gross investment income	535			464			1,035			904
Investment expenses	(5		)	(4		)	(10		)	(9		)
Net investment income	$	530		$	460		$	1,025		$	895

(*) As discussed in Note A — “Accounting Policies — Investments,” AFG adopted guidance in January 2018 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. 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 the previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.

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

	Three months ended June 30, 2018												Three months ended June 30, 2017
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	4		$	—		$	4		$	(338	)	$	11		$	(1	)	$	10		$	262
Equity securities	23			—			23			—			8			(11		)	(3		)	20
Mortgage loans and other investments	—			—			—			—			—			—			—			—
Other (*)	4			—			4			147			(2		)	3			1			(112		)
Total pretax	31			—			31			(191		)	17			(9		)	8			170
Tax effects	(6		)	—			(6		)	40			(6		)	3			(3		)	(60		)
Net of tax	$	25		$	—		$	25		$	(151	)	$	11		$	(6	)	$	5		$	110
	Six months ended June 30, 2018												Six months ended June 30, 2017
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	3		$	(1	)	$	2		$	(937	)	$	16		$	(1	)	$	15		$	464
Equity securities	(72		)	—			(72		)	—			10			(20		)	(10		)	92
Mortgage loans and other investments	—			—			—			—			3			—			3			—
Other (*)	8			—			8			395			(3		)	6			3			(195		)
Total pretax	(61		)	(1		)	(62		)	(542		)	26			(15		)	11			361
Tax effects	13			—			13			114			(9		)	5			(4		)	(126		)
Net of tax	$	(48	)	$	(1	)	$	(49	)	$	(428	)	$	17		$	(10	)	$	7		$	235

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

As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, 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 second quarter and first six months of 2018 on securities that were still owned at June 30, 2018 as follows (in millions):

	Three months ended		Six months ended
	June 30, 2018		June 30, 2018
Included in realized gains (losses)	$	16	$	(71	)
Included in net investment income	15		14
	$	31	$	(57	)

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,
	2018			2017
Fixed maturities:
Gross gains	$	16		$	21
Gross losses	(8		)	(2		)

In the first six months of 2017, AFG recorded gross gains of $15 million and gross losses of $5 million on available for sale equity securities.

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Derivatives

6 Months Ended

Jun. 30, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

As discussed under “Derivatives” in Note A — “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, 2018				December 31, 2017
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	115	$	—	$	105	$	—
Public company warrants	Equity securities	3		—		4		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		2,776		—		2,542
Equity index call options	Equity index call options	615		—		701		—
Equity index put options	Other liabilities	—		—		—		—
Reinsurance contracts (embedded derivative)	Other liabilities	—		2		—		4
		$	733	$	2,778	$	810	$	2,546

The MBS with embedded derivatives consist primarily of interest-only MBS with interest rates that float inversely with short-term rates. 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.

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 ($353 million at June 30, 2018 and $389 million at December 31, 2017) 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 change in the fair value of the call and put options will generally offset the economic change in the liabilities from the index participation. Both the index-based component of the annuities and the related call and put options are considered derivatives. Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products.

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

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 months of 2018 and 2017 (in millions):

		Three months ended June 30,						Six months ended June 30,
Derivative	Statement of Earnings Line	2018			2017			2018			2017
MBS with embedded derivatives	Realized gains (losses) on securities	$	(1	)	$	(3	)	$	(5	)	$	(3	)
Public company warrants	Realized gains (losses) on securities	—			—			(1		)	—
Fixed-indexed and variable-indexed annuities (embedded derivative) (*)	Annuity benefits	(126		)	(112		)	(63		)	(259		)
Equity index call options	Annuity benefits	90			81			52			222
Equity index put options	Annuity benefits	—			—			—			—
Reinsurance contract (embedded derivative)	Net investment income	1			(1		)	2			(2		)
		$	(36	)	$	(35	)	$	(15	)	$	(42	)

(*) The change in fair value of the embedded derivative includes losses related to unlocking of actuarial assumptions of $44 million in both the second quarter and first six months of 2018.

Derivatives Designated and Qualifying as Cash Flow Hedges   As of June 30, 2018, AFG has entered into eleven 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 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 $1.64 billion at June 30, 2018 compared to $1.58 billion at December 31, 2017, reflecting a new swap with an aggregate notional amount at issuance of $130 million entered into in the first quarter of 2018, partially offset by the scheduled amortization discussed above. The fair value of the effective portion of the interest rate swaps in an asset position and included in other assets was zero at June 30, 2018 and less than $1 million at December 31, 2017. The fair value of the effective portion of the interest rate swaps in a liability position and included in other liabilities was $70 million at June 30, 2018 and $31 million at December 31, 2017. 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 losses of $2 million and $1 million during the second quarter and first six months of 2018 as compared to income of $1 million and $3 million in the second quarter and first six months of 2017, respectively. There was no ineffectiveness recorded in net earnings during these periods. A collateral receivable supporting these swaps of $116 million at June 30, 2018 and $70 million at December 31, 2017 is included in other assets in AFG’s Balance Sheet.

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Deferred Policy Acquisition Costs

6 Months Ended

Jun. 30, 2018

Deferred Policy Acquisition Costs Disclosures [Abstract]

Deferred Policy Acquisition Costs

Deferred Policy Acquisition Costs

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

	P&C			Annuity and Other
	Deferred			Deferred			Sales															Consolidated
	Costs			Costs			Inducements			PVFP			Subtotal			Unrealized (*)			Total			Total
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, 2017	$	243		$	1,137		$	105		$	44		$	1,286		$	(324	)	$	962		$	1,205
Additions	151			66			1			—			67			—			67			218
Amortization:
Periodic amortization	(136		)	(36		)	(4		)	(2		)	(42		)	—			(42		)	(178		)
Included in realized gains	—			—			1			—			1			—			1			1
Foreign currency translation	—			—			—			—			—			—			—			—
Change in unrealized	—			—			—			—			—			(90		)	(90		)	(90		)
Balance at June 30, 2017	$	258		$	1,167		$	103		$	42		$	1,312		$	(414	)	$	898		$	1,156
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 December 31, 2016	$	238		$	1,110		$	110		$	46		$	1,266		$	(265	)	$	1,001		$	1,239
Additions	290			133			2			—			135			—			135			425
Amortization:
Periodic amortization	(271		)	(78		)	(10		)	(4		)	(92		)	—			(92		)	(363		)
Included in realized gains	—			2			1			—			3			—			3			3
Foreign currency translation	1			—			—			—			—			—			—			1
Change in unrealized	—			—			—			—			—			(149		)	(149		)	(149		)
Balance at June 30, 2017	$	258		$	1,167		$	103		$	42		$	1,312		$	(414	)	$	898		$	1,156

(*) Unrealized adjustments to DPAC includes net unrealized gains/losses on securities and net unrealized gains/losses on cash flow hedges.

The present value of future profits (“PVFP”) amounts in the table above are net of $145 million and $141 million of accumulated amortization at June 30, 2018 and December 31, 2017, respectively.

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Managed Investment Entities

6 Months Ended

Jun. 30, 2018

Variable Interest Entity, Primary Beneficiary, Does Not Hold Majority Voting Interest, Disclosures [Abstract]

Managed Investment Entities

Managed Investment Entities

AFG is the investment manager and its subsidiaries have investments ranging from 15.0% to 60.9% of the most subordinate debt tranche of sixteen collateralized loan obligation entities or “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 2004 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 its CLOs is limited to its investment in the CLOs, which had an aggregate fair value of $192 million (including $134 million invested in the most subordinate tranches) at June 30, 2018, and $215 million at December 31, 2017.

In March 2018 and March 2017, AFG formed new CLOs, which issued $463 million and $408 million face amount of liabilities, respectively (including $31 million and $24 million face amount purchased by subsidiaries of AFG). During the first six months of 2017, AFG subsidiaries also purchased $29 million face amount of senior debt and subordinate tranches of existing CLOs for $29 million. During the first six months of 2018 and 2017, AFG subsidiaries received $45 million and $64 million, respectively, in sale and redemption proceeds from its CLO investments. During both the first six months of 2018 and 2017, one AFG CLO was substantially liquidated, as permitted by the CLO indentures.

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,
	2018			2017			2018			2017
Investment in CLO tranches at end of period	$	192		$	188		$	192		$	188
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	(29		)	(9		)	(15		)	(4		)
Liabilities	27			20			10			15
Management fees paid to AFG	4			5			8			9
CLO earnings (losses) attributable to AFG shareholders (b)	4			5			7			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 $62 million and $55 million at June 30, 2018 and December 31, 2017, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by $167 million and $118 million at those dates. The CLO assets include loans with an aggregate fair value of $1 million at both June 30, 2018 and December 31, 2017, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of $8 million at both those dates).

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Goodwill and Other Intangibles

6 Months Ended

Jun. 30, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Other Intangibles

Goodwill and Other Intangibles

There were no changes in the goodwill balance of $199 million during the first six months of 2018. Included in other assets in AFG’s Balance Sheet is $34 million at June 30, 2018 and $26 million at December 31, 2017 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of $34 million and $30 million, respectively. Amortization of intangibles was $2 million in both the second quarters of 2018 and 2017 and $4 million in both the first six months of 2018 and 2017.

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Long-Term Debt

6 Months Ended

Jun. 30, 2018

Debt Disclosure [Abstract]

Long-Term Debt

Long-Term Debt

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

	June 30, 2018							December 31, 2017
	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		(5		)	420		425		(5		)	420
Other	3		—			3		3		—			3
	1,018		(7		)	1,011		1,018		(7		)	1,011
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
	300		(10		)	290		300		(10		)	290
	$	1,318	$	(17	)	$	1,301	$	1,318	$	(17	)	$	1,301

AFG has no scheduled principal payments on its long-term debt for the balance of 2018 or in the subsequent five years.

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. No amounts were borrowed under this facility at June 30, 2018 or December 31, 2017.

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Redeemable Noncontrolling Interests

6 Months Ended

Jun. 30, 2018

Noncontrolling Interest [Abstract]

Redeemable Noncontrolling Interests

Redeemable Noncontrolling Interests

Neon Lloyd’s Business   On December 29, 2017, AFG completed the sale of an indirect noncontrolling interest in Neon, its United Kingdom-based Lloyd’s insurer, to certain Neon executives for cash equal to the fair value of the interest sold as determined by a third-party valuation firm. This noncontrolling interest is redeemable at the option of the holder and is presented separately in the mezzanine section of the balance sheet, as discussed in Note A — “Accounting Policies — Noncontrolling Interests.”

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Shareholders' Equity

6 Months Ended

Jun. 30, 2018

Stockholders' Equity Note [Abstract]

Shareholders' Equity

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.

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, 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
Quarter ended June 30, 2017
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	178		$	(63	)	$	115		$	—	$	115
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(8		)	3			(5		)	—		(5		)
Total net unrealized gains on securities	$	529		170			(60		)	110			—		110			$	—		$	639
Net unrealized gains (losses) on cash flow hedges	(8		)	4			(2		)	2			—		2			—			(6		)
Foreign currency translation adjustments	(15		)	3			1			4			—		4			—			(11		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—		—			—			(7		)
Total	$	499		$	177		$	(61	)	$	116		$	—	$	116		$	—		$	615
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
Six months ended June 30, 2017
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	369		$	(129	)	$	240		$	—	$	240
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(8		)	3			(5		)	—		(5		)
Total net unrealized gains on securities	$	404		361			(126		)	235			—		235			$	—		$	639
Net unrealized gains (losses) on cash flow hedges	(7		)	2			(1		)	1			—		1			—			(6		)
Foreign currency translation adjustments	(15		)	3			1			4			—		4			—			(11		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—		—			—			(7		)
Total	$	375		$	366		$	(126	)	$	240		$	—	$	240		$	—		$	615

(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 for income taxes

(b) Includes net unrealized gains of $67 million at June 30, 2018 and $68 million at both March 31, 2018 and December 31, 2017 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 months of 2018, AFG issued 200,625 shares of restricted Common Stock (fair value of $112.86 per share) under the Stock Incentive Plan. In addition, AFG issued 45,804 shares of Common Stock (fair value of $115.49 per share) in the first quarter of 2018 under the Equity Bonus Plan. AFG did not grant any stock options in the first six months of 2018.

Total compensation expense related to stock incentive plans of AFG and its subsidiaries was $6 million in both the second quarters of 2018 and 2017 and $11 million and $17 million in the first six months of 2018 and 2017, respectively.

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Income Taxes

6 Months Ended

Jun. 30, 2018

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The following is a reconciliation of income taxes at the statutory rate (21% in 2018 and 35% in 2017) 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,
	2018					2017					2018					2017
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	260				$	205				$	434				$	428
Income taxes at statutory rate	$	54		21	%	$	72		35	%	$	91		21	%	$	150		35	%
Effect of:
Stock-based compensation	(2		)	(1	%)	(7		)	(3	%)	(7		)	(2	%)	(13		)	(3	%)
Tax exempt interest	(4		)	(2	%)	(6		)	(3	%)	(7		)	(2	%)	(12		)	(3	%)
Dividends received deduction	(1		)	—	%	(2		)	(1	%)	(2		)	—	%	(4		)	(1	%)
Employee Stock Ownership Plan dividends paid deduction	(1		)	—	%	(2		)	(1	%)	(1		)	—	%	(2		)	—	%
Foreign operations	—			—	%	—			—	%	3			1	%	6			1	%
Nondeductible expenses	2			1	%	1			—	%	4			1	%	3			1	%
Change in valuation allowance	2			1	%	2			1	%	2			—	%	—			—	%
Other	2			—	%	2			1	%	2			1	%	—			—	%
Provision for income taxes as shown in the statement of earnings	$	52		20	%	$	60		29	%	$	85		20	%	$	128		30	%

The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was enacted on December 22, 2017, lowered the U.S corporate tax rate to 21% and made other widespread changes to the U.S. tax code effective in 2018. Because the TCJA was enacted in December 2017, AFG recorded the $83 million decrease in its net deferred tax asset resulting from the changes in the tax code (primarily the lower corporate tax rate applicable to 2018 and future years) in the fourth quarter of 2017.

The TCJA is subject to further clarification and interpretation by the U.S. Treasury Department and the Internal Revenue Service. For example, the TCJA changes the way that companies calculate their insurance claims and reserves for tax purposes, including revaluing those tax basis liabilities as of January 1, 2018, based on a methodology and discount factors that have not been published. The resulting transitional deferred tax liability (taxes payable over eight years under the TCJA) and offsetting increase in AFG’s insurance claims and reserves deferred tax assets, were recorded at December 31, 2017 using reasonable estimates based on available information and should be considered provisional in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 118 (“SAB 118”). Because the established transition liability was completely offset by an increase in related deferred tax assets, any adjustment to the provisional amount will not impact AFG’s effective tax rate. In accordance with SAB 118, the insurance claims and reserves transitional deferred tax liability (and offsetting adjustment to the related deferred tax assets) and any other changes in deferred taxes resulting from clarification and interpretation of the TCJA provided during 2018 (none through June 30, 2018) will be recorded in the period in which the guidance is published.

The favorable impact of stock-based compensation on AFG’s effective tax rate in the second quarters and first six months of 2018 and 2017 reflects the high volume of employee stock option exercises during that period and the increase in the market price of AFG Common Stock.

Approximately $19 million of AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules will expire unutilized at December 31, 2018. 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.

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Contingencies

6 Months Ended

Jun. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Contingencies

Contingencies

There have been no significant changes to the matters discussed and referred to in Note M — “Contingencies” of AFG’s 2017 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.

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Insurance

6 Months Ended

Jun. 30, 2018

Insurance [Abstract]

Insurance

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 months of 2018 and 2017 (in millions):

	Six months ended June 30,
	2018			2017
Balance at beginning of year	$	9,678		$	8,563
Less reinsurance recoverables, net of allowance	2,957			2,302
Net liability at beginning of year	6,721			6,261
Provision for losses and LAE occurring in the current period	1,434			1,294
Net increase (decrease) in the provision for claims of prior years	(100		)	(50		)
Total losses and LAE incurred	1,334			1,244
Payments for losses and LAE of:
Current year	(294		)	(253		)
Prior years	(975		)	(953		)
Total payments	(1,269		)	(1,206		)
Reserves of business disposed (*)	(319		)	—
Foreign currency translation and other	(4		)	24
Net liability at end of period	6,463			6,323
Add back reinsurance recoverables, net of allowance	2,630			2,407
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,093		$	8,730

(*) Reflects the reinsurance to close transaction at Neon discussed below.

The net decrease in the provision for claims of prior years during the first six months of 2018 reflects (i) lower than expected losses in the crop business 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).

The net decrease in the provision for claims of prior years during the first six months of 2017 reflects (i) lower than expected losses in the crop and equine operations and lower than expected claim severity in the property and inland marine business (all within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses and at Neon (all within the Specialty casualty sub-segment) and (iii) lower than anticipated claim severity in the fidelity business and lower than expected claim frequency and severity in the surety business (all within the Specialty financial sub-segment). This favorable development was partially offset by (i) higher than expected claim severity in the ocean marine business (within the Property and transportation sub-segment), (ii) higher than anticipated claim severity in the targeted markets and general liability business (all within the Specialty casualty sub-segment) and (iii) an adjustment to the deferred gain on the retroactive reinsurance transaction entered into in connection with the sale of businesses in 1998 (included in Other specialty 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 (the transaction settled in early 2018). In the Lloyd’s market, a reinsurance to close transaction transfers the responsibility for discharging all 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 for a premium. This transaction provided Neon with finality on its legacy business.

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Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2018

Accounting Policies [Abstract]

Basis of Presentation

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, 2018, 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.

Fair Value Measurements

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 significant nonrecurring fair value measurements in the first six months of 2018.

Investments

Investments On January 1, 2018, AFG adopted Accounting Standards Update (“ASU”) 2016-01, which 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 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 under ASU 2016-01 are generally recorded in realized gains (losses) on securities. However, prior to the adoption of the new guidance, AFG classified a small portion of its equity securities as “trading” and reported those investments at fair value with holding gains and losses recognized in net investment income. These investments consisted primarily of equity securities held to offset the impact of changes in the stock market on employee benefit plans that are impacted by stock market performance and totaled $62 million at December 31, 2017. Following the adoption of the new guidance, AFG continues to record holding gains and losses on these securities, as well as its small portfolio of limited partnerships and similar investments carried at fair value under the new guidance and certain other securities classified at purchase as “fair value through net investment income” in net investment income.

Under the new guidance, AFG recorded holding losses of $57 million on equity securities in net earnings during the first six months of 2018 on securities that were still owned at June 30, 2018. Under the prior guidance, these holding losses would have been recorded in AOCI (with the exception of any impairment charge that may have been recorded). Because almost all of the equity securities impacted by the new guidance were carried at fair value through AOCI under the prior guidance, the adoption of the new guidance did not have a material impact on AFG’s financial position.

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.

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 or losses on fixed maturity securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment 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 security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment 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 to reduce the amortized cost of that security to fair value.

Derivatives

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 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.

For derivatives that are designated and qualify as highly effective fair value hedges, changes in the fair value of the derivative, along with changes in the fair value of the hedged item attributable to the hedged risk, are recognized in current period earnings.

Goodwill

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

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 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 Policy Acquisition Costs (DPAC)

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 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” 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.

Managed Investment Entities

Managed Investment EntitiesA 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 the 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.

Unpaid Losses and Loss Adjustment Expenses

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 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 expense and decreases for annuity policy charges are recorded in other income.

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.

Unearned Revenue

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

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).

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.

Debt Issuance Costs

Debt Issuance CostsDebt 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

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.

Premium Recognition

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

Noncontrolling Interests

Noncontrolling Interests   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).

Income Taxes

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

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 K — “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

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

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 of 2018 and 2017 — 1.7 million and 2.0 million; first six months of 2018 and 2017 — 1.7 million and 2.1 million, respectively.

There were no anti-dilutive potential common shares in the second quarter or first six months of 2018 or 2017.

Statement of Cash Flows

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 and property and equipment. “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.

Revenue Recognition Guidance Effective in 2018

Revenue Recognition Guidance Effective in 2018 On January 1, 2018, AFG adopted ASU 2014-09, which provides guidance on recognizing revenue when (or as) performance obligations under the contract are satisfied. The new guidance also updates the accounting for certain costs associated with obtaining and fulfilling contracts with customers and requires certain new disclosures. Because revenue recognition for insurance contracts and financial instruments (AFG’s primary sources of revenue) were excluded from the scope of the new guidance, the adoption of ASU 2014-09 did not have a material impact on AFG’s results of operations or financial position.

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Segments of Operations (Tables)

6 Months Ended

Jun. 30, 2018

Segment Reporting [Abstract]

Segment Reporting Information, by Segment

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,
	2018		2017		2018			2017
Revenues
Property and casualty insurance:
Premiums earned:
Specialty
Property and transportation	$	374	$	357	$	724		$	699
Specialty casualty	595		537		1,174			1,045
Specialty financial	159		146		308			293
Other specialty	33		25		62			50
Total premiums earned	1,161		1,065		2,268			2,087
Net investment income	115		96		215			182
Other income (a)	2		4		4			20
Total property and casualty insurance	1,278		1,165		2,487			2,289
Annuity:
Net investment income	412		360		806			707
Other income	27		26		53			53
Total annuity	439		386		859			760
Other	85		87		168			162
Total revenues before realized gains (losses)	1,802		1,638		3,514			3,211
Realized gains (losses) on securities	31		8		(62		)	11
Total revenues	$	1,833	$	1,646	$	3,452		$	3,222

Earnings Before Income Taxes
Property and casualty insurance:
Underwriting:
Specialty
Property and transportation	$	23		$	21		$	56		$	64
Specialty casualty	29			29			70			44
Specialty financial	22			23			37			45
Other specialty	(1		)	—			2			(1		)
Other lines	(1		)	(1		)	(2		)	(2		)
Total underwriting	72			72			163			150
Investment and other income, net (a)	106			91			199			184
Total property and casualty insurance	178			163			362			334
Annuity	99			85			224			181
Other (b)	(48		)	(51		)	(90		)	(98		)
Total earnings before realized gains (losses) and income taxes	229			197			496			417
Realized gains (losses) on securities	31			8			(62		)	11
Total earnings before income taxes	$	260		$	205		$	434		$	428

(a) Includes income of $13 million (before noncontrolling interest) from the sale of a hotel in the first quarter of 2017.

(b) Includes holding company interest and expenses, including a $7 million loss on retirement of debt in the second quarter of 2017.

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2018

Fair Value Disclosures [Abstract]

Assets and liabilities measured at fair value

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
June 30, 2018
Assets:
Available for sale (“AFS”) fixed maturities:
U.S. Government and government agencies	$	140	$	92	$	8	$	240
States, municipalities and political subdivisions	—		6,852		61		6,913
Foreign government	—		129		—		129
Residential MBS	—		2,739		147		2,886
Commercial MBS	—		878		56		934
Asset-backed securities	—		7,931		1,004		8,935
Corporate and other	29		18,174		1,408		19,611
Total AFS fixed maturities	169		36,795		2,684		39,648
Trading fixed maturities	38		99		—		137
Equity securities	1,471		76		230		1,777
Equity index call options	—		615		—		615
Assets of managed investment entities (“MIE”)	229		4,780		23		5,032
Variable annuity assets (separate accounts) (*)	—		636		—		636
Total assets accounted for at fair value	$	1,907	$	43,001	$	2,937	$	47,845
Liabilities:
Liabilities of managed investment entities	$	220	$	4,598	$	22	$	4,840
Derivatives in annuity benefits accumulated	—		—		2,776		2,776
Other liabilities — derivatives	—		72		—		72
Total liabilities accounted for at fair value	$	220	$	4,670	$	2,798	$	7,688
December 31, 2017
Assets:
Available for sale fixed maturities:
U.S. Government and government agencies	$	122	$	112	$	8	$	242
States, municipalities and political subdivisions	—		6,975		148		7,123
Foreign government	—		127		—		127
Residential MBS	—		3,105		122		3,227
Commercial MBS	—		926		36		962
Asset-backed securities	—		7,218		744		7,962
Corporate and other	30		17,662		1,044		18,736
Total AFS fixed maturities	152		36,125		2,102		38,379
Trading fixed maturities	44		304		—		348
Equity securities	1,411		86		165		1,662
Equity index call options	—		701		—		701
Assets of managed investment entities	307		4,572		23		4,902
Variable annuity assets (separate accounts) (*)	—		644		—		644
Total assets accounted for at fair value	$	1,914	$	42,432	$	2,290	$	46,636
Liabilities:
Liabilities of managed investment entities	$	293	$	4,372	$	22	$	4,687
Derivatives in annuity benefits accumulated	—		—		2,542		2,542
Other liabilities — derivatives	—		35		—		35
Total liabilities accounted for at fair value	$	293	$	4,407	$	2,564	$	7,264

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

Unobservable inputs used by management in determining fair value of embedded derivatives

The following table presents information about the unobservable inputs used by management in determining fair value of these embedded derivatives. See Note E — “Derivatives.”

Unobservable Input	Range
Adjustment for insurance subsidiary’s credit risk	0.4% – 1.7% over the risk free rate
Risk margin for uncertainty in cash flows	0.70% reduction in the discount rate
Surrenders	3% – 23% of indexed account value
Partial surrenders	2% – 9% of indexed account value
Annuitizations	0.1% – 1% of indexed account value
Deaths	1.6% – 8.0% of indexed account value
Budgeted option costs	2.5% – 3.5% of indexed account value

Changes in balances of Level 3 financial assets

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the second quarter and first six months of 2018 and 2017 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.” 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, 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
Asset-backed securities	912			—			(6		)	136			(20		)	—		(18		)	1,004
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	)

				Total realized/unrealized gains (losses) included in
	Balance at March 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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	143			—			1		—			(1		)	—		—			143
Residential MBS	175			(3		)	2		—			(23		)	13		(11		)	153
Commercial MBS	29			1			—		15			—			—		—			45
Asset-backed securities	594			—			2		—			(25		)	19		(92		)	498
Corporate and other	828			4			4		168			(27		)	—		(24		)	953
Total AFS fixed maturities	1,777			2			9		183			(76		)	32		(127		)	1,800
Equity securities	173			(10		)	6		8			(3		)	—		(6		)	168
Assets of MIE	26			(5		)	—		2			—			—		—			23
Total Level 3 assets	$	1,976		$	(13	)	$	15	$	193		$	(79	)	$	32	$	(133	)	$	1,991
Embedded derivatives	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)

(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.

				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
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(1		)	—		(84		)	61
Residential MBS	122			(7		)	—			—			(11		)	57		(14		)	147
Commercial MBS	36			(1		)	—			21			—			—		—			56
Asset-backed securities	744			(2		)	(3		)	340			(57		)	—		(18		)	1,004
Corporate and other	1,044			2			(18		)	472			(79		)	—		(13		)	1,408
Total AFS fixed maturities	2,102			(8		)	(23		)	833			(148		)	57		(129		)	2,684
Equity securities	165			14			—			25			(4		)	30		—			230
Assets of MIE	23			(5		)	—			5			—			—		—			23
Total Level 3 assets	$	2,290		$	1		$	(23	)	$	863		$	(152	)	$	87	$	(129	)	$	2,937
Embedded derivatives (a)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2016			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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	140			—			4		—			(1		)	—		—			143
Residential MBS	190			(2		)	2		1			(31		)	20		(27		)	153
Commercial MBS	25			1			—		15			—			4		—			45
Asset-backed securities	484			—			2		104			(36		)	36		(92		)	498
Corporate and other	712			5			8		288			(65		)	29		(24		)	953
Total AFS fixed maturities	1,559			4			16		408			(133		)	89		(143		)	1,800
Equity securities	174			(16		)	13		20			(3		)	—		(20		)	168
Assets of MIE	29			(6		)	—		4			—			—		(4		)	23
Total Level 3 assets	$	1,762		$	(18	)	$	29	$	432		$	(136	)	$	89	$	(167	)	$	1,991
Embedded derivatives	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)

(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.

Changes in balances of Level 3 financial liabilities

Changes in balances of Level 3 financial assets and liabilities carried at fair value during the second quarter and first six months of 2018 and 2017 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.” 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, 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
Asset-backed securities	912			—			(6		)	136			(20		)	—		(18		)	1,004
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	)

				Total realized/unrealized gains (losses) included in
	Balance at March 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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	143			—			1		—			(1		)	—		—			143
Residential MBS	175			(3		)	2		—			(23		)	13		(11		)	153
Commercial MBS	29			1			—		15			—			—		—			45
Asset-backed securities	594			—			2		—			(25		)	19		(92		)	498
Corporate and other	828			4			4		168			(27		)	—		(24		)	953
Total AFS fixed maturities	1,777			2			9		183			(76		)	32		(127		)	1,800
Equity securities	173			(10		)	6		8			(3		)	—		(6		)	168
Assets of MIE	26			(5		)	—		2			—			—		—			23
Total Level 3 assets	$	1,976		$	(13	)	$	15	$	193		$	(79	)	$	32	$	(133	)	$	1,991
Embedded derivatives	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,963	)	$	(112	)	$	—	$	(80	)	$	26		$	—	$	—		$	(2,129	)

(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.

				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
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—		$	—		$	—		$	—	$	—		$	8
State and municipal	148			—			(2		)	—			(1		)	—		(84		)	61
Residential MBS	122			(7		)	—			—			(11		)	57		(14		)	147
Commercial MBS	36			(1		)	—			21			—			—		—			56
Asset-backed securities	744			(2		)	(3		)	340			(57		)	—		(18		)	1,004
Corporate and other	1,044			2			(18		)	472			(79		)	—		(13		)	1,408
Total AFS fixed maturities	2,102			(8		)	(23		)	833			(148		)	57		(129		)	2,684
Equity securities	165			14			—			25			(4		)	30		—			230
Assets of MIE	23			(5		)	—			5			—			—		—			23
Total Level 3 assets	$	2,290		$	1		$	(23	)	$	863		$	(152	)	$	87	$	(129	)	$	2,937
Embedded derivatives (a)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)
Total Level 3 liabilities (b)	$	(2,542	)	$	(63	)	$	—		$	(244	)	$	73		$	—	$	—		$	(2,776	)

				Total realized/unrealized gains (losses) included in
	Balance at December 31, 2016			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, 2017
AFS fixed maturities:
U.S. government agency	$	8		$	—		$	—	$	—		$	—		$	—	$	—		$	8
State and municipal	140			—			4		—			(1		)	—		—			143
Residential MBS	190			(2		)	2		1			(31		)	20		(27		)	153
Commercial MBS	25			1			—		15			—			4		—			45
Asset-backed securities	484			—			2		104			(36		)	36		(92		)	498
Corporate and other	712			5			8		288			(65		)	29		(24		)	953
Total AFS fixed maturities	1,559			4			16		408			(133		)	89		(143		)	1,800
Equity securities	174			(16		)	13		20			(3		)	—		(20		)	168
Assets of MIE	29			(6		)	—		4			—			—		(4		)	23
Total Level 3 assets	$	1,762		$	(18	)	$	29	$	432		$	(136	)	$	89	$	(167	)	$	1,991
Embedded derivatives	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)
Total Level 3 liabilities (b)	$	(1,759	)	$	(259	)	$	—	$	(159	)	$	48		$	—	$	—		$	(2,129	)

(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.

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
June 30, 2018
Financial assets:
Cash and cash equivalents	$	1,810	$	1,810	$	1,810	$	—	$	—
Mortgage loans	1,147		1,136		—		—		1,136
Policy loans	179		179		—		—		179
Total financial assets not accounted for at fair value	$	3,136	$	3,125	$	1,810	$	—	$	1,315
Financial liabilities:
Annuity benefits accumulated (*)	$	34,673	$	33,204	$	—	$	—	$	33,204
Long-term debt	1,301		1,265		—		1,262		3
Total financial liabilities not accounted for at fair value	$	35,974	$	34,469	$	—	$	1,262	$	33,207
December 31, 2017
Financial assets:
Cash and cash equivalents	$	2,338	$	2,338	$	2,338	$	—	$	—
Mortgage loans	1,125		1,119		—		—		1,119
Policy loans	184		184		—		—		184
Total financial assets not accounted for at fair value	$	3,647	$	3,641	$	2,338	$	—	$	1,303
Financial liabilities:
Annuity benefits accumulated (*)	$	33,110	$	32,461	$	—	$	—	$	32,461
Long-term debt	1,301		1,354		—		1,351		3
Total financial liabilities not accounted for at fair value	$	34,411	$	33,815	$	—	$	1,351	$	32,464

(*) Excludes $213 million and $206 million of life contingent annuities in the payout phase at June 30, 2018 and December 31, 2017, respectively.

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Investments (Tables)

6 Months Ended

Jun. 30, 2018

Investments, Debt and Equity Securities [Abstract]

Available for sale fixed maturities

Available for sale fixed maturities at June 30, 2018 and December 31, 2017, consisted of the following (in millions):

	June 30, 2018												December 31, 2017
	Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value		Amortized Cost		Gross Unrealized					Net Unrealized			Fair Value
			Gains		Losses										Gains		Losses
Fixed maturities:
U.S. Government and government agencies	$	243	$	1	$	(4	)	$	(3	)	$	240	$	244	$	1	$	(3	)	$	(2	)	$	242
States, municipalities and political subdivisions	6,804		162		(53		)	109			6,913		6,887		254		(18		)	236			7,123
Foreign government	127		2		—			2			129		124		3		—			3			127
Residential MBS	2,564		329		(7		)	322			2,886		2,884		349		(6		)	343			3,227
Commercial MBS	920		18		(4		)	14			934		927		36		(1		)	35			962
Asset-backed securities	8,849		132		(46		)	86			8,935		7,836		142		(16		)	126			7,962
Corporate and other	19,737		198		(324		)	(126		)	19,611		18,136		638		(38		)	600			18,736
Total fixed maturities	$	39,244	$	842	$	(438	)	$	404		$	39,648	$	37,038	$	1,423	$	(82	)	$	1,341		$	38,379

Equity securities reported at fair value

Equity securities reported at fair value consisted of the following at June 30, 2018 (in millions):

					Fair Value in
	Actual Cost		Fair Value		excess of Cost
Common stocks	$	1,066	$	1,180	$	114
Perpetual preferred stocks	603		597		(6		)
Total equity securities carried at fair value	$	1,669	$	1,777	$	108

Available for sale securities in a continuous unrealized loss position

The following tables show gross unrealized losses (dollars in millions) on available for sale fixed maturities and equity securities 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
June 30, 2018
Fixed maturities:
U.S. Government and government agencies	$	(1	)	$	102	99	%	$	(3	)	$	99	97	%
States, municipalities and political subdivisions	(36		)	1,957		98	%	(17		)	451		96	%
Foreign government	—			26		100	%	—			—		—	%
Residential MBS	(2		)	157		99	%	(5		)	110		96	%
Commercial MBS	(4		)	215		98	%	—			—		—	%
Asset-backed securities	(36		)	3,738		99	%	(10		)	256		96	%
Corporate and other	(281		)	10,673		97	%	(43		)	651		94	%
Total fixed maturities	$	(360	)	$	16,868	98	%	$	(78	)	$	1,567	95	%
December 31, 2017
Fixed maturities:
U.S. Government and government agencies	$	—		$	55	100	%	$	(3	)	$	123	98	%
States, municipalities and political subdivisions	(8		)	825		99	%	(10		)	431		98	%
Foreign government	—			4		100	%	—			—		—	%
Residential MBS	(1		)	118		99	%	(5		)	118		96	%
Commercial MBS	(1		)	67		99	%	—			—		—	%
Asset-backed securities	(7		)	1,195		99	%	(9		)	299		97	%
Corporate and other	(20		)	2,031		99	%	(18		)	603		97	%
Total fixed maturities	$	(37	)	$	4,295	99	%	$	(45	)	$	1,574	97	%
Equity securities:
Common stocks	$	(22	)	$	117	84	%	$	—		$	—	—	%
Perpetual preferred stocks	—			41		100	%	(1		)	13		93	%
Total equity securities	$	(22	)	$	158	88	%	$	(1	)	$	13	93	%

Roll forward of cumulative credit portion of other-than-temporary impairments on fixed maturity securities

A progression of the credit portion of other-than-temporary impairments 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):

	2018			2017
Balance at March 31	$	144		$	146
Additional credit impairments on:
Previously impaired securities	—			1
Securities without prior impairments	1			—
Reductions due to sales or redemptions	(1		)	(2		)
Balance at June 30	$	144		$	145
Balance at January 1	$	145		$	153
Additional credit impairments on:
Previously impaired securities	—			1
Securities without prior impairments	1			—
Reductions due to sales or redemptions	(2		)	(9		)
Balance at June 30	$	144		$	145

Available for sale fixed maturity securities by contractual maturity date

The table below sets forth the scheduled maturities of available for sale fixed maturities as of June 30, 2018 (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		Amount		%
Maturity
One year or less	$	994	$	1,003	3	%
After one year through five years	7,703		7,764		20	%
After five years through ten years	13,386		13,285		33	%
After ten years	4,828		4,841		12	%
	26,911		26,893		68	%
ABS (average life of approximately 4-1/2 years)	8,849		8,935		22	%
MBS (average life of approximately 4-1/2 years)	3,484		3,820		10	%
Total	$	39,244	$	39,648	100	%

Components of the net unrealized gain on securities, included in Accumulated Other Comprehensive Income

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
June 30, 2018
Net unrealized gain on:
Fixed maturities — annuity segment (a)	$	310		$	(65	)	$	245
Fixed maturities — all other	94			(20		)	74
Total fixed maturities	404			(85		)	319
Deferred policy acquisition costs — annuity segment	(124		)	26			(98		)
Annuity benefits accumulated	(41		)	9			(32		)
Unearned revenue	3			(1		)	2
Total net unrealized gain on marketable securities	$	242		$	(51	)	$	191
December 31, 2017
Net unrealized gain on:
Fixed maturities — annuity segment (a)	$	1,082		$	(227	)	$	855
Fixed maturities — all other	259			(55		)	204
Total fixed maturities	1,341			(282		)	1,059
Equity securities (b)	279			(58		)	221
Total investments	1,620			(340		)	1,280
Deferred policy acquisition costs — annuity segment	(433		)	91			(342		)
Annuity benefits accumulated	(137		)	29			(108		)
Unearned revenue	13			(3		)	10
Total net unrealized gain on marketable securities	$	1,063		$	(223	)	$	840

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

(b) As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings.

Net investment income earned and investment expenses incurred

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

	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Investment income:
Fixed maturities	$	431		$	397		$	843		$	786
Equity securities:
Dividends	20			17			40			36
Change in fair value (*)	15			2			14			4
Equity in earnings of partnerships and similar investments	41			21			87			31
Other	28			27			51			47
Gross investment income	535			464			1,035			904
Investment expenses	(5		)	(4		)	(10		)	(9		)
Net investment income	$	530		$	460		$	1,025		$	895

(*) As discussed in Note A — “Accounting Policies — Investments,” AFG adopted guidance in January 2018 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. 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 the previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.

Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments

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

	Three months ended June 30, 2018												Three months ended June 30, 2017
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	4		$	—		$	4		$	(338	)	$	11		$	(1	)	$	10		$	262
Equity securities	23			—			23			—			8			(11		)	(3		)	20
Mortgage loans and other investments	—			—			—			—			—			—			—			—
Other (*)	4			—			4			147			(2		)	3			1			(112		)
Total pretax	31			—			31			(191		)	17			(9		)	8			170
Tax effects	(6		)	—			(6		)	40			(6		)	3			(3		)	(60		)
Net of tax	$	25		$	—		$	25		$	(151	)	$	11		$	(6	)	$	5		$	110
	Six months ended June 30, 2018												Six months ended June 30, 2017
	Realized gains (losses)												Realized gains (losses)
	Before Impairments			Impairments			Total			Change in Unrealized			Before Impairments			Impairments			Total			Change in Unrealized
Fixed maturities	$	3		$	(1	)	$	2		$	(937	)	$	16		$	(1	)	$	15		$	464
Equity securities	(72		)	—			(72		)	—			10			(20		)	(10		)	92
Mortgage loans and other investments	—			—			—			—			3			—			3			—
Other (*)	8			—			8			395			(3		)	6			3			(195		)
Total pretax	(61		)	(1		)	(62		)	(542		)	26			(15		)	11			361
Tax effects	13			—			13			114			(9		)	5			(4		)	(126		)
Net of tax	$	(48	)	$	(1	)	$	(49	)	$	(428	)	$	17		$	(10	)	$	7		$	235

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

Holding gains (losses) on equity securities still held

AFG recorded net holding gains (losses) on equity securities during the second quarter and first six months of 2018 on securities that were still owned at June 30, 2018 as follows (in millions):

	Three months ended		Six months ended
	June 30, 2018		June 30, 2018
Included in realized gains (losses)	$	16	$	(71	)
Included in net investment income	15		14
	$	31	$	(57	)

Gross realized gains and losses on available for sale fixed maturity and equity security investments

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,
	2018			2017
Fixed maturities:
Gross gains	$	16		$	21
Gross losses	(8		)	(2		)

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Derivatives (Tables)

6 Months Ended

Jun. 30, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives included in Balance Sheet at fair value

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, 2018				December 31, 2017
Derivative	Balance Sheet Line	Asset		Liability		Asset		Liability
MBS with embedded derivatives	Fixed maturities	$	115	$	—	$	105	$	—
Public company warrants	Equity securities	3		—		4		—
Fixed-indexed and variable-indexed annuities (embedded derivative)	Annuity benefits accumulated	—		2,776		—		2,542
Equity index call options	Equity index call options	615		—		701		—
Equity index put options	Other liabilities	—		—		—		—
Reinsurance contracts (embedded derivative)	Other liabilities	—		2		—		4
		$	733	$	2,778	$	810	$	2,546

Summary of gain (loss) included in the Statement of Earnings for changes in the fair value of derivatives

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 months of 2018 and 2017 (in millions):

		Three months ended June 30,						Six months ended June 30,
Derivative	Statement of Earnings Line	2018			2017			2018			2017
MBS with embedded derivatives	Realized gains (losses) on securities	$	(1	)	$	(3	)	$	(5	)	$	(3	)
Public company warrants	Realized gains (losses) on securities	—			—			(1		)	—
Fixed-indexed and variable-indexed annuities (embedded derivative) (*)	Annuity benefits	(126		)	(112		)	(63		)	(259		)
Equity index call options	Annuity benefits	90			81			52			222
Equity index put options	Annuity benefits	—			—			—			—
Reinsurance contract (embedded derivative)	Net investment income	1			(1		)	2			(2		)
		$	(36	)	$	(35	)	$	(15	)	$	(42	)

(*) The change in fair value of the embedded derivative includes losses related to unlocking of actuarial assumptions of $44 million in both the second quarter and first six months of 2018.

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Deferred Policy Acquisition Costs (Tables)

6 Months Ended

Jun. 30, 2018

Deferred Policy Acquisition Costs Disclosures [Abstract]

Deferred Policy Acquisition Costs Details

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

	P&C			Annuity and Other
	Deferred			Deferred			Sales															Consolidated
	Costs			Costs			Inducements			PVFP			Subtotal			Unrealized (*)			Total			Total
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, 2017	$	243		$	1,137		$	105		$	44		$	1,286		$	(324	)	$	962		$	1,205
Additions	151			66			1			—			67			—			67			218
Amortization:
Periodic amortization	(136		)	(36		)	(4		)	(2		)	(42		)	—			(42		)	(178		)
Included in realized gains	—			—			1			—			1			—			1			1
Foreign currency translation	—			—			—			—			—			—			—			—
Change in unrealized	—			—			—			—			—			(90		)	(90		)	(90		)
Balance at June 30, 2017	$	258		$	1,167		$	103		$	42		$	1,312		$	(414	)	$	898		$	1,156
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 December 31, 2016	$	238		$	1,110		$	110		$	46		$	1,266		$	(265	)	$	1,001		$	1,239
Additions	290			133			2			—			135			—			135			425
Amortization:
Periodic amortization	(271		)	(78		)	(10		)	(4		)	(92		)	—			(92		)	(363		)
Included in realized gains	—			2			1			—			3			—			3			3
Foreign currency translation	1			—			—			—			—			—			—			1
Change in unrealized	—			—			—			—			—			(149		)	(149		)	(149		)
Balance at June 30, 2017	$	258		$	1,167		$	103		$	42		$	1,312		$	(414	)	$	898		$	1,156

(*) Unrealized adjustments to DPAC includes net unrealized gains/losses on securities and net unrealized gains/losses on cash flow hedges.

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Managed Investment Entities (Tables)

6 Months Ended

Jun. 30, 2018

Variable Interest Entity, Primary Beneficiary, Does Not Hold Majority Voting Interest, Disclosures [Abstract]

Selected financial information related to collateralized loan obligations

Selected financial information related to the CLOs is shown below (in millions):

	Three months ended June 30,						Six months ended June 30,
	2018			2017			2018			2017
Investment in CLO tranches at end of period	$	192		$	188		$	192		$	188
Gains (losses) on change in fair value of assets/liabilities (a):
Assets	(29		)	(9		)	(15		)	(4		)
Liabilities	27			20			10			15
Management fees paid to AFG	4			5			8			9
CLO earnings (losses) attributable to AFG shareholders (b)	4			5			7			11

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

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

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Long-Term Debt (Tables)

6 Months Ended

Jun. 30, 2018

Debt Disclosure [Abstract]

Schedule of long-term debt instruments

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

	June 30, 2018							December 31, 2017
	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		(5		)	420		425		(5		)	420
Other	3		—			3		3		—			3
	1,018		(7		)	1,011		1,018		(7		)	1,011
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
	300		(10		)	290		300		(10		)	290
	$	1,318	$	(17	)	$	1,301	$	1,318	$	(17	)	$	1,301

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Shareholders' Equity (Tables)

6 Months Ended

Jun. 30, 2018

Stockholders' Equity Note [Abstract]

Components of accumulated other comprehensive income (loss)

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, 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
Quarter ended June 30, 2017
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	178		$	(63	)	$	115		$	—	$	115
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(8		)	3			(5		)	—		(5		)
Total net unrealized gains on securities	$	529		170			(60		)	110			—		110			$	—		$	639
Net unrealized gains (losses) on cash flow hedges	(8		)	4			(2		)	2			—		2			—			(6		)
Foreign currency translation adjustments	(15		)	3			1			4			—		4			—			(11		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—		—			—			(7		)
Total	$	499		$	177		$	(61	)	$	116		$	—	$	116		$	—		$	615
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
Six months ended June 30, 2017
Net unrealized gains on securities:
Unrealized holding gains on securities arising during the period				$	369		$	(129	)	$	240		$	—	$	240
Reclassification adjustment for realized (gains) losses included in net earnings (a)				(8		)	3			(5		)	—		(5		)
Total net unrealized gains on securities	$	404		361			(126		)	235			—		235			$	—		$	639
Net unrealized gains (losses) on cash flow hedges	(7		)	2			(1		)	1			—		1			—			(6		)
Foreign currency translation adjustments	(15		)	3			1			4			—		4			—			(11		)
Pension and other postretirement plans adjustments	(7		)	—			—			—			—		—			—			(7		)
Total	$	375		$	366		$	(126	)	$	240		$	—	$	240		$	—		$	615

(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 for income taxes

(b) Includes net unrealized gains of $67 million at June 30, 2018 and $68 million at both March 31, 2018 and December 31, 2017 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.

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Income Taxes (Tables)

6 Months Ended

Jun. 30, 2018

Income Tax Disclosure [Abstract]

Reconciliation of income taxes at the statutory rate and income taxes shown in the Statement of Earnings

The following is a reconciliation of income taxes at the statutory rate (21% in 2018 and 35% in 2017) 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,
	2018					2017					2018					2017
	Amount			% of EBT		Amount			% of EBT		Amount			% of EBT		Amount			% of EBT
Earnings before income taxes (“EBT”)	$	260				$	205				$	434				$	428
Income taxes at statutory rate	$	54		21	%	$	72		35	%	$	91		21	%	$	150		35	%
Effect of:
Stock-based compensation	(2		)	(1	%)	(7		)	(3	%)	(7		)	(2	%)	(13		)	(3	%)
Tax exempt interest	(4		)	(2	%)	(6		)	(3	%)	(7		)	(2	%)	(12		)	(3	%)
Dividends received deduction	(1		)	—	%	(2		)	(1	%)	(2		)	—	%	(4		)	(1	%)
Employee Stock Ownership Plan dividends paid deduction	(1		)	—	%	(2		)	(1	%)	(1		)	—	%	(2		)	—	%
Foreign operations	—			—	%	—			—	%	3			1	%	6			1	%
Nondeductible expenses	2			1	%	1			—	%	4			1	%	3			1	%
Change in valuation allowance	2			1	%	2			1	%	2			—	%	—			—	%
Other	2			—	%	2			1	%	2			1	%	—			—	%
Provision for income taxes as shown in the statement of earnings	$	52		20	%	$	60		29	%	$	85		20	%	$	128		30	%

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Insurance (Tables)

6 Months Ended

Jun. 30, 2018

Insurance [Abstract]

Reconciliation of beginning and ending liability for unpaid losses and loss adjustment expenses

The following table provides an analysis of changes in the liability for losses and loss adjustment expenses during the first six months of 2018 and 2017 (in millions):

	Six months ended June 30,
	2018			2017
Balance at beginning of year	$	9,678		$	8,563
Less reinsurance recoverables, net of allowance	2,957			2,302
Net liability at beginning of year	6,721			6,261
Provision for losses and LAE occurring in the current period	1,434			1,294
Net increase (decrease) in the provision for claims of prior years	(100		)	(50		)
Total losses and LAE incurred	1,334			1,244
Payments for losses and LAE of:
Current year	(294		)	(253		)
Prior years	(975		)	(953		)
Total payments	(1,269		)	(1,206		)
Reserves of business disposed (*)	(319		)	—
Foreign currency translation and other	(4		)	24
Net liability at end of period	6,463			6,323
Add back reinsurance recoverables, net of allowance	2,630			2,407
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,093		$	8,730

(*) Reflects the reinsurance to close transaction at Neon discussed below.

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Accounting Policies - Narrative (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Jan. 01, 2018	Dec. 31, 2017
Significant Accounting Policies [Line Items]
Net unrealized gain on equity securities included in AOCI		$ 191		$ 191			$ 840
Cumulative effect of accounting change							4
Assets of managed investment entities		5,032		5,032			4,902
Liabilities of managed investment entities		$ 4,840		$ 4,840			4,687
Weighted average common shares adjustment related to stock-based compensation (shares)		1,700,000	2,000,000	1,700,000	2,100,000
Anti-dilutive potential common shares related to stock-based compensation plans (shares)		0	0	0	0
Maturities of short term investments				3 months
Equity securities
Significant Accounting Policies [Line Items]
Available-for-sale securities, Equity securities							1,600
Net unrealized gain on equity securities included in AOCI	[1]						221
Equity securities, trading at fair value							62
Equity securities | Accounting Standards Update 2016-01
Significant Accounting Policies [Line Items]
Net unrealized gain on equity securities included in AOCI							$ 221
Cumulative effect of accounting change						$ (221)
Limited partnerships and similar investments | Accounting Standards Update 2016-01
Significant Accounting Policies [Line Items]
Cumulative effect of accounting change						$ (4)
Equity securities still owned | Equity securities | Accounting Standards Update 2016-01
Significant Accounting Policies [Line Items]
Net holding gains (losses) on equity securities		$ 31		$ (57)

[1] As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings.

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Segments of Operations - Narrative (Details) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2017 USD ($)	Mar. 31, 2017 USD ($)	Jun. 30, 2018 segment
Segment Reporting Information [Line Items]
Number of segments | segment			3
Property and Casualty Insurance | Real Estate Investment
Segment Reporting Information [Line Items]
Pretax income from the sale of real estate properties		$ 13
Other
Segment Reporting Information [Line Items]
Write off of Deferred Debt Issuance Cost	$ 7

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Segments of Operations - Revenues by segment and sub-segment (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Segment Reporting Information [Line Items]
Total premiums earned		$ 1,161	$ 1,065	$ 2,268	$ 2,087
Net investment income		530	460	1,025	895
Other income		43	47	92	106
Revenues before realized gains (losses)		1,802	1,638	3,514	3,211
Realized gains (losses) on securities		31	8	(62)	11
Total revenues		1,833	1,646	3,452	3,222
Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned		1,161	1,065	2,268	2,087
Net investment income		115	96	215	182
Other income	[1]	2	4	4	20
Revenues before realized gains (losses)		1,278	1,165	2,487	2,289
Annuity
Segment Reporting Information [Line Items]
Net investment income		412	360	806	707
Other income		27	26	53	53
Revenues before realized gains (losses)		439	386	859	760
Other
Segment Reporting Information [Line Items]
Revenues before realized gains (losses)		85	87	168	162
Specialty Property and transportation | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned		374	357	724	699
Specialty casualty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned		595	537	1,174	1,045
Specialty financial | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned		159	146	308	293
Other specialty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Total premiums earned		$ 33	$ 25	$ 62	$ 50

[1] Includes income of $13 million (before noncontrolling interest) from the sale of a hotel in the first quarter of 2017.

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Segments of Operations - Earnings before income taxes by segment and sub-segment (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Segment Reporting Information [Line Items]
Earnings before realized gains (losses) and income taxes		$ 229	$ 197	$ 496	$ 417
Realized gains (losses) on securities		31	8	(62)	11
Earnings before income taxes		260	205	434	428
Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		72	72	163	150
Investment and other income, net	[1]	106	91	199	184
Earnings before realized gains (losses) and income taxes		178	163	362	334
Annuity
Segment Reporting Information [Line Items]
Earnings before realized gains (losses) and income taxes		99	85	224	181
Other
Segment Reporting Information [Line Items]
Earnings before realized gains (losses) and income taxes	[2]	(48)	(51)	(90)	(98)
Specialty Property and transportation | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		23	21	56	64
Specialty casualty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		29	29	70	44
Specialty financial | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		22	23	37	45
Other specialty | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		(1)	0	2	(1)
Other lines | Property and Casualty Insurance
Segment Reporting Information [Line Items]
Property and casualty insurance underwriting		$ (1)	$ (1)	$ (2)	$ (2)

[1] Includes income of $13 million (before noncontrolling interest) from the sale of a hotel in the first quarter of 2017.

[2] Includes holding company interest and expenses, including a $7 million loss on retirement of debt in the second quarter of 2017.

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Fair Value Measurements - Narrative (Details) $ in Millions	3 Months Ended			6 Months Ended
	Jun. 30, 2018 USD ($) stock	Mar. 31, 2018 USD ($)	Jun. 30, 2017 USD ($) stock	Jun. 30, 2018 USD ($) stock professional	Jun. 30, 2017 USD ($) stock	Dec. 31, 2017 USD ($)
Fair Value Measurements (Textual) [Abstract]
AFG's internal investment professionals | professional				25
Level 3 assets as a percentage of total assets measured at fair value				6.00%
Percentage of level 3 assets that were priced using non-binding broker quotes				73.00%
Level 3 assets that were priced using non-binding broker quotes				$ 2,140
Fair value of equity securities transferred into Level 3	$ 51		$ 32	87	$ 89
Life contingent annuities	213			$ 213		$ 206
Maximum
Fair Value Measurements (Textual) [Abstract]
Percentage of internally developed Level 3 asset fair values to Shareholders' equity (are less than)				14.00%
Fixed-indexed and variable-indexed annuities (embedded derivative), majority of future years | Minimum
Fair Value Measurements (Textual) [Abstract]
Unobservable input surrenders used in Level 3 fair value determination				7.00%
Fixed-indexed and variable-indexed annuities (embedded derivative), majority of future years | Maximum
Fair Value Measurements (Textual) [Abstract]
Unobservable input surrenders used in Level 3 fair value determination				11.00%
Fixed-indexed and variable-indexed annuities (embedded derivative)
Fair Value Measurements (Textual) [Abstract]
Fair value of derivatives in annuity benefits accumulated measured using a discounted cash flow approach	2,780			$ 2,780
Fixed-indexed and variable-indexed annuities (embedded derivative) | Minimum
Fair Value Measurements (Textual) [Abstract]
Unobservable input surrenders used in Level 3 fair value determination				3.00%
Fixed-indexed and variable-indexed annuities (embedded derivative) | Maximum
Fair Value Measurements (Textual) [Abstract]
Unobservable input surrenders used in Level 3 fair value determination				23.00%
Equity securities
Fair Value Measurements (Textual) [Abstract]
Fair value of equity securities transferred into Level 3	$ 1	$ 29	$ 0	$ 30	$ 0
Preferred stocks
Fair Value Measurements (Textual) [Abstract]
Number of stocks transferred from Level 1 to Level 2 | stock	2			2
Fair Value of assets transferred from Level 1 to Level 2, during the second quarter	$ 6
Fair Value of assets transferred from Level 1 to Level 2, during the first six months	$ 6			$ 6
Number of stocks transferred from Level 2 to Level 1 | stock			2		2
Fair Value of assets transferred from Level 2 to Level 1, during the second quarter			$ 16
Fair Value of assets transferred from Level 2 to Level 1, during the first six months			$ 16		$ 16

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Fair Value Measurements - Assets and liabilities measured and carried at fair value in the financial statements (Details) - USD ($) $ in Millions		Jun. 30, 2018	Dec. 31, 2017
Assets:
Available for sale (AFS) fixed maturities		$ 39,648	$ 38,379
Trading fixed maturities		137	348
Equity index call options		615	701
Assets of managed investment entities (“MIE”)		5,032	4,902
Variable annuity assets (separate accounts)	[1]	636	644
Total assets accounted for at fair value		47,845	46,636
Liabilities:
Liabilities of managed investment entities		4,840	4,687
Total liabilities accounted for at fair value		7,688	7,264
Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		2,776	2,542
Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		72	35
Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		39,648	38,379
Trading fixed maturities		137	348
U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		240	242
States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		6,913	7,123
Foreign government
Assets:
Available for sale (AFS) fixed maturities		129	127
Residential MBS
Assets:
Available for sale (AFS) fixed maturities		2,886	3,227
Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		934	962
Asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		8,935	7,962
Corporate and other
Assets:
Available for sale (AFS) fixed maturities		19,611	18,736
Equity securities
Assets:
Equity securities		1,777	1,662
Level 1
Assets:
Assets of managed investment entities (“MIE”)		229	307
Variable annuity assets (separate accounts)	[1]	0	0
Total assets accounted for at fair value		1,907	1,914
Liabilities:
Liabilities of managed investment entities		220	293
Total liabilities accounted for at fair value		220	293
Level 1 | Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 1 | Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 1 | Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		169	152
Trading fixed maturities		38	44
Level 1 | U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		140	122
Level 1 | States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Foreign government
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Residential MBS
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 1 | Corporate and other
Assets:
Available for sale (AFS) fixed maturities		29	30
Level 1 | Equity securities
Assets:
Equity securities		1,471	1,411
Level 2
Assets:
Assets of managed investment entities (“MIE”)		4,780	4,572
Variable annuity assets (separate accounts)	[1]	636	644
Total assets accounted for at fair value		43,001	42,432
Liabilities:
Liabilities of managed investment entities		4,598	4,372
Total liabilities accounted for at fair value		4,670	4,407
Level 2 | Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 2 | Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		72	35
Level 2 | Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		36,795	36,125
Trading fixed maturities		99	304
Level 2 | U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		92	112
Level 2 | States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		6,852	6,975
Level 2 | Foreign government
Assets:
Available for sale (AFS) fixed maturities		129	127
Level 2 | Residential MBS
Assets:
Available for sale (AFS) fixed maturities		2,739	3,105
Level 2 | Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		878	926
Level 2 | Asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		7,931	7,218
Level 2 | Corporate and other
Assets:
Available for sale (AFS) fixed maturities		18,174	17,662
Level 2 | Equity securities
Assets:
Equity securities		76	86
Level 3
Assets:
Assets of managed investment entities (“MIE”)		23	23
Variable annuity assets (separate accounts)	[1]	0	0
Total assets accounted for at fair value		2,937	2,290
Liabilities:
Liabilities of managed investment entities		22	22
Total liabilities accounted for at fair value		2,798	2,564
Level 3 | Annuity benefits accumulated
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		2,776	2,542
Level 3 | Other liabilities — derivatives
Liabilities:
Derivatives included in annuity benefits accumulated, long-term debt, and other liabilities		0	0
Level 3 | Fixed maturities
Assets:
Available for sale (AFS) fixed maturities		2,684	2,102
Trading fixed maturities		0	0
Level 3 | U.S. Government and government agencies
Assets:
Available for sale (AFS) fixed maturities		8	8
Level 3 | States, municipalities and political subdivisions
Assets:
Available for sale (AFS) fixed maturities		61	148
Level 3 | Foreign government
Assets:
Available for sale (AFS) fixed maturities		0	0
Level 3 | Residential MBS
Assets:
Available for sale (AFS) fixed maturities		147	122
Level 3 | Commercial MBS
Assets:
Available for sale (AFS) fixed maturities		56	36
Level 3 | Asset-backed securities
Assets:
Available for sale (AFS) fixed maturities		1,004	744
Level 3 | Corporate and other
Assets:
Available for sale (AFS) fixed maturities		1,408	1,044
Level 3 | Equity securities
Assets:
Equity securities		230	165
Equity index call options | Equity index call options
Assets:
Equity index call options		615	701
Equity index call options | Level 1 | Equity index call options
Assets:
Equity index call options		0	0
Equity index call options | Level 2 | Equity index call options
Assets:
Equity index call options		615	701
Equity index call options | Level 3 | Equity index call options
Assets:
Equity index call options		$ 0	$ 0

[1] Variable annuity liabilities equal the fair value of variable annuity assets.

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Fair Value Measurements - Unobservable inputs used in determining fair value of embedded derivatives (Details) - Embedded derivatives	6 Months Ended
	Jun. 30, 2018
Unobservable inputs used by management in determining fair value of embedded derivatives
Risk margin for uncertainty in cash flows	0.70%
Minimum
Unobservable inputs used by management in determining fair value of embedded derivatives
Adjustment for insurance subsidiary's credit risk	0.40%
Surrenders	3.00%
Partial surrenders	2.00%
Annuitizations	0.10%
Deaths	1.60%
Budgeted option costs	2.50%
Maximum
Unobservable inputs used by management in determining fair value of embedded derivatives
Adjustment for insurance subsidiary's credit risk	1.70%
Surrenders	23.00%
Partial surrenders	9.00%
Annuitizations	1.00%
Deaths	8.00%
Budgeted option costs	3.50%

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Fair Value Measurements - Changes in balances of Level 3 financial assets carried at fair value (Details) - USD ($) $ in Millions	3 Months Ended			6 Months Ended
	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	$ 2,600	$ 2,290	$ 1,976	$ 2,290	$ 1,762
Total realized/unrealized gains (losses) included in Net income	14		(13)	1	(18)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	(11)		15	(23)	29
Purchases and issuances	397		193	863	432
Sales and settlements	(73)		(79)	(152)	(136)
Transfer into Level 3	51		32	87	89
Transfer out of Level 3	(41)		(133)	(129)	(167)
Financial assets, Ending Balance	2,937	2,600	1,991	2,937	1,991
Fixed maturities
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	2,382	2,102	1,777	2,102	1,559
Total realized/unrealized gains (losses) included in Net income	(2)		2	(8)	4
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	(11)		9	(23)	16
Purchases and issuances	379		183	833	408
Sales and settlements	(73)		(76)	(148)	(133)
Transfer into Level 3	50		32	57	89
Transfer out of Level 3	(41)		(127)	(129)	(143)
Financial assets, Ending Balance	2,684	2,382	1,800	2,684	1,800
U.S. government agency
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	8	8	8	8	8
Total realized/unrealized gains (losses) included in Net income	0		0	0	0
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0		0	0	0
Purchases and issuances	0		0	0	0
Sales and settlements	0		0	0	0
Transfer into Level 3	0		0	0	0
Transfer out of Level 3	0		0	0	0
Financial assets, Ending Balance	8	8	8	8	8
State and municipal
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	62	148	143	148	140
Total realized/unrealized gains (losses) included in Net income	0		0	0	0
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	(1)		1	(2)	4
Purchases and issuances	0		0	0	0
Sales and settlements	0		(1)	(1)	(1)
Transfer into Level 3	0		0	0	0
Transfer out of Level 3	0		0	(84)	0
Financial assets, Ending Balance	61	62	143	61	143
Residential MBS
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	115	122	175	122	190
Total realized/unrealized gains (losses) included in Net income	(3)		(3)	(7)	(2)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0		2	0	2
Purchases and issuances	0		0	0	1
Sales and settlements	(5)		(23)	(11)	(31)
Transfer into Level 3	50		13	57	20
Transfer out of Level 3	(10)		(11)	(14)	(27)
Financial assets, Ending Balance	147	115	153	147	153
Commercial MBS
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	47	36	29	36	25
Total realized/unrealized gains (losses) included in Net income	0		1	(1)	1
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0		0	0	0
Purchases and issuances	9		15	21	15
Sales and settlements	0		0	0	0
Transfer into Level 3	0		0	0	4
Transfer out of Level 3	0		0	0	0
Financial assets, Ending Balance	56	47	45	56	45
Asset-backed securities
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	912	744	594	744	484
Total realized/unrealized gains (losses) included in Net income	0		0	(2)	0
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	(6)		2	(3)	2
Purchases and issuances	136		0	340	104
Sales and settlements	(20)		(25)	(57)	(36)
Transfer into Level 3	0		19	0	36
Transfer out of Level 3	(18)		(92)	(18)	(92)
Financial assets, Ending Balance	1,004	912	498	1,004	498
Corporate and other
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	1,238	1,044	828	1,044	712
Total realized/unrealized gains (losses) included in Net income	1		4	2	5
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	(4)		4	(18)	8
Purchases and issuances	234		168	472	288
Sales and settlements	(48)		(27)	(79)	(65)
Transfer into Level 3	0		0	0	29
Transfer out of Level 3	(13)		(24)	(13)	(24)
Financial assets, Ending Balance	1,408	1,238	953	1,408	953
Equity securities
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	194	165	173	165	174
Total realized/unrealized gains (losses) included in Net income	19		(10)	14	(16)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0		6	0	13
Purchases and issuances	16		8	25	20
Sales and settlements	0		(3)	(4)	(3)
Transfer into Level 3	1	29	0	30	0
Transfer out of Level 3	0		(6)	0	(20)
Financial assets, Ending Balance	230	194	168	230	168
Assets of MIE
Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Roll Forward]
Financial assets, Beginning Balance	24	23	26	23	29
Total realized/unrealized gains (losses) included in Net income	(3)		(5)	(5)	(6)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)	0		0	0	0
Purchases and issuances	2		2	5	4
Sales and settlements	0		0	0	0
Transfer into Level 3	0		0	0	0
Transfer out of Level 3	0		0	0	(4)
Financial assets, Ending Balance	$ 23	$ 24	$ 23	$ 23	$ 23

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Fair Value Measurements - Changes in balances of Level 3 financial liabilities carried at fair value (Details) - USD ($) $ in Millions		3 Months Ended			6 Months Ended
		Jun. 30, 2018		Jun. 30, 2017	Jun. 30, 2018		Jun. 30, 2017
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Financial liabilities, Beginning Balance		$ (2,549)		$ (1,963)	$ (2,542)		$ (1,759)
Total realized/unrealized gains (losses) included in Net income		(126)		(112)	(63)		(259)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)		0		0	0		0
Purchases and issuances		(141)		(80)	(244)		(159)
Sales and settlements		40		26	73		48
Transfer into Level 3		0		0	0		0
Transfer out of Level 3		0		0	0		0
Financial liabilities, Ending Balance	[2]	(2,776)	[1]	(2,129)	(2,776)	[1]	(2,129)
Embedded derivatives
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Financial liabilities, Beginning Balance		(2,549)		(1,963)	(2,542)		(1,759)
Total realized/unrealized gains (losses) included in Net income		(126)	[3]	(112)	(63)	[4]	(259)
Total realized/unrealized gains (losses) included in other comprehensive income (loss)		0		0	0		0
Purchases and issuances		(141)		(80)	(244)		(159)
Sales and settlements		40		26	73		48
Transfer into Level 3		0		0	0		0
Transfer out of Level 3		0		0	0		0
Financial liabilities, Ending Balance		$ (2,776)		$ (2,129)	$ (2,776)		$ (2,129)

[1] 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.

[2] 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.

[3] 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.

[4] 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.

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Fair Value Measurements - The carrying value and fair value of financial instruments (Details) - USD ($) $ in Millions		Jun. 30, 2018	Dec. 31, 2017
Financial assets:
Mortgage loans		$ 1,147	$ 1,125
Policy loans		179	184
Financial liabilities:
Long-term debt		1,301	1,301
Level 1
Financial assets:
Cash and cash equivalents		1,810	2,338
Mortgage loans		0	0
Policy loans		0	0
Total financial assets not accounted for at fair value		1,810	2,338
Financial liabilities:
Annuity benefits accumulated	[1]	0	0
Long-term debt		0	0
Total financial liabilities not accounted for at fair value		0	0
Level 2
Financial assets:
Cash and cash equivalents		0	0
Mortgage loans		0	0
Policy loans		0	0
Total financial assets not accounted for at fair value		0	0
Financial liabilities:
Annuity benefits accumulated	[1]	0	0
Long-term debt		1,262	1,351
Total financial liabilities not accounted for at fair value		1,262	1,351
Level 3
Financial assets:
Cash and cash equivalents		0	0
Mortgage loans		1,136	1,119
Policy loans		179	184
Total financial assets not accounted for at fair value		1,315	1,303
Financial liabilities:
Annuity benefits accumulated	[1]	33,204	32,461
Long-term debt		3	3
Total financial liabilities not accounted for at fair value		33,207	32,464
Carrying Value
Financial assets:
Cash and cash equivalents		1,810	2,338
Mortgage loans		1,147	1,125
Policy loans		179	184
Total financial assets not accounted for at fair value		3,136	3,647
Financial liabilities:
Annuity benefits accumulated	[1]	34,673	33,110
Long-term debt		1,301	1,301
Total financial liabilities not accounted for at fair value		35,974	34,411
Fair Value
Financial assets:
Cash and cash equivalents		1,810	2,338
Mortgage loans		1,136	1,119
Policy loans		179	184
Total financial assets not accounted for at fair value		3,125	3,641
Financial liabilities:
Annuity benefits accumulated	[1]	33,204	32,461
Long-term debt		1,265	1,354
Total financial liabilities not accounted for at fair value		$ 34,469	$ 33,815

[1] Excludes $213 million and $206 million of life contingent annuities in the payout phase at June 30, 2018 and December 31, 2017, respectively.

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Investments - Narrative (Details) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($) security	Jun. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Investment [Line Items]
Percentage (based on amount of unrealized loss) of available for sale fixed maturities that are in an unrealized loss position and rated investment grade			93.00%
Percentage (based on fair value) of available for sale fixed maturities that are in an unrealized loss position and rated investment grade			96.00%
Other than temporary impairment charges	$ 0	$ 9	$ 1	$ 15
Residential MBS
Investment [Line Items]
Non-credit related portion of other-than-temporary impairment charges taken for securities still owned	149		149		$ 158
Gross unrealized losses on fixed maturities	(7)		(7)		(6)
Securities with non-credit other-than-temporary impairment charges
Investment [Line Items]
Gross unrealized gains	135		135		137
Gross unrealized losses	(4)		(4)		(4)
Fixed maturities
Investment [Line Items]
Gross unrealized losses on fixed maturities	(438)		$ (438)		$ (82)
Number of available for sale securities in an unrealized loss position | security			2,043
Other than temporary impairment charges	0	1	$ 1	1
Gross gains			16	21
Gross losses			(8)	(2)
Equity securities
Investment [Line Items]
Other than temporary impairment charges	$ 0	$ 11	0	20
Gross gains				15
Gross losses				$ (5)
Maximum | Residential MBS
Investment [Line Items]
Other than temporary impairment charges			1
Maximum | Corporate bonds
Investment [Line Items]
Other than temporary impairment charges			$ 1

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Investments - Available for sale fixed maturities (Details) - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	$ 39,244	$ 37,038
Available for sale (AFS) fixed maturities	39,648	38,379
Total fixed maturities
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	39,244	37,038
Fixed maturities, Available for sale, Gross Unrealized, Gains	842	1,423
Fixed maturities, Available for sale, Gross Unrealized, Losses	(438)	(82)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	404	1,341
Available for sale (AFS) fixed maturities	39,648	38,379
U.S. Government and government agencies
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	243	244
Fixed maturities, Available for sale, Gross Unrealized, Gains	1	1
Fixed maturities, Available for sale, Gross Unrealized, Losses	(4)	(3)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	(3)	(2)
Available for sale (AFS) fixed maturities	240	242
States, municipalities and political subdivisions
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	6,804	6,887
Fixed maturities, Available for sale, Gross Unrealized, Gains	162	254
Fixed maturities, Available for sale, Gross Unrealized, Losses	(53)	(18)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	109	236
Available for sale (AFS) fixed maturities	6,913	7,123
Foreign government
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	127	124
Fixed maturities, Available for sale, Gross Unrealized, Gains	2	3
Fixed maturities, Available for sale, Gross Unrealized, Losses	0	0
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	2	3
Available for sale (AFS) fixed maturities	129	127
Residential MBS
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	2,564	2,884
Fixed maturities, Available for sale, Gross Unrealized, Gains	329	349
Fixed maturities, Available for sale, Gross Unrealized, Losses	(7)	(6)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	322	343
Available for sale (AFS) fixed maturities	2,886	3,227
Commercial MBS
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	920	927
Fixed maturities, Available for sale, Gross Unrealized, Gains	18	36
Fixed maturities, Available for sale, Gross Unrealized, Losses	(4)	(1)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	14	35
Available for sale (AFS) fixed maturities	934	962
Asset-backed securities
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	8,849	7,836
Fixed maturities, Available for sale, Gross Unrealized, Gains	132	142
Fixed maturities, Available for sale, Gross Unrealized, Losses	(46)	(16)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	86	126
Available for sale (AFS) fixed maturities	8,935	7,962
Corporate and other
Schedule of Available-for-sale Securities [Line Items]
Fixed maturities, Available for sale, Amortized Cost	19,737	18,136
Fixed maturities, Available for sale, Gross Unrealized, Gains	198	638
Fixed maturities, Available for sale, Gross Unrealized, Losses	(324)	(38)
Fixed maturities, Available for sale, Net Unrealized, Gains (Losses)	(126)	600
Available for sale (AFS) fixed maturities	$ 19,611	$ 18,736

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Investments - Equity securities reported at fair value (Details) - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Debt Securities, Trading, and Equity Securities, FV-NI [Line Items]
Equity securities, at fair value	$ 1,777	$ 1,662
Common stocks
Debt Securities, Trading, and Equity Securities, FV-NI [Line Items]
Equity securities, at cost	1,066
Equity securities, at fair value	1,180
Equity securities, fair value in excess of cost	114
Perpetual preferred stocks
Debt Securities, Trading, and Equity Securities, FV-NI [Line Items]
Equity securities, at cost	603
Equity securities, at fair value	597
Equity securities, fair value in excess of cost	(6)
Equity securities
Debt Securities, Trading, and Equity Securities, FV-NI [Line Items]
Equity securities, at cost	1,669
Equity securities, at fair value	1,777
Equity securities, fair value in excess of cost	$ 108

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Investments - Gross unrealized losses on securities by investment category and length of time that have been in a continuous unrealized loss position (Details) - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Total fixed maturities
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (360)	$ (37)
Fair Value - Less than twelve months	$ 16,868	$ 4,295
Fair Value as % of Cost - Less than twelve months	98.00%	99.00%
Unrealized Loss - Twelve months or more	$ (78)	$ (45)
Fair Value - Twelve months or more	$ 1,567	$ 1,574
Fair Value as % of Cost - Twelve months or more	95.00%	97.00%
U.S. Government and government agencies
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (1)	$ 0
Fair Value - Less than twelve months	$ 102	$ 55
Fair Value as % of Cost - Less than twelve months	99.00%	100.00%
Unrealized Loss - Twelve months or more	$ (3)	$ (3)
Fair Value - Twelve months or more	$ 99	$ 123
Fair Value as % of Cost - Twelve months or more	97.00%	98.00%
States, municipalities and political subdivisions
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (36)	$ (8)
Fair Value - Less than twelve months	$ 1,957	$ 825
Fair Value as % of Cost - Less than twelve months	98.00%	99.00%
Unrealized Loss - Twelve months or more	$ (17)	$ (10)
Fair Value - Twelve months or more	$ 451	$ 431
Fair Value as % of Cost - Twelve months or more	96.00%	98.00%
Foreign government
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ 0	$ 0
Fair Value - Less than twelve months	$ 26	$ 4
Fair Value as % of Cost - Less than twelve months	100.00%	100.00%
Unrealized Loss - Twelve months or more	$ 0	$ 0
Fair Value - Twelve months or more	$ 0	$ 0
Fair Value as % of Cost - Twelve months or more	0.00%	0.00%
Residential MBS
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (2)	$ (1)
Fair Value - Less than twelve months	$ 157	$ 118
Fair Value as % of Cost - Less than twelve months	99.00%	99.00%
Unrealized Loss - Twelve months or more	$ (5)	$ (5)
Fair Value - Twelve months or more	$ 110	$ 118
Fair Value as % of Cost - Twelve months or more	96.00%	96.00%
Commercial MBS
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (4)	$ (1)
Fair Value - Less than twelve months	$ 215	$ 67
Fair Value as % of Cost - Less than twelve months	98.00%	99.00%
Unrealized Loss - Twelve months or more	$ 0	$ 0
Fair Value - Twelve months or more	$ 0	$ 0
Fair Value as % of Cost - Twelve months or more	0.00%	0.00%
Asset-backed securities
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (36)	$ (7)
Fair Value - Less than twelve months	$ 3,738	$ 1,195
Fair Value as % of Cost - Less than twelve months	99.00%	99.00%
Unrealized Loss - Twelve months or more	$ (10)	$ (9)
Fair Value - Twelve months or more	$ 256	$ 299
Fair Value as % of Cost - Twelve months or more	96.00%	97.00%
Corporate and other
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months	$ (281)	$ (20)
Fair Value - Less than twelve months	$ 10,673	$ 2,031
Fair Value as % of Cost - Less than twelve months	97.00%	99.00%
Unrealized Loss - Twelve months or more	$ (43)	$ (18)
Fair Value - Twelve months or more	$ 651	$ 603
Fair Value as % of Cost - Twelve months or more	94.00%	97.00%
Total equity securities
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months		$ (22)
Fair Value - Less than twelve months		$ 158
Fair Value as % of Cost - Less than twelve months		88.00%
Unrealized Loss - Twelve months or more		$ (1)
Fair Value - Twelve months or more		$ 13
Fair Value as % of Cost - Twelve months or more		93.00%
Common stocks
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months		$ (22)
Fair Value - Less than twelve months		$ 117
Fair Value as % of Cost - Less than twelve months		84.00%
Unrealized Loss - Twelve months or more		$ 0
Fair Value - Twelve months or more		$ 0
Fair Value as % of Cost - Twelve months or more		0.00%
Perpetual preferred stocks
Available for sale securities in a continuous unrealized loss position
Unrealized Loss - Less than twelve months		$ 0
Fair Value - Less than twelve months		$ 41
Fair Value as % of Cost - Less than twelve months		100.00%
Unrealized Loss - Twelve months or more		$ (1)
Fair Value - Twelve months or more		$ 13
Fair Value as % of Cost - Twelve months or more		93.00%

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Investments - Credit portion of other-than-temporary impairments on fixed maturities for which the non-credit portion of an impairment has been recognized in OCI (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Roll Forward]
Beginning Balance	$ 144	$ 146	$ 145	$ 153
Additional credit impairments on:
Previously impaired securities	0	1	0	1
Securities without prior impairments	1	0	1	0
Reductions due to sales or redemptions	(1)	(2)	(2)	(9)
Ending Balance	$ 144	$ 145	$ 144	$ 145

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Investments - Scheduled maturities of available for sale fixed maturities (Details) $ in Millions	6 Months Ended
	Jun. 30, 2018 USD ($)
Fair Value Percent, Fiscal Year Maturity [Abstract]
Average life of ABS	4 years 6 months
Average life of MBS	4 years 6 months
Fixed maturities
Amortized Cost Basis, Fiscal Year Maturity [Abstract]
One year or less	$ 994
After one year through five years	7,703
After five years through ten years	13,386
After ten years	4,828
Fixed maturities amortized cost, Subtotal	26,911
ABS (average life of approximately 4-1/2 years)	8,849
MBS (average life of approximately 4-1/2 years)	3,484
Amortized Cost	39,244
Fair Value, Fiscal Year Maturity [Abstract]
One year or less	1,003
After one year through five years	7,764
After five years through ten years	13,285
After ten years	4,841
Fixed maturities fair value, Subtotal	26,893
ABS (average life of approximately 4-1/2 years)	8,935
MBS (average life of approximately 4-1/2 years)	3,820
Fair Value	$ 39,648
Fair Value Percent, Fiscal Year Maturity [Abstract]
One year or less	3.00%
After one year through five years	20.00%
After five years through ten years	33.00%
After ten years	12.00%
Fixed maturities fair value, Subtotal, Percent	68.00%
ABS (average life of approximately 4-1/2 years)	22.00%
MBS (average life of approximately 4-1/2 years)	10.00%
Fair value, Total, Percent	100.00%

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Investments - Components of the net unrealized gain on securities that is included in AOCI in the Balance Sheet (Details) - USD ($) $ in Millions		Jun. 30, 2018	Dec. 31, 2017
Unrealized gain on:
Pretax		$ 242	$ 1,063
Deferred Tax		(51)	(223)
Net		191	840
Total investments
Unrealized gain on:
Pretax			1,620
Deferred Tax			(340)
Net			1,280
Total fixed maturities
Unrealized gain on:
Pretax		404	1,341
Deferred Tax		(85)	(282)
Net		319	1,059
Fixed maturities — annuity segment
Unrealized gain on:
Pretax	[1]	310	1,082
Deferred Tax	[1]	(65)	(227)
Net	[1]	245	855
Fixed maturities — all other
Unrealized gain on:
Pretax		94	259
Deferred Tax		(20)	(55)
Net		74	204
Equity securities
Unrealized gain on:
Pretax	[2]		279
Deferred Tax	[2]		(58)
Net	[2]		221
Deferred policy acquisition costs — annuity segment
Unrealized gain on:
Pretax		(124)	(433)
Deferred Tax		26	91
Net		(98)	(342)
Annuity benefits accumulated
Unrealized gain on:
Pretax		(41)	(137)
Deferred Tax		9	29
Net		(32)	(108)
Unearned revenue
Unrealized gain on:
Pretax		3	13
Deferred Tax		(1)	(3)
Net		$ 2	$ 10

[1] Net unrealized gains on fixed maturity investments supporting AFG’s annuity benefits accumulated.

[2] As discussed in Note A — “Accounting Policies — Investments,” effective January 1, 2018, all equity securities other than those accounted for under the equity method are carried at fair value through net earnings.

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Investments - Schedule of sources of net investment income (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Net Investment Income [Line Items]
Investment income		$ 535	$ 464	$ 1,035	$ 904
Investment expenses		(5)	(4)	(10)	(9)
Net investment income		530	460	1,025	895
Fixed maturities
Net Investment Income [Line Items]
Investment income		431	397	843	786
Equity in earnings of partnerships and similar investments
Net Investment Income [Line Items]
Investment income		41	21	87	31
Other
Net Investment Income [Line Items]
Investment income		28	27	51	47
Accounting Standards Update 2016-01 | Equity securities
Net Investment Income [Line Items]
Investment income	[1]	15	2	14	4
Investment income | Equity securities
Net Investment Income [Line Items]
Investment income		$ 20	$ 17	$ 40	$ 36

[1] As discussed in Note A — “Accounting Policies — Investments,” AFG adopted guidance in January 2018 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. 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 the previous guidance and on a small portfolio of limited partnership and similar investments that do not qualify for the equity method of accounting.

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Investments - Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		$ 31	$ 17	$ (61)	$ 26
Realized — impairments		0	(9)	(1)	(15)
Realized gains (losses) on securities		31	8	(62)	11
Net of tax
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		25	11	(48)	17
Realized — impairments		0	(6)	(1)	(10)
Realized gains (losses) on securities		25	5	(49)	7
Change in unrealized		(151)	110	(428)	235
Total pretax
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		31	17	(61)	26
Realized — impairments		0	(9)	(1)	(15)
Realized gains (losses) on securities		31	8	(62)	11
Change in unrealized		(191)	170	(542)	361
Fixed maturities
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		4	11	3	16
Realized — impairments		0	(1)	(1)	(1)
Realized gains (losses) on securities		4	10	2	15
Change in unrealized		(338)	262	(937)	464
Equity securities
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		23	8	(72)	10
Realized — impairments		0	(11)	0	(20)
Realized gains (losses) on securities		23	(3)	(72)	(10)
Change in unrealized		0	20	0	92
Mortgage loans and other investments
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		0	0	0	3
Realized — impairments		0	0	0	0
Realized gains (losses) on securities		0	0	0	3
Change in unrealized		0	0	0	0
Other, Including DPAC and reserves related to the annuity business
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments	[1]	4	(2)	8	(3)
Realized — impairments	[1]	0	3	0	6
Realized gains (losses) on securities	[1]	4	1	8	3
Change in unrealized	[1]	147	(112)	395	(195)
Tax effects
Realized gains (losses) and changes in unrealized appreciation (depreciation) related to fixed maturity and equity security investments
Realized before impairments		(6)	(6)	13	(9)
Realized — impairments		0	3	0	5
Realized gains (losses) on securities		(6)	(3)	13	(4)
Change in unrealized		$ 40	$ (60)	$ 114	$ (126)

[1] Primarily adjustments to deferred policy acquisition costs and reserves related to the annuity business.

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Investments - Holding gains (losses) on equity securities still held (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Realized gains (losses) on securities still owned	$ 31	$ 8	$ (62)	$ 11
Included in net investment income	535	464	1,035	904
Equity securities
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Realized gains (losses) on securities still owned	23	$ (3)	(72)	$ (10)
Equity securities still owned | Equity securities | Accounting Standards Update 2016-01
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Net holding gains (losses) on equity securities	31		(57)
Equity securities still owned | Realized gains (losses) on securities | Equity securities | Accounting Standards Update 2016-01
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Realized gains (losses) on securities still owned	16		(71)
Equity securities still owned | Investment income | Equity securities | Accounting Standards Update 2016-01
Holding Gains (Losses) on Equity Securities Still Held [Line Items]
Included in net investment income	$ 15		$ 14

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Investments - Gross realized gains and losses on available for sale fixed maturity investment transactions (Details) - Fixed maturities - USD ($) $ in Millions	6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Gross realized gains and losses on the sale of available for sale fixed maturity and equity security investments
Gross gains	$ 16	$ 21
Gross losses	$ (8)	$ (2)

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Derivatives - Narrative (Details)	3 Months Ended			6 Months Ended
	Jun. 30, 2018 USD ($) swap	Mar. 31, 2018 USD ($) swap	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($) swap	Jun. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Derivative Instruments, Gain (Loss) [Line Items]
Carrying value of collateral received to support purchased call options	$ 353,000,000			$ 353,000,000		$ 389,000,000
Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Number of interest rate swaps designated and qualifying as a cash flow hedges | swap	11			11
Notional amount of derivative instrument outstanding	$ 1,639,000,000			$ 1,639,000,000		1,580,000,000
Gain (loss) reclassified from AOCI into net investment income	(2,000,000)		$ 1,000,000	(1,000,000)	$ 3,000,000
Gain (loss) on cash flow hedge ineffectiveness recorded in Net Earnings	0		$ 0	0	$ 0
Collateral receivable supporting interest rate swaps	116,000,000			116,000,000		70,000,000
Other assets | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Net derivatives, at fair value	0			0
Other assets | Maximum | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Net derivatives, at fair value						1,000,000
Other liabilities | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Net derivatives, at fair value	(70,000,000)			(70,000,000)		$ (31,000,000)
New interest rate swaps entered into during the period | Cash Flow Hedges | Designated as Hedging Instrument | Interest rate swaps
Derivative Instruments, Gain (Loss) [Line Items]
Notional amount of derivative instrument outstanding		$ 130,000,000
Number of interest rate swaps entered into during the period | swap		1
Annuity benefits | Not Designated as Hedging Instrument | Fixed-Indexed Annuities (Embedded Derivative) [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Total realized/unrealized gains (losses) included in net income for the embedded derivatives related to the unlocking of actuarial assumptions	$ (44,000,000)			$ (44,000,000)

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Derivatives - Derivatives that do not qualify for hedge accounting under GAAP included in the Balance Sheet at fair value (Details) - Not Designated as Hedging Instrument - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	$ 733	$ 810
Derivative liability, at fair value	2,778	2,546
MBS with embedded derivatives | Fixed maturities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	115	105
Public company warrants | Equity securities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	3	4
Fixed-indexed and variable-indexed annuities (embedded derivative) | Annuity benefits accumulated
Derivatives included in AFG' s Balance Sheet at fair value
Derivative liability, at fair value	2,776	2,542
Equity index call options | Equity index call options
Derivatives included in AFG' s Balance Sheet at fair value
Derivative asset, at fair value	615	701
Equity index put options | Other liabilities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative liability, at fair value	0	0
Reinsurance contracts (embedded derivative) | Other liabilities
Derivatives included in AFG' s Balance Sheet at fair value
Derivative liability, at fair value	$ 2	$ 4

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Derivatives - Gain (loss) included in the Statement of Earnings for changes in the fair value of derivatives that do not qualify for hedge accounting (Details) - Not Designated as Hedging Instrument - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative		$ (36)	$ (35)	$ (15)	$ (42)
MBS with embedded derivatives | Realized gains (losses) on securities
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative		(1)	(3)	(5)	(3)
Public company warrants | Realized gains (losses) on securities
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative		0	0	(1)	0
Fixed-indexed and variable-indexed annuities (embedded derivative) | Annuity benefits
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative	[1]	(126)	(112)	(63)	(259)
Equity index call options | Annuity benefits
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative		90	81	52	222
Equity index put options | Annuity benefits
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative		0	0	0	0
Reinsurance contracts (embedded derivative) | Net investment income
Derivative, Gain (Loss) on Derivative, Net [Abstract]
Derivative		$ 1	$ (1)	$ 2	$ (2)

[1] The change in fair value of the embedded derivative includes losses related to unlocking of actuarial assumptions of $44 million in both the second quarter and first six months of 2018

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Deferred Policy Acquisition Costs - Narrative (Details) - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Deferred Policy Acquisition Costs Disclosures [Abstract]
Accumulated amortization of present value of future profits	$ 145	$ 141

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Deferred Policy Acquisition Costs - Progression of deferred policy acquisition costs (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Movement Analysis of Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Deferred policy acquisition costs and present value of future profits, beginning balance		$ 1,417	$ 1,205	$ 1,216	$ 1,239
Deferred policy acquisition costs and present value of future profits, additions		252	218	471	425
Deferred policy acquisition costs and present value of future profits, periodic amortization		(233)	(178)	(463)	(363)
Deferred policy acquisition costs and present value of future profits, annuity unlocking		29		29
Deferred policy acquisition costs and present value of future profits, change included in realized gains		3	1	6	3
Deferred policy acquisition costs and present value of future profits, foreign currency translation		(2)	0	(1)	1
Deferred policy acquisition costs and present value of future profits, change in unrealized		116	(90)	324	(149)
Deferred policy acquisition costs and present value of future profits, ending balance		1,582	1,156	1,582	1,156
P&C
Movement Analysis of Deferred Policy Acquisition Costs [Roll Forward]
Deferred policy acquisition costs, beginning balance		279	243	270	238
Deferred policy acquisition costs, additions		181	151	343	290
Deferred policy acquisition costs, periodic amortization		(160)	(136)	(314)	(271)
Deferred policy acquisition costs, foreign currency translation		(2)	0	(1)	1
Deferred policy acquisition costs, ending balance		298	258	298	258
Annuity and Other
Movement Analysis of Deferred Policy Acquisition Costs [Roll Forward]
Deferred policy acquisition costs, beginning balance		1,208	1,137	1,217	1,110
Deferred policy acquisition costs, additions		70	66	127	133
Deferred policy acquisition costs, periodic amortization		(66)	(36)	(135)	(78)
Deferred policy acquisition costs, annuity unlocking		28		28
Deferred policy acquisition costs, change included in realized gains		3	0	6	2
Deferred policy acquisition costs, ending balance		1,243	1,167	1,243	1,167
Movement in Deferred Sales Inducements [Roll Forward]
Deferred sales inducements, beginning balance		97	105	102	110
Deferred sales inducements, additions		1	1	1	2
Deferred sales inducements, periodic amortization		(5)	(4)	(10)	(10)
Deferred sales inducements, annuity unlocking		1		1
Deferred sales inducements, change included in realized gains		0	1	0	1
Deferred sales inducements, ending balance		94	103	94	103
Movement in Present Value of Future Insurance Profits [Roll Forward]
Present value of future profits, beginning balance		47	44	49	46
Present value of future profits, periodic amortization		(2)	(2)	(4)	(4)
Present value of future profits, annuity unlocking		0		0
Present value of future profits, ending balance		45	42	45	42
Movement in Unrealized Gains (Losses) Related to Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Unrealized investment gains (losses), beginning balance	[1]	(214)	(324)	(422)	(265)
Unrealized investment gains (losses), change in unrealized	[1]	116	(90)	324	(149)
Unrealized investment gains (losses), ending balance	[1]	(98)	(414)	(98)	(414)
Movement Analysis of Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Deferred policy acquisition costs and present value of future profits, beginning balance		1,138	962	946	1,001
Deferred policy acquisition costs and present value of future profits, additions		71	67	128	135
Deferred policy acquisition costs and present value of future profits, periodic amortization		(73)	(42)	(149)	(92)
Deferred policy acquisition costs and present value of future profits, annuity unlocking		29		29
Deferred policy acquisition costs and present value of future profits, change included in realized gains		3	1	6	3
Deferred policy acquisition costs and present value of future profits, change in unrealized		116	(90)	324	(149)
Deferred policy acquisition costs and present value of future profits, ending balance		1,284	898	1,284	898
Excluding Unrealized Gains | Annuity and Other
Movement Analysis of Deferred Policy Acquisition Costs and Present Value of Future Profits [Roll Forward]
Deferred policy acquisition costs and present value of future profits, beginning balance		1,352	1,286	1,368	1,266
Deferred policy acquisition costs and present value of future profits, change in unrealized		0	0	0	0
Deferred policy acquisition costs and present value of future profits, ending balance		$ 1,382	$ 1,312	$ 1,382	$ 1,312

[1] Unrealized adjustments to DPAC includes net unrealized gains/losses on securities and net unrealized gains/losses on cash flow hedges.

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Managed Investment Entities - Narrative (Details) $ in Millions	1 Months Ended		6 Months Ended
	Mar. 31, 2018 USD ($)	Mar. 31, 2017 USD ($)	Jun. 30, 2018 USD ($) collateralizedloanobligation	Jun. 30, 2017 USD ($) collateralizedloanobligation	Dec. 31, 2017 USD ($)
Variable Interest Entity [Line Items]
Percentage of investment of most subordinate debt tranche, Minimum			15.00%
Percentage of investment of most subordinate debt tranche, Maximum			60.90%
Number of collateralized loan obligation entities | collateralizedloanobligation			16
Face amount of managed investment entities liabilities purchased by subsidiaries after issuance date				$ 29
Amount paid by subsidiaries to purchase managed investment entities liabilities after issuance date				29
Proceeds received by subsidiaries related to sales and redemptions of managed investment entities liabilities			$ 45	$ 64
Number of collateralized loan obligation entities substantially liquidated, during the period | collateralizedloanobligation			1	1
Difference between aggregate unpaid principal balance and fair value of CLOs' fixed maturity investments			$ 62		$ 55
Difference between aggregate unpaid principal balance and carrying value of CLOs' debt			167		118
Carrying amount of CLO loans in default			1		1
Aggregate unpaid principal balance of CLO loans in default			8		8
Variable interest entity, primary beneficiary
Variable Interest Entity [Line Items]
Aggregate fair value of investment in collateralized loan obligations			192	$ 188	$ 215
New Collateralized Loan Obligation Entities
Variable Interest Entity [Line Items]
Face value of liabilities issued by managed investment entities on issuance date	$ 463	$ 408
Face amount of managed investment entities liabilities purchased by subsidiaries at issuance date	$ 31	$ 24
Subordinated Debt Obligations | Variable interest entity, primary beneficiary
Variable Interest Entity [Line Items]
Aggregate fair value of investment in collateralized loan obligations			$ 134

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Managed Investment Entities - Selected financial information related to CLOs (Details) - USD ($) $ in Millions		3 Months Ended		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Gains (losses) on change in fair value of assets/liabilities:
Assets	[1]	$ (29)	$ (9)	$ (15)	$ (4)
Liabilities	[1]	27	20	10	15
Management fees paid to AFG		4	5	8	9
CLO earnings (losses) attributable to AFG shareholders	[2]	4	5	7	11
Variable interest entity, primary beneficiary
Variable Interest Entity [Line Items]
Investment in CLO tranches at end of period		$ 192	$ 188	$ 192	$ 188	$ 215

[1] Included in revenues in AFG’s Statement of Earnings.

[2] Included in earnings before income taxes in AFG’s Statement of Earnings.

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Goodwill and Other Intangibles - Narrative (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2017
Goodwill and Intangible Assets Disclosure [Abstract]
Changes in the goodwill balance during the period			$ 0
Goodwill	$ 199,000,000		199,000,000		$ 199,000,000
Amortizable intangible assets related to property and casualty insurance acquisitions	34,000,000		34,000,000		26,000,000
Accumulated amortization	34,000,000		34,000,000		$ 30,000,000
Amortization of intangible assets	$ 2,000,000	$ 2,000,000	$ 4,000,000	$ 4,000,000

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Long-Term Debt - Narrative (Details) - USD ($)	6 Months Ended
	Jun. 30, 2018	Dec. 31, 2017
Long-term Debt, Fiscal Year Maturity [Abstract]
Scheduled principal payments on debt in next year	$ 0
Scheduled principal payments on debt in year two	0
Scheduled principal payments on debt in year three	0
Scheduled principal payments on debt in year four	0
Scheduled principal payments on debt in year five	0
Scheduled principal payments on debt in year six	0
AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Revolving credit line	500,000,000
Amount borrowed under revolving credit facility	$ 0	$ 0
Interest rate description for revolving credit facility	1.00% to 1.875% (currently 1.375%) over LIBOR
LIBOR | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on revolving debt facility	1.375%
LIBOR | AFG | Minimum
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on revolving debt facility	1.00%
LIBOR | AFG | Maximum
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on revolving debt facility	1.875%
Senior Notes | 4.50% Senior Notes due June 2047 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	4.50%
Senior Notes | 3.50% Senior Notes due August 2026 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	3.50%
Subordinated Debentures | 6-1/4% Subordinated Debentures due September 2054 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	6.25%
Subordinated Debentures | 6% Subordinated Debentures due November 2055 | AFG
Long-term Debt, Fiscal Year Maturity [Abstract]
Interest rate on debt instruments	6.00%

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Long-Term Debt - Schedule of long-term debt (Details) - USD ($) $ in Millions	Jun. 30, 2018	Dec. 31, 2017
Summary of Carrying value of long-term debt
Principal	$ 1,318	$ 1,318
Discount and Issue Costs	(17)	(17)
Carrying Value	1,301	1,301
Senior Notes | AFG
Summary of Carrying value of long-term debt
Principal	1,018	1,018
Discount and Issue Costs	(7)	(7)
Carrying Value	1,011	1,011
Senior Notes | 4.50% Senior Notes due June 2047 | AFG
Summary of Carrying value of long-term debt
Principal	590	590
Discount and Issue Costs	(2)	(2)
Carrying Value	588	588
Senior Notes | 3.50% Senior Notes due August 2026 | AFG
Summary of Carrying value of long-term debt
Principal	425	425
Discount and Issue Costs	(5)	(5)
Carrying Value	420	420
Senior Notes | Other | AFG
Summary of Carrying value of long-term debt
Principal	3	3
Discount and Issue Costs	0	0
Carrying Value	3	3
Subordinated Debentures | AFG
Summary of Carrying value of long-term debt
Principal	300	300
Discount and Issue Costs	(10)	(10)
Carrying Value	290	290
Subordinated Debentures | 6-1/4% Subordinated Debentures due September 2054 | AFG
Summary of Carrying value of long-term debt
Principal	150	150
Discount and Issue Costs	(5)	(5)
Carrying Value	145	145
Subordinated Debentures | 6% Subordinated Debentures due November 2055 | AFG
Summary of Carrying value of long-term debt
Principal	150	150
Discount and Issue Costs	(5)	(5)
Carrying Value	$ 145	$ 145

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Shareholders' Equity - Preferred stock authorized for issuance (Details)	Jun. 30, 2018 $ / shares shares
Voting Preferred Stock
Class of Stock [Line Items]
Preferred Stock, shares authorized | shares	12,500,000.0
Preferred Stock, par value (in USD per share) | $ / shares	$ 0
Nonvoting Preferred Stock
Class of Stock [Line Items]
Preferred Stock, shares authorized | shares	12,500,000.0
Preferred Stock, par value (in USD per share) | $ / shares	$ 0

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Shareholders' Equity - Narrative (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended			6 Months Ended
	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Jan. 01, 2018	Dec. 31, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Net of tax unrealized gains (losses) related to credit-only impaired securities	$ 67	$ 68		$ 67			$ 68
Cumulative effect of accounting change							$ 4
Compensation expense related to stock incentive plans	$ 6		$ 6	$ 11	$ 17
Stock Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted Common Stock, shares issued (shares)				200,625
Restricted Common Stock, fair value per share (USD per share)				$ 112.86
Common Stock options issued under stock incentive plan (shares)				0
Annual Equity Bonus Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Other benefit plans, shares issued (shares)		45,804
Common Stock issued, fair value per share (USD per share)		$ 115.49
Accounting Standards Update 2016-01 | Equity securities
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Cumulative effect of accounting change						$ (221)

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Shareholders' Equity - Progression of the components of accumulated other comprehensive income (Details) - USD ($) $ in Millions		3 Months Ended				6 Months Ended
		Jun. 30, 2018		Jun. 30, 2017		Jun. 30, 2018		Jun. 30, 2017		Jan. 01, 2018		Dec. 31, 2017
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance						$ 813
Other comprehensive income (loss), net of tax		$ (158)		$ 116		(445)		$ 240
Cumulative effect of accounting change												$ 4
AOCI ending balance		147				147
Accumulated Net Investment Gain (Loss) Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, Pretax		(187)		178		(540)		369
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, tax		39		(63)		113		(129)
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, net of tax		(148)		115		(427)		240
Reclassification from accumulated other comprehensive income, pretax	[1]	(4)		(8)		(2)		(8)
Reclassification from accumulated other comprehensive income, tax	[1]	1		3		1		3
Reclassification from accumulated other comprehensive income, net of tax		(3)		(5)		(1)		(5)
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		(191)		170		(542)		361
Other comprehensive income (loss), tax		40		(60)		114		(126)
Other comprehensive income (loss), net of tax		(151)		110		(428)		235
Accumulated Net Investment Gain (Loss) Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, net of tax		0		0		0		0
Reclassification from accumulated other comprehensive income, net of tax	[1]	0		0		0		0
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Net Investment Gain (Loss) Attributable to Parent
Accumulated Other Comprehensive Income (Loss) [Line Items]
Other comprehensive income (loss), unrealized holding gains on securities arising during the period, net of tax		(148)		115		(427)		240
Reclassification from accumulated other comprehensive income, net of tax		(3)		(5)		(1)		(5)
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		342	[2]	529		840	[2]	404
Other comprehensive income (loss), net of tax		(151)		110		(428)		235
Cumulative effect of accounting change	[3]	0		0		0		0		$ (221)
AOCI ending balance		191	[2]	639		191	[2]	639
Accumulated Net Gain (Loss) from Cash Flow Hedges Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		(4)		4		(18)		2
Other comprehensive income (loss), tax		1		(2)		4		(1)
Other comprehensive income (loss), net of tax		(3)		2		(14)		1
Accumulated Net Gain (Loss) from Cash Flow Hedges Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Net Gain (Loss) from Cash Flow Hedges Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		(24)		(8)		(13)		(7)
Other comprehensive income (loss), net of tax		(3)		2		(14)		1
Cumulative effect of accounting change	[3]	0		0		0		0		0
AOCI ending balance		(27)		(6)		(27)		(6)
Accumulated Foreign Currency Adjustment Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		(4)		3		(2)		3
Other comprehensive income (loss), tax		0		1		(1)		1
Other comprehensive income (loss), net of tax		(4)		4		(3)		4
Accumulated Foreign Currency Adjustment Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Foreign Currency Adjustment Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		(5)		(15)		(6)		(15)
Other comprehensive income (loss), net of tax		(4)		4		(3)		4
Cumulative effect of accounting change	[3]	0		0		0		0		0
AOCI ending balance		(9)		(11)		(9)		(11)
Accumulated Defined Benefit Plans Adjustment Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		0		0		0		0
Other comprehensive income (loss), tax		0		0		0		0
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Defined Benefit Plans Adjustment Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
Accumulated Defined Benefit Plans Adjustment Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		(8)		(7)		(8)		(7)
Other comprehensive income (loss), net of tax		0		0		0		0
Cumulative effect of accounting change	[3]	0		0		0		0		0
AOCI ending balance		(8)		(7)		(8)		(7)
AOCI Including Portion Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), pretax		(199)		177		(562)		366
Other comprehensive income (loss), tax		41		(61)		117		(126)
Other comprehensive income (loss), net of tax		(158)		116		(445)		240
AOCI Attributable to Noncontrolling Interest
Accumulated Other Comprehensive Income [Roll Forward]
Other comprehensive income (loss), net of tax		0		0		0		0
AOCI Attributable to Parent
Accumulated Other Comprehensive Income [Roll Forward]
AOCI beginning balance		305		499		813		375
Other comprehensive income (loss), net of tax		(158)		116		(445)		240
Cumulative effect of accounting change		0	[3]	0	[3]	0	[3]	0	[3]	$ (221)	[3]	$ (221)
AOCI ending balance		$ 147		$ 615		$ 147		$ 615

[1] 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 for income taxes

[2] Includes net unrealized gains of $67 million at June 30, 2018 and $68 million at both March 31, 2018 and December 31, 2017 related to securities for which only the credit portion of an other-than-temporary impairment has been recorded in earnings.

[3] 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.

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Income Taxes - Narrative (Details) - USD ($) $ in Millions		3 Months Ended			6 Months Ended
	Jan. 01, 2018	Jun. 30, 2018	Dec. 31, 2017	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Income Tax Reconciliation [Line Items]
Statutory rate of income taxes		21.00%		35.00%	21.00%	35.00%
Operating loss carryforwards subject to SRLY tax rules will expire unutilized at December 31, 2018		$ 19			$ 19
Tax Cuts and Jobs Act of 2017
Income Tax Reconciliation [Line Items]
Statutory rate of income taxes	21.00%
Decrease in net deferred tax asset resulting from the changes in the Tax Cuts and Jobs Act of 2017			$ 83

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Income Taxes - Reconciliation of income taxes at the statutory rate to the provision for income taxes (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Effective Income Tax Rate Reconciliation, Amount [Abstract]
Earnings before income taxes (“EBT”)	$ 260	$ 205	$ 434	$ 428
Income taxes at statutory rate	54	72	91	150
Effect of stock-based compensation	(2)	(7)	(7)	(13)
Effect of tax exempt interest	(4)	(6)	(7)	(12)
Effect of dividends received deduction	(1)	(2)	(2)	(4)
Effect of employee stock ownership plan dividends paid deduction	(1)	(2)	(1)	(2)
Effect of foreign operations	0	0	3	6
Effect of nondeductible expenses	2	1	4	3
Effect of change in valuation allowance	2	2	2	0
Effect of other income tax reconciliation	2	2	2	0
Provision for income taxes as shown on the Statement of Earnings	$ 52	$ 60	$ 85	$ 128
Effective Income Tax Rate Reconciliation, Percent [Abstract]
Income taxes at statutory rate as a percentage of EBT	21.00%	35.00%	21.00%	35.00%
Effect of stock-based compensation as a percentage of EBT	(1.00%)	(3.00%)	(2.00%)	(3.00%)
Effect of tax exempt interest as a percentage of EBT	(2.00%)	(3.00%)	(2.00%)	(3.00%)
Effect of dividends received deduction as a percentage of EBT	(0.00%)	(1.00%)	(0.00%)	(1.00%)
Effect of employee stock ownership plan dividends paid deduction as a percentage of EBT	(0.00%)	(1.00%)	(0.00%)	(0.00%)
Effect of foreign operations as a percentage of EBT	0.00%	0.00%	1.00%	1.00%
Effect of nondeductible expenses as a percentage of EBT	1.00%	0.00%	1.00%	1.00%
Effect of change in valuation allowance as a percentage of EBT	1.00%	1.00%	0.00%	0.00%
Effect of other income tax reconciliation as a percentage of EBT	0.00%	1.00%	1.00%	0.00%
Provision for income taxes as shown on the Statement of Earnings as a percentage of EBT	20.00%	29.00%	20.00%	30.00%

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Insurance - Analysis of changes in the liability for losses and loss adjustment expenses, net of reinsurance (Details) - USD ($) $ in Millions		6 Months Ended
		Jun. 30, 2018	Jun. 30, 2017
Analysis of changes in the liability for losses and loss adjustment expenses, net of reinsurance
Balance at beginning of year		$ 9,678	$ 8,563
Less reinsurance recoverables, net of allowance		2,957	2,302
Net liability at beginning of year		6,721	6,261
Liability for losses and loss adjustment expenses, period increase (decrease) [Abstract]
Provision for losses and LAE occurring in the current period		1,434	1,294
Total losses and LAE incurred		1,334	1,244
Payments for losses and LAE of:
Current year		(294)	(253)
Prior years		(975)	(953)
Total payments		(1,269)	(1,206)
Reserves of business disposed	[1]	(319)	0
Foreign currency translation and other		(4)	24
Net liability at end of period		6,463	6,323
Add back reinsurance recoverables, net of allowance		2,630	2,407
Gross unpaid losses and LAE included in the balance sheet at end of period		9,093	8,730
Net increase (decrease) in the provision for claims of prior years
Liability for losses and loss adjustment expenses, period increase (decrease) [Abstract]
Net increase (decrease) in the provision for claims of prior years		$ (100)	$ (50)

[1] Reflects the reinsurance to close transaction at Neon discussed below.