____________________________________________________________________________________________

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2021

or

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

For the transition period from ____ to ____

Commission File No. 1-13653

AMERICAN FINANCIAL GROUP, INC.

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

301 East Fourth Street, Cincinnati, Ohio 45202

(513) 579-2121

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

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

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

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

Smaller reporting company  ☐                   Emerging growth company  ☐

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

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

Securities Registered Pursuant to Section 12(b) of the Act:
	Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
	Common Stock	AFG	New York Stock Exchange
	5.875% Subordinated Debentures due March 30, 2059	AFGB	New York Stock Exchange
	5.625% Subordinated Debentures due June 1, 2060	AFGD	New York Stock Exchange
	5.125% Subordinated Debentures due December 15, 2059	AFGC	New York Stock Exchange
	4.50% Subordinated Debentures due September 15, 2060	AFGE	New York Stock Exchange

As of May 1, 2021, there were 85,099,638 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.

____________________________________________________________________________________________

AMERICAN FINANCIAL GROUP, INC. 10-Q

TABLE OF CONTENTS

	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	36
Item 3 — Quantitative and Qualitative Disclosure about Market Risk	64
Item 4 — Controls and Procedures	64
Part II — Other Information
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 6 — Exhibits	65
Signature	65

AMERICAN FINANCIAL GROUP, INC. 10-Q

PART I

ITEM 1. — FINANCIAL STATEMENTS

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (UNAUDITED)

(Dollars in Millions)

	March 31, 2021		December 31, 2020
Assets:
Cash and cash equivalents	$	1,691	$	1,665
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $9,059 and $8,812; allowance for expected credit losses of $10 and $12)	9,289		9,084
Fixed maturities, trading at fair value	26		24
Equity securities, at fair value	944		889
Investments accounted for using the equity method	1,324		1,235
Mortgage loans	408		377
Real estate and other investments	218		220
Total cash and investments	13,900		13,494
Recoverables from reinsurers	3,231		3,288
Prepaid reinsurance premiums	755		768
Agents’ balances and premiums receivable	1,209		1,229
Deferred policy acquisition costs	244		244
Assets of managed investment entities	5,102		4,971
Other receivables	576		678
Other assets	865		977
Goodwill	176		176
Assets of discontinued annuity operations	48,139		47,885
Total assets	$	74,197	$	73,710
Liabilities and Equity:
Unpaid losses and loss adjustment expenses	$	10,384	$	10,392
Unearned premiums	2,821		2,803
Payable to reinsurers	753		807
Liabilities of managed investment entities	5,045		4,914
Long-term debt	1,963		1,963
Other liabilities	1,653		1,584
Liabilities of discontinued annuity operations	44,893		44,458
Total liabilities	67,512		66,921
Shareholders’ equity:
Common Stock, no par value        — 200,000,000 shares authorized        — 85,126,062 and 86,345,246 shares outstanding	85		86
Capital surplus	1,279		1,281
Retained earnings	4,354		4,149
Accumulated other comprehensive income, net of tax	967		1,273
Total shareholders’ equity	6,685		6,789
Noncontrolling interests	—		—
Total equity	6,685		6,789
Total liabilities and equity	$	74,197	$	73,710

2

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)

(In Millions, Except Per Share Data)

	Three months ended March 31,
	2021		2020
Revenues:
Property and casualty insurance net earned premiums	$	1,173	$	1,209
Net investment income	188		104
Realized gains (losses) on securities	77		(328)
Income of managed investment entities:
Investment income	46		59
Gain (loss) on change in fair value of assets/liabilities	2		(13)
Other income	23		24
Total revenues	1,509		1,055
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses	667		707
Commissions and other underwriting expenses	380		420
Interest charges on borrowed money	24		17
Expenses of managed investment entities	39		53
Other expenses	64		43
Total costs and expenses	1,174		1,240
Earnings (loss) from continuing operations before income taxes	335		(185)
Provision (credit) for income taxes	68		(41)
Net earnings (loss) from continuing operations, including noncontrolling interests	267		(144)
Net earnings (loss) from discontinued operations	152		(160)
Net earnings (loss), including noncontrolling interests	419		(304)
Less: Net earnings (loss) from continuing operations attributable to noncontrolling interests	—		(3)
Net Earnings (Loss) Attributable to Shareholders	$	419	$	(301)
Earnings (Losses) Attributable to Shareholders per Basic Common Share from:
Continuing operations	$	3.11	$	(1.57)
Discontinued operations	1.77		(1.77)
Total basic earnings (losses) attributable to shareholders	$	4.88	$	(3.34)
Earnings (Losses) Attributable to Shareholders per Diluted Common Share:
Continuing operations	$	3.08	$	(1.57)
Discontinued operations	1.76		(1.77)
Total diluted earnings (losses) attributable to shareholders	$	4.84	$	(3.34)
Average number of Common Shares:
Basic	85.9		90.3
Diluted	86.6		90.3

3

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

(In Millions)

	Three months ended March 31,
	2021		2020
Net earnings (loss), including noncontrolling interests	$	419	$	(304)
Other comprehensive income (loss), net of tax:
Net unrealized losses on securities:
Unrealized holding losses on securities arising during the period	(281)		(865)
Reclassification adjustment for realized (gains) losses included in net earnings	(11)		19
Total net unrealized losses on securities	(292)		(846)
Net unrealized gains (losses) on cash flow hedges	(14)		27
Foreign currency translation adjustments	—		(10)
Other comprehensive loss, net of tax	(306)		(829)
Total comprehensive income (loss), net of tax	113		(1,133)
Less: Comprehensive income (loss) attributable to noncontrolling interests	—		(1)
Comprehensive income (loss) attributable to shareholders	$	113	$	(1,132)

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	Common Stock and Capital		Retained		Accumulated Other Comp.				Noncon- trolling		Total		Noncon- trolling
	Shares	Surplus		Earnings		Income		Total		Interests		Equity		Interests
Balance at December 31, 2020	86,345,246	$	1,367	$	4,149	$	1,273	$	6,789	$	—	$	6,789
Net earnings	—	—		419		—		419		—		419
Other comprehensive loss	—	—		—		(306)		(306)		—		(306)
Dividends ($0.50 per share)	—	—		(43)		—		(43)		—		(43)
Shares issued:
Exercise of stock options	403,012	19		—		—		19		—		19
Restricted stock awards	207,020	—		—		—		—		—		—
Other benefit plans	15,632	2		—		—		2		—		2
Dividend reinvestment plan	2,306	—		—		—		—		—		—
Stock-based compensation expense	—	5		—		—		5		—		5
Shares acquired and retired	(1,757,702)	(28)		(164)		—		(192)		—		(192)
Shares exchanged — benefit plans	(76,984)	(1)		(7)		—		(8)		—		(8)
Forfeitures of restricted stock	(12,468)	—		—		—		—		—		—
Balance at March 31, 2021	85,126,062	$	1,364	$	4,354	$	967	$	6,685	$	—	$	6,685
Balance at December 31, 2019	90,303,686	$	1,397	$	4,009	$	863	$	6,269	$	—	$	6,269	$	—
Cumulative effect of accounting change	—	—		7		—		7		—		7		—
Net loss	—	—		(301)		—		(301)		—		(301)		(3)
Other comprehensive income (loss)	—	—		—		(831)		(831)		—		(831)		2
Dividends ($0.45 per share)	—	—		(40)		—		(40)		—		(40)		—
Shares issued:
Exercise of stock options	204,093	9		—		—		9		—		9		—
Restricted stock awards	227,867	—		—		—		—		—		—		—
Other benefit plans	14,541	1		—		—		1		—		1		—
Dividend reinvestment plan	1,617	—		—		—		—		—		—		—
Stock-based compensation expense	—	6		—		—		6		—		6		—
Shares acquired and retired	(826,283)	(12)		(49)		—		(61)		—		(61)		—
Shares exchanged — benefit plans	(95,854)	(2)		(9)		—		(11)		—		(11)		—
Forfeitures of restricted stock	(2,331)	—		—		—		—		—		—		—
Other	—	—		(1)		—		(1)		—		(1)		1
Balance at March 31, 2020	89,827,336	$	1,399	$	3,616	$	32	$	5,047	$	—	$	5,047	$	—

5

AMERICAN FINANCIAL GROUP, INC. 10-Q

AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(In Millions)

	Three months ended March 31,
	2021		2020
Operating Activities:
Net earnings (loss), including noncontrolling interests	$	419	$	(304)
Adjustments:
Depreciation and amortization	99		113
Annuity benefits	161		276
Realized (gains) losses on investing activities	(158)		550
Net (purchases) sales of trading securities	(3)		8
Deferred annuity and life policy acquisition costs	(49)		(49)
Change in:
Reinsurance and other receivables	275		161
Other assets	164		410
Insurance claims and reserves	5		(152)
Payable to reinsurers	(54)		(35)
Other liabilities	(25)		(543)
Managed investment entities’ assets/liabilities	(38)		89
Other operating activities, net	(169)		8
Net cash provided by operating activities	627		532
Investing Activities:
Purchases of:
Fixed maturities	(3,443)		(4,140)
Equity securities	(41)		(232)
Mortgage loans	(35)		(21)
Equity index options and other investments	(164)		(245)
Real estate, property and equipment	(13)		(9)
Proceeds from:
Maturities and redemptions of fixed maturities	1,947		1,220
Repayments of mortgage loans	12		4
Sales of fixed maturities	147		1,483
Sales of equity securities	350		80
Sales and settlements of equity index options and other investments	269		248
Sales of real estate, property and equipment	—		1
Managed investment entities:
Purchases of investments	(527)		(414)
Proceeds from sales and redemptions of investments	557		370
Other investing activities, net	3		2
Net cash used in investing activities	(938)		(1,653)
Financing Activities:
Annuity receipts	1,179		1,410
Ceded annuity receipts	(207)		—
Annuity surrenders, benefits and withdrawals	(1,148)		(813)
Ceded annuity surrenders, benefits and withdrawals	167		—
Net transfers from variable annuity assets	25		15
Issuances of managed investment entities’ liabilities	752		—
Retirements of managed investment entities’ liabilities	(725)		(41)
Issuances of Common Stock	20		10
Repurchases of Common Stock	(192)		(61)
Cash dividends paid on Common Stock	(43)		(40)
Net cash provided by (used in) financing activities	(172)		480
Net Change in Cash and Cash Equivalents	(483)		(641)
Cash and cash equivalents at beginning of period	2,810		2,314
Cash and cash equivalents at end of period	2,327		1,673
Less: cash and cash equivalents at end of period from discontinued operations	636		368
Cash and cash equivalents at end of period from continuing operations	$	1,691	$	1,305

6

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

INDEX TO NOTES
A.	Accounting Policies	H.	Managed Investment Entities
B.	Discontinued Operations	I.	Goodwill and Other Intangibles
C.	Sales of Businesses	J.	Long-Term Debt
D.	Segments of Operations	K.	Shareholders’ Equity
E.	Fair Value Measurements	L.	Income Taxes
F.	Investments	M.	Contingencies
G.	Derivatives	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 including reclassifying the assets and liabilities of the Annuity subsidiaries to be sold to assets and liabilities of discontinued annuity operations and their earnings to net earnings (loss) from discontinued operations. See Note B — “Discontinued Operations.” All significant intercompany balances and transactions have been eliminated. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements. Events or transactions occurring subsequent to March 31, 2021, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

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

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

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

Fair Value Measurements   Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first three months of 2021.

Credit Losses on Financial Instruments   On January 1, 2020, AFG adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which provides a new loss model for determining credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) and requires an entity to estimate the credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses considers historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. Expected credit losses, and subsequent increases or decreases in such expected losses, are recorded immediately through net earnings as an allowance that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the balance sheet at the amount expected to be collected. AFG’s portfolio of mortgage loans crosses a wide variety of commercial properties with very strong loan to value ratios and no credit losses in recent years. In addition, the reinsurance used in AFG’s insurance operations is purchased from financially

7

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

strong (highly rated) reinsurers and the Company has a long history of collecting premiums receivable through various economic cycles. At the date of adoption, the impact of adjusting AFG’s existing allowances for uncollectable mortgage loans, premiums receivable and reinsurance recoverables to the allowances calculated under the new guidance resulted in a reduction in the net allowance, which was recorded as the cumulative effect of an accounting change ($7 million increase in retained earnings at January 1, 2020).

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

Investments   Equity securities other than those accounted for under the equity method are reported at fair value with holding gains and losses generally recorded in realized gains (losses) on securities. However, AFG records holding gains and losses on securities classified as “trading” under previous guidance, its small portfolio of limited partnerships and similar investments carried at fair value and certain other securities classified at purchase as “fair value through net investment income” in net investment income.

Fixed maturity securities classified as “available for sale” (including those that are reported as assets of discontinued annuity operations) are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (“AOCI”) in AFG’s Balance Sheet. Fixed maturity securities classified as “trading” are reported at fair value with changes in unrealized holding gains or losses during the period included in net investment income. Mortgage loans (net of any allowance) are carried primarily at the aggregate unpaid balance.

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

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

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

Derivatives   Derivatives included in AFG’s Balance Sheet are recorded at fair value. Changes in fair value of derivatives are included in earnings unless the derivatives are designated and qualify as highly effective cash flow hedges. Derivatives that do not qualify for hedge accounting under GAAP consist primarily of (i) components of certain fixed maturity securities (primarily interest-only and principal-only MBS) and (ii) the equity-based component of certain annuity products (included in liabilities of discontinued annuity operations) and related equity index options (included in assets of discontinued annuity operations) 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.

8

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI and are reclassified into earnings when the variability of the cash flows from the hedged items impacts earnings. When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item in the statement of earnings as the cash flows from the hedged item. AFG 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 owned by AFG’s discontinued annuity operations.

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

Reinsurance   Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG’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 property and casualty insurance subsidiaries also assume reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

An AFG discontinued annuity 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.

Certain reinsurance arrangements in AFG’s discontinued annuity operations do not transfer significant insurance risk and are therefore accounted for using the deposit method. This accounting treatment results in amounts paid by AFG to the reinsurer to be recorded as a deposit asset. The reinsurance deposit asset (reinsurance recoverable) is adjusted as amounts are paid or received under the underlying contracts. AFG’s reinsurance partner posts collateral in excess of amounts due to AFG under these contracts. Under reinsurance accounting guidance on transactions involving annuities, the gain or loss is deferred and recognized over the expected life of the underlying annuity contracts (using methods similar to those used to amortize 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. For AFG’s discontinued annuity operations, 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 (included in assets of discontinued annuity operations) 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.

9

AMERICAN FINANCIAL GROUP, INC. 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED

DPAC related to traditional life and health insurance (included in assets of discontinued annuity operations) 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”) (included in assets of discontinued annuity operations). 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 the discontinued 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 securities, a component of AOCI in AFG’s Balance Sheet.

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

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

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

The fair values of a CLO’s assets may differ from the separately measured fair values of its liabilities even though the CLO liabilities only have recourse to the CLO assets. AFG has set the carrying value of the CLO liabilities equal to the fair value of the CLO assets (which have more observable fair values) as an alternative to reporting those liabilities at a separately measured fair value. CLO earnings attributable to AFG’s shareholders are measured by the change in the fair value of AFG’s investments in the CLOs and management fees earned.

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 (included in liabilities of discontinued annuity operations) rather than as revenue and expense. Increases in this liability for interest credited and decreases for annuity policy charges are recorded in net earnings (losses) before income taxes from discontinued operations. For traditional fixed annuities, the liability for annuity

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benefits accumulated represents the account value that had accrued to the benefit of the policyholder as of the balance sheet date. For fixed-indexed annuities (“FIAs”), the liability for annuity benefits accumulated includes an embedded derivative that represents the estimated fair value of the index participation with the remaining component representing the discounted value of the guaranteed minimum contract benefits.

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

Unearned Revenue   Certain upfront policy charges on annuities are deferred as unearned revenue (included in liabilities of discontinued annuity operations) and recognized in net earnings (loss) before income taxes from discontinued operations 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 (included in liabilities of discontinued annuity operations) 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 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 (included in assets and liabilities of discontinued annuity operations) represent the fair value of deposits invested in underlying investment funds on which AFG earns a fee. Investment funds are selected and may be changed only by the policyholder, who retains all investment risk.

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

Leases   Leases for terms of longer than one year are recognized as assets and liabilities for the rights and obligations created by those leases on the balance sheet based on the present value of contractual cash flows.

At March 31, 2021 AFG has a $153 million lease liability included in other liabilities and a lease right-of-use asset of $133 million included in other assets compared to $159 million and $139 million, respectively, at December 31, 2020.

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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.

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 (included in net earnings (loss) from discontinued operations) 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.

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

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

Stock-Based Compensation   All share-based grants are recognized as compensation expense on a straight-line basis over their vesting periods based on their calculated fair value at the date of grant.

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

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

Earnings Per Share   Although basic earnings per share only considers shares of common stock outstanding during the period, the calculation of diluted earnings per share includes the following adjustments to weighted average common shares related to stock-based compensation plans: first three months of 2021 and 2020 — 0.7 million and none, respectively.

There were no anti-dilutive potential common shares for the first three months of 2021 and 0.8 million anti-dilutive potential common shares for the first three months 2020 due to AFG’s net loss attributable to shareholders in that period.

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

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B.    Discontinued Operations

Annuity Business   On January 27, 2021, AFG announced that it entered into a definitive agreement to sell its Annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”). Under the terms of the agreement, which is expected to close in the second quarter of 2021. MassMutual will acquire Great American Life Insurance Company (“GALIC”) and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. In addition to AFG’s annuity operations, these subsidiaries include AFG’s run-off life and long-term care operations. Prior to the sale, AFG will acquire approximately $460 million in investments accounted for using the equity method and approximately $100 million of directly owned real estate from GALIC (based on March 31, 2021 values). Beginning with the first quarter of 2021, the results of the Annuity business to be sold are reported as discontinued operations in accordance with generally accepted accounting principles, which included adjusting prior period results to reflect these operations as discontinued.

Details of the assets and liabilities of the Annuity subsidiaries to be sold were as follows (in millions):

	March 31, 2021		December 31, 2020
Assets of businesses to be sold:
Cash and cash equivalents	$	636	$	1,145
Fixed maturities, available for sale	34,754		34,123
Fixed maturities, trading at fair value	40		42
Equity securities	624		774
Investments accounted for using the equity method	671		646
Mortgage loans	1,244		1,251
Policy loans	148		151
Equity index call options	813		825
Other investments	180		199