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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2022
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____

Commission File No. 1-13653

afg-20220930_g1.jpg
AMERICAN FINANCIAL GROUP, INC.
Incorporated under the Laws of Ohio                                                                IRS Employer I.D. No. 31-1544320
301 East Fourth Street, Cincinnati, Ohio 45202
(513) 579-2121
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common StockAFGNew York Stock Exchange
5.875% Subordinated Debentures due March 30, 2059AFGBNew York Stock Exchange
5.625% Subordinated Debentures due June 1, 2060AFGDNew York Stock Exchange
5.125% Subordinated Debentures due December 15, 2059AFGCNew York Stock Exchange
4.50% Subordinated Debentures due September 15, 2060AFGENew York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☑                        Accelerated filer  ☐                         Non-accelerated filer  ☐
Smaller reporting company  ☐                   Emerging growth company  ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 1, 2022, there were 85,143,503 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries.

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

AMERICAN FINANCIAL GROUP, INC. 10-Q
PART I
ITEM 1. — FINANCIAL STATEMENTS
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(Dollars in Millions)
September 30,
2022		December 31,
2021
Assets:
Cash and cash equivalents$794 $2,131 
Investments:
Fixed maturities, available for sale at fair value (amortized cost — $10,744 and $10,193; allowance for expected credit losses of $9 and $9)
10,034 10,357 
Fixed maturities, trading at fair value30 28 
Equity securities, at fair value996 1,042 
Investments accounted for using the equity method1,661 1,517 
Mortgage loans676 520 
Real estate and other investments131 150 
Total cash and investments14,322 15,745 
Recoverables from reinsurers4,108 3,519 
Prepaid reinsurance premiums1,180 834 
Agents’ balances and premiums receivable1,698 1,265 
Deferred policy acquisition costs292 267 
Assets of managed investment entities5,099 5,296 
Other receivables1,328 857 
Other assets1,259 902 
Goodwill246 246 
Total assets$29,532 $28,931 
Liabilities and Equity:
Unpaid losses and loss adjustment expenses$12,067 $11,074 
Unearned premiums3,785 3,041 
Payable to reinsurers1,366 920 
Liabilities of managed investment entities5,002 5,220 
Long-term debt1,533 1,964 
Other liabilities1,847 1,700 
Total liabilities25,600 23,919 
Shareholders’ equity:
Common Stock, no par value
       — 200,000,000 shares authorized
       — 85,140,521 and 84,920,965 shares outstanding
85 85 
Capital surplus1,358 1,330 
Retained earnings3,091 3,478 
Accumulated other comprehensive income (loss), net of tax(602)119 
Total shareholders’ equity3,932 5,012 
Total liabilities and shareholders’ equity$29,532 $28,931 
2
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(In Millions, Except Per Share Data)
Three months ended September 30,Nine months ended September 30,
2022202120222021
Revenues:
Property and casualty insurance net earned premiums$1,767 $1,529 $4,462 $3,952 
Net investment income151 169 549 521 
Realized gains (losses) on:
Securities(35)(17)(143)103 
Subsidiaries— — — 4 
Income of managed investment entities:
Investment income75 45 175 135 
Gain (loss) on change in fair value of assets/liabilities
(5)1 (25)9 
Other income31 27 93 70 
Total revenues1,984 1,754 5,111 4,794 
Costs and Expenses:
Property and casualty insurance:
Losses and loss adjustment expenses1,176 954 2,643 2,335 
Commissions and other underwriting expenses445 417 1,291 1,187 
Interest charges on borrowed money19 24 65 71 
Expenses of managed investment entities62 37 148 115 
Other expenses72 55 187 196 
Total costs and expenses1,774 1,487 4,334 3,904 
Earnings from continuing operations before income taxes
210 267 777 890 
Provision for income taxes
45 48 155 164 
Net earnings from continuing operations
165 219 622 726 
Net earnings from discontinued operations
— — — 914 
Net Earnings
$165 $219 $622 $1,640 
Earnings per Basic Common Share:
Continuing operations$1.93 $2.57 $7.30 $8.52 
Discontinued operations— — — 10.72 
Total basic earnings$1.93 $2.57 $7.30 $19.24 
Earnings per Diluted Common Share:
Continuing operations$1.93 $2.56 $7.29 $8.45 
Discontinued operations— — — 10.66 
Total diluted earnings$1.93 $2.56 $7.29 $19.11 
Average number of Common Shares:
Basic85.2 84.8 85.1 85.2 
Diluted85.4 85.2 85.3 85.8 
3
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(In Millions)
 
Three months ended September 30,Nine months ended September 30,
2022202120222021
Net earnings$165 $219 $622 $1,640 
Other comprehensive loss, net of tax:
Net unrealized gains (losses) on securities:
Unrealized holding losses on securities arising during the period
(231)(29)(698)(177)
Reclassification adjustment for realized (gains) losses included in net earnings
3 2 8 (16)
Reclassification adjustment for unrealized gains of subsidiaries sold— — — (884)
Total net unrealized losses on securities
(228)(27)(690)(1,077)
Net unrealized losses on cash flow hedges:
Unrealized holding gains (losses) on cash flow hedges arising during the period(21)— (27)(1)
Reclassification adjustment for investment income included in net earnings— — (2)(11)
Reclassification adjustment for unrealized gains on cash flow hedges of subsidiaries sold— — — (29)
Total net unrealized losses on cash flow hedges
(21)— (29)(41)
Foreign currency translation adjustments(5)(3)(2)(3)
Pension and other postretirement plans adjustments (“OPRP”):
Unrealized holding losses on pension and OPRP arising during the period— — — (1)
Reclassification adjustment for pension settlement loss included in net earnings— — — 9 
Total pension and OPRP adjustments— — — 8 
Other comprehensive loss, net of tax
(254)(30)(721)(1,113)
Comprehensive income (loss)
$(89)$189 $(99)$527 
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
CommonCommon Stock
and Capital		RetainedAccumulated
Other Comp.
SharesSurplusEarningsIncome (Loss)Total
Balance at June 30, 202285,154,263 $1,436 $2,979 $(348)$4,067 
Net earnings
— — 165 — 165 
Other comprehensive loss
— — — (254)(254)
Dividends ($0.56 per share)
— — (48)— (48)
Shares issued:
Exercise of stock options14,553 — — — — 
Restricted stock awards— — — — — 
Other benefit plans19,220 2 — — 2 
Dividend reinvestment plan1,328 1 — — 1 
Stock-based compensation expense— 4 — — 4 
Shares acquired and retired(45,500)— (5)— (5)
Shares exchanged — benefit plans(886)— — — — 
Forfeitures of restricted stock(2,457)— — — — 
Balance at September 30, 202285,140,521 $1,443 $3,091 $(602)$3,932 
Balance at June 30, 202184,713,927 $1,388 $4,023 $190 $5,601 
Net earnings— — 219 — 219 
Other comprehensive loss
— — — (30)(30)
Dividends ($6.50 per share)
— — (551)— (551)
Shares issued:
Exercise of stock options153,842 6 — — 6 
Restricted stock awards— — — — — 
Other benefit plans17,029 2 — — 2 
Dividend reinvestment plan6,272 1 — — 1 
Stock-based compensation expense— 4 — — 4 
Shares acquired and retired(94,960)(1)(11)— (12)
Shares exchanged — benefit plans(562)— — — — 
Forfeitures of restricted stock(540)— — — — 
Balance at September 30, 202184,795,008 $1,400 $3,680 $160 $5,240 

5
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) — CONTINUED
(Dollars in Millions)
 Shareholders’ Equity
CommonCommon Stock
and Capital		RetainedAccumulated
Other Comp.		 
SharesSurplusEarningsIncome (Loss)Total
Balance at December 31, 202184,920,965 $1,415 $3,478 $119 $5,012 
Net earnings
— — 622 — 622 
Other comprehensive loss
— — — (721)(721)
Dividends ($11.68 per share)
— — (993)— (993)
Shares issued:
Exercise of stock options138,498 5 — — 5 
Restricted stock awards151,080 — — — — 
Other benefit plans54,171 7 — — 7 
Dividend reinvestment plan27,518 4 — — 4 
Stock-based compensation expense— 14 — — 14 
Shares acquired and retired(80,701)(1)(9)— (10)
Shares exchanged — benefit plans(57,195)(1)(7)— (8)
Forfeitures of restricted stock(13,815)— — — — 
Balance at September 30, 202285,140,521 $1,443 $3,091 $(602)$3,932 
Balance at December 31, 202086,345,246 $1,367 $4,149 $1,273 $6,789 
Net earnings
— — 1,640 — 1,640 
Other comprehensive loss
— — — (1,113)(1,113)
Dividends ($21.50 per share)
— — (1,826)— (1,826)
Shares issued:
Exercise of stock options1,118,586 55 — — 55 
Restricted stock awards207,020 — — — — 
Other benefit plans60,494 7 — — 7 
Dividend reinvestment plan42,926 5 — — 5 
Stock-based compensation expense— 11 — — 11 
Shares acquired and retired(2,769,182)(44)(274)— (318)
Shares exchanged — benefit plans(91,926)(1)(9)— (10)
Forfeitures of restricted stock(118,156)— — — — 
Balance at September 30, 202184,795,008 $1,400 $3,680 $160 $5,240 
6
AMERICAN FINANCIAL GROUP, INC. 10-Q
AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In Millions)
Nine months ended September 30,
20222021
Operating Activities:
Net earnings$622 $1,640 
Adjustments:
Depreciation and amortization78 160 
Annuity benefits— 377 
Realized (gains) losses on investing activities136 (1,111)
Net purchases of trading securities(2)(6)
Deferred annuity and life policy acquisition costs— (98)
Change in:
Reinsurance and other receivables(1,830)(987)
Other assets(163)238 
Insurance claims and reserves1,737 1,204 
Payable to reinsurers446 339 
Other liabilities16 88 
Managed investment entities’ assets/liabilities133 (78)
Other operating activities, net(130)(341)
Net cash provided by operating activities
1,043 1,425 
Investing Activities:
Purchases of:
Fixed maturities(3,733)(6,907)
Equity securities(194)(110)
Mortgage loans(273)(179)
Equity index options and other investments(96)(313)
Real estate, property and equipment(72)(53)
Businesses(10)— 
Proceeds from:
Maturities and redemptions of fixed maturities2,126 4,075 
Repayments of mortgage loans117 27 
Sales of fixed maturities1,068 690 
Sales of equity securities112 462 
Sales and settlements of equity index options and other investments
128 562 
Sales of real estate, property and equipment31 25 
Sales of businesses— 3,547 
Cash and cash equivalents of businesses sold— (2,060)
Managed investment entities:
Purchases of investments(1,061)(1,480)
Proceeds from sales and redemptions of investments801 1,579 
Other investing activities, net(6)32 
Net cash used in investing activities
(1,062)(103)
Financing Activities:
Reductions of long-term debt(436)— 
Issuances of Common Stock12 60 
Repurchases of Common Stock(10)(318)
Cash dividends paid on Common Stock(989)(1,482)
Annuity receipts— 2,403 
Ceded annuity receipts— (311)
Annuity surrenders, benefits and withdrawals— (1,931)
Ceded annuity surrenders, benefits and withdrawals— 282 
Net transfers from variable annuity assets— 34 
Issuances of managed investment entities’ liabilities666 1,665 
Retirements of managed investment entities’ liabilities(561)(1,701)
Net cash used in financing activities
(1,318)(1,299)
Net Change in Cash and Cash Equivalents(1,337)23 
Cash and cash equivalents at beginning of period2,131 2,810 
Cash and cash equivalents at end of period$794 $2,833 
7
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
INDEX TO NOTES
A.
Accounting Policies
H.
Goodwill and Other Intangibles
B.Discontinued OperationsI.
Long-Term Debt
C.
Acquisition and Sale of Businesses
J.
Shareholders’ Equity
D.
Segments of Operations
K.
Income Taxes
E.
Fair Value Measurements
L.
Contingencies
F.
Investments
M.
Insurance
G.
Managed Investment Entities

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 September 30, 2022, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein.

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

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

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

Fair Value Measurements   Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first nine months of 2022.

Investments   Equity securities other than those accounted for under the equity method are reported at fair value with holding gains and losses generally recorded in realized gains (losses) on securities. However, AFG records holding gains and losses on its portfolio of limited partnerships and similar investments, which do not qualify for equity method accounting and are carried at fair value, and certain other securities classified at purchase as “fair value through net investment income” in net investment income.

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

8
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Premiums and discounts on fixed maturity securities are amortized using the effective interest method. Mortgage-backed securities (“MBS”) are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.

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

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

Credit Losses on Financial Instruments Measured at Amortized Cost   Credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) reflect estimated credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses considers historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. Expected credit losses, and subsequent increases or decreases in such expected losses, are recorded immediately through net earnings as an allowance that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the balance sheet at the amount expected to be collected.

Derivatives   Derivatives included in AFG’s Balance Sheet are recorded at fair value. Changes in fair value of derivatives are included in earnings unless the derivatives are designated and qualify as highly effective cash flow hedges.

To qualify for hedge accounting, at the inception of a derivative contract, AFG formally documents the relationship between the terms of the hedge and the hedged items and its risk management objective. This documentation includes defining how hedge effectiveness is evaluated at the inception date and over the life of the derivative.

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

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

Reinsurance   Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG reports as assets (i) the estimated reinsurance recoverable on paid and unpaid losses, including an estimate for losses incurred but not reported, and (ii) amounts paid or due to reinsurers
9
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
applicable to the unexpired terms of policies in force. Payable to reinsurers includes ceded premiums due to reinsurers, as well as ceded premiums retained by AFG under contracts to fund ceded losses as they become due. AFG also assumes reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies.

Deferred Policy Acquisition Costs (“DPAC”)   Policy acquisition costs (principally commissions, premium taxes and certain underwriting and policy issuance costs) directly related to the successful acquisition or renewal of an insurance contract are deferred. DPAC is limited based upon recoverability without any consideration for anticipated investment income and is charged against income ratably over the terms of the related policies. A premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses and unamortized acquisition costs exceed the related unearned premiums. A premium deficiency is first recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency and reported with unpaid losses and loss adjustment expenses.

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

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

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

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

At September 30, 2022, assets and liabilities of managed investment entities included $117 million in assets and $105 million in liabilities of temporary warehousing entities that were established to provide AFG the ability to form new CLOs when management believes market conditions are favorable. At closing, all warehoused assets will be transferred to the new CLOs and the liabilities will be repaid.

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

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

10
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
Debt Issuance Costs   Debt issuance costs related to AFG’s outstanding debt are presented in its Balance Sheet as a direct reduction in the carrying value of long-term debt and are amortized over the life of the related debt using the effective interest method as a component of interest expense. Debt issuance costs related to AFG’s revolving credit facilities are included in other assets in AFG’s Balance Sheet.

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

At September 30, 2022 AFG has a $118 million lease liability included in other liabilities and a lease right-of-use asset of $104 million included in other assets compared to $136 million and $118 million, respectively, at December 31, 2021.

Premium Recognition   Property and casualty premiums are earned generally over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations.

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

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

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

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

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

Earnings Per Share   Although basic earnings per share only considers shares of common stock outstanding during the period, the calculation of diluted earnings per share includes the following adjustments to weighted average common shares related to stock-based compensation plans: third quarter of 2022 and 2021 — 0.2 million and 0.4 million; first nine months of 2022 and 2021 — 0.2 million and 0.6 million.

There were no anti-dilutive potential common shares for the third quarter or the first nine months of 2022 and 2021.

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

11
AMERICAN FINANCIAL GROUP, INC. 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
B.    Discontinued Operations

Annuity Business   Effective May 31, 2021, AFG completed the sale of its Annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”). MassMutual acquired Great American Life Insurance Company and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. In addition to AFG’s annuity operations, these subsidiaries included AFG’s run-off life and long-term care operations. Proceeds from the sale were $3.57 billion (including $34 million in post-closing adjustments) and AFG realized a $656 million net gain on the sale in the first nine months of 2021.

Details of the assets and liabilities of the Annuity subsidiaries sold were as follows (in millions):
May 31, 2021
Assets of businesses sold:
Cash and cash equivalents$2,060 
Investments38,323 
Recoverables from reinsurers6,748 
Other assets
2,152 
Total assets of discontinued annuity operations49,283 
Liabilities of businesses sold:
Annuity benefits accumulated43,690 
Other liabilities1,813 
Total liabilities of discontinued annuity operations45,503 
Reclassify AOCI(913)
Net investment in annuity businesses sold, excluding AOCI$2,867 

Details of the results of operations for the discontinued annuity operations were (in millions):
Nine months ended September 30, 2021 (*)
Net investment income$746 
Realized gains on securities112 
Other income52 
Total revenues910 
Annuity benefits377 
Annuity and supplemental insurance acquisition expenses136 
Other expenses73 
Total costs and expenses586 
Earnings before income taxes from discontinued operations324 
Provision for income taxes on discontinued operations66 
Net earnings from operations, net of tax