Derivatives

6 Months Ended

Jun. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

As discussed under “Derivatives” in Note A — “Accounting Policies,” AFG uses derivatives to mitigate certain market risks related to its investment portfolio and deferred compensation obligations to employees.

The following table presents the classification of derivative assets and liabilities included in AFG’s Balance Sheet at fair value (in millions):


		June 30, 2024				December 31, 2023
	Balance Sheet Line	Asset		Liability		Asset		Liability
Derivatives designated and qualifying as cash flow hedges:
Interest rate swaps	Other assets/Other liabilities	$	—	$	26	$	1	$	22

Derivatives not designated as hedging instruments:
Fixed maturities with embedded derivatives	Fixed maturities	59		—		81		—
Total return swap	Other assets/Other liabilities	1		—		5		—
		$	60	$	26	$	87	$	22

AFG’s interest rate swaps 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 the applicable Secured Overnight Financing Rate (“SOFR”).

Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on SOFR. The notional amounts of the interest rate swaps generally decline over each swap’s respective life (the swaps expire between July 2024 and July 2028) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on SOFR. The total outstanding notional amount of AFG’s interest rate swaps was $1.19 billion at June 30, 2024 compared to $1.30 billion at December 31, 2023, reflecting scheduled amortization. Amounts reclassified from AOCI to net earnings were losses of $7 million in the second quarter of both 2024 and 2023,and losses of $14 million and $12 million in the first six months of 2024 and 2023, respectively. Based on forward interest rate curves at June 30, 2024, management estimates that it will reclassify approximately $17 million of pre-tax net losses on interest rate swaps in AOCI to net investment income over the next twelve months. The actual amount will vary based on changes in SOFR. A collateral receivable supporting these swaps of $47 million and $48 million at June 30, 2024 and December 31, 2023, respectively, is included in other assets in AFG’s Balance Sheet.

The fixed maturities with embedded derivatives consist of convertible fixed maturity securities and interest-only and principal-only MBS. AFG records the change in the fair value of these securities in net earnings. These investments are part of AFG’s overall investment strategy and represent a small component of AFG’s overall investment portfolio.

AFG is exposed to fair value changes from certain equity and fixed maturity market-based exposures related to its deferred compensation obligations to certain employees. To mitigate this risk, AFG entered into a total return swap in 2022. A liability to return collateral related to the swap of $1 million and $5 million is included in other liabilities on AFG’s Balance Sheet at June 30, 2024 and December 31, 2023, respectively.

The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives (in millions):


		Three months ended June 30,				Six months ended June 30,
	Statement of Earnings Line	2024		2023		2024		2023
Qualifying cash flow hedges:
Interest rate swaps	Net investment income	$	(7)	$	(7)	$	(14)	$	(12)

Non-designated hedges:
Fixed maturities with embedded derivatives	Realized gains (losses) on securities	—		(4)		(1)		(3)
Fixed maturities with embedded derivatives	Net investment income	1		7		1		10
Total return swap	Other expenses	—		3		6		9
Earnings (losses) on non-designated hedges		1		6		6		16
Total earnings (losses) on derivatives		$	(6)	$	(1)	$	(8)	$	4