AMERICAN FINANCIAL GROUP INC - Annual Report: 2020 (Form 10-K)

________________________________________________________________________________________________________________________________________________________________________

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2020

☐ 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

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

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $4.91 billion.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 86,399,280 shares (excluding 14.9 million shares owned by subsidiaries) as of February 1, 2021.

___________________________________________________

Documents Incorporated by Reference:

Proxy Statement for 2021 Annual Meeting of Stockholders (portions of which are incorporated by reference into Part III hereof).

________________________________________________________________________________________________________________________________________________________________________

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AMERICAN FINANCIAL GROUP, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K


			Page
FORWARD-LOOKING STATEMENTS			1

Part I
Item 1	—	Business	2
Item 1A	—	Risk Factors	20
Item 1B	—	Unresolved Staff Comments	none
Item 2	—	Properties	28
Item 3	—	Legal Proceedings	28
Item 4	—	Mine Safety Disclosures	none

Part II
Item 5	—	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	29
Item 6	—	Selected Financial Data	none
Item 7	—	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A	—	Quantitative and Qualitative Disclosure About Market Risk	114
Item 8	—	Financial Statements and Supplementary Data	115
Item 9	—	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	none
Item 9A	—	Controls and Procedures	115
Item 9B	—	Other Information	none

Part III
Item 10	—	Directors, Executive Officers and Corporate Governance	S-1
Item 11	—	Executive Compensation	S-1
Item 12	—	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	S-1
Item 13	—	Certain Relationships and Related Transactions, and Director Independence	S-1
Item 14	—	Principal Accounting Fees and Services	S-1

Part IV
Item 15	—	Exhibits, Financial Statement Schedules	S-1

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FORWARD-LOOKING STATEMENTS

The disclosures in this Form 10-K contain certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties. 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 the following and those discussed in Item 1A — Risk Factors.

•that AFG may be unable to complete the sale of its annuity business because, among other reasons, conditions to the closing of the proposed transaction may not be satisfied or waived, uncertainty as to the timing of completion of the proposed transaction, or failure to realize the anticipated benefits from the proposed transaction;

•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 options;

•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;

•changes in insurance law or regulation, including changes in statutory accounting rules, including modifications to capital requirements;

•the effects of the COVID-19 outbreak, including the effects on the international and national economy and credit markets, legislative or regulatory developments affecting the insurance industry, quarantines or other travel or health-related restrictions;

•changes in the legal environment affecting AFG or its customers;

•tax law and accounting changes;

•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;

•disruption caused by cyber-attacks or other technology breaches or failures by AFG or its business partners and service providers, which could negatively impact AFG’s business and/or expose AFG to litigation;

•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 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.

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PART I

Item 1. Business

Introduction

American Financial Group, Inc. (“AFG” or the “Company”) is an insurance holding company. Through the operations of Great American Insurance Group, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses, and in the sale of traditional fixed and indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets. The members of the Great American Insurance Group have been in business for nearly 150 years. Management believes that approximately 50% of the 2020 gross written premiums in AFG’s Specialty property and casualty group are produced by “top 10” ranked businesses and that AFG was also a “top ten” provider of fixed annuities in 2020, including the second largest seller of fixed-indexed annuities (“FIAs”) through financial institutions. AFG’s in-house team of investment professionals oversees the Company’s investment portfolio. On January 27, 2021, AFG entered into a definitive agreement to sell its Annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”) for $3.5 billion in cash, subject to final closing adjustments. In the transaction, 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 (“AILIC”) and Manhattan National Life Insurance Company.

AFG’s address is 301 East Fourth Street, Cincinnati, Ohio 45202; its phone number is (513) 579-2121. SEC filings, news releases, AFG’s Code of Ethics applicable to directors, officers and employees, AFG’s Corporate Social Responsibility Report and other information may be accessed free of charge through AFG’s Internet site at: www.AFGinc.com. (Information on AFG’s Internet site is not part of this Form 10-K.) See Note C — “Segments of Operations” to the financial statements for information on AFG’s assets, revenues and earnings before income taxes by segment.

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Building Long-Term Value for AFG Shareholders

AFG allows each of its businesses the autonomy to make decisions related to underwriting, claims and policy servicing. This entrepreneurial business model promotes agility, innovative product design, unique applications of pricing segmentation, as well as developing distribution strategies and building relationships in the markets served. Management believes that AFG’s ability to grow book value per share at a double-digit annual rate over time is evidence that the Company’s culture, business model and employee incentive plans create a compelling structure to build long-term value for AFG’s shareholders.

As highlighted in the illustration below, over the past 20 plus years, AFG has sharpened its focus on the businesses that management knows best. This has been accomplished through organic growth, carefully selected acquisitions, start-ups, and dispositions.

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Timeline of Selected Start-ups, Acquisitions and Dispositions

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Property and Casualty Insurance Segment

General

AFG’s property and casualty insurance operations provide a wide range of commercial coverages through approximately 35 insurance businesses (at December 31, 2020) that make up the Great American Insurance Group. AFG’s property and casualty insurance operations ultimately report to a single senior executive and operate under a business model that allows local decision-making for underwriting, claims and policy servicing in each of the niche operations. Each business is managed by experienced professionals in particular lines or customer groups and operates autonomously but with certain central controls and accountability. The decentralized approach allows each unit the autonomy necessary to respond to local and specialty market conditions while capitalizing on the efficiencies of centralized investment and administrative support functions. AFG’s property and casualty insurance operations had approximately 6,500 employees as of December 31, 2020. These operations are conducted through the subsidiaries listed in the following table, which includes independent financial strength ratings and 2020 gross written premiums (in millions) for each major subsidiary. These ratings are generally based on concerns for policyholders and agents and are not directed toward the protection of investors. AFG believes that maintaining a rating in the “A” category by A.M. Best is important to compete successfully in most lines of business.

Ratings

Gross
Written

AM Best

S&P

Premiums

Insurance Group

Great American Insurance

A+

5,231

National Interstate

A+

not rated

796

Summit (Bridgefield Casualty and Bridgefield Employers)

A+

541

Republic Indemnity

A+

170

Mid-Continent Casualty

A+

146

Other (*)

203

7,087

(*)Includes $92 million of gross premiums written by AFG’s Neon Lloyd’s Syndicate, which was put into run-off in December 2019 and sold in December 2020. See Note B — “Acquisitions and Sale of Businesses” to the financial statements.

The primary objectives of AFG’s property and casualty insurance operations are to achieve solid underwriting profitability and provide excellent service to its policyholders and agents. Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses, loss adjustment expenses (“LAE”), underwriting expenses and policyholder dividends to premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect investment income, other income, other expenses or federal income taxes.

While many costs included in underwriting are readily determined (commissions, administrative expenses and many of the losses on claims reported), the process of determining overall underwriting results is highly dependent upon the use of estimates in the case of losses incurred or expected but not yet reported or developed. Actuarial procedures and projections are used to obtain “point estimates” of ultimate losses. While the process is imprecise and develops amounts which are subject to change over time, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate.

Financial information is reported in accordance with U.S. generally accepted accounting principles (“GAAP”) for shareholder and other investor-related purposes and reported on a statutory basis for U.S. insurance regulatory purposes. Unless indicated otherwise, the financial information presented in this Form 10-K for AFG’s property and casualty insurance operations is presented based on GAAP. Statutory information is only prepared for AFG’s U.S.-based subsidiaries, which represented approximately 97% of AFG’s direct written premiums in 2020, and is provided for industry comparisons or where comparable GAAP information is not readily available.

Major differences for statutory accounting include charging policy acquisition costs to expense as incurred rather than spreading the costs over the periods covered by the policies; reporting investment grade bonds and redeemable preferred stocks at amortized cost rather than fair value; netting of reinsurance recoverables and prepaid reinsurance premiums against the corresponding liabilities rather than reporting such items separately; and charging to surplus certain GAAP assets, such as furniture and fixtures and agents’ balances over 90 days old.

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AFG’s statutory combined ratio averaged 92.9% for the period 2011 to 2020 as compared to 100.5% for the property and casualty commercial lines industry over the same period. AFG believes that its specialty niche focus, product line diversification and underwriting discipline have contributed to the Company’s ability to consistently outperform the industry’s underwriting results. Management’s philosophy is to refrain from writing business that is not expected to produce an underwriting profit even if it is necessary to limit premium growth to do so.

(*)The sources of the commercial lines industry ratios are © 2020 Conning, Inc., as published in Conning’s Property-Casualty Forecast & Analysis by Line of Insurance (Fourth-Quarter 2020 edition, used with permission) for 2020 and © 2020 A.M. Best Company’s Review & Preview Reports for the preceding years.

Property and Casualty Results

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. See Note C — “Segments of Operations” to the financial statements for the reconciliation of AFG’s earnings before income taxes by significant business segment to the statement of earnings.

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The following table shows the performance of AFG’s property and casualty insurance operations (dollars in millions):


	2020			2019			2018
Gross written premiums	$	7,087		$	7,299		$	6,840
Ceded reinsurance	(2,074)			(1,957)			(1,817)
Net written premiums	$	5,013		$	5,342		$	5,023

Net earned premiums	$	5,099		$	5,185		$	4,865
Loss and LAE	3,271			3,271			3,003


Underwriting expenses	1,604			1,702			1,560
Underwriting gain (a)	$	224		$	212		$	302

GAAP ratios:
Loss and LAE ratio	64.1		%	63.0		%	61.7		%
Underwriting expense ratio	31.4		%	32.8		%	32.1		%
Combined ratio	95.5		%	95.8		%	93.8		%

Statutory ratios:
Loss and LAE ratio	60.7		%	61.3		%	60.2		%
Underwriting expense ratio	31.2		%	31.6		%	31.6		%
Combined ratio	91.9		%	92.9		%	91.8		%

Industry statutory combined ratio (b)
All lines	100.0		%	98.2		%	99.6		%
Commercial lines	101.7		%	99.9		%	99.7		%

(a)Includes underwriting losses from Neon, which was sold in December 2020, of $135 million in 2020, $36 million in 2019 and $63 million in 2018.

(b)The sources of the industry ratios are © 2020 Conning, Inc., as published in Conning’s Property-Casualty Forecast & Analysis by Line of Insurance (Fourth-Quarter 2020 edition, used with permission) for 2020 and © 2020 A.M. Best Company’s Review & Preview Report (February 2020 Edition) for 2019 and 2018.

As with other property and casualty insurers, AFG’s operating results can be adversely affected by unpredictable catastrophe losses. Certain natural disasters (hurricanes, severe storms, earthquakes, tornadoes, floods, etc.) and other incidents of major loss (explosions, civil disorder, terrorist events, fires, etc.) are classified as catastrophes by industry associations. Losses from these incidents are usually tracked separately from other business of insurers because of their sizable effects on overall operations. Total net losses to AFG’s insurance operations from current accident year catastrophes were $128 million in 2020, $60 million in 2019 and $103 million in 2018 and are included in the table above. These net losses include $37 million in 2020, $13 million in 2019 and $32 million in 2018 related to Neon’s operations. In addition to these catastrophe losses, AFG’s property and casualty operations recorded $115 million in COVID-19 related losses in 2020, including $20 million at Neon.

AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and through the purchase of reinsurance. AFG’s net exposure to a catastrophic earthquake or windstorm that industry models indicate should statistically occur once in every 500 years (a “500-year event”) is expected to be approximately 2% of AFG’s Shareholders’ Equity.

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Property and Casualty Insurance Products

AFG is focused on growth opportunities in what it believes to be more profitable specialty businesses where AFG personnel are experts in particular lines of business or customer groups. The following are examples of AFG’s specialty businesses grouped by sub-segment:


Property and Transportation
Agricultural-related			Federally reinsured multi-peril crop (allied lines) insurance covering most perils as well as crop-hail, equine mortality and other coverages for full-time operating farms/ranches and agribusiness operations on a nationwide basis.

Commercial Automobile			Coverage for vehicles (such as buses and trucks) in a broad range of businesses including the moving and storage and transportation industries, as well as alternative risk transfer programs, and a specialized physical damage product for the trucking industry.

Property, Inland Marine and Ocean Marine			Coverage primarily for commercial properties, builders’ risk, contractors’ equipment, property, motor truck cargo, marine cargo, boat dealers, marina operators/dealers and excursion vessels.

Specialty Casualty
Excess and Surplus			Liability, umbrella and excess coverage for unique, volatile or hard to place risks, using rates and forms that generally do not have to be approved by state insurance regulators.

Executive and Professional Liability			Coverage for directors and officers of businesses and non-profit organizations, errors and omissions, cyber, and mergers and acquisitions.

General Liability			Coverage for contractor-related businesses, energy development and production risks, and environmental liability risks.

Targeted Programs			Coverage (primarily liability and property) for social service agencies, leisure, entertainment and non-profit organizations, customized solutions for other targeted markets and alternative risk programs using agency captives.

Umbrella and Excess Liability			Coverage in excess of primary layers.

Workers’ Compensation			Coverage for prescribed benefits payable to employees who are injured on the job.

Specialty Financial
Fidelity and Surety			Fidelity and crime coverage for government, mercantile and financial institutions and surety coverage for various types of contractors and public and private corporations.

Lease and Loan Services			Coverage for insurance risk management programs for lending and leasing institutions, including equipment leasing and collateral and lender-placed mortgage property insurance.

Management believes specialization is the key element to the underwriting success of these business units. These specialty businesses are opportunistic and premium volume will vary based on prevailing market conditions. AFG continually evaluates expansion in existing markets and opportunities in new specialty markets that meet its profitability objectives. Likewise, AFG will withdraw from markets that do not meet its profit objectives or business strategy.

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2020 SPECIALTY PROPERTY AND CASUALTY BY SUB-SEGMENT

(*)Excludes underwriting profits and losses recorded outside of AFG’s Specialty property and casualty group.

Premium Distribution

The following table shows the net written premiums by sub-segment for AFG’s property and casualty insurance operations for 2020 (excluding Neon), 2019 and 2018 (in millions):


	2020		2019		2018
Property and transportation	$	1,887	$	1,876	$	1,754
Specialty casualty	2,304		2,701		2,509
Specialty financial	604		617		602
Other specialty (*)	197		148		158
	$	4,992	$	5,342	$	5,023

(*)Premiums assumed by AFG’s internal reinsurance program from the operations that make up AFG’s Specialty property and casualty insurance sub-segments.

In addition to the premiums in the table above, the Neon exited lines had $21 million of net written premiums in 2020. Neon’s premiums were included in the Specialty Casualty sub-segment in 2019 and 2018 (prior to being put into run-off at the end of 2019).

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The geographic distribution of statutory direct written premiums by AFG’s U.S.-based insurers for 2020, 2019 and 2018 is shown below. Approximately 3% of AFG’s direct written premiums in 2020 were derived from non U.S.-based insurers. In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off. In December 2020, AFG completed the sale of the legal entities comprising Neon to RiverStone Holdings Limited. Neon generated approximately 45% and 85% of the non U.S.-based direct written premiums in 2020 and 2019, respectively.


	2020		2019		2018			2020		2019		2018
California	13.3	%	13.4	%	13.5	%	New Jersey	2.3	%	2.5	%	2.6	%
Florida	9.7	%	10.1	%	10.0	%	Michigan	2.3	%	1.9	%	1.8	%
Texas	6.9	%	6.9	%	6.8	%	Kansas	2.2	%	2.2	%	2.3	%
New York	6.8	%	6.7	%	6.8	%	Ohio	2.2	%	1.9	%	1.7	%
Illinois	5.5	%	5.5	%	5.3	%	Indiana	2.1	%	2.0	%	1.9	%
Georgia	3.5	%	3.3	%	3.3	%	North Carolina	2.1	%	2.0	%	2.1	%
Pennsylvania	2.6	%	2.6	%	2.5	%	Other	36.1	%	36.4	%	36.9	%
Missouri	2.4	%	2.6	%	2.5	%		100.0	%	100.0	%	100.0	%

Reinsurance

Consistent with standard practice of most insurance companies, AFG reinsures a portion of its property and casualty business with other insurance companies and assumes a relatively small amount of business from other insurers. AFG uses reinsurance for two primary purposes: (i) to provide higher limits of coverage than it would otherwise be willing to provide (i.e. large line capacity) and (ii) to protect its business by reducing the impact of catastrophes. The availability and cost of reinsurance are subject to prevailing market conditions, which may affect the volume and profitability of business that is written. AFG is subject to credit risk with respect to its reinsurers, as the ceding of risk to reinsurers does not relieve AFG of its liability to its insureds until claims are fully settled.

Reinsurance is provided on either a facultative or treaty basis. Facultative reinsurance is generally provided on a risk-by-risk basis. Individual risks are ceded and assumed based on an offer and acceptance of risk by each party to the transaction. AFG purchases facultative reinsurance, both pro rata and excess of loss, depending on the risk and available reinsurance markets. Treaty reinsurance provides for risks meeting prescribed criteria to be automatically ceded and assumed according to contract provisions.

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Catastrophe Reinsurance AFG has taken steps to limit its exposure to wind and earthquake losses through individual risk selection, including minimizing coastal and known fault-line exposures, and purchasing catastrophe reinsurance. In addition, AFG purchases catastrophe reinsurance for its workers’ compensation businesses. Although the cost of catastrophe reinsurance varies depending on exposure and the level of worldwide loss activity, AFG continues to obtain reinsurance coverage in adequate amounts at acceptable rates.

In January 2021, AFG’s property and casualty insurance subsidiaries renewed substantially all of their catastrophe reinsurance coverages. For AFG’s U.S.-based operations, the Company continued to place $85 million of coverage in excess of a $15 million per event primary retention in the traditional reinsurance markets. In addition, AFG’s U.S.-based operations have a $50 million layer of coverage in excess of $100 million in catastrophe losses that will be up for renewal in June 2021.

In addition to traditional reinsurance, AFG had catastrophe coverage through a catastrophe bond structure with Riverfront Re Ltd. from June 1, 2017 through January 15, 2021. AFG expects to place a new catastrophe bond in the first six months of 2021.

The commercial marketplace requires large policy limits ($25 million or more) in several of AFG’s lines of business, including certain property, environmental, aviation, executive and professional liability, umbrella and excess liability, and fidelity and surety coverages. Since these limits exceed management’s desired exposure to an individual risk, AFG generally enters into reinsurance agreements to reduce its net exposure under such policies to an acceptable level. Reinsurance continues to be available for this large line capacity exposure with satisfactory pricing and terms.

In addition to the catastrophe and large line capacity reinsurance programs discussed above, AFG purchases reinsurance on a product-by-product basis. AFG regularly reviews the financial strength of its current and potential reinsurers. These reviews include consideration of credit ratings, available capital, claims paying history and expertise. This process periodically results in the transfer of risks to more financially secure reinsurers. Substantially all reinsurance is ceded to companies with investment grade S&P ratings or is secured by “funds withheld” or other collateral. Under “funds withheld” arrangements, AFG retains ceded premiums to fund ceded losses as they become due from the reinsurer. Recoverables from the following companies were individually between 5% and 12% of AFG’s total property and casualty reinsurance recoverable (including prepaid reinsurance premiums and net of payables to reinsurers) at December 31, 2020: Everest Reinsurance Company, Hannover Rueck SE, Munich Reinsurance America, Inc., Swiss Reinsurance America Corporation and Transatlantic Reinsurance Company. In addition, AFG has a reinsurance recoverable from Ohio Casualty Insurance Company of $130 million related to that company’s purchase of AFG’s commercial lines business in 1998. No other reinsurers exceeded 5% of AFG’s property and casualty reinsurance recoverable.

The following table presents (by type of coverage) the amount of each loss above the specified retention covered by treaty reinsurance programs in AFG’s U.S.-based property and casualty insurance operations (in millions) as of January 1, 2021:


			Reinsurance Coverage						AFG
	Primary		Coverage		AFG Participation (a)				Maximum
	Retention		Amount		%		$		Loss (b)
U.S.-based operations:
California Workers’ Compensation	$	2	$	148	1	%	$	1	$	3
Summit Workers’ Compensation	3		37		—	%	—		3
Other Workers’ Compensation	2		48		3	%	1		3
Commercial Umbrella	2		48		10	%	5		7
Property — General	5		45		—	%	—		5
Property — Catastrophe (c)	15		135		7	%	9		24

(a)Includes the participation of AFG’s internal reinsurance program.

(b)Maximum loss per event for claims up to reinsurance coverage limit.

(c)Although AFG’s maximum potential loss per event is generally $15 million, there are certain unlikely scenarios where AFG’s exposure could be as high as $24 million.

In addition to the coverage shown above, AFG reinsures a portion of its crop insurance business through the Federal Crop Insurance Corporation (“FCIC”). The FCIC offers both proportional (or “quota share”) and non-proportional coverages. The proportional coverage provides that a fixed percentage of risk is assumed by the FCIC. The non-proportional coverage allows AFG to select desired retention of risk on a state-by-state, county, crop or plan basis. AFG typically reinsures 15% to 25% of gross written premiums with the FCIC. AFG also purchases quota share reinsurance in the private market. This

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quota share provides for a ceding commission to AFG and a profit-sharing provision. During both 2020 and 2019, AFG reinsured 50% of premiums not reinsured by the FCIC in the private market and purchased stop loss protection coverage for the remaining portion of the business. In 2021, AFG expects to reinsure 50% of the premiums not reinsured by the FCIC in the private market.

The balance sheet caption “Recoverables from reinsurers — Property and casualty insurance” included approximately $171 million on paid losses and LAE and $3.12 billion on unpaid losses and LAE at December 31, 2020. These amounts are net of allowances of approximately $6 million for expected credit losses on reinsurance recoverables. The collectability of a reinsurance balance is based upon the financial condition of a reinsurer as well as individual claim considerations.

Reinsurance premiums ceded and assumed are presented in the following table (in millions):


	2020		2019		2018
Reinsurance ceded	$	2,074	$	1,957	$	1,817
Reinsurance ceded, excluding crop	1,483		1,371		1,202
Reinsurance assumed — including involuntary pools and associations	225		255		214

Loss and Loss Adjustment Expense Reserves

The consolidated financial statements include the estimated liability for unpaid losses and LAE of AFG’s insurance subsidiaries. This liability represents estimates of the ultimate net cost of all unpaid losses and LAE and is determined by using case-basis evaluations, actuarial projections and management’s judgment. These estimates are subject to the effects of changes in claim amounts and frequency and are periodically reviewed and adjusted as additional information becomes known. In accordance with industry practices, such adjustments are reflected in current year operations. Generally, reserves for reinsurance assumed and involuntary pools and associations are reflected in AFG’s results at the amounts reported by those entities. See Note P — “Insurance — Property and Casualty Insurance Reserves” to the financial statements for information on the development of AFG’s liability for unpaid losses and loss adjustment expenses by accident year as well as a progression of the liability on a GAAP basis over the past three years.

A reconciliation of the liability for losses and LAE reported in the annual statements filed with the state insurance departments in accordance with statutory accounting principles (“SAP”) to the liability reported in the accompanying consolidated financial statements in accordance with GAAP at December 31, 2020 follows (in millions):


Liability reported on a SAP basis, net of $108 million of retroactive reinsurance	$	6,958
Reinsurance recoverables, net of allowance	3,117
Other, including reserves of foreign insurers	317
Liability reported on a GAAP basis	$	10,392

Asbestos and Environmental-related (“A&E”) Insurance Reserves AFG’s property and casualty group, like many others in the industry, has A&E claims arising in most cases from general liability policies written more than thirty years ago. The establishment of reserves for such A&E claims presents unique and difficult challenges and is subject to uncertainties significantly greater than those presented by other types of claims. For a discussion of these uncertainties, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves” and Note N — “Contingencies” to the financial statements.

The following table (in millions) is a progression of the property and casualty group’s A&E reserves.


	2020		2019		2018
Reserves at beginning of year	$	383	$	395	$	403
Incurred losses and LAE	47		18		18
Paid losses and LAE	(8)		(30)		(26)
Reserves at end of year, net of reinsurance recoverable	422		383		395
Reinsurance recoverable, net of allowance	150		146		129
Gross reserves at end of year	$	572	$	529	$	524

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, with an in-depth internal review during

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the intervening years. AFG has historically conducted an external study every two years. AFG is currently evaluating the frequency of future external studies.

A comprehensive external study of AFG’s A&E reserves was completed in the third quarter of 2020 with the aid of specialty actuarial, engineering and consulting firms and outside counsel. As a result of the external study, AFG’s property and casualty insurance segment recorded a $47 million pretax special charge to increase its asbestos reserves by $26 million (net of reinsurance) and its environmental reserves by $21 million (net of reinsurance). Over the past few years, the focus of AFG’s asbestos claims litigation has shifted to smaller companies and companies with ancillary exposures. AFG’s insureds with these exposures have been the driver of the property and casualty segment’s asbestos reserve increases in recent years. AFG is seeing modestly increasing estimates for indemnity and defense compared to prior studies on certain specific open claims.

The increase in property and casualty environmental reserves in 2020 (as well as in 2019 and 2018) was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites. AFG has updated its view of legal defense costs on open environmental claims as well as a number of claims and sites where the estimated investigation and remediation costs have increased. As in past years, there were no new or emerging broad industry trends that were identified in this review.

As a result of the in-depth internal review completed in the third quarter of 2019, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $3 million (net of reinsurance) and its environmental reserves by $15 million (net of reinsurance).

As a result of the in-depth internal review of AFG’s A&E reserves completed in the third quarter of 2018, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $6 million (net of reinsurance) and its environmental reserves by $12 million (net of reinsurance).

Marketing

The property and casualty insurance group directs its sales efforts primarily through independent insurance agents and brokers, although small portions are written through employee agents. Independent agents and brokers generally receive a commission on the sale of each policy. Some agents and brokers are eligible for a bonus commission based on the overall profitability of policies or volume of business placed with AFG by the broker or agent in a particular year. The property and casualty insurance group writes insurance through several thousand agents and brokers.

Competition

AFG’s property and casualty insurance businesses compete with other individual insurers, state funds and insurance groups of varying sizes, some of which are mutual insurance companies possessing competitive advantages in that all their profits inure to their policyholders. See Item 1A — Risk Factors. AFG also competes with self-insurance plans, captive programs and risk retention groups. Due to the specialty nature of these coverages, competition is based primarily on service to policyholders and agents, specific characteristics of products offered and reputation for claims handling. Financial strength ratings, price, commissions and profit-sharing terms are also important factors. Management believes that sophisticated data analysis for refinement of risk profiles, extensive specialized knowledge and loss prevention service have helped AFG compete successfully.

Annuity Segment

General

On January 27, 2021 AFG reached an agreement to sell its annuity subsidiaries to MassMutual in a transaction that is expected to close in the second quarter of 2021.

AFG’s annuity business is focused on the sale of fixed and indexed annuities in the retail, financial institutions, broker-dealer and registered investment advisor markets through independent producers and through direct relationships with certain financial institutions. The Company has a long history in the annuities industry, long-term agent relationships and a reputation for simple, consumer-friendly products. Disciplined product management and operations have enabled AFG to maintain a consistent crediting rate strategy and low-cost structure. AFG’s annuity products are designed to be simple and easy to understand. Lower upfront commissions and bonuses as compared to many competitors allow the Company to pay higher annual crediting rates. In the current low interest rate environment, management is focused on earning the appropriate returns on AFG’s products rather than growing premiums. The annuity operations had approximately 600 employees at December 31, 2020.

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AFG’s annuity operations are conducted primarily through the subsidiaries listed in the following table, which includes 2020 statutory annuity premiums (in millions), annuity policies in force and independent ratings.

Annuity

Policies

Ratings

Company

Premiums

In Force

AM Best

S&P

Great American Life Insurance Company

3,474

371,000

A+

Annuity Investors Life Insurance Company

121

102,000

A+

AFG believes that the ratings assigned by independent insurance rating agencies are an important competitive factor because agents, potential policyholders and financial institutions often use a company’s rating as an initial screening device in considering annuity products. AFG believes that a rating in the “A” category by at least one rating agency is necessary to successfully compete in its primary annuity markets. In the fourth quarter of 2020, AM Best upgraded the ratings of GALIC and AILIC from A (Excellent) to A+ (Superior), its second highest rating.

In February 2020, GALIC entered into a flow reinsurance agreement with Commonwealth Annuity and Life Insurance Company (“Commonwealth”), a subsidiary of Global Atlantic Financial Group, Limited. Under the terms of the agreement, GALIC cedes certain newly issued traditional fixed and indexed annuities on a quota share coinsurance basis with such quota share percentages being up to 50%. That agreement was effective for policies issued after May 6, 2020. Under accounting guidance, the reinsurance transaction will be accounted for using the deposit method.

In October 2020, GALIC entered into a block reinsurance agreement with Commonwealth. Under the terms of the agreement, GALIC ceded approximately $5.96 billion of in force traditional fixed and indexed annuities, representing approximately 15% of its in force business, and transferred related investments to Commonwealth. GALIC realized pretax gains of $369 million (net of deferred policy acquisition costs) from the transfer of securities in this transaction. The reinsurance transaction will be accounted for using the deposit method and the $180 million loss on the transaction will be deferred and recognized over the expected life of the underlying annuity contracts (7-10 years). Under both the flow and block reinsurance agreements, Commonwealth is required to maintain collateral in trusts in excess of amounts owed to GALIC.

Due to the deposit-type nature of annuities, annuity premiums received and benefit payments are recorded as increases or decreases in the annuity benefits accumulated liability rather than as revenue and expense under GAAP. Statutory premiums of AFG’s annuity operations for the last three years were as follows (in millions):


	Statutory Premiums
	2020		2019		2018
Financial institutions single premium annuities — indexed	$	1,372	$	1,537	$	1,776
Financial institutions single premium annuities — fixed	896		1,229		492
Retail single premium annuities — indexed	591		943		1,418
Retail single premium annuities — fixed	99		120		87
Broker dealer single premium annuities — indexed	457		657		1,271
Broker dealer single premium annuities — fixed	27		32		14
Pension risk transfer	499		257		132
Education market — fixed and indexed annuities	129		164		192
Total fixed annuity premiums	4,070		4,939		5,382
Variable annuities	17		21		25
Total gross annuity premiums	4,087		4,960		5,407
Ceded Premiums	(492)		—		—
Total net annuity premiums	$	3,595	$	4,960	$	5,407

Annuities are long-term retirement saving instruments that benefit from income accruing on a tax-deferred basis. The issuer of the annuity collects premiums, credits interest or earnings on the policy and pays out a benefit upon death, surrender or annuitization. Single premium annuities are generally issued in exchange for a one-time, lump-sum premium payment. Certain annuities, primarily in the education market, have premium payments that are flexible in both amount and timing as determined by the policyholder and are generally made through payroll deductions.

Annuity contracts are generally classified as either fixed rate (including indexed) or variable. With a traditional fixed rate annuity, AFG seeks to maintain a desired spread between the yield on its investment portfolio and the rate it credits to policyholders. AFG accomplishes this by: (i) offering crediting rates that it has the option to change after any initial guarantee period (subject to minimum interest rate and other contractual guarantees); (ii) designing annuity products that encourage persistency; and (iii) maintaining an appropriate matching of the duration of assets and liabilities.

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An indexed annuity provides policyholders with the opportunity to receive a crediting rate tied, in part, to the performance of an existing stock market or other financial index (generally the S&P 500) or other external rate, price, or unit value (an “index”). A fixed-indexed annuity protects against the related downside risk through a guarantee of principal (excluding surrender charges, market value adjustments, and certain benefit charges). In 2018, AFG began offering variable-indexed annuities, which are similar to fixed-indexed annuities except that the product offers greater upside participation in the selected index as compared to a fixed-indexed annuity and replaces the guarantee of principal in a fixed-indexed annuity with a guaranteed maximum loss. AFG purchases and sells call and put options designed to substantially offset the effect of the index participation in the liabilities associated with indexed annuities.

As an accommodation in its education market, AFG offers a limited amount of variable annuities. With a variable annuity, the earnings credited to the policy vary based on the investment results of the underlying investment options chosen by the policyholder, generally without any guarantee of principal except in the case of death of the insured. Premiums directed to the underlying investment options maintained in separate accounts are invested in funds managed by various independent investment managers. AFG earns a fee on amounts deposited into separate accounts. Subject to contractual provisions, policyholders may also choose to direct all or a portion of their premiums to various fixed-rate options, in which case AFG earns a spread on amounts deposited.

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 spread earned are often presented by annuity businesses to help users of their financial statements better understand the company’s performance. The following table shows the earnings before income taxes, as well as the net spread earned on fixed annuities, for the annuity segment both before and after the impact of reinsurance, unlocking, changes in the fair value of derivatives and other impacts of the changes in the stock market and interest rates on annuity segment results (dollars in millions):


	Year ended December 31,
	2020			2019			2018
Annuity earnings before income taxes — before the impact of reinsurance, unlocking, derivatives related to FIAs and other impacts of stock market performance and interest rates on FIAs	$	359		$	409		$	409
Reinsurance	(47)			—			—
Unlocking	(46)			(1)			(31)
Impact of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs over or under option costs (a):
Change in fair value of derivatives related to FIAs	(279)			(294)			(51)
Accretion of guaranteed minimum FIA benefits	(404)			(408)			(347)
Other annuity benefits	(60)			(14)			(83)
Less cost of equity options	562			586			506
Related impact on the amortization of deferred policy acquisition costs (b)	86			84			(42)
Annuity segment earnings before income taxes	$	171		$	362		$	361

Net spread earned on fixed annuities — before impact of reinsurance, unlocking, changes in the fair value of derivatives related to FIAs and other impacts of changes in the stock market and interest rates on FIAs	0.91		%	1.08		%	1.20		%
Impact of changes in fair value of derivatives related to FIAs and other impacts of the stock market and interest rates under (over) option costs	(0.24		%)	(0.12		%)	(0.04		%)
Reinsurance	(0.12		%)	—		%	—		%
Unlocking	(0.12		%)	—		%	(0.09		%)
Net spread earned on fixed annuities	0.43		%	0.96		%	1.07		%

(a)FIAs 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 with a fair value of $3.93 billion at December 31, 2020) and the related call and put options (net fair value of $820 million at December 31, 2020) 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. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results.

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

Marketing

AFG sells its single premium annuities, excluding financial institution production (discussed below), primarily through a retail network of approximately 50 national marketing organizations (“NMOs”) and managing general agents (“MGAs”) who, in turn, direct over 500 actively producing agents.

AFG also sells single premium annuities in financial institutions through direct relationships with certain financial institutions and through independent agents and brokers. The table below highlights the percentage of AFG’s total gross annuity premiums generated through its top five financial institution relationships (ranked based on 2020 statutory premiums):


	2020		2019		2018
Wells Fargo & Company	11.9	%	12.0	%	7.4	%
The PNC Financial Services Group, Inc.	9.0	%	8.8	%	6.6	%
Regions Financial Corporation	7.4	%	6.7	%	4.8	%
LPL Financial	4.4	%	4.4	%	4.8	%
BB&T Corporation	3.5	%	5.1	%	3.7	%

Competition

AFG’s annuity businesses operate in highly competitive markets. They compete with other insurers and financial institutions based on many factors, including: (i) ratings; (ii) financial strength; (iii) reputation; (iv) service to policyholders and agents; (v) product design (including interest rates credited, bonus features and index participation); and (vi) commissions. Since most policies are marketed and distributed through independent agents, the insurance companies must also compete for agents.

No single insurer dominates the markets in which AFG’s annuity businesses compete. See Item 1A — Risk Factors. AFG’s competitors include (i) individual insurers and insurance groups, (ii) mutual funds and (iii) other financial institutions. In a broader sense, AFG’s annuity businesses compete for retirement savings with a variety of financial institutions offering a full range of financial services. In the financial institution annuity market, AFG’s annuities compete directly against competitors’ annuities, certificates of deposit and other investment alternatives at the point of sale. In addition, over the last few years, several offshore and/or hedge fund companies have made significant acquisitions of annuity businesses, resulting in annuity groups that are larger in size than AFG’s annuity business.

Sales of annuities, including renewal premiums, are affected by many factors, including: (i) competitive annuity products and rates; (ii) the general level and volatility of interest rates, including the slope of the yield curve; (iii) the favorable tax treatment of annuities; (iv) commissions paid to agents; (v) services offered; (vi) ratings from independent insurance rating agencies; (vii) other alternative investments; (viii) performance and volatility of the equity markets; (ix) media coverage of annuities; (x) regulatory developments regarding suitability and the sales process; and (xi) general economic conditions.

Other Operations

AFG ceased new sales of long-term care insurance in January 2010 and sold substantially all of its run-off long-term care business in December 2015. The legal entities sold in 2015, United Teacher Associates Insurance Company and Continental General Insurance Company, contained substantially all of AFG’s long-term care insurance reserves (96% as measured by net statutory reserves as of November 30, 2015), as well as smaller blocks of annuity and life insurance business. Renewal premiums on the remaining small block of long-term care policies (which are guaranteed renewable) covering approximately 1,500 lives will be accepted unless those policies lapse. At December 31, 2020, AFG’s long-term care insurance reserves were $52 million, net of reinsurance recoverables and excluding the impact of unrealized gains on securities.

Although AFG no longer actively markets new life insurance products, it continues to service and receive renewal premiums on its in force block of approximately 80,000 policies and $8.33 billion gross ($2.91 billion net of reinsurance) of life insurance in force at December 31, 2020. Renewal premiums, net of reinsurance, were $20 million in 2020, $22 million in 2019 and $21 million in 2018. At December 31, 2020, AFG’s life insurance reserves were $280 million, net of reinsurance recoverables.

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On January 27, 2021, AFG entered into a definitive agreement to sell its annuity subsidiaries in a transaction that is expected to close in the second quarter of 2021. In addition to AFG’s annuity segment, the subsidiaries to be sold include AFG’s run-off life and long-term care operations discussed above.

Through subsidiaries, AFG is engaged in a variety of other operations, including commercial real estate operations in Cincinnati (office buildings), Whitefield, New Hampshire (Mountain View Grand Resort), Chesapeake Bay (Skipjack Cove Yachting Resort and Bay Bridge Marina), Charleston (Charleston Harbor Resort and Marina) and Palm Beach (Sailfish Marina and Resort). These operations employed approximately 200 full-time employees at December 31, 2020.

Human Capital Resources

AFG’s principal goal is for all employees to feel included, respected, safe and empowered to perform at their best. AFG helps employees succeed by cultivating specialized knowledge, professional education and leadership development in a service-oriented culture. AFG respects human rights, appreciates diversity and values the unique perspective each employee brings to the workplace. AFG operates with integrity and self-discipline in an environment that values clear and open communication and where the importance of family, community and work-life balance are priorities.

When employees feel actively engaged with AFG’s mission and strategy, they deliver higher levels of service to its customers and create stronger bottom-line results for its business. AFG strives to attract diverse and exceptional people who can grow by fostering a workplace culture that inspires and rewards people and by developing a workforce that can meet the Company’s current and future goals.

AFG offers training programs that encourage people to build careers in insurance and develop professional skills that positively impact employees’ careers as well as AFG’s customers and business. These include tuition reimbursement programs, monetary incentives and extensive personal and professional learning opportunities. AFG believes that professional development is one of many reasons why its average employee tenure exceeds industry averages.

As part of managing AFG’s business responsibly and supporting its employees to be at their best — away from work as well as on the job — AFG provides a competitive benefits package that includes an extensive wellness program. AFG offers onsite fitness centers at many of its locations, financial incentives for taking care of one’s health and health management programs to increase employees’ engagement with their healthcare providers. In response to the COVID-19 pandemic, AFG implemented changes that it considered to be in the best interest of its employees by seamlessly activating business continuity plans, including work-from-home capabilities, alternate work locations and additional remote work options so that its employees continued to work in an uninterrupted manner and operations remained fully functional.

See the Corporate Social Responsibility Report located on AFG’s website for more information regarding human capital programs and initiatives. None of the information provided on the website is incorporated into, or deemed to be a part of, this Annual Report on Form 10-K or in any other report or document we file with the SEC.

Investment Portfolio

General

AFG’s in-house team of investment professionals have followed a consistent strategy over many years and changing economic conditions. Management believes that AFG’s investment expertise has been the driver of strong investment results and effective portfolio risk management over many years.

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The allocation of AFG’s $52.50 billion investment portfolio at December 31, 2020 is shown below.

Investment Portfolio

On January 27, 2021, AFG entered into a definitive agreement to sell its annuity subsidiaries in a transaction that is expected to close in the second quarter of 2021. Approximately $39.69 billion of AFG’s investments at December 31, 2020 are held by AFG’s annuity subsidiaries and will be disposed of in the pending sale. The allocation of AFG’s $12.96 billion investment portfolio, excluding the assets to be disposed is shown below:

For additional information on AFG’s investments, see Note E — “Investments” to the financial statements and Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Investments.” AFG’s earned yield (net investment income divided by average invested assets) on fixed maturities was 4.2% for 2020 and 4.4% for both 2019 and 2018.

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The table below compares total returns, which include changes in fair value, on AFG’s fixed maturities and common stocks and equivalents to comparable public indices. While there are no directly comparable indices to AFG’s portfolio, the two shown below are widely used benchmarks in the financial services industry.


	2020		2019		2018
Total return on AFG’s fixed maturities	6.6	%	8.7	%	1.3	%
Barclays Capital U.S. Universal Bond Index	7.6	%	9.3	%	(0.3	%)

Total return on AFG’s common stocks and equivalents	(1.8	%)	26.0	%	(12.0	%)
Standard & Poor’s 500 Index	18.4	%	31.5	%	(4.4	%)

AFG’s bond portfolio is invested primarily in taxable bonds. The following table shows AFG’s available for sale fixed maturity investments by Standard & Poor’s Corporation or comparable rating as of December 31, 2020 (dollars in millions).


	Amortized		Fair Value
	Cost, net (*)		Amount		%
S&P or comparable rating
AAA, AA, A	$	23,674	$	25,059	59	%
BBB	11,938		13,155		30	%
Total investment grade	35,612		38,214		89	%
BB	869		885		2	%
B	266		264		1	%
CCC, CC, C	478		542		1	%
D	142		166		—	%
Total non-investment grade	1,755		1,857		4	%
Not rated	3,001		3,136		7	%
Total	$	40,368	$	43,207	100	%

(*)Amortized cost, net of allowance for expected credit losses.

The National Association of Insurance Commissioners (“NAIC”) has retained third-party investment management firms to assist in the determination of appropriate NAIC designations for mortgage-backed securities (“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. Approximately 9% of AFG’s fixed maturity investments are MBS. At December 31, 2020, 97% (based on statutory carrying value of $40.37 billion) of AFG’s fixed maturity investments held by its insurance companies had an NAIC designation of 1 or 2 (the highest of the six designations).

Regulation

AFG’s insurance company subsidiaries are subject to regulation in the jurisdictions where they do business. In general, the insurance laws of the various states establish regulatory agencies with broad administrative powers governing, among other things, premium rates, solvency standards, licensing of insurers, agents and brokers, trade practices, forms of policies, maintenance of specified reserves and capital for the protection of policyholders, deposits of securities for the benefit of policyholders, investment activities and relationships between insurance subsidiaries and their parents and affiliates. Material transactions between insurance subsidiaries and their parents and affiliates generally must receive prior approval of the applicable insurance regulatory authorities and be disclosed. In addition, while differing from state to state, these regulations typically restrict the maximum amount of dividends that may be paid by an insurer to its shareholders in any twelve-month period without advance regulatory approval. Such limitations are generally based on net earnings or statutory surplus. Under applicable restrictions, the maximum amount of dividends available to AFG in 2021 from its insurance subsidiaries without seeking regulatory approval is approximately $705 million.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), among other things, established a Federal Insurance Office (“FIO”) within the U.S. Treasury. Under this law, regulations will need to be created for the FIO to carry out its mandate to focus on systemic risk oversight. Since its formation, the FIO has worked with the NAIC and other stakeholders to explore a hybrid approach to regulation of the insurance industry; however, the state-based system of regulation has largely been retained. AFG cannot predict the future role of the FIO and its role in regulation of the insurance industry and how that might ultimately affect AFG’s operations.

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Most states have created insurance guaranty associations that assess solvent insurers to pay claims of insurance companies that become insolvent. Annual guaranty assessments for AFG’s insurance companies have not been material.

Item 1A. Risk Factors

In addition to the other information set forth in this report, particularly information under “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the following are the material factors affecting AFG’s business. Any one of these factors could cause AFG’s actual results to vary materially from recent results or from anticipated future results. Additional risks and uncertainties not currently known to AFG or that AFG currently deems to be immaterial also may materially adversely affect AFG’s business, financial condition or results of operations.

RISKS RELATING TO ECONOMIC, POLITICAL AND GLOBAL MARKET CONDITIONS

General economic, financial market and political conditions and conditions in the markets in which we operate may materially adversely affect our investment portfolio, results of operations, financial condition and stock price.

General economic, financial market and political conditions and conditions in the markets in which we operate could have a material adverse effect on our results of operations and financial condition. Limited availability of credit, deteriorations of the global mortgage and real estate markets, declines in consumer confidence and consumer spending, increases in prices or in the rate of inflation, periods of high unemployment, persistently low or rapidly increasing interest rates, disruptive geopolitical events and other events outside of our control, such as a major epidemic or a continuation or worsening of the COVID-19 pandemic or another pandemic, could contribute to increased volatility and diminished expectations for the economy and the financial markets, including the value of our investment portfolio and the market for our stock. In addition, our investment portfolio includes alternative investments which are marked-to-market through earnings. These investments may be adversely impacted by economic volatility, including real estate market deterioration, which could impact our net investment returns and result in an adverse impact on operating results.

A significant majority of AFG’s investment portfolio consists of fixed maturity investments, and changes in global economic conditions, including interest rates, could have a material adverse effect on AFG’s results of operations and financial condition.

As of December 31, 2020, approximately 82% of AFG’s investment portfolio holdings consisted of fixed maturity investments that are sensitive to changes in interest rates. Changes in interest rates may materially adversely affect the performance of some of our investments, including by materially reducing the fair value of and net investment income from fixed maturities and increasing unrealized losses in our investment portfolio. The value of AFG’s fixed maturity investments is also subject to credit risk as certain investments may default or become impaired due to deterioration in the financial condition of issuers of those investments.

Interest rates have remained at historical lows for an extended period. In addition, central banks in some countries have pursued largely unprecedented negative interest rate policies in recent years, the consequences of which are uncertain. The continuation of the current low interest rate environment or a deflationary environment with negative interest rates could affect business behavior in ways that are adverse to AFG and could constrict AFG’s net investment income.

As of December 31, 2020, mortgage-backed securities constituted approximately 9% of AFG’s fixed maturity portfolio. In addition to the risks applicable to the entire fixed maturity investment portfolio, changes in interest rates can expose AFG to prepayment risks on mortgage-backed securities. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are paid down more quickly, requiring AFG to reinvest the proceeds at the then current market rates, which may be lower than on the securities repaid.

AFG’s alternative investments may be illiquid and volatile in terms of value and returns, which could negatively affect AFG’s investment income and liquidity.

In addition to fixed maturity securities, AFG has invested, and may from time to time continue to invest in alternative investments such as limited partnerships and subordinate tranches of collateralized loan obligations. These and other similar investments may have different, more significant risk characteristics than investments in fixed maturity securities, may be more volatile and may be illiquid due to restrictions on sales, transfers and redemption terms, all of which could negatively affect AFG’s investment income and overall portfolio liquidity.

AFG has also invested, and from time to time may continue to make investments in limited partnerships and other entities that AFG does not control. AFG does not have management or operational control over the investees which may limit

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AFG’s ability to take actions that could protect or increase the value of the investment. In addition, these investments may be illiquid due to contractual provisions, and AFG may be unable to obtain liquidity through distributions from these investments in a timely manner or on favorable terms.

Alternative or “other” investments may not meet regulatory admissibility requirements or may result in increased regulatory capital charges to the insurance subsidiaries that hold these investments, which could limit those subsidiaries’ ability to pay dividends and negatively impact AFG’s liquidity.

Changes in interest rates could adversely affect the results of operations of AFG’s annuity segment.

The profitability of AFG’s annuity segment is largely dependent on the spread between what it earns on its investments and the crediting rate it pays on its annuity contracts plus expenses incurred.

Both rising and declining interest rates can negatively affect AFG’s annuity results. Most of AFG’s annuity products have guaranteed minimum crediting rates. Although AFG could reduce the average crediting rate on a substantial portion of its traditional fixed and indexed annuities during periods of low or falling interest rates, AFG may not be able to fully offset the decline in investment earnings with lower crediting rates.

During periods of rising interest rates, AFG may experience competitive pressure to increase crediting rates to avoid a decline in sales or increased surrenders, thus resulting in lower spreads. In addition, an increase in surrenders could require the sale of investments at a time when the prices of those assets are lower due to the increase in market rates, which may result in realized investment losses.

The modification or elimination of the London Inter-Bank Offered Rate may adversely affect AFG’s results of operations.

The modification or elimination of the London Inter-Bank Offered Rate (“LIBOR”), a long-standing benchmark interest rate for floating-rate financial contracts, may adversely affect the interest rates on and fair value of AFG’s floating rate investments, interest rate swaps, Federal Home Loan Bank advances and any other assets or liabilities whose value is tied to LIBOR. In addition, the majority of the assets and liabilities of the collateralized loan obligations that AFG manages and consolidates are tied to LIBOR. On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, initially announced that it has commitments from panel banks to submit rates to LIBOR through the end of 2021 but will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Subsequent to such announcement, on November 30, 2020, the ICE Benchmark Administrator announced a plan to extend reporting of most U.S. Dollar-based LIBOR tenors to June 30, 2023. Even with this extension, it remains unclear if, how and in what form, LIBOR will continue to exist after June 30, 2023. Proposals for alternative reference rates for dollars and other currencies have been announced or have already begun publication and contractual provisions relating to alternative rates following the cessation of LIBOR are actively being included in documentation. The State of New York has also proposed legislation which would provide for an alternative rate to LIBOR for contracts which do not include provisions relating to LIBOR cessation. Markets are slowly developing in response to these new rates but questions around liquidity in these alternative reference rates and how to appropriately adjust these alternative reference rates to eliminate any economic value transfer at the time of transition persist. In addition, in certain cases, it is difficult to amend existing contracts to include LIBOR replacement provisions and there are no assurances that a legislative solution will be passed or enforceable. At this time, AFG cannot predict the overall effect of the modification or elimination of LIBOR or the establishment of alternative benchmark rates.

Adverse developments in the financial markets may limit AFG’s access to capital.

Financial markets in the U.S. and elsewhere can experience extreme volatility, which exerts downward pressure on stock prices and limits access to the equity and debt markets for certain issuers, including AFG. While AFG can borrow up to $500 million under its revolving credit facility, AFG’s access to funds through this facility is dependent on the ability of its banks to meet their funding commitments. There were no borrowings outstanding under AFG’s bank credit line or any other parent company short-term borrowing arrangements during 2020. If AFG cannot obtain adequate capital or sources of credit on favorable terms, or at all, its business, operating results and financial condition could be adversely affected.

RISKS RELATING TO OUR INSURANCE OPERATIONS, DISTRIBUTION AND PRODUCTS

Intense competition could adversely affect AFG’s results of operations.

The property and casualty insurance segment operates in a highly competitive industry that is affected by many factors that can cause significant fluctuations in its results of operations. The lines of business in this segment compete with other individual insurers, state funds and insurance groups of varying sizes, some of which are mutual insurance companies possessing competitive advantages in that all their profits inure to their policyholders. In addition, certain foreign insurers

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may be taxed at lower rates, which may result in a competitive advantage over AFG. The property and casualty insurance segment also competes with self-insurance plans, captive programs and risk retention groups. Competition is based on many factors, including service to policyholders and agents, product design, reputation for claims handling, price, commissions, ratings and financial strength.

AFG’s annuity segment competes with individual insurers and insurance groups, mutual funds and other financial institutions. In addition, in recent years, offshore and/or hedge fund companies have made significant acquisitions of annuity businesses. Competition is based on numerous factors including reputation, product design, interest crediting rates, performance, scope of distribution, commissions and perceived financial strength and credit ratings.

Some of AFG’s competitors have more capital and greater resources than AFG and may offer a broader range of products and lower prices than AFG offers. If competition limits AFG’s ability to write new or renewal business at adequate rates, its results of operations will be adversely affected.

The continued threat of terrorism and ongoing military and other actions, as well as civil unrest, may adversely affect AFG’s results of operations.

The occurrence of one or more terrorist attacks could cause significant losses from insurance claims that could adversely affect AFG’s profitability. Private sector catastrophe reinsurance is limited and generally unavailable for terrorism losses caused by attacks with nuclear, biological, chemical or radiological weapons. Reinsurance coverage from the federal government under the Terrorism Risk Insurance Program Reauthorization Act of 2019 (“TRIPRA”) is also limited. Although TRIPRA provides benefits for certified acts of terrorism that exceed a certain threshold of industry losses, those benefits are subject to a deductible and other limitations.

AFG’s results of operations could be adversely impacted by catastrophes, both natural and man-made, pandemics or severe weather conditions or climate change.

Catastrophes can be caused by unpredictable natural events such as hurricanes, windstorms, severe storms, tornadoes, floods, hailstorms, severe winter weather, earthquakes, explosions and fire, and by other events, such as terrorist attacks, as well as pandemics and other similar outbreaks in many parts of the world, including the outbreak of COVID-19. While not considered a catastrophe by insurance industry standards, droughts can have a significant adverse impact on AFG’s crop insurance results. These events may have a material adverse effect on AFG’s workforce and business operations as well as the workforce and operations of AFG’s customers and independent agents. Some of the assets in AFG’s investment portfolio may be adversely affected by declines in the financial markets, changes in interest rates, reduced liquidity and economic activity caused by large-scale catastrophes, pandemics, terrorist attacks or similar events which could have a material adverse effect on AFG’s revenue, liquidity and operating results.

The extent of gross losses for AFG’s insurance operations from a catastrophe event is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event, potentially mitigated by any reinsurance coverage purchased by AFG’s insurance subsidiaries. In addition, certain catastrophes could result in both property and non-property claims from the same event. A severe catastrophe or a series of catastrophes could result in losses exceeding AFG’s reinsurance protection and may have a material adverse impact on its results of operations or financial condition.

Volatility in crop prices, as a result of weather conditions, climate change or otherwise, could adversely impact AFG’s results of operations.

Weather conditions, including too much moisture (flooding or excessive rain) or not enough moisture (droughts), and the level of crop prices in the commodities market heavily impact AFG’s crop insurance business. These factors are inherently unpredictable and could result in significant volatility in the results of the crop insurance business from one year to the next. AFG’s crop results could also be negatively impacted by pests and plant disease. A large decline in the commodity prices of one or more of the major crops that AFG insures could have a material adverse effect on AFG’s results of operations or financial condition.

Changing climate conditions may increase the frequency and severity of catastrophic events and thereby adversely affect our financial condition and results.

Changing weather patterns and climatic conditions, such as global warming, appear to have contributed to the unpredictability, frequency and severity of natural disasters and created additional uncertainty as to future trends and exposures. There is a growing scientific consensus that global warming and other climate change are increasing the frequency and severity of catastrophic weather events, such as hurricanes, tornadoes, windstorms, floods and other natural disasters. Such changes make it more difficult for AFG to predict and model catastrophic events, reducing AFG’s ability to accurately price its exposure to such events and mitigate its risks. Any increase in the frequency or severity of

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natural disasters may result in losses exceeding AFG’s reinsurance protection and may have a material adverse impact on its results of operations or financial condition.

The impact of COVID-19 and related risks could materially affect AFG’s results of operations, financial position and liquidity.

The global COVID-19 pandemic has resulted in, and is expected to continue to result in, significant disruptions in economic activity and financial markets both domestically and internationally. COVID-19 has directly and indirectly adversely affected AFG and will likely continue to do so for an uncertain period of time. The cumulative effects of COVID-19 on AFG cannot be predicted at this time, but could include (or could continue to include), without limitation:

•Continued volatility and further disruption in financial markets which could result in significant declines in the fair value of AFG’s investments and could lead to investment losses due to creditor defaults and bankruptcies;

•Continued low or declining interest rates which could reduce future investment results;

•Continued negative impact on premium volumes and annuity sales due to the impact of COVID-19 on general economic activity;

•Negative impact on the global economy or the economies of particular countries or regions, including travel, trade, tourism, the health system, food supply, consumption and overall economic output;

•Reduced cash flows from policyholders delaying premium payments and increased surrenders and annuitizations of in force annuities;

•Increased claims, including annuity and life insurance death claims, losses, litigation and related expenses;

•Legislative, regulatory, and judicial actions in response to COVID-19, including, but not limited to: actions prohibiting AFG from canceling insurance policies in accordance with policy terms; requiring AFG to cover losses when its policies specifically excluded coverage or did not provide coverage; ordering AFG to provide premium refunds; granting extended grace periods for payment of premiums; and providing for extended periods of time to pay past due premiums; and

•Policyholder losses from COVID-19-related claims could be greater than AFG’s reserves for those losses.

AFG may experience difficulties with technology or data security, which could have an adverse effect on its business or reputation.

AFG uses computer systems and services to store, retrieve, evaluate and utilize company and customer data and information. Systems failures or outages could compromise AFG’s ability to perform business functions in a timely manner, which could harm its ability to conduct business and hurt its relationships with business partners and customers. In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a malicious software attack, a terrorist attack or war, AFG’s systems may be inaccessible to employees, customers or business partners for an extended period of time. Even if AFG’s employees are able to report to work, they may be unable to perform their duties for an extended period of time if AFG’s data or systems are disabled or destroyed.

AFG’s computer systems are subject to cyber-attacks, viruses, malware, hackers and other external hazards, as well as inadvertent errors, equipment and system failures and to unauthorized or illegitimate actions by employees, consultants, agents and other persons with legitimate access to AFG’s systems. In addition, over time, the sophistication of these threats continues to increase. AFG’s administrative and technical controls as well as other preventative actions used to reduce the risk of cyber incidents and protect AFG’s information may be insufficient to detect or prevent future unauthorized access, other physical and electronic break-ins, cyber-attacks or other security breaches to AFG’s computer systems or those of third parties with whom AFG does business.

AFG has increasingly outsourced certain technology and business process functions to third parties and may continue to do so in the future. Outsourcing of certain technology and business process functions to third parties may expose AFG to increased risk related to data security or service disruptions. If AFG does not effectively develop, implement and monitor these relationships, third-party providers do not perform as anticipated, technological or other problems are incurred with a transition, or outsourcing relationships relevant to AFG’s business process functions are terminated, AFG may not realize expected productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business.

The increased risks identified above could expose AFG to data loss, disruption of service, monetary and reputational damages, competitive disadvantage and significant increases in compliance costs and costs to improve the security and resiliency of AFG’s computer systems. The compromise of personal, confidential or proprietary information could also subject AFG to legal liability or regulatory action under evolving cyber-security, data protection and privacy laws and regulations enacted by the U.S. federal and state governments, Canada, the European Union (the “EU”) or other jurisdictions or by various regulatory organizations or exchanges. As a result, AFG’s ability to conduct business and its results of operations might be materially and adversely affected.

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Any failure to appropriately collect, administer and protect consumer information could adversely affect AFG’s reputation, subject AFG to fines, claims and penalties, and have a material adverse effect on AFG’s business, financial condition and results of operations.

AFG and certain of its third-party vendors collect and store sensitive data in the ordinary course of AFG’s business, including personal identification information of its employees and that of its customers, vendors, investors and other third parties. In connection with AFG’s property and casualty insurance operations, data may include medical information. Laws and regulations in this area are evolving at an international, national and state level and are generally becoming more rigorous, including through the adoption of more stringent subject matter-specific laws, like the California Consumer Privacy Act of 2018, the New York Department of Financial Services’ Cybersecurity Regulation and Ohio’s insurance data security law, which regulate the collection and use of data and security and data breach obligations. If any disruption or security breach results in a loss or damage to AFG’s data, or inappropriate disclosure of AFG’s confidential information or that of others, it could damage AFG’s reputation, affect its relationships with customers and clients, lead to claims against AFG, result in regulatory action and harm AFG’s business. In addition, AFG may be required to incur significant costs to mitigate the damage caused by any security breach or to protect against future damage.

AFG’s international operations exposes it to investment, political and economic risks, including foreign currency and credit risk.

AFG’s international operations expose AFG to a number of additional risks. These risks include restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have an adverse effect on AFG’s business and reputation. AFG’s business activities outside the United States may also be subject to political and economic risks, including foreign currency and credit risk.

AFG’s business activities outside the United States subject AFG to additional domestic and foreign laws and regulations, including the Foreign Corrupt Practices Act, the UK Bribery Act and similar laws in other countries that prohibit the making of improper payments to foreign officials. Although AFG has policies and controls in place that are designed to ensure compliance with these laws, if those controls are ineffective and an employee or intermediary fails to comply with applicable laws and regulations, AFG could suffer civil and criminal penalties and AFG’s business and reputation could be adversely affected. Some countries have laws and regulations that lack clarity and, even with local expertise and effective controls, it can be difficult to determine the exact requirements of, and potential liability for non-compliance under, the local laws. Failure to comply with local laws in a particular market may result in substantial liability and could have a significant and negative effect not only on AFG’s business in that market but also on AFG’s reputation generally.

Ineffective risk management policies in the indexed annuity business could adversely affect AFG’s results of operations.

AFG’s risk management policies and procedures, which are intended to identify, monitor and manage economic risks in its annuity business, may not be fully effective at mitigating risk exposures in all market conditions or against all types of risk. For instance, AFG uses derivatives to alleviate risks related to floating-rate investments as well as annuity products that credit interest or provide a return based, in part, on the change in a referenced index. AFG’s use of derivatives may not accurately counterbalance the actual risk exposure, and any derivatives held may not be sufficient to completely hedge the associated risks. In addition, counterparties may fail to perform under the derivative financial instruments. AFG may also decide not to hedge, or fail to identify, certain risks to which it is exposed. Ultimately, AFG’s use of derivatives and other risk management strategies may be inadequate to protect against the full extent of the exposure or losses AFG seeks to mitigate.

A significant percentage of AFG’s sales of annuity products through financial institutions is concentrated in a small number of institutions.

Annuity premiums generated through financial institutions represented 55% of AFG’s total gross annuity premiums in 2020. In 2020, two large financial institutions accounted for 38% of AFG’s total gross sales through financial institutions and 21% of AFG’s overall gross annuity sales. In the financial institutions annuity market, AFG competes directly against competitors’ annuities, certificates of deposit and other investment alternatives at the point of sale. Loss of a substantial portion of this business coupled with a failure to replace these financial institutions if they significantly reduce sales of AFG annuities could reduce AFG’s future growth.

AFG’s revenues could be adversely affected if it is not able to attract and retain independent agents.

AFG’s reliance on the independent agency market makes it vulnerable to a reduction in the amount of business written by agents. Many of AFG’s competitors also rely significantly on the independent agency market. Some of AFG’s competitors offer a wider variety of products, higher crediting rates or higher commissions. A reduction in the number of independent agencies marketing AFG’s products, the failure of agencies to successfully market AFG’s products, changes in the

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strategy or operations of agencies (including agency consolidation) or the choice of agencies to reduce their writings of AFG products could adversely affect AFG’s revenues and profitability.

Exposure to asbestos or environmental claims could materially adversely affect AFG’s results of operations and financial condition.

AFG has asbestos and environmental (“A&E”) exposures arising from its insurance operations and former railroad and manufacturing operations. Uncertainties surrounding the final resolution of these A&E liabilities continue, and it is difficult to estimate AFG’s ultimate exposure to such liabilities and related litigation. Establishing A&E liabilities is subject to uncertainties that are significantly greater than those presented by other types of liabilities. Uncertainties include the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays, the risks inherent in complex litigation and difficulty in properly allocating liability for the asbestos or environmental damage. As a result, A&E liabilities are subject to revision as new information becomes available and as claims are made and develop. Claimants continue to assert new and novel theories of recovery, and from time to time, there is proposed state and federal legislation regarding A&E liability, which would also affect AFG’s exposure. If AFG has not established adequate reserves to cover future claims, AFG’s results of operations and financial condition could be materially adversely affected.

AFG may suffer losses from litigation, which could materially and adversely affect AFG’s financial condition and business operations.

AFG, primarily in its property and casualty insurance operations and historical operations, is involved in litigation. Litigation by nature is unpredictable, and the outcome of any case is uncertain and could result in liabilities that vary from the amounts AFG has currently recorded. Pervasive or significant changes in the judicial environment relating to matters such as trends in the size of jury awards, developments in the law relating to the liability of insurers or tort defendants, and rulings concerning the availability or amount of certain types of damages could cause AFG’s ultimate liabilities to change from current expectations. Changes in federal or state tort litigation laws or other applicable law could have a similar effect. It is not possible to predict changes in the judicial and legislative environment, including in connection with asbestos and environmental claims. AFG’s business, financial condition, results of operations and liquidity could also be adversely affected if judicial or legislative developments cause AFG’s ultimate liabilities to increase from current expectations.

RISKS RELATED TO FINANCIAL STRENGTH, CREDIT AND COUNTERPARTIES

A downgrade or potential downgrade in AFG’s financial strength and/or credit ratings by one or more rating agencies could adversely affect its business, financial condition, results of operations and/or cash flows.

Financial strength ratings are an important factor in establishing the competitive position of insurance companies and may have an effect on an insurance company’s sales. A downgrade out of the “A” category in AFG’s insurers’ claims-paying and financial strength ratings could significantly reduce AFG’s business volumes in certain lines of business, adversely impact AFG’s ability to access the capital markets and increase AFG’s borrowing costs.

In addition to the financial strength ratings of AFG’s principal insurance company subsidiaries, various rating agencies also publish credit ratings for AFG. Credit ratings are indicators of a debt issuer’s ability to meet the terms of debt obligations in a timely manner, are part of AFG’s overall financial profile and affect AFG’s ability to access certain types of capital. A downgrade in AFG’s credit ratings could have a material adverse effect on AFG’s financial condition and results of operations and cash flows in a number of ways, including adversely limiting access to capital markets, potentially increasing the cost of debt or increasing borrowing costs under AFG’s current revolving credit facility.

The inability to obtain reinsurance or to collect on ceded reinsurance could adversely affect AFG’s results of operations.

AFG purchases reinsurance to limit the amount of risk it retains. Market conditions determine the availability and cost of the reinsurance protection AFG purchases, which affects the level of AFG’s business and profitability, as well as the level and types of risk AFG retains. If AFG is unable to obtain sufficient reinsurance at a cost AFG deems acceptable, AFG may opt to reduce the volume of its underwriting. AFG is also subject to credit risk with respect to its reinsurers, as AFG will remain liable to its insureds regardless of whether a reinsurer is able to meet its obligations under agreements covering the reinsurance ceded. As of December 31, 2020, AFG has $10.09 billion of recoverables from reinsurers on its balance sheet. The collectability of recoverables from reinsurers is subject to uncertainty arising from a number of factors, including a reinsurers’ financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract and changes in market conditions. Collection risk related to AFG’s $6.54 billion recoverable from traditional and

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indexed annuity reinsurance transactions is significantly reduced since the reinsurer is required to maintain collateral (in trusts) in excess of amounts owed to GALIC.

RISKS RELATING TO ESTIMATES, ASSUMPTIONS AND VALUATIONS

AFG’s property and casualty reserves may be inadequate, which could have a material adverse effect on AFG’s results of operations.

Liabilities for unpaid losses and loss adjustment expenses (“LAE”) do not represent an exact calculation of liability but instead represent management estimates of what the ultimate settlement and administration of claims will cost, supported by actuarial expertise and projection techniques, at a given accounting date. The process of estimating unpaid losses and LAE reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as: changes in claims handling procedures, adverse changes in loss cost trends (including inflationary pressures on medical costs), economic conditions (including general inflation), legal trends and legislative changes, and varying judgments and viewpoints of the individuals involved in the estimation process, among others. The impact of many of these items on ultimate costs for unpaid losses and LAE is difficult to estimate. Unpaid losses and LAE reserve estimation difficulties also differ significantly by product line due to differences in claim complexity, the volume of claims, the potential severity of individual claims, the determination of an occurrence date for a claim and lags in the time between damage, loss or injury and when a claim is actually reported to the insurer. In addition, the historic development of AFG’s liability for unpaid losses and LAE may not necessarily reflect future trends in the development of these amounts. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on historical information. To the extent that reserves are inadequate and are strengthened, AFG’s profitability would be adversely affected because the amount of any such increase would be treated as a charge to earnings in the period in which the deficiency is recognized.

Variations from the actuarial assumptions used to establish certain assets and liabilities in AFG’s annuity business could adversely affect AFG’s results of operations.

The earnings on AFG’s annuity products depend significantly upon the extent to which actual experience is consistent with the assumptions used in setting reserves and establishing and amortizing deferred policy acquisition costs. These assumptions relate to investment yields (and spreads over fixed annuity crediting rates), benefit utilization rates, equity market performance, the cost of options used in the indexed annuity business, mortality, surrenders, annuitizations and other withdrawals. Developing such assumptions is complex and involves information obtained from company-specific and industry-wide data, as well as general economic information. These assumptions, and therefore AFG’s results of operations, could be negatively impacted by changes in any of the factors listed above.

REGULATORY AND LEGAL RISKS

AFG is subject to comprehensive regulation, and its ability to earn profits may be restricted by these regulations.

AFG is subject to comprehensive regulation by government agencies in the states and countries where its insurance company subsidiaries are domiciled and where these subsidiaries issue policies and handle claims. Most insurance regulations are designed to protect the interests of AFG’s policyholders and third-party claimants as opposed to its investors.

The Dodd-Frank Act, enacted in June 2010, mandates changes to the regulation of the financial services industry. Legislative or regulatory requirements imposed by or promulgated in connection with the Dodd-Frank Act may impact AFG in many ways, including, but not limited to: placing AFG at a competitive disadvantage relative to its competition or other financial services entities; changing the competitive landscape of the financial services sector or the insurance industry; making it more expensive for AFG to conduct its business; and otherwise having a material adverse effect on the overall business climate as well as AFG’s financial condition and results of operations.

Changes in domestic or foreign tax laws or interpretations of such laws could increase AFG’s corporate taxes and reduce earnings. For example, on December 22, 2017, the U.S. enacted The Tax Cuts and Jobs Act of 2017 (“TCJA”), which significantly reformed the U.S. tax code. Amendments or clarifications of the TCJA from additional regulatory and administrative guidance, may occur. Any changes in federal income tax laws, including changes to the TCJA, could adversely affect the federal income taxation of AFG’s ongoing operations and have a material adverse impact on its financial condition and results of operations.

As a participant in the federal crop insurance program, AFG could also be impacted by regulatory and legislative changes affecting that program. For example, the reinsurance levels that the federal government provides to authorized carriers

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could be reduced by future legislation. AFG will continue to monitor new and changing federal regulations and the potential impact, if any, on its insurance company subsidiaries.

On June 5, 2019, the U.S. Securities and Exchange Commission adopted a package of regulatory proposals to enhance standards of conduct owed by broker-dealers to their clients known as Regulation Best Interest. The new rule heightens the standards 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.

Existing insurance-related laws and regulations may become more restrictive in the future or new restrictive laws may be enacted; it is not possible to predict the potential effects of these laws and regulations. The costs of compliance or the failure to comply with existing or future regulations could impose significant burdens on AFG.

As a holding company, AFG is dependent on the operations of its insurance company subsidiaries to meet its obligations and pay future dividends.

AFG is a holding company and a legal entity separate and distinct from its insurance company subsidiaries. As a holding company without significant operations of its own, AFG’s principal sources of funds are dividends and other distributions from its insurance company subsidiaries. State insurance laws differ from state to state but, absent advance regulatory approval, restrict the maximum amount of dividends that may be paid by an insurer to its shareholders in any twelve-month period. AFG’s rights to participate in any distribution of assets of its insurance company subsidiaries are subject to prior claims of policyholders and creditors (except to the extent that its rights, if any, as a creditor are recognized). Consequently, AFG’s ability to pay its debts, expenses and dividends to its shareholders may be limited.

Statutory capital requirements set by the NAIC and the various state insurance regulatory bodies establish regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) ratios for insurance companies. Statutory surplus and RBC ratios may change in a given year based on a number of factors, including statutory earnings/losses, reserve changes, excess capital held to support growth, equity market and interest rate changes, the value of investment securities, and changes to the RBC formulas. Increases in the amount of capital or reserves that AFG’s larger insurance subsidiaries are required to hold could reduce the amount of future dividends such subsidiaries are able to distribute to the holding company or require capital contributions. Any reduction in the RBC ratios of AFG’s insurance subsidiaries could also adversely affect their financial strength ratings as determined by rating agencies.

Changes to existing accounting standards could adversely impact AFG’s reported results of operations.

As a U.S.-based SEC registrant, AFG prepares its financial statements in accordance with GAAP, as promulgated by the Financial Accounting Standards Board, subject to the accounting-related rules and interpretations of the SEC. Changes in accounting standards, particularly those that specifically apply to insurance company operations, may impact AFG’s reported financial results and could cause increased volatility in reported earnings, resulting in other adverse impacts on AFG’s ratings and cost of capital, and decrease the understandability of AFG’s financial results as well as the comparability of AFG’s reported results with other insurers.

GENERAL RISK FACTORS

Certain shareholders exercise substantial control over AFG’s affairs, which may impede a change of control transaction.

Carl H. Lindner III and S. Craig Lindner are each Co-Chief Executive Officers and Directors of AFG. Together, Carl H. Lindner III and S. Craig Lindner beneficially own 12.0% of AFG’s outstanding Common Stock as of February 1, 2021. Other members of the Lindner family own, directly or through trusts, a significant number of additional shares of AFG Common Stock. As a result, the Lindner family has the ability to exercise significant influence over AFG’s management and over matters requiring shareholder approval. Such influence could prevent an acquisition of AFG at a price which other shareholders may find attractive.

The price of AFG Common Stock may fluctuate significantly, which may make it difficult for holders to resell common stock when they want or at a price they find attractive.

The price of AFG Common Stock, which is listed on the NYSE, constantly changes. AFG’s Common Stock price could materially fluctuate or decrease in response to a number of events or factors discussed in this section in addition to other events or factors including: quarterly variations in our operating results; operating and stock price performance of comparable companies; and negative publicity relating to us or our competitors. In addition, broad market and industry fluctuations may materially and adversely affect the trading price or volume of AFG Common Stock, regardless of our actual operating performances.

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Item 2. Properties

AFG and its insurance subsidiaries lease the majority of their office and storage facilities in numerous cities throughout the United States and internationally, including the Company’s headquarters in Cincinnati, Ohio. Subsidiaries of AFG own several other buildings in downtown Cincinnati. AFG and its affiliates occupy approximately half of the aggregate 645,000 square feet of commercial and office space in these buildings. A property and casualty insurance subsidiary occupies approximately 90% of the 281,000 square feet of rentable office space on 17.5 acres of land that it owns in Richfield, Ohio. See Item 1 — Business — “Other Operations” for a discussion of AFG’s other commercial real estate operations.

Item 3. Legal Proceedings

AFG and its subsidiaries are involved in litigation from time to time, generally arising in the ordinary course of business. This litigation may include, but is not limited to, general commercial disputes, lawsuits brought by policyholders, employment matters, reinsurance collection matters and actions challenging certain business practices of insurance subsidiaries. Except for the following, management believes that none of the litigation meets the threshold for disclosure under this Item.

AFG’s insurance company subsidiaries and its 100%-owned subsidiary, American Premier Underwriters, Inc (including its subsidiaries, “American Premier”), are parties to litigation and receive claims alleging injuries and damages from asbestos, environmental and other substances and workplace hazards and have established loss accruals for such potential liabilities. None of such litigation or claims is individually material to AFG; however, the ultimate loss for these claims may vary materially from amounts currently recorded as the conditions surrounding resolution of these claims continue to change.

American Premier is a party or named as a potentially responsible party in a number of proceedings and claims by regulatory agencies and private parties under various environmental protection laws, including the Comprehensive Environmental Response, Compensation and Liability Act, seeking to impose responsibility on American Premier for hazardous waste or discharge remediation costs at certain railroad sites formerly owned by its predecessor, Penn Central Transportation Company (“PCTC”), and at certain other sites where hazardous waste or discharge allegedly generated by PCTC’s railroad operations and American Premier’s former manufacturing operations is present. It is difficult to estimate American Premier’s liability for remediation costs at these sites for a number of reasons, including the number and financial resources of other potentially responsible parties involved at a given site, the varying availability of evidence by which to allocate responsibility among such parties, the wide range of costs for possible remediation alternatives, changing technology and the period of time over which these matters develop. Nevertheless, American Premier believes that its accruals for potential environmental liabilities are adequate to cover the probable amount of such liabilities, based on American Premier’s estimates of remediation costs and related expenses and its estimates of the portions of such costs that will be borne by other parties. Such estimates are based on information currently available to American Premier and are subject to future change as additional information becomes available.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

AFG Common Stock is listed and traded on the New York Stock Exchange under the symbol AFG. There were approximately 5,000 shareholders of record of AFG Common Stock at February 1, 2021.

Issuer Purchases of Equity Securities

AFG repurchased shares of its Common Stock during 2020 as follows:


	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (*)
First quarter	826,283	$	74.28	826,283	4,173,717
Second quarter	1,194,236	63.71		1,194,236	2,979,481
Third quarter	1,447,588	66.01		1,447,588	1,531,893
Fourth quarter:
October	470,644	$	71.69	470,644	6,061,249
November	592,643	77.60		592,643	5,468,606
December	—	—		—	5,468,606
Total	4,531,394	$	69.02	4,531,394

(*)Represents the remaining shares that may be repurchased under the Plans authorized by AFG’s Board of Directors in February 2016 and February 2019. In October 2020, AFG’s Board of Directors authorized the repurchase of five million additional shares.

AFG acquired 97,731 shares of its Common Stock (at an average of $109.89 per share) in the first nine months of 2020, 74 shares (at $73.55 per share) in October 2020, 3,155 shares (at an average of $85.13 per share) in November 2020 and 703 shares (at an average of $88.76 per share) in December 2020 in connection with its stock incentive plans.

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Stock Performance Graph

The following graph compares performance of AFG Common Stock during the five year period from December 31, 2015 through December 31, 2020 with the performance of (i) the S&P 500 Composite Stock Index (“S&P 500 Index”), (ii) the S&P 500 Property & Casualty Insurance Index and (iii) the S&P 500 Life & Health Index. The graph assumes that an initial investment of $100 was made on December 31, 2015 and all dividends were reinvested. The stock price performance presented below is not intended to be indicative of future price performance.


	As of December 31,
	2015		2016		2017		2018		2019		2020
AFG	$	100	$	126	$	163	$	141	$	180	$	151
S&P 500 Index	100		112		136		130		171		203
S&P 500 P&C Index (b)	100		116		142		135		170		181
S&P 500 Life & Health Index (c)	100		125		145		115		142		128

(a)Cumulative total shareholder return measures the performance of a company’s stock (or an index) over time and is calculated as the change in the stock price plus cumulative dividends (assuming dividends are reinvested) over a specific period of time divided by the stock price at the beginning of the time period.

(b)The S&P 500 Property & Casualty Insurance Index included the following companies at December 31, 2020 (weighted by market capitalization): The Allstate Corporation, Chubb Limited, Cincinnati Financial Corporation, Loews Corporation, The Progressive Corporation, The Travelers Companies, Inc. and W.R. Berkley Corporation.

(c)The S&P 500 Life & Health Insurance Index included the following companies at December 31, 2020 (weighted by market capitalization): Aflac Incorporated, Globe Life Inc., Lincoln National Corporation, MetLife Inc., Principal Financial Group, Inc., Prudential Financial, Inc. and Unum Group.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations


INDEX TO MD&A
	Page		Page
General	31	Results of Operations	54
Overview	31	General	54
Critical Accounting Policies	32	Results of Operations — Fourth Quarter	57
Liquidity and Capital Resources	33	Segmented Statement of Earnings	57
Ratios	33	Property and Casualty Insurance	59
Condensed Consolidated Cash Flows	34	Annuity	69
Parent and Subsidiary Liquidity	35	Holding Company, Other and Unallocated	78
Condensed Parent Only Cash Flows	37	Results of Operations — Full Year	82
Contractual Obligations	38	Segmented Statement of Earnings	82
Off-Balance Sheet Arrangements	38	Property and Casualty Insurance	84
Investments	39	Annuity	96
Uncertainties	42	Holding Company, Other and Unallocated	108
Managed Investment Entities	49	Recent and Pending Accounting Standards	113

GENERAL

Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of AFG’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements beginning on page F-1.

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.

At December 31, 2020, AFG (parent) held approximately $215 million in cash and securities and had $500 million available under a bank line of credit, which expires in December 2025.

Pending Sale of the 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”) for $3.5 billion in cash, subject to final closing adjustments. Under the terms of the agreement, which is expected to close in the second quarter of 2021, MassMutual will acquire AFG’s wholly-owned annuity subsidiary, Great American Life Insurance Company (“GALIC”) and GALIC’s two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. At December 31, 2020, GALIC and its subsidiaries had approximately $40 billion of traditional fixed and indexed annuity reserves. AFG expects to recognize an after-tax gain on the sale of $620 million to $690 million ($7.10 to $7.90 per AFG share) upon closing. Prior to the completion of the transaction, AFG will acquire approximately $500 million in real estate-related partnerships and directly owned real estate from GALIC. Beginning with the first quarter of 2021, AFG will report the results of the Annuity business as discontinued operations, in accordance with GAAP, which includes adjusting prior period results to reflect these operations as discontinued.

Annuity Block Reinsurance Agreement

GALIC entered into a reinsurance agreement with Commonwealth Annuity and Life Insurance Company (“Commonwealth”), a subsidiary of Global Atlantic Financial Group Limited in October 2020. Under the terms of the

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agreement, GALIC ceded approximately $5.96 billion of in force traditional fixed and indexed annuities, representing approximately 15% of its in force business, and transferred related investments to Commonwealth. The agreement requires Commonwealth to maintain collateral in a trust in excess of amounts owed to GALIC.

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

AFG reported fourth quarter 2020 net earnings attributable to shareholders of $692 million ($7.93 per share, diluted) compared to $211 million ($2.31 per share, diluted) in the fourth quarter of 2019, reflecting:

•higher net realized gains on securities in the fourth quarter of 2020 compared to the fourth quarter of 2019 reflecting the disposal of investments in the annuity block reinsurance transaction,

•higher underwriting profit in the property and casualty insurance segment,

•lower earnings in the annuity segment, and

•higher interest charges on borrowed money.

Full year 2020 net earnings attributable to AFG’s shareholders were $732 million ($8.20 per share, diluted) compared to $897 million ($9.85 per share, diluted) in 2019. The COVID-19 pandemic has had widespread financial and economic impacts and adversely impacted returns on AFG’s $3.81 billion of investments that are accounted for using the equity method or carried at fair value through net earnings. AFG’s results reflect:

•higher underwriting profit in the property and casualty insurance segment,

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

•lower earnings in the annuity segment, and

•higher interest charges on borrowed money.

Outlook

The COVID-19 pandemic began to have a significant impact on global, social and economic activity during the first quarter of 2020. AFG has taken actions under its business continuity plan to minimize risk to the Company’s employees and to prevent any significant disruption to AFG’s business, agents or policyholders.

Management believes that AFG’s strong financial position and current liquidity and capital at its subsidiaries will give AFG the flexibility to continue to effectively address and respond to the ongoing uncertainties presented by the pandemic. Even with management’s expectation that the impacts of the pandemic will continue into 2021, AFG’s insurance subsidiaries have capital at or in excess of the levels required by ratings agencies in order to maintain their current ratings, and the parent company does not have any near-term debt maturities.

As a result of the contracted economy, exposures in many of AFG’s property and casualty businesses have changed due to workforce reduction, fewer miles driven and reduced revenue. This has and may continue to lead to lower frequency in certain lines while there has and may continue to be COVID-19 related increases in claim frequency in other lines of business.

There is also uncertainty as to potential government decree or legislation that could alter the coverage landscape, such as the imposition of retroactive business interruption insurance. Like most of the insurance industry, AFG’s business interruption coverages require direct physical damage to covered property for business interruption coverage to apply and the vast majority of AFG’s property policies also contain virus exclusions. See Item 1A — “Risk Factors.”

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 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 amortization of annuity deferred policy acquisition costs,

•the measurement of the derivatives embedded in indexed annuity liabilities,

•the establishment of asbestos and environmental reserves of former railroad and manufacturing operations, and

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•the valuation of investments, including the determination of impairment allowances.

See “Liquidity and Capital Resources — Uncertainties” for a discussion of insurance reserves, recoverables from reinsurers, indexed annuity embedded derivatives and contingencies related to American Premier’s former operations and “Liquidity and Capital Resources — Investments” for a discussion of impairments on investments. Deferred policy acquisition costs (“DPAC”) and certain liabilities related to annuities are amortized in relation to the present value of expected gross profits on the policies. Assumptions considered in determining expected gross profits involve significant judgment and include management’s estimates of interest rates and investment spreads, surrenders, annuitizations, renewal premiums and mortality. Should actual experience require management to change its assumptions (commonly referred to as “unlocking”), a charge or credit would be recorded to adjust DPAC or annuity liabilities to the levels they would have been if the new assumptions had been used from the inception date of each policy.

LIQUIDITY AND CAPITAL RESOURCES

Ratios

AFG’s debt to total capital ratio on a consolidated basis is shown below (dollars in millions). Management intends to maintain the ratio of debt to capital at or below 25% and intends to maintain the capital of its significant insurance subsidiaries at or above levels currently indicated by rating agencies as appropriate for the current ratings.


		December 31,
	2020							2019
		Actual			Adjusted (*)
Principal amount of long-term debt		$	1,993		$	1,993			$	1,493
Total capital		7,486			8,141				6,883
Ratio of debt to total capital:
Including subordinated debt		26.6		%	24.5		%		21.7		%
Excluding subordinated debt		17.6		%	16.2		%		14.8		%

(*) The adjusted information above is shown “as if” the transaction to sell AFG’s annuity business to MassMutual closed on December 31, 2020, and assumes an after-tax gain on the sale of the annuity business of $655 million (midpoint of the estimated range).

The ratio of debt to total capital is a non-GAAP measure that management believes is useful for investors, analysts and 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) related to fixed maturity investments).

Fixed charges are computed on a “total enterprise” basis. For purposes of calculating the ratios, “earnings” have been computed by adding to pretax earnings the fixed charges and the noncontrolling interests in earnings of subsidiaries having fixed charges and the undistributed equity in earnings or losses of investees. Fixed charges include interest (including annuity benefits as indicated), amortization of debt premium/discount and expense, preferred dividend and distribution requirements of subsidiaries and a portion of rental expense deemed to be representative of the interest factor. The ratio of core earnings to fixed charges excluding annuity benefits and the ratio of earnings to fixed charges excluding and including annuity benefits are shown in the table below:


	Year ended December 31,
	2020	2019
Ratio of core earnings to fixed charges excluding annuity benefits	10.81	12.78
Impact of non-core items	(1.02)	1.83
Ratio of earnings to fixed charges excluding annuity benefits	9.79	14.61
Impact of including interest on annuities as a fixed charge	(8.13)	(12.76)
Ratio of earnings to fixed charges including annuity benefits	1.66	1.85

Although the ratio of earnings to fixed charges excluding annuity benefits is not required or encouraged to be disclosed under Securities and Exchange Commission rules, some investors and lenders may not consider interest credited to annuity policyholders’ accounts a borrowing cost for an insurance company, and accordingly, believe this ratio is meaningful.

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The NAIC’s model law for risk-based capital (“RBC”) applies to both life and property and casualty companies. RBC formulas determine the amount of capital that an insurance company needs so that it has an acceptable expectation of not becoming financially impaired. At December 31, 2020, the capital ratios of all AFG insurance companies exceeded the RBC requirements.

Condensed Consolidated Cash Flows

AFG’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):


	Year ended December 31,
	2020		2019		2018
Net cash provided by operating activities	$	2,183	$	2,456	$	2,083
Net cash used in investing activities	(1,564)		(3,065)		(5,350)
Net cash provided by (used in) financing activities	(123)		1,408		2,444
Net change in cash and cash equivalents	$	496	$	799	$	(823)

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 $25 million in 2020, $23 million in 2019 and $148 million in 2018, accounting for a $2 million increase in cash flows from operating activities in 2020 compared to 2019 and a $125 million decrease in cash flows from operating activities in 2019 compared to 2018. 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 $2.16 billion, $2.43 billion and $1.94 billion in 2020, 2019 and 2018, respectively.

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 $1.56 billion in 2020 compared to $3.07 billion in 2019, a decrease of $1.51 billion. As discussed below (under net cash provided by financing activities), AFG’s annuity segment had net cash flows from annuity policyholders of $351 million in 2020 and $1.66 billion in 2019. Settlements of equity index call options exceeded purchases by $322 million in 2020 compared to $64 million in 2019, accounting for a $258 million decrease in cash used in investing activities. On December 31, 2020, AFG completed the sale of GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon. The assets sold included $425 million in cash and cash equivalents, resulting in an increase in cash used in investing activities in 2020. 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 $281 million use of cash in 2020 compared to an $11 million source of cash in 2019, accounting for a $292 million increase in net cash used in investing activities in 2020 compared to 2019. See Note A — “Accounting Policies — Managed Investment Entities” and Note H — “Managed Investment Entities” to the financial statements.

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Net cash used in investing activities was $3.07 billion in 2019 compared to $5.35 billion in 2018, a decrease of $2.28 billion. As discussed below (under net cash provided by financing activities), AFG’s annuity segment had net cash flows from annuity policyholders of $1.66 billion in 2019 and $2.76 billion in 2018. In addition, AFG’s cash on hand increased by $799 million during 2019 as AFG held more cash due to fewer investment opportunities in 2019 compared to 2018 when AFG invested a large portion of its cash on hand at the beginning of the year. Net investment activity in the managed investment entities was an $11 million source of cash in 2019 compared to a $169 million use of cash in 2018, accounting for a $180 million decrease in net cash used in investing activities in 2019 compared to 2018.

Net Cash Provided by (Used In) Financing Activities AFG’s financing activities consist primarily of transactions with annuity policyholders, issuances and retirements of long-term debt, issuances and repurchases of common stock, and dividend payments. Net cash used in financing activities was $123 million in 2020 compared to net cash provided by financing activities of $1.41 billion in 2019, a decrease in net cash provided by financing activities of $1.53 billion. Net annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $351 million in 2020 compared to $1.66 billion in 2019, resulting in a $1.31 billion decrease in net cash provided by financing activities in 2020 compared to 2019. In 2020, GALIC transferred $554 million of cash as part of its reinsurance agreement with Commonwealth to cede in force traditional fixed and indexed annuities. In 2020, AFG issued $300 million of 5.25% Senior Notes due in 2030, $150 million of 5.625% Subordinated Debentures due in 2060 and $200 million of 4.50% Subordinated Debentures due in 2060. The net proceeds of these offerings contributed $634 million to net cash provided by financing activities in 2020. The November 2020 redemption of AFG’s 6% Subordinated Debentures due in 2055 was a $150 million use of cash in 2020. In 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in 2059 and $200 million of 5.125% Subordinated Debentures due in 2059, the net proceeds of which contributed $315 million to net cash provided by financing activities in 2019. The December 2019 redemption of AFG’s 6-1/4% Subordinated Debentures was a $150 million use of cash in 2019. During 2020, AFG repurchased $313 million of its Common Stock compared to no share repurchases in 2019. In addition to its regular quarterly cash dividends, AFG paid special cash dividends of $2.00 per share in 2020 and $3.30 per share in 2019, which resulted in total cash dividends of $334 million in 2020 compared to $444 million in 2019. 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 $221 million in 2020 compared to retirements of managed investment entity liabilities exceeding issuances by $11 million in 2019, accounting for an $232 million increase in net cash provided by financing activities in 2020 compared to 2019. See Note A — “Accounting Policies — Managed Investment Entities” and Note H — “Managed Investment Entities” to the financial statements.

Net cash provided by financing activities was $1.41 billion in 2019 compared to $2.44 billion in 2018, a decrease of $1.03 billion. Annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $1.66 billion in 2019 compared to $2.76 billion in 2018, resulting in a $1.10 billion decrease in net cash provided by financing activities in 2019 compared to 2018. In 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in 2059 and $200 million of 5.125% Subordinated Debentures due in 2059, the net proceeds of which contributed $315 million to net cash provided by financing activities in 2019. The December redemption of AFG’s 6-1/4% Subordinated Debentures was a $150 million use of cash in 2019. During 2018, AFG had no additional long-term debt borrowings or repayments. In addition to its regular quarterly cash dividends, AFG paid special cash dividends of $3.30 per share and $3.00 per share in 2019 and 2018, respectively, which resulted in total cash dividends of $444 million in 2019 compared to $394 million in 2018. Retirements of managed investment entity liabilities exceeded issuances by $11 million in 2019 compared to issuances of managed investment entity liabilities exceeding retirements by $48 million in 2018, accounting for a $59 million decrease in net cash provided by financing activities in 2019 compared to 2018.

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.

As discussed above, in January 2021, AFG reached a definitive agreement to sell its annuity business to MassMutual for $3.5 billion in cash, subject to final closing adjustments. AFG’s capital and liquidity will be significantly enhanced as a result of the transaction. With a strong balance sheet and substantial excess capital, management will continue to evaluate opportunities for deploying AFG’s excess capital, including the potential for healthy, profitable organic growth, expansion of the Specialty property & casualty niche businesses through acquisitions and start-ups that meet target return thresholds, as well as share repurchases and special dividends.

In December 2020, AFG replaced its existing credit facility with a new five-year, $500 million revolving credit facility which expires in December 2025. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875%

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(currently 1.375%) over LIBOR based on AFG’s credit rating. The credit facility also includes provisions relating to the replacement of LIBOR with different floating rates in the event of the discontinuance of LIBOR. There were no borrowings under this agreement, or under any other parent company short-term borrowing arrangements, during 2020.

In 2020, AFG repurchased 4,531,394 shares of its Common Stock for $313 million and paid a special cash dividend of $2.00 per share of AFG Common Stock in December totaling approximately $173 million.

In 2020, AFG issued $300 million of 5.25% Senior Notes due in April 2030, $150 million of 5.625% Subordinated Debentures due in June 2060 and $200 million of 4.50% Subordinated Debentures due in September 2060 to increase liquidity and provide flexibility at the parent holding company in its response to the uncertainties of the economic environment. The net proceeds from the offerings were used for general corporate purposes, which included repurchases of outstanding common shares and the November 2020 redemption of AFG’s $150 million outstanding principal amount of 6% Subordinated Debentures due in November 2055 at par value.

In 2019, AFG paid special cash dividends of $3.30 per share of AFG Common Stock ($1.50 per share in May and $1.80 per share in November) totaling approximately $297 million.

In December 2019, AFG issued $200 million of 5.125% Subordinated Debentures due in December 2059. A portion of the net proceeds of the offering were used to redeem AFG’s $150 million outstanding principal amount of 6-1/4% Subordinated Debentures due in September 2054, at par value, with the remainder used for general corporate purposes.

In March 2019, AFG issued $125 million of 5.875% Subordinated Debentures due in March 2059. The net proceeds of the offering were used for general corporate purposes.

In 2018, AFG paid special cash dividends of $3.00 per share of AFG Common Stock ($1.50 per share in May and November) totaling approximately $267 million and repurchased 65,589 shares of its Common Stock for $6 million.

All debentures and notes issued by AFG are rated investment grade by two nationally recognized rating agencies. Under a currently effective shelf registration statement, AFG can offer additional equity or debt securities. The shelf registration provides AFG with flexibility to access the capital markets from time to time as market and other conditions permit.

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.

Subsidiary Liquidity GALIC, which is expected to be sold in the second quarter of 2021, 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 December 31, 2020, GALIC had $1.13 billion in outstanding advances from the FHLB (included in annuity benefits accumulated), bearing interest at rates ranging from 0.31% to 1.35% (average rate of 0.53% at December 31, 2020). While these advances must be repaid between 2021 and 2025 ($931 million in 2021 and $200 million in 2025), GALIC has the option to prepay all or a portion on the majority 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 December 31, 2020, GALIC estimated that it had additional borrowing capacity of approximately $600 million from the FHLB.

In February 2020, GALIC entered into a flow reinsurance agreement with Commonwealth under which GALIC cedes certain newly issued traditional fixed and indexed annuities on a quota share coinsurance basis with such quota share percentages being up to 50%. That agreement was effective for policies issued after May 6, 2020. Under accounting guidance, the reinsurance transaction will be accounted for using the deposit method.

As discussed above, in the fourth quarter of 2020, GALIC entered into a reinsurance agreement with Commonwealth. Under the terms of the agreement, GALIC ceded approximately $5.96 billion of traditional fixed and indexed annuities, representing approximately 15% of its in force business, and transferred a similar amount of investments to Commonwealth. The assets transferred were primarily available for sale fixed maturity securities, the disposal of which resulted in the recognition of approximately $292 million (net of DPAC and tax) in net realized gains on securities. Under reinsurance accounting guidance, the transaction will be accounted for using the deposit method and the loss on the transaction will be deferred and recognized over the expected life of the underlying annuity contracts (7-10 years). Under both the flow and the block reinsurance agreements, Commonwealth is required to maintain collateral in trusts in excess of amounts owed to GALIC.

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In the fourth quarter of 2018, GALIC entered into a reinsurance treaty with Hannover Life Reassurance Company of America that transfers the risk of certain surrender activity in GALIC’s fixed-indexed annuity business. This treaty meets the statutory risk transfer rules and resulted in increases in statutory surplus (through an after-tax reserve credit) of $139 million at December 31, 2020 and $124 million at December 31, 2019. The treaty reduces statutory capital and surplus volatility related to GALIC’s fixed-indexed annuity policies from stock market fluctuations, which could impact GALIC’s risk-based capital and the amount of dividends available in future periods. Under GAAP, this transaction does not meet the GAAP insurance risk transfer criteria and did not have a material impact on AFG’s financial statements.

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. Due to the anticipated slowdown in cash collections from the state mandated increases in grace periods for premium payments, AFG’s property and casualty insurance subsidiaries have maintained higher than typical cash balances since March 2020. AFG has not experienced a material increase in uncollectable premiums receivable as policyholders continue to make payments in accordance with the agreed upon terms.

For statutory accounting purposes, equity securities of non-affiliates and equity call and put options used in the fixed-indexed and variable-indexed annuity business are generally carried at fair value. At December 31, 2020, AFG’s insurance companies owned publicly traded equity securities with a fair value of $1.59 billion and equity index call and put options with a net fair value of $820 million. Decreases in market prices could adversely affect the insurance group’s capital, potentially impacting the amount of dividends available or necessitating a capital contribution. Conversely, increases in market prices could have a favorable impact on the group’s dividend-paying capability.

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. Even in the current uncertain COVID-19 environment, management believes that the capital levels in AFG’s insurance subsidiaries are adequate to maintain its business and rating agency ratings. Should the current adverse financial conditions continue into 2021, AFG’s insurance subsidiaries will reduce dividend payments to AFG parent as needed to maintain sufficient capital at the insurance companies. 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.

Condensed Parent Only Cash Flows

AFG’s parent holding company only condensed cash flows from operating, investing and financing activities are shown below (in millions):


	Year ended December 31,
	2020		2019		2018
Net cash provided by operating activities	$	483	$	306	$	215
Net cash provided by (used in) investing activities	(294)		(56)		10
Net cash used in financing activities	(140)		(242)		(366)
Net change in cash and cash equivalents	$	49	$	8	$	(141)

Parent Net Cash Provided by Operating Activities Parent holding company cash flows from operating activities consist primarily of dividends and tax payments received from AFG’s insurance subsidiaries, reduced by tax payments to the IRS and holding company interest and other expenses. Parent holding company net cash provided by operating activities was $483 million in 2020 compared to $306 million in 2019 and $215 million in 2018. The $177 million increase in net cash provided by operating activities in 2020 as compared to 2019 was due primarily to higher dividends received from subsidiaries in 2020 as compared to 2019. The $91 million increase in net cash provided by operating activities in 2019 as compared to 2018 was due primarily to higher dividends received from subsidiaries.

Parent Net Cash Provided by (Used in) Investing Activities Parent holding company investing activities consist of capital contributions to and returns of capital from subsidiaries and, to a much lesser extent, parent company investment activity. Parent holding company net cash used in investing activities was $294 million in 2020 compared to

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$56 million in 2019 and net cash provided by investing activities of $10 million in 2018. The $56 million in net cash used in investing activities in 2019 and the $10 million in net cash provided by investing activities in 2018 are significantly lower than the $294 million in net cash used in investing activities in 2020 due primarily to higher capital contributions to AFG’s property and casualty subsidiaries in 2020.

Parent Net Cash Used in Financing Activities Parent company financing activities consist primarily of the issuance and retirement of long-term debt, dividends to shareholders, and, to a lesser extent, proceeds from employee stock option exercises and repurchases of AFG Common Stock. Significant long-term debt and common stock transactions are discussed above under “Parent Holding Company Liquidity.” Parent holding company net cash used in financing activities was $140 million in 2020 compared to $242 million in 2019 and $366 million in 2018. The $102 million decrease in net cash used in financing activities in 2020 as compared to 2019 reflects the net issuances of long-term debt in 2020 and lower dividends (due primarily to special dividends of $2.00 per share in 2020 compared to special dividends of $3.30 per share in 2019), partially offset by $313 million in repurchases of outstanding common shares in 2020 compared to no repurchases in 2019. The $124 million decrease in net cash used in financing activities in 2019 as compared to 2018 reflects the net issuances of long-term debt in 2019, partially offset by higher dividends (due primarily to special dividends of $3.30 per share in 2019 compared to $3.00 per share in 2018).

Contractual Obligations

The following table shows an estimate (based on historical patterns and expected trends) of payments to be made for insurance reserve liabilities, as well as scheduled payments for major contractual obligations (in millions).


	Total		Within One Year		2-3 Years		4-5 Years		More than 5 Years
Annuities (a)	$	46,885	$	4,584	$	10,716	$	11,559	$	20,026
Life, accident and health liabilities (a)	1,217		99		212		139		767
Property and casualty unpaid losses and loss adjustment expenses (b)	10,392		2,827		2,764		1,174		3,627
Long-term debt, including interest	4,307		92		184		184		3,847
Operating leases (c)	178		43		64		43		28
Total	$	62,979	$	7,645	$	13,940	$	13,099	$	28,295

(a)Amounts presented in the table represent estimated cash payments under such contracts, based on significant assumptions related to mortality, morbidity, lapse, renewal, retirement and annuitization. These assumptions also include interest and index crediting consistent with assumptions used to amortize DPAC and assess loss recognition. All estimated cash payments are undiscounted for the time value of money. As a result, total outflows for all years exceed the corresponding liabilities of $42.57 billion for annuity benefits accumulated and $607 million for life, accident and health reserves included in AFG’s Balance Sheet as of December 31, 2020. Based on the same assumptions, AFG projects reinsurance recoveries related to annuity benefits accumulated totaling $7.25 billion as follows: Within 1 year — $876 million; 2-3 years — $1.73 billion; 4-5 years — $2.05 billion; and thereafter — $2.59 billion and reinsurance recoveries related to life, accident and health reserves totaling $577 million as follows: Within 1 year — $58 million; 2-3 years — $91 million; 4-5 years — $74 million; and thereafter — $354 million. Actual payments and their timing could differ significantly from these estimates. Both the annuities and life, accident and health liabilities are part of the pending sale of annuity business, which is expected to close in the second quarter of 2021.

(b)Dollar amounts and time periods are estimates based on historical net payment patterns applied to the gross reserves and do not represent actual contractual obligations. Based on the same assumptions, AFG projects reinsurance recoveries related to these reserves totaling $3.12 billion as follows: Within 1 year — $848 million; 2-3 years — $829 million; 4-5 years — $352 million; and thereafter — $1.09 billion. Actual payments and their timing could differ significantly from these estimates.

(c)Amounts presented in the table represent lease component payments, including short-term lease payments, and exclude non-lease component payments of building leases (primarily common area maintenance and property tax payments). Estimated non-lease component payments totaling $89 million are as follows: Within 1 year — $18 million; 2-3 years — $30 million; 4-5 years — $25 million; and thereafter — $16 million.

AFG has no material contractual purchase obligations or other long-term liabilities at December 31, 2020.

Off-Balance Sheet Arrangements

See Note Q — “Additional Information — Financial Instruments — Unfunded Commitments” to the financial statements.

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Investments

AFG attempts to optimize investment income while building the value of its portfolio, placing emphasis upon total long-term performance.

AFG’s investment portfolio at December 31, 2020, contained $43.21 billion (79% in the annuity subsidiaries to be sold) in fixed maturity securities classified as available for sale and carried at fair value with unrealized gains and losses included in accumulated other comprehensive income and $66 million (64% in the annuity subsidiaries to be sold) in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG’s investment portfolio includes $1.25 billion (46% in the annuity subsidiaries to be sold) in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and $413 million (50% in the annuity subsidiaries to be sold) in equity securities carried at fair value with holding gains and losses included in net investment income.

As detailed in Note E — “Investments — Net Unrealized Gain on Marketable Securities” to the financial statements, unrealized gains and losses on AFG’s fixed maturity securities are included in shareholders’ equity after adjustments for related changes in DPAC and certain liabilities related to annuity, long-term care and life businesses and deferred income taxes. DPAC and certain other balance sheet amounts applicable to annuity, long-term care and life businesses are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding increases or decreases (net of tax) included in accumulated other comprehensive income in AFG’s Balance Sheet.

Fixed income investment funds are generally invested in securities with intermediate-term maturities with an objective of optimizing total return while allowing flexibility to react to changes in market conditions. At December 31, 2020, the average life of AFG’s fixed maturities was about 5-1/2 years.

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 published closing prices. For AFG’s fixed maturity portfolio, approximately 87% was priced using pricing services at December 31, 2020 and the balance was 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 mortgage-backed securities (“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 December 31, 2020 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional.

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Fair value of fixed maturity portfolio	$	43,273
Percentage impact on fair value of 100 bps increase in interest rates	(3.5		%)
Pretax impact on fair value of fixed maturity portfolio	$	(1,515)
Offsetting adjustments to deferred policy acquisition costs and other balance sheet amounts	650
Estimated pretax impact on accumulated other comprehensive income	(865)
Deferred income tax	182
Estimated after-tax impact on accumulated other comprehensive income	$	(683)

At December 31, 2020 the fair value of the fixed maturity portfolio in AFG’s property and casualty group was $9.10 billion. The pretax impact on the fair value upon a 100 basis point increase in interest rates would have been a decline of approximately $273 million in fair value ($216 million after tax) at December 31, 2020.

Approximately 88% of the fixed maturities held by AFG at December 31, 2020, 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 because, 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.

Summarized information for AFG’s MBS (including those classified as trading) at December 31, 2020, 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 3-1/2 years and 3 years, respectively. Approximately 75% of AFG’s MBS are owned in the annuity businesses expected to be sold.


	Amortized Cost, net (*)		Fair Value		Fair Value as % of Cost		Unrealized Gain (Loss)		% Rated Investment Grade
Collateral type
Residential:
Agency-backed	$	487	$	494	101	%	$	7	100	%
Non-agency prime	1,297		1,403		108	%	106		62	%
Alt-A	757		860		114	%	103		36	%
Subprime	269		299		111	%	30		17	%
Commercial	748		790		106	%	42		96	%
	$	3,558	$	3,846	108	%	$	288	65	%

(*)Amortized cost, net of allowance for expected credit losses.

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 December 31, 2020, 96% (based on statutory carrying value of $3.52 billion) of AFG’s MBS had an NAIC designation of 1.

Municipal bonds represented approximately 13% of AFG’s fixed maturity portfolio at December 31, 2020. 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 December 31, 2020, approximately 79% of the municipal bond portfolio was held in revenue bonds, with the remaining 21% held in general obligation bonds.

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Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at December 31, 2020, is shown in the following table (dollars in millions). Approximately $2.47 billion of available for sale fixed maturity securities had no unrealized gains or losses at December 31, 2020.


	Securities With Unrealized Gains			Securities With Unrealized Losses
Available for Sale Fixed Maturities
Fair value of securities	$	35,209		$	5,528
Amortized cost of securities	$	32,252		$	5,646
Gross unrealized gain (loss)	$	2,957		$	(118)
Fair value as % of amortized cost	109		%	98		%
Number of security positions	4,160			620
Number individually exceeding $2 million gain or loss	374			4
Concentration of gains (losses) by type or industry (exceeding 5% of unrealized):
States and municipalities	$	486		$	(2)
Banks, savings and credit institutions	446			(7)
Mortgage-backed securities	294			(6)
Insurance	226			—
Other asset-backed securities	169			(66)
Technology	160			(1)
Collateralized loan obligations	27			(17)
Percentage rated investment grade	92		%	88		%

The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturity securities at December 31, 2020, 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	5	%	—	%
After one year through five years	30	%	10	%
After five years through ten years	29	%	7	%
After ten years	8	%	4	%
	72	%	21	%
Collateralized loan obligations and other asset-backed securities (average life of approximately 3-1/2 years)	19	%	74	%
Mortgage-backed securities (average life of approximately 3-1/2 years)	9	%	5	%
	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 December 31, 2020
Securities with unrealized gains:
Exceeding $500,000 (1,523 securities)	$	22,847	$	2,570	113	%
$500,000 or less (2,637 securities)	12,362		387		103	%
	$	35,209	$	2,957	109	%
Securities with unrealized losses:
Exceeding $500,000 (70 securities)	$	1,250	$	(74)	94	%
$500,000 or less (550 securities)	4,278		(44)		99	%
	$	5,528	$	(118)	98	%

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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 December 31, 2020
Investment grade fixed maturities with losses for:
Less than one year (241 securities)	$	2,813	$	(56)	98	%
One year or longer (147 securities)	2,057		(34)		98	%
	$	4,870	$	(90)	98	%
Non-investment grade fixed maturities with losses for:
Less than one year (184 securities)	$	554	$	(21)	96	%
One year or longer (48 securities)	104		(7)		94	%
	$	658	$	(28)	96	%

When a decline in the value of a specific investment is considered to be other-than-temporary, an allowance for credit losses (impairment) is charged to earnings (accounted for as a realized loss). The determination of whether unrealized losses are other-than-temporary requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include:

a)whether the unrealized loss is credit-driven or a result of changes in market interest rates,

b)the extent to which fair value is less than cost basis,

c)cash flow projections received from independent sources,

d)historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases,

e)near-term prospects for improvement in the issuer and/or its industry,

f)third-party research and communications with industry specialists,

g)financial models and forecasts,

h)the continuity of interest payments, maintenance of investment grade ratings and hybrid nature of certain investments,

i)discussions with issuer management, and

j)ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value.

Based on its analysis of the factors listed above, management believes AFG will recover its cost basis (net of any allowance) in the fixed maturity 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 December 31, 2020. Although AFG has the ability to continue holding its fixed maturity 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 regarding 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, increases in the allowance for credit losses 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, see “Results of Operations — Consolidated Realized Gains (Losses) on Securities.”

Uncertainties

As more fully explained in the following paragraphs, 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.

Property and Casualty Insurance Reserves Estimating the liability for unpaid losses and loss adjustment expenses (“LAE”) is inherently judgmental and is influenced by factors that are subject to significant variation. Determining the liability is a complex process incorporating input from many areas of the Company including actuarial, underwriting, pricing, claims and operations management.

The estimates of liabilities for unpaid claims and for expenses of investigation and adjustment of unpaid claims are based upon: (i) the accumulation of case estimates for losses reported prior to the close of the accounting periods on direct business written (“case reserves”); (ii) estimates received from ceding reinsurers and insurance pools and associations; (iii) estimates of claims incurred but not reported or “IBNR” (including possible development on known claims);

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(iv) estimates (based on experience) of expense for investigating and adjusting claims; and (v) the current state of law and coverage litigation.

The process used to determine the total reserve for liabilities involves estimating the ultimate incurred losses and LAE, adjusted for amounts already paid on the claims. The IBNR reserve is derived by first estimating the ultimate unpaid reserve liability and subtracting case reserves for loss and LAE. See Note P — “Insurance — Property and Casualty Insurance Reserves” to the financial statements for a discussion of the factors considered and actuarial methods used in determining management’s best estimate of the ultimate liability for unpaid losses and LAE.

The following table shows (in millions) the breakdown of AFG’s property and casualty insurance reserves between case reserves, IBNR reserves and LAE reserves (estimated amounts required to adjust, record and settle claims, other than the claim payments themselves) at December 31, 2020 and gross written premiums for the year ended December 31, 2020.


	Gross Loss Reserves
	Case		IBNR		LAE		Total Reserves		Gross Written Premiums
Statutory Line of Business
Other liability — occurrence	$	779	$	2,423	$	563	$	3,765	$	1,340
Workers’ compensation	989		1,304		345		2,638		1,130
Other liability — claims made	233		389		288		910		663
Commercial auto/truck liability/medical	289		352		122		763		470
Special property (fire, allied lines, inland marine, earthquake)	222		208		30		460		1,457
Products liability — occurrence	86		219		144		449		169
Commercial multi-peril	169		110		81		360		328
Other lines	181		432		119		732		1,197
Total Statutory	2,948		5,437		1,692		10,077		6,754
Adjustments for GAAP:
Foreign operations	115		165		29		309		319
Deferred gains on retroactive reinsurance	—		22		—		22		—
Loss reserve discounting	(5)		—		—		(5)		—
Other	(11)		—		—		(11)		14
Total Adjustments for GAAP	99		187		29		315		333
Total GAAP Reserves and Premiums	$	3,047	$	5,624	$	1,721	$	10,392	$	7,087

While current factors and reasonably likely changes in variable factors are considered in estimating the liability for unpaid losses and LAE, there is no method or system that can eliminate the risk of actual ultimate results differing from such estimates.

Following is a discussion of certain critical variables affecting the estimation of loss reserves of the more significant long-tail lines of business (asbestos and environmental liabilities are separately discussed below). Many other variables may also impact ultimate claim costs.

An important assumption underlying reserve estimates is that the cost trends implicitly built into development patterns will continue into the future. However, future results could vary due to an unexpected change in the underlying cost trends. This unexpected change could arise from a variety of sources including a general increase in economic inflation, inflation from social programs, new medical technologies, or other factors such as those listed below in connection with AFG’s largest lines of business. It is not possible to isolate and measure the potential impact of just one of these variables, and future cost trends could be partially impacted by several such variables. However, it is reasonable to address the sensitivity of the reserves to potential impact from changes in these variables by measuring the effect of a possible overall 1% change in future cost trends that may be caused by one or more variables. Utilizing the effect of a 1% change in overall cost trends enables changes greater than 1% to be estimated by extrapolation. Each additional 1% change in the cost trend would increase the effect on net earnings by an amount slightly (about 5%) greater than the effect of the previous 1%. For example, if a 1% change in cost trends in a line of business would change net earnings by $20 million, a 2% change would change net earnings by approximately $41 million.

The estimated cumulative impact that a 1% change in cost trends in AFG’s more significant lines of property and casualty business (exceeding 5% of total reserves) would have on net earnings is shown below (in millions).

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Line of business	Effect of 1% Change in Cost Trends
Other liability — occurrence	$	52
Workers’ compensation	71
Other liability — claims made	17
Commercial auto/truck liability/medical	11

The judgments and uncertainties surrounding management’s reserve estimation process and the potential for reasonably possible variability in management’s most recent reserve estimates may also be viewed by looking at how recent historical estimates of reserves have developed. The following table shows (dollars in millions) what the impact on AFG’s net earnings would be on the more significant lines of business if the December 31, 2020, reserves (net of reinsurance) developed at the same rate as the average development of the most recent five years.


	5-yr. Average Development (a)(b)		Net Reserves (b) December 31, 2020		Effect on Net Earnings (b)
Other liability — occurrence	5.5	%	$	1,643	$	(90)
Workers’ compensation	(4.5	%)	2,223		100
Other liability — claims made	(2.2	%)	691		15
Commercial auto/truck liability/medical	(0.9	%)	538		5

(a)Adverse (favorable), net of tax effect.

(b)Excludes asbestos and environmental liabilities.

The following discussion describes key assumptions and important variables that affect the estimate of the reserve for loss and LAE of the more significant lines of business and explains what caused them to change from assumptions used in the preceding period.

Other Liability — Occurrence

This long-tail line of business consists of coverages protecting the insured against legal liability resulting from negligence, carelessness, or a failure to act causing property damage or personal injury to others. Some of the important variables affecting estimation of loss reserves for other liability — occurrence include:

•Litigious climate

•Unpredictability of judicial decisions regarding coverage issues

•Magnitude of jury awards

•Outside counsel costs

•Timing of claims reporting

AFG recorded adverse prior year reserve development of $99 million in 2020 and $143 million in 2019 related to its other liability — occurrence coverage due primarily to continued claim severity increases in excess and umbrella liability coverages. AFG recorded adverse prior year reserve development of $48 million in 2018 due to claim severity increases in excess and umbrella liability coverages as well as late emergence of excess workers’ compensation and Texas non-subscribers workers’ injury claims.

While management applies the actuarial methods mentioned above, more judgment is involved in arriving at the final reserve to be held. For recent accident years, more weight is given to the Bornhuetter-Ferguson method.

Workers’ Compensation

This long-tail line of business provides coverage to employees who may be injured in the course of employment. Some of the important variables affecting estimation of loss reserves for workers’ compensation include:

•Legislative actions and regulatory and legal interpretations

•Future medical cost inflation

•Economic conditions

•Frequency of reopening claims previously closed

•Advances in medical equipment and processes

•Pace and intensity of employee rehabilitation

•Changes in the use of pharmaceutical drugs

•Changes in longevity trends for permanently injured workers

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Approximately 28% and 23% of AFG’s workers’ compensation reserves at December 31, 2020 relate to policies written in Florida and California, respectively. The Castellanos v. Next Door Company decision in Florida and the implementation of Senate Bill 863 in California are two examples of changes that impacted the workers’ compensation operating environment and added difficulty and uncertainty to the estimation of related liabilities.

AFG recorded favorable prior year reserve development of $178 million in 2020 due to lower than anticipated medical claim severity and improving claim closure rates, particularly in the southeastern United States and California. AFG recorded favorable prior year reserve development of $180 million in 2019 related to its workers’ compensation coverage due to lower than anticipated frequency of lost-time claims and medical severity. AFG recorded favorable prior year reserve development of $127 million in 2018 due to lower than anticipated claim severity in the southeastern United States and improving claim closure rates in California.

Other Liability — Claims Made

This long-tail line of business consists mostly of directors’ and officers’ liability (“D&O”). Some of the important variables affecting estimation of loss reserves for other liability — claims made include:

•Litigious climate

•Economic conditions

•Variability of stock prices

•Magnitude of jury awards

The general state of the economy and the variability of the stock price of the insured can affect the frequency and severity of shareholder class action suits and other situations that trigger coverage under D&O policies. For example, from 2008 to 2010, economic conditions led to higher frequency of claims, particularly in the D&O policies for small account and not-for-profit organizations. Since then, claim frequency has decreased from its peak in 2010 and has stabilized to near pre-2008 levels.

AFG recorded favorable prior year reserve development of $8 million in 2020, $4 million in 2019 and $9 million in 2018 on its D&O business as claim frequency and severity was less than expected across several prior accident years.

Commercial Auto/Truck Liability/Medical

This line of business is a mix of coverage protecting the insured against legal liability for property damage or personal injury to others arising from the operation of commercial motor vehicles. The property damage liability exposure is usually short-tail with relatively quick reporting and settlement of claims. The bodily injury and medical payments exposures are longer-tailed; although the claim reporting is relatively quick, the final settlement can take longer to achieve. Some of the important variables affecting estimation of loss reserves for commercial auto/truck liability/medical are similar to other liability — occurrence and include:

•Magnitude of jury awards

•Unpredictability of judicial decisions regarding coverage issues

•Litigious climate and trends

•Change in frequency of severe accidents

•Health care costs and utilization of medical services by injured parties

AFG recorded favorable prior year reserve development of $16 million in 2020, $15 million in 2019 and $26 million in 2018. Although severity trends for this line of business continue to be elevated, the severity has been lower than initially projected in each period.

Recoverables from Reinsurers and Availability of Reinsurance AFG is subject to credit risk with respect to its reinsurers, as reinsurance contracts do not relieve AFG of its liability to policyholders. To mitigate this risk, substantially all reinsurance is ceded to companies rated “A” or better by S&P or is secured by “funds withheld” or other collateral.

The availability and cost of reinsurance are subject to prevailing market conditions, which are beyond AFG’s control and which may affect AFG’s level of business and profitability. Although the cost of certain reinsurance programs may increase, management believes that AFG will be able to maintain adequate reinsurance coverage at acceptable rates without a material adverse effect on AFG’s results of operations. AFG’s gross and net combined ratios are shown in the table below.

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See Item 1 — Business — “Property and Casualty Insurance Segment — Reinsurance” for more information on AFG’s reinsurance programs. For additional information on the effect of reinsurance on AFG’s historical results of operations see Note P — “Insurance — Reinsurance” to the financial statements.

The following table illustrates the effect that purchasing property and casualty reinsurance has had on AFG’s combined ratio over the last three years.


	2020		2019		2018
Before reinsurance (gross)	97.1	%	95.6	%	94.1	%
Effect of reinsurance	(1.6	%)	0.2	%	(0.3	%)
Actual (net of reinsurance)	95.5	%	95.8	%	93.8	%

Outside of its property and casualty operations, AFG also has reinsurance recoverables of $6.54 billion related to the annuity business and $265 million related to the run-off long-term care and life business. The annuity related recoverable is due from Commonwealth Annuity and Life Insurance Company. Under the terms of the agreements, Commonwealth is required to maintain collateral in trusts in excess of amounts owed to GALIC. Of the $265 million related to the run-off long-term care and life business, $183 million ($179 million net of credit allowances) is due (directly or indirectly) from Hannover Life Reassurance Company of America (rated AA- by S&P).

Asbestos and Environmental-related (“A&E”) Insurance Reserves Asbestos and environmental reserves of the property and casualty group consisted of the following (in millions):


	December 31,
	2020		2019
Asbestos	$	239	$	221
Environmental	183		162
A&E reserves, net of reinsurance recoverable	422		383
Reinsurance recoverable, net of allowance	150		146
Gross A&E reserves	$	572	$	529

Asbestos reserves include claims asserting alleged injuries and damages from exposure to asbestos. Environmental reserves include claims relating to polluted sites.

Asbestos claims against manufacturers, distributors or installers of asbestos products were presented under the products liability section of their policies, which typically had aggregate limits that capped an insurer’s liability. In addition, asbestos claims are being presented as “non-products” claims, such as those by installers of asbestos products and by property owners or operators who allegedly had asbestos on their property, under the premises or operations section of their policies. Unlike products exposures, these non-products exposures typically had no aggregate limits, creating greater exposure for insurers. Further, in an effort to seek additional insurance coverage, some insureds with installation activities who have substantially eroded their products coverage are presenting new asbestos claims as non-products operations claims or attempting to reclassify previously settled products claims as non-products claims to restore a portion of previously exhausted products aggregate limits.

Approximately 42% of AFG’s net asbestos reserves relate to policies written directly by AFG subsidiaries. Claims from these policies generally are product-oriented claims with only a limited amount of non-products exposures and are dominated by small to mid-sized commercial entities that are mostly regional policyholders with few national target defendants. The remainder is assumed reinsurance business that includes exposures from 1954 to 1983. The asbestos and environmental assumed claims are ceded by various insurance companies under reinsurance treaties. A majority of the individual assumed claims have exposures of less than $100,000 to AFG. Asbestos losses assumed include some of the industry known manufacturers, distributors and installers. Pollution losses include industry known insured names and sites.

Establishing reserves for A&E claims relating to policies and participations in reinsurance treaties and former operations is subject to uncertainties that are significantly greater than those presented by other types of claims. For this group of claims, traditional actuarial techniques that rely on historical loss development trends cannot be used and a range of reasonably possible losses cannot be estimated. Case reserves and expense reserves are established by the claims department as specific policies are identified. In addition to the case reserves established for known claims, management establishes additional reserves for claims not yet known or reported and for possible development on known claims. These additional reserves are management’s best estimate based on periodic comprehensive studies and internal

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reviews adjusted for payments and identifiable changes, supplemented by management’s review of industry information about such claims, with due consideration to individual claim situations.

Management believes that estimating the ultimate liability for asbestos claims presents a unique and difficult challenge to the insurance industry 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. Environmental claims likewise present challenges in prediction, due to uncertainty regarding the interpretation of insurance policies, complexities regarding multi-party involvements at sites, evolving cleanup standards and protracted time periods required to assess the level of cleanup required at contaminated sites.

The following factors could impact AFG’s A&E reserves and payments:

•There is interest at the state level to attempt to legislatively address asbestos liabilities and the manner in which asbestos claims are resolved. These developments are fluid and could result in piecemeal state-by-state solutions.

•The manner by which bankruptcy courts are addressing asbestos liabilities is in flux.

•AFG’s insureds may make claims alleging significant non-products exposures.

While management believes that AFG’s reserves for A&E claims are a reasonable estimate of ultimate liability for such claims, actual results may vary materially from the amounts currently recorded due to the difficulty in predicting the number of future claims, the impact of bankruptcy filings and unresolved issues such as whether coverage exists, whether policies are subject to aggregate limits on coverage, how claims are to be allocated among triggered policies and implicated years and whether claimants who exhibit no signs of illness will be successful in pursuing their claims. A 1% variation in loss cost trends, caused by any of the factors previously described, would change net earnings by approximately $38 million.

AFG tracks its A&E claims by policyholder. The following table shows, by type of claim, the number of policyholders that did not receive any payments in the calendar year separate from policyholders that did receive a payment. Policyholder counts represent policies written by AFG subsidiaries and do not include assumed reinsurance.


	2020	2019	2018
Number of policyholders with no indemnity payments:
Asbestos	97	98	94
Environmental	116	113	112
	213	211	206
Number of policyholders with indemnity payments:
Asbestos	48	46	49
Environmental	22	17	32
	70	63	81
Total	283	274	287

Amounts paid (net of reinsurance recoveries) for asbestos and environmental claims, including LAE, were as follows (in millions):


	2020		2019		2018
Asbestos	$	8	$	17	$	9
Environmental	—		13		17
Total	$	8	$	30	$	26

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The survival ratio is a measure often used by industry analysts to compare A&E reserves’ strength among companies. This ratio is typically calculated by dividing reserves for A&E exposures by the three-year average of paid losses, and therefore measures the number of years that it would take to pay off current reserves based on recent average payments. Because this ratio can be significantly impacted by a number of factors such as loss payout variability, caution should be exercised in attempting to determine reserve adequacy based simply on the survival ratio. At December 31, 2020, the property and casualty insurance segment’s three-year survival ratios compare favorably with industry survival ratios published by A.M. Best (as of December 31, 2019, and adjusted for several large portfolio transfers) as detailed in the following table:


	Property and Casualty Insurance Reserves
	Three-Year Survival Ratio (Times Paid Losses)
	Asbestos	Environmental	Total A&E
AFG (12/31/2020)	21.5	18.2	19.9
Industry (12/31/2019)	7.9	8.5	8.1

During the third quarter of 2020, AFG completed a comprehensive external study of its asbestos and environmental exposures relating to the run-off operations of its property and casualty insurance segment and its exposures related to former railroad and manufacturing operations and sites. 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 with the aid of specialty actuarial, engineering and consulting firms and outside counsel, with an in-depth internal review during the intervening years.

As a result of the 2020 external study, AFG’s property and casualty insurance segment recorded a $47 million pretax special charge to increase its asbestos reserves by $26 million (net of reinsurance) and its environmental reserves by $21 million (net of reinsurance). Over the past few years, the focus of AFG’s asbestos claims litigation has shifted to smaller companies and companies with ancillary exposures. AFG’s insureds with these exposures have been the driver of the property and casualty segment’s asbestos reserve increases in recent years. AFG is seeing modestly increasing estimates for indemnity and defense compared to prior studies on certain specific open claims.

The increase in property and casualty environmental reserves was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and its estimate of future, but as yet unreported, claims. AFG has updated its view of legal defense costs on open environmental claims as well as a number of claims and sites where the estimated investigation and remediation costs have increased. As in past years, there were no new or emerging broad industry trends that were identified in this review.

An in-depth internal review of AFG’s A&E reserves was completed in the third quarter of 2019. As a result of the 2019 internal review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $3 million (net of reinsurance) and its environmental reserves by $15 million (net of reinsurance). The increase in property and casualty environmental reserves relates to updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites.

An in-depth internal review of AFG’s A&E reserves was also completed in the third quarter of 2018. As a result of the 2018 internal review, AFG’s property and casualty insurance segment recorded an $18 million pretax special charge to increase its asbestos reserves by $6 million (net of reinsurance) and its environmental reserves by $12 million (net of reinsurance). The increase in property and casualty asbestos reserves relates to increased estimates for indemnity and defense costs. The increase in property and casualty environmental reserves was primarily associated with updated estimates of site investigation and remedial costs with respect to existing sites and newly identified sites.

Contingencies related to Subsidiaries’ Former Operations The A&E studies and reviews discussed above encompassed reserves for various environmental and occupational injury and disease claims and other contingencies arising out of the railroad operations disposed of by American Premier’s predecessor and certain manufacturing operations disposed of by American Premier and its subsidiaries and by Great American Financial Resources, Inc. Charges resulting from the A&E study and reviews were $21 million in 2020, $11 million in 2019 and $9 million in 2018. For a discussion of the charges recorded for those operations, see “Results of Operations — Holding Company, Other and Unallocated.” Liabilities for claims and contingencies arising from these former railroad and manufacturing operations totaled $101 million at December 31, 2020. For a discussion of the uncertainties in determining the ultimate liability, see Note N — “Contingencies” to the financial statements.

Indexed Annuity Embedded Derivatives As of December 31, 2020, annuity benefits accumulated in AFG’s Balance Sheet includes $3.93 billion for the fair value of the derivatives embedded in its fixed-indexed and variable-indexed annuities. As discussed in Note F — “Derivatives” to the financial statements, AFG’s fixed-indexed and variable-

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indexed annuities provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. Under GAAP, this index participation is considered an embedded derivative that is required to be carried at fair value in the financial statements. 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. The fair value of the embedded derivatives represents an estimate of the present value of projected policyholder benefits from the equity participation in excess of the projected minimum guaranteed contract values. As discussed in Note D — “Fair Value Measurements” to the financial statements, the fair value of the embedded derivatives is impacted by fluctuations in interest rates, the stock market (including the cost of options), policyholder behavior and other factors. Fluctuations in certain of these factors, such as changes in interest rates and the performance of the stock market, are not economic in nature for the current reporting period, but rather impact the timing of reported results. The indexed annuity embedded derivatives are part of the pending sale of annuity business, which is expected to close in the second quarter of 2021.

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 H — “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.

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CONDENSED CONSOLIDATING BALANCE SHEET


	Before CLO Consolidation		Managed Investment Entities		Consol. Entries			Consolidated As Reported
December 31, 2020
Assets:
Cash and investments	$	52,702	$	—	$	(200)	(a)	$	52,502
Assets of managed investment entities	—		4,971		—			4,971
Other assets	16,093		—		—		(a)	16,093
Total assets	$	68,795	$	4,971	$	(200)		$	73,566
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	13,195	$	—	$	—		$	13,195
Annuity, life, accident and health benefits and reserves	43,180		—		—			43,180
Liabilities of managed investment entities	—		4,971		(200)		(a)	4,771
Long-term debt and other liabilities	5,631		—		—			5,631
Total liabilities	62,006		4,971		(200)			66,777

Redeemable noncontrolling interests	—		—		—			—

Shareholders’ equity:
Common Stock and Capital surplus	1,367		—		—			1,367
Retained earnings	4,149		—		—			4,149
Accumulated other comprehensive income, net of tax	1,273		—		—			1,273
Total shareholders’ equity	6,789		—		—			6,789
Noncontrolling interests	—		—		—			—
Total equity	6,789		—		—			6,789
Total liabilities and equity	$	68,795	$	4,971	$	(200)		$	73,566

December 31, 2019
Assets:
Cash and investments	$	55,416	$	—	$	(164)	(a)	$	55,252
Assets of managed investment entities	—		4,736		—			4,736
Other assets	10,143		—		(1)		(a)	10,142
Total assets	$	65,559	$	4,736	$	(165)		$	70,130
Liabilities:
Unpaid losses and loss adjustment expenses and unearned premiums	$	13,062	$	—	$	—		$	13,062
Annuity, life, accident and health benefits and reserves	41,018		—		—			41,018
Liabilities of managed investment entities	—		4,736		(165)		(a)	4,571
Long-term debt and other liabilities	5,210		—		—			5,210
Total liabilities	59,290		4,736		(165)			63,861

Redeemable noncontrolling interests	—		—		—			—

Shareholders’ equity:
Common Stock and Capital surplus	1,397		—		—			1,397
Retained earnings	4,009		—		—			4,009
Accumulated other comprehensive income, net of tax	863		—		—			863
Total shareholders’ equity	6,269		—		—			6,269
Noncontrolling interests	—		—		—			—
Total equity	6,269		—		—			6,269
Total liabilities and equity	$	65,559	$	4,736	$	(165)		$	70,130

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

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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS


	Before CLO Consolidation (a)		Managed Investment Entities		Consol. Entries			Consolidated As Reported
Three months ended December 31, 2020
Revenues:
Property and casualty insurance net earned premiums	$	1,325	$	—	$	—		$	1,325
Net investment income	567		—		(19)		(b)	548
Realized gains (losses) on:
Securities	591		—		—			591
Subsidiaries	53		—		—			53
Income (loss) of managed investment entities:
Investment income	—		47		—			47
Gain (loss) on change in fair value of assets/liabilities	—		(1)		9		(b)	8
Other income	55		—		(4)		(c)	51
Total revenues	2,591		46		(14)			2,623
Costs and Expenses:
Insurance benefits and expenses	1,563		—		—			1,563
Expenses of managed investment entities	—		46		(14)		(b)(c)	32
Interest charges on borrowed money and other expenses	144		—		—			144
Total costs and expenses	1,707		46		(14)			1,739
Earnings before income taxes	884		—		—			884
Provision for income taxes	190		—		—			190
Net earnings, including noncontrolling interests	694		—		—			694
Less: Net earnings (loss) attributable to noncontrolling interests	2		—		—			2
Net earnings attributable to shareholders	$	692	$	—	$	—		$	692

Three months ended December 31, 2019
Revenues:
Property and casualty insurance net earned premiums	$	1,370	$	—	$	—		$	1,370
Net investment income	586		—		7		(b)	593
Realized gains (losses) on securities	65		—		—			65
Income (loss) of managed investment entities:
Investment income	—		63		—			63
Gain (loss) on change in fair value of assets/liabilities	—		(1)		(13)		(b)	(14)
Other income	57		—		(4)		(c)	53
Total revenues	2,078		62		(10)			2,130
Costs and Expenses:
Insurance benefits and expenses	1,685		—		—			1,685
Expenses of managed investment entities	—		62		(10)		(b)(c)	52
Interest charges on borrowed money and other expenses	134		—		—			134
Total costs and expenses	1,819		62		(10)			1,871
Earnings before income taxes	259		—		—			259
Provision for income taxes	68		—		—			68
Net earnings, including noncontrolling interests	191		—		—			191
Less: Net earnings (loss) attributable to noncontrolling interests	(20)		—		—			(20)
Net earnings attributable to shareholders	$	211	$	—	$	—		$	211

(a)Includes income of $19 million in the fourth quarter of 2020 and a loss of $7 million in the fourth quarter of 2019, representing the change in fair value of AFG’s CLO investments plus $4 million in both the fourth quarter of 2020 and 2019 in CLO management fees earned.

(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including $10 million and $6 million in the fourth quarter of 2020 and 2019, respectively, in distributions recorded as interest expense by the CLOs.

(c)Elimination of management fees earned by AFG.

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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED


	Before CLO Consolidation (a)		Managed Investment Entities		Consol. Entries			Consolidated As Reported
Year ended December 31, 2020
Revenues:
Property and casualty insurance net earned premiums	$	5,099	$	—	$	—		$	5,099
Net investment income	2,130		—		2		(b)	2,132
Realized gains (losses) on:
Securities	289		—		—			289
Subsidiaries	23		—		—			23
Income (loss) of managed investment entities:
Investment income	—		201		—			201
Gain (loss) on change in fair value of assets/liabilities	—		(11)		(28)		(b)	(39)
Other income	219		—		(15)		(c)	204
Total revenues	7,760		190		(41)			7,909
Costs and Expenses:
Insurance benefits and expenses	6,394		—		—			6,394
Expenses of managed investment entities	—		190		(41)		(b)(c)	149
Interest charges on borrowed money and other expenses	518		—		—			518
Total costs and expenses	6,912		190		(41)			7,061
Earnings before income taxes	848		—		—			848
Provision for income taxes	127		—		—			127
Net earnings, including noncontrolling interests	721		—		—			721
Less: Net earnings (loss) attributable to noncontrolling interests	(11)		—		—			(11)
Net earnings attributable to shareholders	$	732	$	—	$	—		$	732

Year ended December 31, 2019
Revenues:
Property and casualty insurance net earned premiums	$	5,185	$	—	$	—		$	5,185
Net investment income	2,307		—		(4)		(b)	2,303
Realized gains (losses) on securities	287		—		—			287
Income (loss) of managed investment entities:
Investment income	—		269		—			269
Gain (loss) on change in fair value of assets/liabilities	—		(8)		(22)		(b)	(30)
Other income	238		—		(15)		(c)	223
Total revenues	8,017		261		(41)			8,237
Costs and Expenses:
Insurance benefits and expenses	6,400		—		—			6,400
Expenses of managed investment entities	—		261		(41)		(b)(c)	220
Interest charges on borrowed money and other expenses	509		—		—			509
Total costs and expenses	6,909		261		(41)			7,129
Earnings before income taxes	1,108		—		—			1,108
Provision for income taxes	239		—		—			239
Net earnings, including noncontrolling interests	869		—		—			869
Less: Net earnings (loss) attributable to noncontrolling interests	(28)		—		—			(28)
Net earnings attributable to shareholders	$	897	$	—	$	—		$	897

(a)Includes a loss of $2 million in 2020 and income of $4 million in 2019, representing the change in fair value of AFG’s CLO investments plus $15 million in both 2020 and 2019 in CLO management fees earned.

(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including $26 million in both 2020 and 2019 in distributions recorded as interest expense by the CLOs.

(c)Elimination of management fees earned by AFG.

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CONDENSED CONSOLIDATING STATEMENT OF EARNINGS - CONTINUED


	Before CLO Consolidation (a)		Managed Investment Entities		Consol. Entries			Consolidated As Reported
Year ended December 31, 2018
Revenues:
Property and casualty insurance net earned premiums	$	4,865	$	—	$	—		$	4,865
Net investment income	2,101		—		(7)		(b)	2,094
Realized gains (losses) on securities	(266)		—		—			(266)
Income (loss) of managed investment entities:
Investment income	—		255		—			255
Gain (loss) on change in fair value of assets/liabilities	—		(7)		(14)		(b)	(21)
Other income	239		—		(16)		(c)	223
Total revenues	6,939		248		(37)			7,150
Costs and Expenses:
Insurance benefits and expenses	5,845		—		—			5,845
Expenses of managed investment entities	—		248		(37)		(b)(c)	211
Interest charges on borrowed money and other expenses	455		—		—			455
Total costs and expenses	6,300		248		(37)			6,511
Earnings before income taxes	639		—		—			639
Provision for income taxes	122		—		—			122
Net earnings, including noncontrolling interests	517		—		—			517
Less: Net earnings (loss) attributable to noncontrolling interests	(13)		—		—			(13)
Net earnings attributable to shareholders	$	530	$	—	$	—		$	530

(a)Includes income of $7 million representing the change in fair value of AFG’s CLO investments plus $16 million in CLO management fees earned.

(b)Elimination of the change in fair value of AFG’s investments in the CLOs, including $21 million in distributions recorded as interest expense by the CLOs.

(c)Elimination of management fees earned by AFG.

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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) and significant tax benefits (charges) related to 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, such as the Neon exited lines and for asbestos and environmental exposures, are excluded from core earnings.

Beginning with the second quarter of 2019, AFG’s core net operating earnings for its annuity segment excludes unlocking, the impact of changes in the fair value of derivatives related to fixed-indexed annuities (“FIAs”), and other impacts of changes in the stock market and interest rates on the accounting for FIAs over or under the cost of the equity index options purchased to mitigate the risk in the index-based component of those FIAs (“annuity non-core earnings (losses)”). Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of FIA liabilities that management believes can be inconsistent with the long-term economics of this growing portion of AFG’s annuity business. Management believes that separating these impacts as “non-core” provides investors with a better view of the fundamental performance of the business, and a more comparable measure of the annuity segment’s business compared to the results identified as “core” by its peers. Core net operating earnings for the annuity segment for the first quarter of 2019 and prior periods were not adjusted, so results for periods following the change are not directly comparable to prior periods. The impact of the items now considered annuity non-core earnings on prior periods is highlighted in the discussion following the reconciliation of net earnings attributable to shareholders to core net operating earnings.

In the fourth quarter of 2020, AFG entered into a reinsurance agreement (“annuity block reinsurance”) with Commonwealth. Under reinsurance accounting guidance, the transaction will be accounted for using the deposit method and the $180 million loss on the transaction will be deferred and recognized over the expected life of the underlying annuity contracts (7-10 years). Consistent with internal management reporting, the impact of reinsurance on earnings, which includes the amortization of the deferred loss and the impact of changes related to FIAs (discussed above) that are related to reinsured policies and other impacts of reinsurance are excluded from core operating earnings and reported as “annuity non-core earnings (losses)”.

In January 2021, AFG entered into a definitive agreement to sell its Annuity business to MassMutual. Beginning with the first quarter of 2021, AFG will report the results of its annuity segment and the run-off life and long-term care operations (reported in the Holding Company, Other and Unallocated segment) as discontinued operations, in accordance with GAAP, which includes adjusting prior period results to reflect these operations as discontinued.

In December 2019, AFG initiated actions to exit the Lloyd’s of London insurance market, which included placing its Lloyd’s subsidiaries including its Lloyd’s Managing Agency, Neon Underwriting Ltd., into run-off. Neon and its predecessor, Marketform, have failed to achieve AFG’s profitability objectives since AFG’s purchase of Marketform in 2008. Consistent with the treatment of other items that are not indicative of AFG’s ongoing operations (both favorable and unfavorable), beginning with the first quarter of 2020, AFG’s core net operating earnings for its property and casualty insurance segment excludes the run-off operations of Neon (“Neon exited lines”). In the third quarter of 2020, AFG reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon, to RiverStone Holdings Limited. The transaction closed in the fourth quarter of 2020.

AFG recorded $111 million in non-core losses related to the runoff of the Neon business in 2020, which included a $23 million gain on the sale of the business. In conjunction with the sale, AFG recognized a tax benefit of $72 million, resulting in a net non-core, after-tax loss of $39 million from the Neon exited lines in 2020.

The Neon exited lines impact is highlighted in the discussion following the reconciliation of net earnings attributable to shareholders to core net operating earnings.

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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 December 31,				Year ended December 31,
	2020		2019		2020		2019		2018
Components of net earnings attributable to shareholders:
Core operating earnings before income taxes	$	346	$	251	$	946	$	967	$	932
Pretax non-core items:
Realized gains (losses) on securities	591		65		289		287		(266)
Annuity non-core earnings (losses) (a)	(48)		24		(188)		(36)		—
Special A&E charges	—		—		(68)		(29)		(27)
Neon exited lines (b)	—		(76)		(122)		(76)		—
Loss on retirement of debt	(5)		(5)		(5)		(5)		—
Other	—		—		(4)		—		—
Earnings before income taxes	884		259		848		1,108		639
Provision for income taxes:
Core operating earnings	77		50		194		193		184
Non-core items:
Realized gains (losses) on securities	123		14		60		60		(56)
Annuity non-core earnings (losses) (a)	(10)		5		(39)		(7)		—
Special A&E charges	—		—		(14)		(6)		(6)
Neon exited lines (b)	1		—		(72)		—		—
Loss on retirement of debt	(1)		(1)		(1)		(1)		—
Other	—		—		(1)		—		—
Total provision for income taxes	190		68		127		239		122
Net earnings, including noncontrolling interests	694		191		721		869		517
Less net earnings (loss) attributable to noncontrolling interests:
Core operating earnings	—		(2)		—		(10)		(13)
Neon exited lines (b)	2		(18)		(11)		(18)		—
Total net earnings (loss) attributable to noncontrolling interests	2		(20)		(11)		(28)		(13)
Net earnings attributable to shareholders	$	692	$	211	$	732	$	897	$	530

Net earnings:
Core net operating earnings	$	269	$	203	$	752	$	784	$	761
Realized gains (losses) on securities	468		51		229		227		(210)
Annuity non-core earnings (losses) (a)	(38)		19		(149)		(29)		—
Special A&E charges	—		—		(54)		(23)		(21)
Neon exited lines (b)	(3)		(58)		(39)		(58)		—
Loss on retirement of debt	(4)		(4)		(4)		(4)		—
Other	—		—		(3)		—		—
Net earnings attributable to shareholders	$	692	$	211	$	732	$	897	$	530

Diluted per share amounts:
Core net operating earnings	$	3.09	$	2.22	$	8.44	$	8.62	$	8.40
Realized gains (losses) on securities	5.36		0.56		2.56		2.47		(2.31)
Annuity non-core earnings (losses) (a)	(0.44)		0.21		(1.67)		(0.31)		—
Special A&E charges	—		—		(0.61)		(0.25)		(0.24)
Neon exited lines (b)	(0.04)		(0.64)		(0.45)		(0.64)		—
Loss on retirement of debt	(0.04)		(0.04)		(0.04)		(0.04)