American Financial Group Inc

American Financial Group Inc details

American Financial Group is an insurance holding company, based in Cincinnati, Ohio. 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 fixed-indexed annuities in the retail, financial institutions, broker-dealer, and registered investment advisor markets. Great American Insurance Group's roots go back to 1872 with the founding of its flagship company, Great American Insurance Company.

Ticker:AFG
Employees: 6600

Filing

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended
September 30, 2022 or ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____ to ____ Commission File No. 1-13653 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 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐ Indicate by check mark whether the Registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. Yes ☑ No ☐ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑ As of November 1, 2022, there were 85,143,503 shares of the Registrant’s Common Stock outstanding, excluding 14.9 million shares owned by subsidiaries. Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q TABLE OF CONTENTS Page Part I — Financial Information Item 1 — Financial Statements: Consolidated Balance Sheet 2 Consolidated Statement of Earnings 3 Consolidated Statement of Comprehensive Income 4 Consolidated Statement of Changes in Equity 5 Consolidated Statement of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations 33 Item 3 — Quantitative and Qualitative Disclosure about Market Risk 74 Item 4 — Controls and Procedures 74 Part II — Other Information Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds 75 Item 6 — Exhibits 76 Signature 76 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q PART I ITEM 1. — FINANCIAL STATEMENTS AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in Millions) September 30, December 31, 2022 2021 Assets: Cash and cash equivalents $ 794 $ 2,131 Investments: Fixed maturities, available for sale at fair value (amortized cost — $ 10,744 and $ 10,193 ; allowance for expected credit losses of $ 9 and $ 9 ) 10,034 10,357 Fixed maturities, trading at fair value 30 28 Equity securities, at fair value 996 1,042 Investments accounted for using the equity method 1,661 1,517 Mortgage loans 676 520 Real estate and other investments 131 150 Total cash and investments 14,322 15,745 Recoverables from reinsurers 4,108 3,519 Prepaid reinsurance premiums 1,180 834 Agents’ balances and premiums receivable 1,698 1,265 Deferred policy acquisition costs 292 267 Assets of managed investment entities 5,099 5,296 Other receivables 1,328 857 Other assets 1,259 902 Goodwill 246 246 Total assets $ 29,532 $ 28,931 Liabilities and Equity: Unpaid losses and loss adjustment expenses $ 12,067 $ 11,074 Unearned premiums 3,785 3,041 Payable to reinsurers 1,366 920 Liabilities of managed investment entities 5,002 5,220 Long-term debt 1,533 1,964 Other liabilities 1,847 1,700 Total liabilities 25,600 23,919 Shareholders’ equity: Common Stock, no par value — 200,000,000 shares authorized — 85,140,521 and 84,920,965 shares outstanding 85 85 Capital surplus 1,358 1,330 Retained earnings 3,091 3,478 Accumulated other comprehensive income (loss), net of tax ( 602 ) 119 Total shareholders’ equity 3,932 5,012 Total liabilities and shareholders’ equity $ 29,532 $ 28,931 2 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (In Millions, Except Per Share Data) Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Revenues: Property and casualty insurance net earned premiums $ 1,767 $ 1,529 $ 4,462 $ 3,952 Net investment income 151 169 549 521 Realized gains (losses) on: Securities ( 35 ) ( 17 ) ( 143 ) 103 Subsidiaries — — — 4 Income of managed investment entities: Investment income 75 45 175 135 Gain (loss) on change in fair value of assets/liabilities ( 5 ) 1 ( 25 ) 9 Other income 31 27 93 70 Total revenues 1,984 1,754 5,111 4,794 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 1,176 954 2,643 2,335 Commissions and other underwriting expenses 445 417 1,291 1,187 Interest charges on borrowed money 19 24 65 71 Expenses of managed investment entities 62 37 148 115 Other expenses 72 55 187 196 Total costs and expenses 1,774 1,487 4,334 3,904 Earnings from continuing operations before income taxes 210 267 777 890 Provision for income taxes 45 48 155 164 Net earnings from continuing operations 165 219 622 726 Net earnings from discontinued operations — — — 914 Net Earnings $ 165 $ 219 $ 622 $ 1,640 Earnings per Basic Common Share: Continuing operations $ 1.93 $ 2.57 $ 7.30 $ 8.52 Discontinued operations — — — 10.72 Total basic earnings $ 1.93 $ 2.57 $ 7.30 $ 19.24 Earnings per Diluted Common Share: Continuing operations $ 1.93 $ 2.56 $ 7.29 $ 8.45 Discontinued operations — — — 10.66 Total diluted earnings $ 1.93 $ 2.56 $ 7.29 $ 19.11 Average number of Common Shares: Basic 85.2 84.8 85.1 85.2 Diluted 85.4 85.2 85.3 85.8 3 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED) (In Millions) Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Net earnings $ 165 $ 219 $ 622 $ 1,640 Other comprehensive loss, net of tax: Net unrealized gains (losses) on securities: Unrealized holding losses on securities arising during the period ( 231 ) ( 29 ) ( 698 ) ( 177 ) Reclassification adjustment for realized (gains) losses included in net earnings 3 2 8 ( 16 ) Reclassification adjustment for unrealized gains of subsidiaries sold — — — ( 884 ) Total net unrealized losses on securities ( 228 ) ( 27 ) ( 690 ) ( 1,077 ) Net unrealized losses on cash flow hedges: Unrealized holding gains (losses) on cash flow hedges arising during the period ( 21 ) — ( 27 ) ( 1 ) Reclassification adjustment for investment income included in net earnings — — ( 2 ) ( 11 ) Reclassification adjustment for unrealized gains on cash flow hedges of subsidiaries sold — — — ( 29 ) Total net unrealized losses on cash flow hedges ( 21 ) — ( 29 ) ( 41 ) Foreign currency translation adjustments ( 5 ) ( 3 ) ( 2 ) ( 3 ) Pension and other postretirement plans adjustments (“OPRP”): Unrealized holding losses on pension and OPRP arising during the period — — — ( 1 ) Reclassification adjustment for pension settlement loss included in net earnings — — — 9 Total pension and OPRP adjustments — — — 8 Other comprehensive loss, net of tax ( 254 ) ( 30 ) ( 721 ) ( 1,113 ) Comprehensive income (loss) $ ( 89 ) $ 189 $ ( 99 ) $ 527 4 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (Dollars in Millions) Shareholders’ Equity Common Stock Accumulated Common and Capital Retained Other Comp. Shares Surplus Earnings Income (Loss) Total Balance at June 30, 2022 85,154,263 $ 1,436 $ 2,979 $ ( 348 ) $ 4,067 Net earnings — — 165 — 165 Other comprehensive loss — — — ( 254 ) ( 254 ) Dividends ($ 0.56 per share) — — ( 48 ) — ( 48 ) Shares issued: Exercise of stock options 14,553 — — — — Restricted stock awards — — — — — Other benefit plans 19,220 2 — — 2 Dividend reinvestment plan 1,328 1 — — 1 Stock-based compensation expense — 4 — — 4 Shares acquired and retired ( 45,500 ) — ( 5 ) — ( 5 ) Shares exchanged — benefit plans ( 886 ) — — — — Forfeitures of restricted stock ( 2,457 ) — — — — Balance at September 30, 2022 85,140,521 $ 1,443 $ 3,091 $ ( 602 ) $ 3,932 Balance at June 30, 2021 84,713,927 $ 1,388 $ 4,023 $ 190 $ 5,601 Net earnings — — 219 — 219 Other comprehensive loss — — — ( 30 ) ( 30 ) Dividends ($ 6.50 per share) — — ( 551 ) — ( 551 ) Shares issued: Exercise of stock options 153,842 6 — — 6 Restricted stock awards — — — — — Other benefit plans 17,029 2 — — 2 Dividend reinvestment plan 6,272 1 — — 1 Stock-based compensation expense — 4 — — 4 Shares acquired and retired ( 94,960 ) ( 1 ) ( 11 ) — ( 12 ) Shares exchanged — benefit plans ( 562 ) — — — — Forfeitures of restricted stock ( 540 ) — — — — Balance at September 30, 2021 84,795,008 $ 1,400 $ 3,680 $ 160 $ 5,240 5 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) — CONTINUED (Dollars in Millions) Shareholders’ Equity Common Stock Accumulated Common and Capital Retained Other Comp. Shares Surplus Earnings Income (Loss) Total Balance at December 31, 2021 84,920,965 $ 1,415 $ 3,478 $ 119 $ 5,012 Net earnings — — 622 — 622 Other comprehensive loss — — — ( 721 ) ( 721 ) Dividends ($ 11.68 per share) — — ( 993 ) — ( 993 ) Shares issued: Exercise of stock options 138,498 5 — — 5 Restricted stock awards 151,080 — — — — Other benefit plans 54,171 7 — — 7 Dividend reinvestment plan 27,518 4 — — 4 Stock-based compensation expense — 14 — — 14 Shares acquired and retired ( 80,701 ) ( 1 ) ( 9 ) — ( 10 ) Shares exchanged — benefit plans ( 57,195 ) ( 1 ) ( 7 ) — ( 8 ) Forfeitures of restricted stock ( 13,815 ) — — — — Balance at September 30, 2022 85,140,521 $ 1,443 $ 3,091 $ ( 602 ) $ 3,932 Balance at December 31, 2020 86,345,246 $ 1,367 $ 4,149 $ 1,273 $ 6,789 Net earnings — — 1,640 — 1,640 Other comprehensive loss — — — ( 1,113 ) ( 1,113 ) Dividends ($ 21.50 per share) — — ( 1,826 ) — ( 1,826 ) Shares issued: Exercise of stock options 1,118,586 55 — — 55 Restricted stock awards 207,020 — — — — Other benefit plans 60,494 7 — — 7 Dividend reinvestment plan 42,926 5 — — 5 Stock-based compensation expense — 11 — — 11 Shares acquired and retired ( 2,769,182 ) ( 44 ) ( 274 ) — ( 318 ) Shares exchanged — benefit plans ( 91,926 ) ( 1 ) ( 9 ) — ( 10 ) Forfeitures of restricted stock ( 118,156 ) — — — — Balance at September 30, 2021 84,795,008 $ 1,400 $ 3,680 $ 160 $ 5,240 6 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q AMERICAN FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In Millions) Nine months ended September 30, 2022 2021 Operating Activities: Net earnings $ 622 $ 1,640 Adjustments: Depreciation and amortization 78 160 Annuity benefits — 377 Realized (gains) losses on investing activities 136 ( 1,111 ) Net purchases of trading securities ( 2 ) ( 6 ) Deferred annuity and life policy acquisition costs — ( 98 ) Change in: Reinsurance and other receivables ( 1,830 ) ( 987 ) Other assets ( 163 ) 238 Insurance claims and reserves 1,737 1,204 Payable to reinsurers 446 339 Other liabilities 16 88 Managed investment entities’ assets/liabilities 133 ( 78 ) Other operating activities, net ( 130 ) ( 341 ) Net cash provided by operating activities 1,043 1,425 Investing Activities: Purchases of: Fixed maturities ( 3,733 ) ( 6,907 ) Equity securities ( 194 ) ( 110 ) Mortgage loans ( 273 ) ( 179 ) Equity index options and other investments ( 96 ) ( 313 ) Real estate, property and equipment ( 72 ) ( 53 ) Businesses ( 10 ) — Proceeds from: Maturities and redemptions of fixed maturities 2,126 4,075 Repayments of mortgage loans 117 27 Sales of fixed maturities 1,068 690 Sales of equity securities 112 462 Sales and settlements of equity index options and other investments 128 562 Sales of real estate, property and equipment 31 25 Sales of businesses — 3,547 Cash and cash equivalents of businesses sold — ( 2,060 ) Managed investment entities: Purchases of investments ( 1,061 ) ( 1,480 ) Proceeds from sales and redemptions of investments 801 1,579 Other investing activities, net ( 6 ) 32 Net cash used in investing activities ( 1,062 ) ( 103 ) Financing Activities: Reductions of long-term debt ( 436 ) — Issuances of Common Stock 12 60 Repurchases of Common Stock ( 10 ) ( 318 ) Cash dividends paid on Common Stock ( 989 ) ( 1,482 ) Annuity receipts — 2,403 Ceded annuity receipts — ( 311 ) Annuity surrenders, benefits and withdrawals — ( 1,931 ) Ceded annuity surrenders, benefits and withdrawals — 282 Net transfers from variable annuity assets — 34 Issuances of managed investment entities’ liabilities 666 1,665 Retirements of managed investment entities’ liabilities ( 561 ) ( 1,701 ) Net cash used in financing activities ( 1,318 ) ( 1,299 ) Net Change in Cash and Cash Equivalents ( 1,337 ) 23 Cash and cash equivalents at beginning of period 2,131 2,810 Cash and cash equivalents at end of period $ 794 $ 2,833 7 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEX TO NOTES A. Accounting Policies H. Goodwill and Other Intangibles B. Discontinued Operations I. Long-Term Debt C. Acquisition and Sale of Businesses J. Shareholders’ Equity D. Segments of Operations K. Income Taxes E. Fair Value Measurements L. Contingencies F. Investments M. Insurance G. Managed Investment Entities A. Accounting Policies Basis of Presentation The accompanying consolidated financial statements for American Financial Group, Inc. and its subsidiaries (“AFG”) are unaudited; however, management believes that all adjustments (consisting only of normal recurring accruals unless otherwise disclosed herein) necessary for fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results to be expected for the year. The financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary to be in conformity with U.S. generally accepted accounting principles (“GAAP”). Certain reclassifications have been made to prior periods to conform to the current year’s presentation. All significant intercompany balances and transactions have been eliminated. The results of operations of companies since their formation or acquisition are included in the consolidated financial statements. Events or transactions occurring subsequent to September 30, 2022, and prior to the filing of this Form 10-Q, have been evaluated for potential recognition or disclosure herein. Unless otherwise stated, the information in the Notes to the Consolidated Financial Statements relates to AFG’s continuing operations. The preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Changes in circumstances could cause actual results to differ materially from those estimates. Discontinued Operations Disposals of components of an entity that represent a strategic shift and that have a major effect on a reporting entity’s operations and financial results are reported as discontinued operations. Fair Value Measurements Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect AFG’s assumptions about the assumptions market participants would use in pricing the asset or liability. AFG did not have any material nonrecurring fair value measurements in the first nine months of 2022. Investments Equity securities other than those accounted for under the equity method are reported at fair value with holding gains and losses generally recorded in realized gains (losses) on securities. However, AFG records holding gains and losses on its portfolio of limited partnerships and similar investments, which do not qualify for equity method accounting and are carried at fair value, and certain other securities classified at purchase as “fair value through net investment income” in net investment income. Fixed maturity securities classified as “available for sale” are reported at fair value with unrealized gains and losses included in accumulated other comprehensive income (“AOCI”) in AFG’s Balance Sheet. Fixed maturity securities classified as “trading” are reported at fair value with changes in unrealized holding gains or losses during the period included in net investment income. Mortgage loans (net of any allowance) are carried primarily at the aggregate unpaid balance. 8 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Premiums and discounts on fixed maturity securities are amortized using the effective interest method. Mortgage-backed securities (“MBS”) are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations. Limited partnerships and similar investments are generally accounted for using the equity method of accounting. Under the equity method, AFG records its share of the earnings or losses of the investee based on when it is reported by the investee in its financial statements rather than in the period in which the investee declares a dividend. AFG’s share of the earnings or losses from equity method investments is generally recorded on a quarter lag due to the timing of the receipt of the investee’s financial statements. AFG’s equity in the earnings (losses) of limited partnerships and similar investments is included in net investment income. Realized gains or losses on the disposal of fixed maturity securities are determined on the specific identification basis. When a decline in the value of an available for sale fixed maturity is considered to be other-than-temporary at the balance sheet date, an allowance for credit losses (impairment), including any write-off of accrued interest, is charged to earnings (included in realized gains (losses) on securities). If management can assert that it does not intend to sell the security and it is not more likely than not that it will have to sell it before recovery of its amortized cost basis (net of allowance), then the impairment is separated into two components: (i) the allowance related to credit losses (recorded in earnings) and (ii) the amount related to all other factors (recorded in other comprehensive income). The credit-related portion is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the charge. The allowance is limited to the difference between a security’s amortized cost basis and its fair value. Subsequent increases or decreases in expected credit losses are recorded immediately in net earnings through realized gains (losses). If management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment is recorded in earnings to reduce the amortized cost (net of allowance) of that security to fair value. Credit Losses on Financial Instruments Measured at Amortized Cost Credit-related impairments for financial instruments measured at amortized cost (mortgage loans, premiums receivable and reinsurance recoverables) reflect estimated credit losses expected over the life of an exposure or pool of exposures. The estimate of expected credit losses considers historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. Expected credit losses, and subsequent increases or decreases in such expected losses, are recorded immediately through net earnings as an allowance that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the balance sheet at the amount expected to be collected. Derivatives Derivatives included in AFG’s Balance Sheet are recorded at fair value. Changes in fair value of derivatives are included in earnings unless the derivatives are designated and qualify as highly effective cash flow hedges. To qualify for hedge accounting, at the inception of a derivative contract, AFG formally documents the relationship between the terms of the hedge and the hedged items and its risk management objective. This documentation includes defining how hedge effectiveness is evaluated at the inception date and over the life of the derivative. Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI and are reclassified into earnings when the variability of the cash flows from the hedged items impacts earnings. When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item in the statement of earnings as the cash flows from the hedged item. AFG uses interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities. Goodwill Goodwill represents the excess of cost of subsidiaries over AFG’s equity in their underlying net assets at the date of acquisition. Goodwill is not amortized, but is subject to an impairment test at least annually. An entity is not required to complete the quantitative annual goodwill impairment test on a reporting unit if the entity elects to perform a qualitative analysis and determines that it is more likely than not that the reporting unit’s fair value exceeds its carrying amount. Reinsurance Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. AFG reports as assets (i) the estimated reinsurance recoverable on paid and unpaid losses, including an estimate for losses incurred but not reported, and (ii) amounts paid or due to reinsurers 9 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED applicable to the unexpired terms of policies in force. Payable to reinsurers includes ceded premiums due to reinsurers, as well as ceded premiums retained by AFG under contracts to fund ceded losses as they become due. AFG also assumes reinsurance from other companies. Earnings on reinsurance assumed is recognized based on information received from ceding companies. Deferred Policy Acquisition Costs (“DPAC”) Policy acquisition costs (principally commissions, premium taxes and certain underwriting and policy issuance costs) directly related to the successful acquisition or renewal of an insurance contract are deferred. DPAC is limited based upon recoverability without any consideration for anticipated investment income and is charged against income ratably over the terms of the related policies. A premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses and unamortized acquisition costs exceed the related unearned premiums. A premium deficiency is first recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency is greater than unamortized acquisition costs, a liability is accrued for the excess deficiency and reported with unpaid losses and loss adjustment expenses. Managed Investment Entities A company is considered the primary beneficiary of, and therefore must consolidate, a variable interest entity (“VIE”) based primarily on its ability to direct the activities of the VIE that most significantly impact that entity’s economic performance and the obligation to absorb losses of, or receive benefits from, the entity that could potentially be significant to the VIE. AFG manages, and has investments in, collateralized loan obligations (“CLOs”) that are VIEs (see Note G — “Managed Investment Entities” ). AFG has determined that it is the primary beneficiary of these CLOs because (i) its role as asset manager gives it the power to direct the activities that most significantly impact the economic performance of the CLOs and (ii) through its investment in the CLO debt tranches, it has exposure to CLO losses (limited to the amount AFG invested) and the right to receive CLO benefits that could potentially be significant to the CLOs. Because AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities, the assets and liabilities of the CLOs are shown separately in AFG’s Balance Sheet. AFG has elected the fair value option for reporting on the CLO assets and liabilities to improve the transparency of financial reporting related to the CLOs. The net gain or loss from accounting for the CLO assets and liabilities at fair value is presented separately in AFG’s Statement of Earnings. The fair values of a CLO’s assets may differ from the separately measured fair values of its liabilities even though the CLO liabilities only have recourse to the CLO assets. AFG has set the carrying value of the CLO liabilities equal to the fair value of the CLO assets (which have more observable fair values) as an alternative to reporting those liabilities at a separately measured fair value. CLO earnings attributable to AFG’s shareholders are measured by the change in the fair value of AFG’s investments in the CLOs and management fees earned. At September 30, 2022, assets and liabilities of managed investment entities included $ 117 million in assets and $ 105 million in liabilities of temporary warehousing entities that were established to provide AFG the ability to form new CLOs when management believes market conditions are favorable. At closing, all warehoused assets will be transferred to the new CLOs and the liabilities will be repaid. Unpaid Losses and Loss Adjustment Expenses The net liabilities stated for unpaid claims and for expenses of investigation and adjustment of unpaid claims represent management’s best estimate and are based upon (i) the accumulation of case estimates for losses reported prior to the close of the accounting period on direct business written; (ii) estimates received from ceding reinsurers and insurance pools and associations; (iii) estimates of unreported losses (including possible development on known claims) based on past experience; (iv) estimates based on experience of expenses for investigating and adjusting claims; and (v) the current state of the law and coverage litigation. Establishing reserves for asbestos, environmental and other mass tort claims involves considerably more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, novel theories of coverage, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage. Loss reserve liabilities are subject to the impact of changes in claim amounts and frequency and other factors. Changes in estimates of the liabilities for losses and loss adjustment expenses are reflected in the statement of earnings in the period in which determined. Despite the variability inherent in such estimates, management believes that the liabilities for unpaid losses and loss adjustment expenses are adequate and reasonable. 10 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Debt Issuance Costs Debt issuance costs related to AFG’s outstanding debt are presented in its Balance Sheet as a direct reduction in the carrying value of long-term debt and are amortized over the life of the related debt using the effective interest method as a component of interest expense. Debt issuance costs related to AFG’s revolving credit facilities are included in other assets in AFG’s Balance Sheet. Leases Leases for terms of longer than one year are recognized as assets and liabilities for the rights and obligations created by those leases on the balance sheet based on the present value of contractual cash flows. At September 30, 2022 AFG has a $ 118 million lease liability included in other liabilities and a lease right-of-use asset of $ 104 million included in other assets compared to $ 136 million and $ 118 million, respectively, at December 31, 2021. Premium Recognition Property and casualty premiums are earned generally over the terms of the policies on a pro rata basis. Unearned premiums represent that portion of premiums written, which is applicable to the unexpired terms of policies in force. On reinsurance assumed from other insurance companies or written through various underwriting organizations, unearned premiums are based on information received from such companies and organizations. Income Taxes Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. A valuation allowance is established to reduce total deferred tax assets to an amount that will more likely than not be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recorded in net earnings in the period that includes the enactment date. AFG recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on AFG’s reserve for uncertain tax positions are recognized as a component of tax expense. Stock-Based Compensation All share-based grants are recognized as compensation expense on a straight-line basis over their vesting periods based on their calculated fair value at the date of grant. AFG records excess tax benefits or deficiencies for share-based payments through income tax expense in the statement of earnings. In addition, AFG accounts for forfeitures of awards when they occur. Benefit Plans AFG provides retirement benefits to qualified employees of participating companies through the AFG 401(k) Retirement and Savings Plan, a defined contribution plan. AFG makes all contributions to the retirement fund portion of the plan and matches a percentage of employee contributions to the savings fund. Company contributions are expensed in the year for which they are declared. AFG and many of its subsidiaries provide health care and life insurance benefits to eligible retirees. AFG also provides postemployment benefits to former or inactive employees (primarily those on disability) who were not deemed retired under other company plans. The projected future cost of providing these benefits is expensed over the period employees earn such benefits. Earnings Per Share Although basic earnings per share only considers shares of common stock outstanding during the period, the calculation of diluted earnings per share includes the following adjustments to weighted average common shares related to stock-based compensation plans: third quarter of 2022 and 2021 — 0.2 million and 0.4 million; first nine months of 2022 and 2021 — 0.2 million and 0.6 million. There were no anti-dilutive potential common shares for the third quarter or the first nine months of 2022 and 2021. Statement of Cash Flows For cash flow purposes, “investing activities” are defined as making and collecting loans and acquiring and disposing of debt or equity instruments, property and equipment and businesses. “Financing activities” include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. All other activities are considered “operating.” Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements. 11 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED B. Discontinued Operations Annuity Business Effective May 31, 2021, AFG completed the sale of its Annuity business to Massachusetts Mutual Life Insurance Company (“MassMutual”). MassMutual acquired Great American Life Insurance Company and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. In addition to AFG’s annuity operations, these subsidiaries included AFG’s run-off life and long-term care operations. Proceeds from the sale were $ 3.57 billion (including $ 34 million in post-closing adjustments) and AFG realized a $ 656 million net gain on the sale in the first nine months of 2021. Details of the assets and liabilities of the Annuity subsidiaries sold were as follows (in millions): May 31, 2021 Assets of businesses sold: Cash and cash equivalents $ 2,060 Investments 38,323 Recoverables from reinsurers 6,748 Other assets 2,152 Total assets of discontinued annuity operations 49,283 Liabilities of businesses sold: Annuity benefits accumulated 43,690 Other liabilities 1,813 Total liabilities of discontinued annuity operations 45,503 Reclassify AOCI ( 913 ) Net investment in annuity businesses sold, excluding AOCI $ 2,867 Details of the results of operations for the discontinued annuity operations were (in millions): Nine months ended September 30, 2021 (*) Net investment income $ 746 Realized gains on securities 112 Other income 52 Total revenues 910 Annuity benefits 377 Annuity and supplemental insurance acquisition expenses 136 Other expenses 73 Total costs and expenses 586 Earnings before income taxes from discontinued operations 324 Provision for income taxes on discontinued operations 66 Net earnings from operations, net of tax 258 Gain on sale, net of tax 656 Net earnings from discontinued operations $ 914 (*) Results through the May 31, 2021 effective date of the sale. 12 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The impact of the sale of the annuity business is shown below (in millions): May 31, 2021 Cash proceeds $ 3,571 Sale related expenses ( 8 ) Total net proceeds 3,563 Net investment in annuity businesses sold, excluding AOCI 2,867 Reclassify net deferred tax asset ( 199 ) Pretax gain on sale 895 Income tax expense: Reclassify net deferred tax asset 199 Tax liabilities triggered by the sale 41 Other ( 1 ) Total income tax expense 239 Net gain on sale $ 656 Summarized cash flows for the discontinued annuity operations were (in millions): Nine months ended September 30, 2021 Net cash provided by operating activities $ 87 Net cash used in investing activities ( 1,709 ) Net cash provided by financing activities 477 Derivatives The vast majority of AFG’s derivatives that do not qualify for hedge accounting were held by the sold annuity subsidiaries. The following table summarizes the gains (losses) included in net earnings from discontinued operations for changes in the fair value of derivatives that do not qualify for hedge accounting for the first nine months of 2021 (in millions): Derivative Nine months ended September 30, 2021 (*) MBS with embedded derivatives $ ( 1 ) Fixed-indexed and variable-indexed annuities (embedded derivative) ( 222 ) Equity index call options 237 Equity index put options 5 Reinsurance contract (embedded derivative) 1 $ 20 (*) Results through the May 31, 2021 effective date of the sale. C. Acquisition and Sale of Businesses Verikai In December 2021, AFG acquired Verikai, Inc., a machine learning and artificial intelligence company that utilizes predictive risk tools to assess insurance risk, for $ 120 million using cash on hand at the parent. Verikai continues to operate as a stand-alone company to service its insurance clients. AFG expects to benefit from Verikai’s predictive risk tool and unique Marketplace solution as it enters the medical stop loss insurance business, with a primary focus on small and underserved risks. AFG may pay up to $ 50 million in contingent consideration based on performance measures over a multiple year period. Expenses related to the acquisition were approximately $ 1 million and were expensed as incurred. The purchase price was allocated to the acquired assets and liabilities of Verikai based on management’s best estimate of fair value as of the acquisition date. Annuity Operations See Note B — “Discontinued Operations,” for information on the 2021 sale of AFG’s annuity operations. 13 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED In the third quarter of 2022, AFG acquired an insurance agency business for $12 million, including $10 million in cash. Virtually all of the purchase price was recorded as an amortizing intangible asset representing the fair value of the agency’s customer base at acquisition. D. Segments of Operations Subsequent to the sale of its annuity operations, see Note B — “Discontinued Operations,” AFG manages its business as two segments: Property and casualty insurance and Other, which includes holding company costs and operations attributable to the noncontrolling interests of the managed investment entities. AFG reports its property and casualty insurance business in the following Specialty sub-segments: (i) Property and transportation, which includes physical damage and liability coverage for buses and trucks and other specialty transportation niches, inland and ocean marine, agricultural-related products and other commercial property coverages, (ii) Specialty casualty, which includes primarily excess and surplus, executive and professional liability, general liability, umbrella and excess liability, specialty coverages in targeted markets, customized programs for small to mid-sized businesses and workers’ compensation insurance, and (iii) Specialty financial, which includes risk management insurance programs for lending and leasing institutions (including equipment leasing and collateral and lender-placed mortgage property insurance), fidelity and surety products and trade credit insurance. Premiums and underwriting profit included under Other specialty represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments and amortization of deferred gains on retroactive reinsurance transactions related to the sales of businesses in prior years. AFG’s reportable segments and their components were determined based primarily upon similar economic characteristics, products and services. The following tables (in millions) show AFG’s revenues and earnings from continuing operations before income taxes by segment and sub-segment. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Revenues Property and casualty insurance: Premiums earned: Specialty Property and transportation $ 857 $ 700 $ 1,805 $ 1,547 Specialty casualty 677 613 1,973 1,772 Specialty financial 171 163 505 477 Other specialty 62 53 179 156 Total premiums earned 1,767 1,529 4,462 3,952 Net investment income 145 165 524 467 Other income 2 4 12 9 Total property and casualty insurance 1,914 1,698 4,998 4,428 Other 105 73 256 208 Real estate-related entities (*) — — — 51 Total revenues before realized gains (losses) 2,019 1,771 5,254 4,687 Realized gains (losses) on securities ( 35 ) ( 17 ) ( 143 ) 103 Realized gain on subsidiaries — — — 4 Total revenues $ 1,984 $ 1,754 $ 5,111 $ 4,794 (*) Represents investment income from the real estate and real estate-related entities acquired from AFG’s discontinued annuity operations while they were held by the annuity operations. Subsequent to the sale of the annuity operations, income from these investments is included in the segment of the acquirer. 14 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Earnings From Continuing Operations Before Income Taxes Property and casualty insurance: Underwriting: Specialty Property and transportation $ 39 $ 45 $ 140 $ 163 Specialty casualty 118 110 372 237 Specialty financial 15 26 81 72 Other specialty ( 14 ) ( 12 ) ( 30 ) ( 16 ) Other lines ( 3 ) ( 1 ) ( 5 ) ( 2 ) Total underwriting 155 168 558 454 Investment and other income, net 134 161 498 451 Total property and casualty insurance 289 329 1,056 905 Other (a) ( 44 ) ( 45 ) ( 136 ) ( 173 ) Real estate-related entities (b) — — — 51 Total earnings from continuing operations before realized gains (losses) and income taxes 245 284 920 783 Realized gains (losses) on securities ( 35 ) ( 17 ) ( 143 ) 103 Realized gain on subsidiaries — — — 4 Total earnings from continuing operations before income taxes $ 210 $ 267 $ 777 $ 890 (a) Includes holding company interest and expenses, including a gain of $ 1 million and a loss of $ 10 million on retirement of debt in the third quarter and first nine months of 2022, respectively. (b) Represents investment income from the real estate and real estate-related entities acquired from AFG’s discontinued annuity operations while they were held by the annuity operations. Subsequent to the sale of the annuity operations, income from these investments is included in the segment of the acquirer. 15 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED E. Fair Value Measurements Accounting standards for measuring fair value are based on inputs used in estimating fair value. The three levels of the hierarchy are as follows: Level 1 — Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis). AFG’s Level 1 financial instruments consist primarily of publicly traded equity securities, highly liquid government bonds for which quoted market prices in active markets are available and short-term investments of managed investment entities. Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. AFG’s Level 2 financial instruments include corporate and municipal fixed maturity securities, asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), certain non-affiliated common stocks and investments of managed investment entities priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2. Level 3 — Valuations derived from market valuation techniques generally consistent with those used to estimate the fair values of Level 2 financial instruments in which one or more significant inputs are unobservable or when the market for a security exhibits significantly less liquidity relative to markets supporting Level 2 fair value measurements. The unobservable inputs may include management’s own assumptions about the assumptions market participants would use based on the best information available at the valuation date. Financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information are classified as Level 3. The contingent consideration liability (included in other liabilities in AFG’s Balance Sheet) relates to AFG’s acquisitions of Verikai in December 2021, and to a lesser extent, a small insurance agency in September 2022, which are discussed in Note C — “Acquisition and Sale of Businesses.” These liabilities are remeasured at fair value at each balance sheet date with changes in fair value recognized in net earnings. To estimate the fair value of the contingent consideration liability related to the Verikai acquisition ($ 23 million at September 30, 2022), AFG uses a weighted probability-based income approach which includes significant unobservable inputs and is classified as Level 3. There was no change to the estimated fair value of this liability during the third quarter or first nine months of 2022. As discussed in Note A — “Accounting Policies — Managed Investment Entities,” AFG has set the carrying value of its CLO liabilities equal to the fair value of the CLO assets (which have more observable fair values) as an alternative to reporting those liabilities at separately measured fair values. As a result, the CLO liabilities are categorized within the fair value hierarchy on the same basis (proportionally) as the related CLO assets. Since the portion of the CLO liabilities allocated to Level 3 is derived from the fair value of the CLO assets, these amounts are excluded from the progression of Level 3 financial instruments. AFG’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. AFG’s internal investment professionals are a group of approximately 20 investment professionals whose primary responsibility is to manage AFG’s investment portfolio. These professionals monitor individual investments as well as overall industries and are active in the financial markets on a daily basis. The group is led by AFG’s chief investment officer, who reports directly to one of AFG’s Co-CEOs. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG’s internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, the Company communicates directly with the pricing services regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the service to value specific securities. 16 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Assets and liabilities measured and carried at fair value in the financial statements are summarized below (in millions): Level 1 Level 2 Level 3 Total September 30, 2022 Assets: Available for sale (“AFS”) fixed maturities: U.S. government and government agencies $ 214 $ — $ — $ 214 States, municipalities and political subdivisions — 1,257 1 1,258 Foreign government — 223 — 223 Residential MBS — 1,596 8 1,604 Commercial MBS — 85 — 85 Collateralized loan obligations — 1,804 2 1,806 Other asset-backed securities — 1,970 301 2,271 Corporate and other 10 2,268 295 2,573 Total AFS fixed maturities 224 9,203 607 10,034 Trading fixed maturities — 30 — 30 Equity securities 570 42 384 996 Assets of managed investment entities (“MIE”) 296 4,792 11 5,099 Total assets accounted for at fair value $ 1,090 $ 14,067 $ 1,002 $ 16,159 Liabilities: Contingent consideration — acquisitions $ — $ — $ 25 $ 25 Liabilities of managed investment entities 291 4,701 10 5,002 Other liabilities — derivatives — 46 — 46 Total liabilities accounted for at fair value $ 291 $ 4,747 $ 35 $ 5,073 December 31, 2021 Assets: Available for sale fixed maturities: U.S. government and government agencies $ 215 $ 1 $ — $ 216 States, municipalities and political subdivisions — 1,791 41 1,832 Foreign government — 246 — 246 Residential MBS — 946 14 960 Commercial MBS — 104 — 104 Collateralized loan obligations — 1,643 — 1,643 Other asset-backed securities — 2,398 278 2,676 Corporate and other 11 2,402 267 2,680 Total AFS fixed maturities 226 9,531 600 10,357 Trading fixed maturities — 28 — 28 Equity securities 679 50 313 1,042 Assets of managed investment entities 390 4,893 13 5,296 Total assets accounted for at fair value $ 1,295 $ 14,502 $ 926 $ 16,723 Liabilities: Contingent consideration — acquisitions $ — $ — $ 23 $ 23 Liabilities of managed investment entities 384 4,823 13 5,220 Total liabilities accounted for at fair value $ 384 $ 4,823 $ 36 $ 5,243 Approximately 6 % of the total assets carried at fair value at September 30, 2022, were Level 3 assets. Approximately 16 % ($ 158 million) of those Level 3 assets were priced using non-binding broker quotes, for which there is a lack of transparency as to the inputs used to determine fair value. Details as to the quantitative inputs are neither provided by the brokers nor otherwise reasonably obtainable by AFG. Approximately $ 23 million ( 2 %) of the Level 3 assets were priced by pricing services where either a single price was not corroborated, prices varied enough among the providers, or other market factors led management to determine these securities be classified as Level 3 assets. Approximately 23 % ($ 231 million) of the Level 3 assets were equity investments in limited partnerships and similar investments that do not qualify for equity method accounting whose prices were determined based on financial information provided by the limited partnerships. 17 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Internally developed fixed maturities are priced using a variety of inputs, including appropriate credit spreads over the treasury yield (of a similar duration), trade information and prices of comparable securities and other security specific features (such as optional early redemption). Internally developed Level 3 asset fair values represent approximately $ 590 million ( 59 %) of the total fair value of Level 3 assets at September 30, 2022. Approximately 67 % ($ 397 million) of these internally developed Level 3 assets are priced using a pricing model that uses a discounted cash flow approach to estimate the fair value of fixed maturity securities. The credit spread applied by management is the significant unobservable input of the pricing model. In instances where the pricing model suggests a price in excess of par value and the security is currently callable at par value, management caps the fair value at par value. Approximately 25 % ($ 145 million) of the internally developed Level 3 assets are equity securities which are priced primarily using broker quotes and internal models with some inputs that are not market observable. Management believes that any justifiable changes in unobservable inputs used to determine internally developed fair values would not have resulted in a material change in AFG’s financial position. Changes in balances of Level 3 financial assets and liabilities carried at fair value during the third quarter and first nine months of 2022 and 2021 are presented below (in millions). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period. Total realized/unrealized gains (losses) included in Purchases Transfer Transfer Net and Sales and into out of Balance at June 30, 2022 earnings (loss) Other comprehensive income (loss) issuances settlements Level 3 Level 3 Balance at September 30, 2022 AFS fixed maturities: U.S. government agency $ — $ — $ — $ — $ — $ — $ — $ — State and municipal 1 — — — — — — 1 Residential MBS 8 — — — — 4 ( 4 ) 8 Commercial MBS — — — — — — — — Collateralized loan obligations 2 — — — — — — 2 Other asset-backed securities 313 — ( 8 ) 5 ( 9 ) — — 301 Corporate and other 269 ( 1 ) ( 12 ) 45 ( 5 ) — ( 1 ) 295 Total AFS fixed maturities 593 ( 1 ) ( 20 ) 50 ( 14 ) 4 ( 5 ) 607 Equity securities 378 ( 2 ) — 24 ( 15 ) — ( 1 ) 384 Assets of MIE 12 ( 1 ) — — — — — 11 Total Level 3 assets $ 983 $ ( 4 ) $ ( 20 ) $ 74 $ ( 29 ) $ 4 $ ( 6 ) $ 1,002 Contingent consideration — acquisitions $ ( 23 ) $ — $ — $ ( 2 ) $ — $ — $ — $ ( 25 ) Total Level 3 liabilities $ ( 23 ) $ — $ — $ ( 2 ) $ — $ — $ — $ ( 25 ) Total realized/unrealized gains (losses) included in Purchases Transfer Transfer Net and Sales and into out of Balance at June 30, 2021 earnings (loss) Other comprehensive income (loss) issuances settlements Level 3 Level 3 Balance at September 30, 2021 AFS fixed maturities: U.S. government agency $ — $ — $ — $ — $ — $ — $ — $ — State and municipal 36 — — — — 8 ( 2 ) 42 Residential MBS 28 ( 1 ) — — ( 1 ) — ( 8 ) 18 Commercial MBS — — — — — — — — Collateralized loan obligations 6 — 1 — — — ( 6 ) 1 Other asset-backed securities 315 1 ( 1 ) 41 ( 38 ) — ( 9 ) 309 Corporate and other 220 — ( 1 ) 36 ( 9 ) 2 — 248 Total AFS fixed maturities 605 — ( 1 ) 77 ( 48 ) 10 ( 25 ) 618 Equity securities 245 7 — 20 ( 4 ) — — 268 Assets of MIE 15 ( 2 ) — 1 — — ( 2 ) 12 Total Level 3 assets $ 865 $ 5 $ ( 1 ) $ 98 $ ( 52 ) $ 10 $ ( 27 ) $ 898 18 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Total realized/unrealized gains (losses) included in Purchases Transfer Transfer Net and Sales and into out of Balance at December 31, 2021 earnings (loss) Other comprehensive income (loss) issuances settlements Level 3 Level 3 Balance at September 30, 2022 AFS fixed maturities: U.S. government agency $ — $ — $ — $ — $ — $ — $ — $ — State and municipal 41 — ( 3 ) — ( 1 ) — ( 36 ) 1 Residential MBS 14 — — — ( 1 ) 4 ( 9 ) 8 Commercial MBS — — — — — — — — Collateralized loan obligations — — — — — 2 — 2 Other asset-backed securities 278 2 ( 24 ) 62 ( 51 ) 34 — 301 Corporate and other 267 ( 1 ) ( 26 ) 105 ( 15 ) — ( 35 ) 295 Total AFS fixed maturities 600 1 ( 53 ) 167 ( 68 ) 40 ( 80 ) 607 Equity securities 313 20 — 75 ( 20 ) 3 ( 7 ) 384 Assets of MIE 13 ( 3 ) — 1 — — — 11 Total Level 3 assets $ 926 $ 18 $ ( 53 ) $ 243 $ ( 88 ) $ 43 $ ( 87 ) $ 1,002 Contingent consideration — acquisitions $ ( 23 ) $ — $ — $ ( 2 ) $ — $ — $ — $ ( 25 ) Total Level 3 liabilities $ ( 23 ) $ — $ — $ ( 2 ) $ — $ — $ — $ ( 25 ) Total realized/unrealized gains (losses) included in Purchases Transfer Transfer Net and Sales and into out of Balance at December 31, 2020 earnings (loss) OCI issuances settlements Level 3 Level 3 Sale of Annuity Business Balance at September 30, 2021 AFS fixed maturities: U.S. government agency $ — $ — $ — $ — $ — $ — $ — $ — $ — State and municipal 39 — — — ( 3 ) 8 ( 2 ) — 42 Residential MBS 38 ( 4 ) — 6 ( 2 ) 6 ( 26 ) — 18 Commercial MBS 2 — — — — — ( 2 ) — — Collateralized loan obligations 16 1 — — ( 1 ) — ( 15 ) — 1 Other asset-backed securities 305 1 — 131 ( 110 ) 14 ( 32 ) — 309 Corporate and other 138 ( 1 ) ( 2 ) 142 ( 29 ) 5 ( 5 ) — 248 Total AFS fixed maturities 538 ( 3 ) ( 2 ) 279 ( 145 ) 33 ( 82 ) — 618 Equity securities 176 78 — 44 ( 23 ) — ( 7 ) — 268 Assets of MIE 21 1 — 3 — 1 ( 14 ) — 12 Assets of discontinued annuity operations 2,971 85 ( 21 ) 209 ( 328 ) 32 ( 229 ) ( 2,719 ) — Total Level 3 assets $ 3,706 $ 161 $ ( 23 ) $ 535 $ ( 496 ) $ 66 $ ( 332 ) $ ( 2,719 ) $ 898 Liabilities of discontinued annuity operations $ ( 3,933 ) $ ( 222 ) $ — $ ( 146 ) $ 158 $ — $ — $ 4,143 $ — Total Level 3 liabilities $ ( 3,933 ) $ ( 222 ) $ — $ ( 146 ) $ 158 $ — $ — $ 4,143 $ — 19 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Fair Value of Financial Instruments The carrying value and fair value of financial instruments that are not carried at fair value in the financial statements are summarized below (in millions): Carrying Fair Value Value Total Level 1 Level 2 Level 3 September 30, 2022 Financial assets: Cash and cash equivalents $ 794 $ 794 $ 794 $ — $ — Mortgage loans 676 623 — — 623 Total financial assets not accounted for at fair value $ 1,470 $ 1,417 $ 794 $ — $ 623 Long-term debt $ 1,533 $ 1,344 $ — $ 1,341 $ 3 Total financial liabilities not accounted for at fair value $ 1,533 $ 1,344 $ — $ 1,341 $ 3 December 31, 2021 Financial assets: Cash and cash equivalents $ 2,131 $ 2,131 $ 2,131 $ — $ — Mortgage loans 520 533 — — 533 Total financial assets not accounted for at fair value $ 2,651 $ 2,664 $ 2,131 $ — $ 533 Long-term debt $ 1,964 $ 2,261 $ — $ 2,258 $ 3 Total financial liabilities not accounted for at fair value $ 1,964 $ 2,261 $ — $ 2,258 $ 3 F. Investments Available for sale fixed maturities at September 30, 2022 and December 31, 2021, consisted of the following (in millions): Amortized Net Fair Cost Allowance for Expected Credit Losses Gross Unrealized Unrealized Value Gains Losses September 30, 2022 Fixed maturities: U.S. government and government agencies $ 229 $ — $ — $ ( 15 ) $ ( 15 ) $ 214 States, municipalities and political subdivisions 1,356 — 2 ( 100 ) ( 98 ) 1,258 Foreign government 235 — — ( 12 ) ( 12 ) 223 Residential MBS 1,759 1 22 ( 176 ) ( 154 ) 1,604 Commercial MBS 88 — — ( 3 ) ( 3 ) 85 Collateralized loan obligations 1,879 1 — ( 72 ) ( 72 ) 1,806 Other asset-backed securities 2,449 7 — ( 171 ) ( 171 ) 2,271 Corporate and other 2,749 — 3 ( 179 ) ( 176 ) 2,573 Total fixed maturities $ 10,744 $ 9 $ 27 $ ( 728 ) $ ( 701 ) $ 10,034 December 31, 2021 Fixed maturities: U.S. government and government agencies $ 216 $ — $ 2 $ ( 2 ) $ — $ 216 States, municipalities and political subdivisions 1,758 — 74 — 74 1,832 Foreign government 248 — — ( 2 ) ( 2 ) 246 Residential MBS 915 — 48 ( 3 ) 45 960 Commercial MBS 102 — 2 — 2 104 Collateralized loan obligations 1,643 1 3 ( 2 ) 1 1,643 Other asset-backed securities 2,677 7 17 ( 11 ) 6 2,676 Corporate and other 2,634 1 55 ( 8 ) 47 2,680 Total fixed maturities $ 10,193 $ 9 $ 201 $ ( 28 ) $ 173 $ 10,357 20 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Equity securities which are reported at fair value with holding gains and losses recognized in net earnings, consisted of the following at September 30, 2022 and December 31, 2021 (in millions): September 30, 2022 December 31, 2021 Actual Cost Fair Value Actual Cost Fair Value over (under) Cost Fair Value Fair Value over Cost Common stocks $ 549 $ 530 $ ( 19 ) $ 491 $ 586 $ 95 Perpetual preferred stocks 462 466 4 403 456 53 Total equity securities carried at fair value $ 1,011 $ 996 $ ( 15 ) $ 894 $ 1,042 $ 148 Investments accounted for using the equity method held by AFG’s continuing operations, by category, carrying value and net investment income are as follows (in millions): Net Investment Income Carrying Value Three months ended September 30, Nine months ended September 30, September 30, 2022 December 31, 2021 2022 2021 2022 2021 Real estate-related investments (*) $ 1,218 $ 1,130 $ 40 $ 52 $ 209 $ 151 Private equity 413 352 ( 2 ) 21 36 66 Private debt 30 35 ( 1 ) — 1 5 Total investments accounted for using the equity method $ 1,661 $ 1,517 $ 37 $ 73 $ 246 $ 222 (*) Includes 92 % with underlying investments in multi-family properties, 1 % in single family properties and 7 % in other property types as of September 30, 2022 and 88 % with underlying investments in multi-family properties, 1 % in single family properties and 11 % in other property types as of December 31, 2021. The earnings (losses) from these investments are generally reported on a quarter lag due to the timing required to obtain the necessary information from the funds. AFG regularly reviews and discusses fund performance with the fund managers to corroborate the reasonableness of the underlying reported asset values and to assess whether any events have occurred within the lag period that may materially affect the valuation of these investments. With respect to partnerships and similar investments, AFG had unfunded commitments of $ 389 million and $ 366 million as of September 30, 2022 and December 31, 2021, respectively. 21 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The following table shows gross unrealized losses (dollars in millions) on available for sale fixed maturities by investment category and length of time that individual securities have been in a continuous unrealized loss position at the following balance sheet dates. Less Than Twelve Months Twelve Months or More Unrealized Fair Fair Value as Unrealized Fair Fair Value as Loss Value % of Cost Loss Value % of Cost September 30, 2022 Fixed maturities: U.S. government and government agencies $ ( 4 ) $ 108 96 % $ ( 11 ) $ 106 91 % States, municipalities and political subdivisions ( 98 ) 1,124 92 % ( 2 ) 14 88 % Foreign government ( 7 ) 145 95 % ( 5 ) 61 92 % Residential MBS ( 174 ) 1,421 89 % ( 2 ) 19 90 % Commercial MBS ( 3 ) 68 96 % — 10 100 % Collateralized loan obligations ( 61 ) 1,465 96 % ( 11 ) 329 97 % Other asset-backed securities ( 137 ) 1,806 93 % ( 34 ) 326 91 % Corporate and other ( 151 ) 2,174 94 % ( 28 ) 208 88 % Total fixed maturities $ ( 635 ) $ 8,311 93 % $ ( 93 ) $ 1,073 92 % December 31, 2021 Fixed maturities: U.S. government and government agencies $ ( 1 ) $ 92 99 % $ ( 1 ) $ 22 96 % States, municipalities and political subdivisions — 9 100 % — 13 100 % Foreign government ( 2 ) 160 99 % — — — % Residential MBS ( 3 ) 419 99 % — 7 100 % Commercial MBS — 34 100 % — — — % Collateralized loan obligations ( 1 ) 806 100 % ( 1 ) 77 99 % Other asset-backed securities ( 8 ) 1,250 99 % ( 3 ) 81 96 % Corporate and other ( 8 ) 500 98 % — 26 100 % Total fixed maturities $ ( 23 ) $ 3,270 99 % $ ( 5 ) $ 226 98 % At September 30, 2022, the gross unrealized losses on fixed maturities of $ 728 million relate to approximately 1,900 securities. Investment grade securities (as determined by nationally recognized rating agencies) represented approximately 94 % of the gross unrealized loss and 94 % of the fair value. To evaluate fixed maturities for expected credit losses (impairment), management considers whether the unrealized loss is credit-driven or a result of changes in market interest rates, the extent to which fair value is less than cost basis, historical operating, balance sheet and cash flow data from the issuer, third party research and communications with industry specialists and discussions with issuer management. AFG analyzes its MBS for expected credit losses (impairment) each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan to collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data. Management believes AFG will recover its cost basis (net of any allowance) in the securities with unrealized losses and that AFG has the ability to hold the securities until they recover in value and had no intent to sell them at September 30, 2022. 22 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Credit losses on available for sale fixed maturities are measured based on the present value of expected future cash flows compared to amortized cost. Impairment losses are recognized through an allowance and recoveries of previously impaired amounts are recorded as an immediate reversal of all or a portion of the allowance. In addition, the allowance on available for sale fixed maturities cannot cause the amortized cost net of the allowance to be below fair value. Accordingly, future changes in the fair value of an impaired security (when the allowance was limited by the fair value) due to reasons other than issuer credit (e.g. changes in market interest rates) result in increases or decreases in the allowance, which are recorded through realized gains (losses) on securities. A progression of the allowance for expected credit losses on fixed maturity securities held by AFG’s continuing operations is shown below (in millions): Structured Securities (*) Corporate and Other Total Balance at June 30, 2022 $ 7 $ — $ 7 Initial allowance for purchased securities with credit deterioration — — — Provision for expected credit losses on securities with no previous allowance 2 — 2 Additions (reductions) to previously recognized expected credit losses — — — Reductions due to sales or redemptions — — — Balance at September 30, 2022 $ 9 $ — $ 9 Balance at June 30, 2021 $ 8 $ 1 $ 9 Initial allowance for purchased securities with credit deterioration — — — Provision for expected credit losses on securities with no previous allowance — — — Additions (reductions) to previously recognized expected credit losses — — — Reductions due to sales or redemptions — — — Balance at September 30, 2021 $ 8 $ 1 $ 9 Balance at January 1, 2022 $ 8 $ 1 $ 9 Initial allowance for purchased securities with credit deterioration — — — Provision for expected credit losses on securities with no previous allowance 3 — 3 Additions (reductions) to previously recognized expected credit losses ( 2 ) — ( 2 ) Reductions due to sales or redemptions — ( 1 ) ( 1 ) Balance at September 30, 2022 $ 9 $ — $ 9 Balance at January 1, 2021 $ 10 $ 2 $ 12 Initial allowance for purchased securities with credit deterioration — — — Provision for expected credit losses on securities with no previous allowance — — — Additions (reductions) to previously recognized expected credit losses ( 2 ) 1 ( 1 ) Reductions due to sales or redemptions — ( 2 ) ( 2 ) Balance at September 30, 2021 $ 8 $ 1 $ 9 (*) Includes mortgage-backed securities, collateralized loan obligations and other asset-backed securities. In the third quarter and first nine months of 2022 and 2021, AFG did not purchase any securities with expected credit losses. 23 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturities as of September 30, 2022 (dollars in millions). Securities with sinking funds are reported at average maturity. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid by the issuers. Amortized Fair Value Cost, net (*) Amount % Maturity One year or less $ 578 $ 575 6 % After one year through five years 2,693 2,511 25 % After five years through ten years 1,018 932 9 % After ten years 280 250 2 % 4,569 4,268 42 % Collateralized loan obligations and other ABS (average life of approximately 3.5 years) 4,320 4,077 41 % MBS (average life of approximately 5.5 years) 1,846 1,689 17 % Total $ 10,735 $ 10,034 100 % (*) Amortized cost, net of allowance for expected credit losses. Certain risks are inherent in fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates. There were no investments in individual issuers that exceeded 10% of shareholders’ equity at September 30, 2022 or December 31, 2021. Net Investment Income The following table shows (in millions) investment income earned and investment expenses incurred in AFG’s continuing operations. Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Investment income: Fixed maturities $ 98 $ 73 $ 263 $ 217 Equity securities: Dividends 9 6 24 21 Change in fair value (*) ( 6 ) 7 ( 8 ) 41 Equity in earnings of partnerships and similar investments 37 73 246 222 Other 17 14 37 28 Gross investment income 155 173 562 529 Investment expenses ( 4 ) ( 4 ) ( 13 ) ( 8 ) Net investment income $ 151 $ 169 $ 549 $ 521 (*) Although the change in the fair value of the majority of AFG’s equity securities is recorded in realized gains (losses) on securities, AFG records holding gains and losses in net investment income on its portfolio of limited partnerships and similar investments that do not qualify for equity method accounting and certain other securities classified at purchase as “fair value through net investment income.” 24 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Realized gains (losses) and changes in unrealized appreciation (depreciation) from continuing operations included in AOCI related to fixed maturity securities are summarized as follows (in millions): Three months ended September 30, 2022 Three months ended September 30, 2021 Realized gains (losses) Realized gains (losses) Before Impairments Impairment Allowance Total Change in Unrealized Before Impairments Impairment Allowance Total Change in Unrealized Fixed maturities $ ( 6 ) $ ( 2 ) $ ( 8 ) $ ( 288 ) $ ( 2 ) $ — $ ( 2 ) $ ( 35 ) Equity securities ( 27 ) — ( 27 ) — ( 15 ) — ( 15 ) — Mortgage loans and other investments — — — — — — — — Total pretax ( 33 ) ( 2 ) ( 35 ) ( 288 ) ( 17 ) — ( 17 ) ( 35 ) Tax effects 7 — 7 60 5 — 5 8 Net of tax $ ( 26 ) $ ( 2 ) $ ( 28 ) $ ( 228 ) $ ( 12 ) $ — $ ( 12 ) $ ( 27 ) Nine months ended September 30, 2022 Nine months ended September 30, 2021 Realized gains (losses) Realized gains (losses) Before Impairments Impairment Allowance Total Change in Unrealized Before Impairments Impairment Allowance Total Change in Unrealized Fixed maturities $ ( 20 ) $ ( 1 ) $ ( 21 ) $ ( 874 ) $ ( 2 ) $ 1 $ ( 1 ) $ ( 59 ) Equity securities ( 122 ) — ( 122 ) — 104 — 104 — Mortgage loans and other investments — — — — — — — — Total pretax ( 142 ) ( 1 ) ( 143 ) ( 874 ) 102 1 103 ( 59 ) Tax effects 30 — 30 184 ( 20 ) — ( 20 ) 13 Net of tax $ ( 112 ) $ ( 1 ) $ ( 113 ) $ ( 690 ) $ 82 $ 1 $ 83 $ ( 46 ) All equity securities other than those accounted for under the equity method are carried at fair value through net earnings. AFG recorded net holding gains (losses) on equity securities from continuing operations during the third quarter and first nine months of 2022 and 2021 on securities that were still owned at September 30, 2022 and September 30, 2021 as follows (in millions): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Included in realized gains (losses) $ ( 26 ) $ ( 16 ) $ ( 119 ) $ 82 Included in net investment income ( 7 ) 7 ( 4 ) 41 $ ( 33 ) $ ( 9 ) $ ( 123 ) $ 123 Gross realized gains and losses (excluding changes in impairment allowance and mark-to-market of derivatives) on available for sale fixed maturity investment transactions from continuing operations consisted of the following (in millions): Nine months ended September 30, 2022 2021 Gross gains $ 2 $ 4 Gross losses ( 11 ) ( 2 ) Derivatives Designated and Qualifying as Cash Flow Hedges As of September 30, 2022, AFG has interest rate swaps that are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of AFG’s floating-rate fixed maturity securities to fixed rates by offsetting the variability in cash flows attributable to changes in short-term reference rates (LIBOR or SOFR). Under the terms of the swaps, AFG receives fixed-rate interest payments in exchange for variable interest payments based on short-term LIBOR or SOFR. The notional amounts of the interest rate swaps generally decline over each swap’s respective life (the swaps expire between July 2024 and July 2028) in anticipation of the expected decline in AFG’s portfolio of fixed maturity securities with floating interest rates based on short-term LIBOR or SOFR. The total outstanding notional amount of AFG’s interest rate swaps was $ 1.22 billion at September 30, 2022, all of which were entered into in the first nine months of 2022. The fair value of the interest rate swaps in an asset position and included in other assets at 25 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED September 30, 2022 was less than $1 million. The fair value of the interest rate swaps in a liability position and included in other liabilities at September 30, 2022 was $37 million. The net unrealized gain or loss on cash flow hedges is included in AOCI, net of deferred taxes. The amount reclassified from AOCI (before taxes) to net earnings was income of $1 million and $3 million for the third quarter and first nine months of 2022, respectively. A collateral receivable supporting these swaps of $63 million at September 30, 2022 is included in other assets in AFG’s Balance Sheet. G. Managed Investment Entities AFG is the investment manager and it has investments ranging from 7.4 % to 82.7 % of the most subordinate debt tranche of fourteen active collateralized loan obligation entities (“CLOs”), which are considered variable interest entities. AFG also owns portions of the senior debt tranches of certain of these CLOs. Upon formation between 2012 and 2022, these entities issued securities in various senior and subordinate classes and invested the proceeds primarily in secured bank loans, which serve as collateral for the debt securities issued by each CLO. None of the collateral was purchased from AFG. AFG’s investments in the subordinate debt tranches of these entities receive residual income from the CLOs only after the CLOs pay expenses (including management fees to AFG) and interest on and returns of capital to senior levels of debt securities. There are no contractual requirements for AFG to provide additional funding for these entities. AFG has not provided and does not intend to provide any financial support to these entities. AFG’s maximum exposure to economic loss on the CLOs that it manages is limited to its investment in those CLOs, which had an aggregate fair value of $ 97 million (including $ 62 million invested in the most subordinate tranches and $ 12 million invested in a temporary warehousing entity) at September 30, 2022, and $ 76 million at December 31, 2021. In May 2022, AFG formed one new CLO, which issued $ 404 million face amount of liabilities (including $ 13 million face amount purchased by AFG). The following table shows a progression of the fair value of AFG's investment in CLO tranches held by continuing operations (in millions): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Balance at beginning of period $ 85 $ 57 $ 76 $ 57 Purchases — — 33 — Distributions ( 4 ) ( 5 ) ( 13 ) ( 17 ) Change in fair value 4 4 ( 11 ) 16 Balance at end of period (*) $ 85 $ 56 $ 85 $ 56 (*) Excludes $ 12 million and $ 40 million invested in temporary warehousing entities at September 30, 2022 and September 30, 2021, respectively, that were established to provide AFG the ability to form new CLOs when management believes market conditions are favorable. The revenues and expenses of the CLOs are separately identified in AFG’s Statement of Earnings, after the elimination of management fees and earnings attributable to AFG as measured by the change in the fair value of AFG’s investments in the CLOs. Selected financial information related to the CLOs is shown below (in millions): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Gains (losses) on change in fair value of assets/liabilities (*): Assets $ 7 $ 10 $ ( 297 ) $ 77 Liabilities ( 12 ) ( 9 ) 272 ( 68 ) Management fees paid to AFG 4 4 12 12 CLO earnings (losses) attributable to AFG: From continuing operations $ 4 $ 5 $ ( 10 ) $ 17 From discontinued annuity operations — — — 20 Total $ 4 $ 5 $ ( 10 ) $ 37 (*) Included in revenues in AFG’s Statement of Earnings. 26 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED The aggregate unpaid principal balance of the CLOs’ fixed maturity investments exceeded the fair value of the investments by $ 366 million and $ 72 million at September 30, 2022 and December 31, 2021, respectively. The aggregate unpaid principal balance of the CLOs’ debt exceeded its carrying value by $ 448 million and $ 187 million at those dates. The CLO assets include loans with an aggregate fair value of $ 4 million at September 30, 2022 and $ 9 million at December 31, 2021, for which the CLOs are not accruing interest because the loans are in default (aggregate unpaid principal balance of $ 12 million at September 30, 2022 and $ 18 million at December 31, 2021). In addition to the CLOs that it manages, AFG had investments in CLOs that are managed by third parties (therefore not consolidated), which are included in available for sale fixed maturity securities and had a fair value of $ 1.81 billion at September 30, 2022 and $ 1.64 billion at December 31, 2021. H. Goodwill and Other Intangibles There were no changes in the goodwill balance of $ 246 million during the first nine months of 2022. Included in other assets in AFG’s Balance Sheet is $ 111 million at September 30, 2022 and $ 106 million at December 31, 2021 in amortizable intangible assets related to property and casualty insurance acquisitions. These amounts are net of accumulated amortization of $ 20 million and $ 67 million, respectively. Amortization of intangibles was $ 2 million and $ 1 million in the third quarter of 2022 and 2021, respectively, and $ 7 million and $ 5 million in the first nine months of 2022 and 2021, respectively. I. Long-Term Debt Long-term debt consisted of the following (in millions): September 30, 2022 December 31, 2021 Principal Discount and Issue Costs Carrying Value Principal Discount and Issue Costs Carrying Value Direct Senior Obligations of AFG: 4.50 % Senior Notes due June 2047 $ 586 $ ( 2 ) $ 584 $ 590 $ ( 2 ) $ 588 3.50 % Senior Notes due August 2026 — — — 425 ( 3 ) 422 5.25 % Senior Notes due April 2030 295 ( 5 ) 290 300 ( 5 ) 295 Other 3 — 3 3 — 3 884 ( 7 ) 877 1,318 ( 10 ) 1,308 Direct Subordinated Obligations of AFG: 4.50 % Subordinated Debentures due September 2060 200 ( 5 ) 195 200 ( 5 ) 195 5.125 % Subordinated Debentures due December 2059 200 ( 6 ) 194 200 ( 6 ) 194 5.625 % Subordinated Debentures due June 2060 150 ( 4 ) 146 150 ( 4 ) 146 5.875 % Subordinated Debentures due March 2059 125 ( 4 ) 121 125 ( 4 ) 121 675 ( 19 ) 656 675 ( 19 ) 656 $ 1,559 $ ( 26 ) $ 1,533 $ 1,993 $ ( 29 ) $ 1,964 Scheduled principal payments on debt for the balance of 2022, the subsequent five years and thereafter are as follows: 2022 — none ; 2023 — none ; 2024 — none ; 2025 — none ; 2026 — none ; 2027 — none and thereafter — $ 1.56 billion. In the first six months of 2022, AFG repurchased $ 49 million principal amount of its 3.50 % Senior Notes due in August 2026 in open market transactions for $ 51 million. In June 2022, AFG redeemed the remaining $ 376 million of outstanding 3.50 % Senior Notes due August 2026 for $ 382 million (including a $ 6 million make-whole premium). In the third quarter of 2022, AFG repurchased $ 4 million principal amount of its 4.50 % Senior Notes due in June 2047 for $ 3 million and $ 5 million principal amount of its 5.25 % Senior Notes due in April 2030 for $ 5 million in open market transactions (a portion of these repurchases settled in the first few days of October 2022). 27 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED AFG can borrow up to $500 million under its revolving credit facility, which expires in December 2025. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG’s credit rating. No amounts were borrowed under this facility at September 30, 2022 or December 31, 2021. J. Shareholders’ Equity AFG is authorized to issue 12.5 million shares of Voting Preferred Stock and 12.5 million shares of Nonvoting Preferred Stock, each without par value. Accumulated Other Comprehensive Income (Loss), Net of Tax (“AOCI”) Comprehensive income is defined as all changes in shareholders’ equity except those arising from transactions with shareholders. Comprehensive income includes net earnings and other comprehensive income (loss), which consists primarily of changes in net unrealized gains or losses on available for sale fixed maturity securities. The progression of the components of accumulated other comprehensive income (loss) follows (in millions): Other Comprehensive Income (Loss) AOCI Beginning Balance Pretax Tax Net of tax AOCI Ending Balance Quarter ended September 30, 2022 Net unrealized gains (losses) on securities: Unrealized holding losses on securities arising during the period $ ( 292 ) $ 61 $ ( 231 ) Reclassification adjustment for realized (gains) losses included in net earnings (*) 4 ( 1 ) 3 Total net unrealized losses on securities $ ( 326 ) ( 288 ) 60 ( 228 ) $ ( 554 ) Net unrealized gains (losses) on cash flow hedges: Unrealized holding losses on cash flow hedges arising during the period $ ( 26 ) $ 5 $ ( 21 ) Reclassification adjustment for investment income included in net earnings ( 1 ) 1 — Net unrealized losses on cash flow hedges ( 8 ) ( 27 ) 6 ( 21 ) ( 29 ) Foreign currency translation adjustments ( 15 ) ( 4 ) ( 1 ) ( 5 ) ( 20 ) Pension and other postretirement plans adjustments (“OPRP”) 1 — — — 1 Total $ ( 348 ) $ ( 319 ) $ 65 $ ( 254 ) $ ( 602 ) Quarter ended September 30, 2021 Net unrealized gains (losses) on securities: Unrealized holding losses on securities arising during the period $ ( 37 ) $ 8 $ ( 29 ) Reclassification adjustment for realized (gains) losses included in net earnings (*) 2 — 2 Total net unrealized gains (losses) on securities $ 205 ( 35 ) 8 ( 27 ) $ 178 Foreign currency translation adjustments ( 16 ) ( 3 ) — ( 3 ) ( 19 ) Pension and other postretirement plans adjustments (“OPRP”) 1 — — — 1 Total $ 190 $ ( 38 ) $ 8 $ ( 30 ) $ 160 28 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Other Comprehensive Income (Loss) AOCI Beginning Balance Pretax Tax Net of tax AOCI Ending Balance Nine months ended September 30, 2022 Net unrealized gains (losses) on securities: Unrealized holding losses on securities arising during the period $ ( 884 ) $ 186 $ ( 698 ) Reclassification adjustment for realized (gains) losses included in net earnings (*) 10 ( 2 ) 8 Total net unrealized gains (losses) on securities $ 136 ( 874 ) 184 ( 690 ) $ ( 554 ) Net unrealized gains (losses) on cash flow hedges: — Unrealized holding losses on cash flow hedges arising during the period ( 34 ) 7 ( 27 ) Reclassification adjustment for investment income included in net earnings ( 3 ) 1 ( 2 ) Net unrealized losses on cash flow hedges — ( 37 ) 8 ( 29 ) ( 29 ) Foreign currency translation adjustments ( 18 ) ( 1 ) ( 1 ) ( 2 ) ( 20 ) Pension and other postretirement plan adjustments 1 — — — 1 Total $ 119 $ ( 912 ) $ 191 $ ( 721 ) $ ( 602 ) Nine months ended September 30, 2021 Net unrealized gains (losses) on securities: Unrealized holding losses on securities arising during the period $ ( 224 ) $ 47 $ ( 177 ) Reclassification adjustment for realized (gains) losses included in net earnings (*) ( 21 ) 5 ( 16 ) Reclassification for unrealized gains on securities of subsidiaries sold ( 1,119 ) 235 ( 884 ) Total net unrealized gains (losses) on securities $ 1,255 ( 1,364 ) 287 ( 1,077 ) $ 178 Net unrealized gains (losses) on cash flow hedges: Unrealized holding losses on cash flow hedges arising during the period ( 1 ) — ( 1 ) Reclassification adjustment for investment income included in net earnings from discontinued operations ( 14 ) 3 ( 11 ) Reclassification for unrealized gains on cash flow hedges of subsidiaries sold ( 37 ) 8 ( 29 ) Total net unrealized gains (losses) on cash flow hedges 41 ( 52 ) 11 ( 41 ) — Foreign currency translation adjustments ( 16 ) ( 3 ) — ( 3 ) ( 19 ) Pension and OPRP adjustments: Unrealized holding losses on pension and OPRP arising during the period ( 1 ) — ( 1 ) Reclassification adjustment for pension settlement loss included in other expense in net earnings 11 ( 2 ) 9 Total pension and OPRP adjustments ( 7 ) 10 ( 2 ) 8 1 Total $ 1,273 $ ( 1,409 ) $ 296 $ ( 1,113 ) $ 160 (*) The reclassification adjustment out of net unrealized gains (losses) on securities affected the following lines in AFG’s Statement of Earnings: OCI component Affected line in the statement of earnings Pretax Realized gains (losses) on securities Tax Provision for income taxes Stock Incentive Plans Under AFG’s stock incentive plans, employees of AFG and its subsidiaries are eligible to receive equity awards in the form of stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock awards. In the first nine months of 2022, AFG issued 151,080 shares of restricted Common Stock (fair value of $ 133.94 per share) under the Stock Incentive Plan. Total compensation expense related to stock incentive plans of AFG and its subsidiaries was $ 4 million in the third quarter of 2022 and 2021 and $ 14 million and $ 11 million in the first nine months of 2022 and 2021, respectively. 29 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED K. Income Taxes The following is a reconciliation of income taxes on continuing operations at the statutory rate of 21 % to the provision for income taxes as shown in AFG’s Statement of Earnings (dollars in millions): Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Amount % of EBT Amount % of EBT Amount % of EBT Amount % of EBT Earnings from continuing operations before income taxes (“EBT”) $ 210 $ 267 $ 777 $ 890 Income taxes at statutory rate $ 44 21 % $ 56 21 % $ 163 21 % $ 187 21 % Effect of: Employee stock ownership plan dividend paid deduction ( 1 ) — % ( 2 ) ( 1 %) ( 7 ) ( 1 %) ( 10 ) ( 1 %) Stock-based compensation — — % ( 2 ) ( 1 %) ( 4 ) ( 1 %) ( 12 ) ( 1 %) Tax exempt interest ( 1 ) — % ( 2 ) ( 1 %) ( 5 ) ( 1 %) ( 6 ) ( 1 %) Adjustment to prior year taxes ( 3 ) ( 2 %) ( 1 ) — % ( 3 ) — % ( 1 ) — % Dividends received deduction — — % — — % ( 1 ) — % ( 1 ) — % Foreign operations 1 — % 2 1 % 6 1 % — — % Nondeductible expenses 2 1 % 2 1 % 5 1 % 6 1 % Change in valuation allowance 2 1 % ( 2 ) ( 1 %) 1 — % 1 — % Other 1 — % ( 3 ) ( 1 %) — — % — ( 1 %) Provision for income taxes as shown in the statement of earnings $ 45 21 % $ 48 18 % $ 155 20 % $ 164 18 % AFG’s net operating loss carryforwards (“NOL”) subject to separate return limitation year (“SRLY”) tax rules of $ 43 million will expire unutilized at December 31, 2022. Since AFG maintains a full valuation allowance against its SRLY NOLs, the expiration of these loss carryforwards will be offset by a corresponding reduction in the valuation allowance and will have no overall impact on AFG’s income tax expense or results of operations. In August 2022, the United States federal government enacted the Inflation Reduction Act (“IRA”) which, among other things, created a new corporate alternative minimum tax (“AMT”) based on the earnings that a company reports in its financial statements and imposes a 1% excise tax on corporate stock repurchases. The effective date of the IRA is January 1, 2023, and the August 2022 enactment did not have an immediate impact on AFG’s financial statements. Due to the lack of specific guidance at this time, AFG cannot determine whether it will be subject to the new AMT. Any AMT incurred would be available to offset AFG’s taxes payable under the standard calculation in future periods. Accordingly, the AMT is a timing difference and would result in the recording of an offsetting deferred tax asset with no impact on overall income tax expense. The excise tax on stock repurchases would be recorded as part of the cost of the repurchases directly in shareholders’ equity. L. Contingencies There have been no significant changes to the matters discussed and referred to in Note M — “Contingencies” of AFG’s 2021 Form 10-K, which covers property and casualty insurance reserves for claims related to environmental exposures, asbestos and other mass tort claims and environmental and occupational injury and disease claims of subsidiaries’ former railroad and manufacturing operations. 30 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED M. Insurance Property and Casualty Insurance Reserves The following table provides an analysis of changes in the liability for losses and loss adjustment expenses during the first nine months of 2022 and 2021 (in millions): Nine months ended September 30, 2022 2021 Balance at beginning of year $ 11,074 $ 10,392 Less reinsurance recoverables, net of allowance 3,419 3,117 Net liability at beginning of year 7,655 7,275 Provision for losses and LAE occurring in the current period 2,869 2,543 Net decrease in the provision for claims of prior years ( 226 ) ( 208 ) Total losses and LAE incurred 2,643 2,335 Payments for losses and LAE of: Current year ( 667 ) ( 589 ) Prior years ( 1,501 ) ( 1,430 ) Total payments ( 2,168 ) ( 2,019 ) Foreign currency translation and other 1 — Net liability at end of period 8,131 7,591 Add back reinsurance recoverables, net of allowance 3,936 3,400 Gross unpaid losses and LAE included in the balance sheet at end of period $ 12,067 $ 10,991 The net decrease in the provision for claims of prior years during the first nine months of 2022 reflects (i) lower than anticipated losses in the crop business, lower than expected claim frequency in the trucking and ocean marine businesses and in the Singapore operations, lower than expected claim frequency and severity in the aviation business and lower than anticipated claim severity in the property and inland marine business (within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses, lower than expected claim frequency in the executive liability business and lower than anticipated claim frequency and severity in the excess and surplus business (within the Specialty casualty sub-segment) and (iii) lower than anticipated claim frequency in the surety, trade credit and financial institutions businesses (within the Specialty financial sub-segment). This favorable development was partially offset by higher than anticipated claim severity in the targeted markets and excess liability businesses (within the Specialty casualty sub-segment). The net decrease in the provision for claims of prior years during the first nine months of 2021 reflects (i) lower than anticipated claim frequency and severity in the transportation businesses, lower than expected losses in the crop business, lower than expected claim severity in the property and inland marine business and lower than expected claim frequency in the aviation business (within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses (within the Specialty casualty sub-segment) and (iii) lower than anticipated claim frequency in the surety and trade credit businesses and lower than expected claim frequency and severity in the financial institutions business (within the Specialty financial sub-segment). This favorable development was partially offset by (i) higher than expected claim frequency and severity in equine business (within the Property and transportation sub-segment) and (ii) higher than anticipated claim severity in the general liability and targeted markets businesses (within the Specialty casualty sub-segment). 31 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED Recoverables from Reinsurers and Premiums Receivable Progressions of the 2022 and 2021 allowance for expected credit losses on recoverables from reinsurers and premiums receivable related to continuing operations are shown below (in millions): Recoverables from Reinsurers Premiums Receivable 2022 2021 2022 2021 Balance at June 30 $ 7 $ 8 $ 9 $ 9 Provision (credit) for expected credit losses 1 — ( 1 ) 1 Write-offs charged against the allowance — — — — Balance at September 30 $ 8 $ 8 $ 8 $ 10 Balance at January 1 $ 8 $ 6 $ 8 $ 10 Provision (credit) for expected credit losses — 2 — — Write-offs charged against the allowance — — — — Balance at September 30 $ 8 $ 8 $ 8 $ 10 32 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations INDEX TO MD&A Page Page Forward-Looking Statements 33 Results of Operations — Third Quarter 46 Overview 34 Segmented Statement of Earnings 46 Critical Accounting Policies 35 Property and Casualty Insurance 48 Liquidity and Capital Resources 35 Holding Company, Other and Unallocated 58 Ratios 35 Results of Operations — First Nine Months 61 Condensed Consolidated Cash Flows 35 Segmented Statement of Earnings 61 Parent and Subsidiary Liquidity 36 Property and Casualty Insurance 62 Investments 37 Holding Company, Other and Unallocated 71 Uncertainties 40 Real Estate Entities Acquired from the Annuity Operations Managed Investment Entities 41 74 Results of Operations 44 Discontinued Annuity Operations 74 General 44 FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Some of the forward-looking statements can be identified by the use of words such as “anticipates”, “believes”, “expects”, “projects”, “estimates”, “intends”, “plans”, “seeks”, “could”, “may”, “should”, “will” or the negative version of those words or other comparable terminology. Such forward-looking statements include statements relating to: expectations concerning market and other conditions and their effect on future premiums, revenues, earnings, investment activities, and the amount and timing of share repurchases; recoverability of asset values; expected losses and the adequacy of reserves for asbestos, environmental pollution and mass tort claims; rate changes; and improved loss experience. Actual results and/or financial condition could differ materially from those contained in or implied by such forward-looking statements for a variety of reasons including but not limited to: • changes in financial, political and economic conditions, including changes in interest and inflation rates, currency fluctuations and extended economic recessions or expansions in the U.S. and/or abroad; • performance of securities markets; • 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 pandemic; • 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 pandemics, 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; • 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; • the impact of the conditions in the international financial markets and the global economy relating to AFG’s international operations; and • effects on AFG’s reputation, including as a result of environmental, social and governance matters. 33 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued 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. OBJECTIVE The objective of Management’s Discussion and Analysis is to provide a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of AFG’s financial condition, changes in financial condition and results of operations. The tables and narrative that follow are presented in a manner that is consistent with the information that AFG’s management uses to make operational decisions and allocate capital resources. They are provided to demonstrate the nature of the transactions and events that could impact AFG’s financial results. This discussion should be read in conjunction with the financial statements beginning on page 2 . 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 its businesses are financial in nature, AFG does not prepare its consolidated financial statements using a current-noncurrent format. Consequently, certain traditional ratios and financial analysis tests are not meaningful. Results of Operations Through the operations of its subsidiaries, AFG is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses. AFG’s former annuity operations are reported as discontinued operations. AFG reported net earnings from continuing operations of $165 million ($1.93 per share, diluted) for the third quarter of 2022 compared to $219 million ($2.56 per share, diluted) for the third quarter of 2021. Lower underwriting profit, lower net investment income, higher holding company expenses and higher net realized losses on securities in the third quarter of 2022 compared to the third quarter of 2021 were the drivers of these results, partially offset by lower interest charges on borrowed money. AFG reported net earnings from continuing operations of $622 million ($7.29 per share, diluted) for the first nine months of 2022 compared to $726 million ($8.45 per share, diluted) for the first nine months of 2021. Higher underwriting profit, higher net investment income, lower interest charges on borrowed money and lower holding company expenses in 2022 compared to 2021 were more than offset by net realized losses on securities in the first nine months of 2022 compared to net realized gains on securities in the first nine months of 2021. Sale of the Annuity Business In May 2021, AFG sold its annuity business, including Great American Life Insurance Company and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company to Massachusetts Mutual Life Insurance Company (“MassMutual”). Total proceeds from the sale were $3.57 billion and AFG realized an after-tax gain on the sale of $656 million in the first six months of 2021. Outlook AFG’s financial condition, results of operations and cash flows are impacted by the economic, legal and regulatory environment. Inflation, supply chain disruption, labor shortages and other economic conditions may impact premium levels, loss cost trends and investment returns. 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 macro-economic environment, the conflict between Russia and Ukraine and the COVID-19 pandemic. AFG’s insurance subsidiaries continue to 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. Management expects continued premium growth and strong underwriting results in the ongoing favorable property and casualty insurance market. In addition, the deployment of cash in a rising interest rate environment will continue to increase investment income on fixed maturity investments compared to 2021. 34 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued 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 establishment of asbestos and environmental liabilities of former railroad and manufacturing operations, and • the valuation of investments, including the determination of impairment allowances. For a discussion of these policies, see Management’s Discussion and Analysis — “Critical Accounting Policies” in AFG’s 2021 Form 10-K. LIQUIDITY AND CAPITAL RESOURCES Ratios AFG’s debt to total capital ratio on a consolidated basis is shown below (dollars in millions): September 30, 2022 December 31, 2021 2020 Principal amount of long-term debt $ 1,559 $ 1,993 $ 1,993 Total capital 6,074 6,869 7,486 Ratio of debt to total capital: Including subordinated debt 25.7 % 29.0 % 26.6 % Excluding subordinated debt 14.6 % 19.2 % 17.6 % 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 and shareholders’ equity (excluding unrealized gains (losses) related to fixed maturity investments). 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): Nine months ended September 30, 2022 2021 Net cash provided by operating activities $ 1,043 $ 1,425 Net cash used in investing activities (1,062) (103) Net cash used in financing activities (1,318) (1,299) Net change in cash and cash equivalents $ (1,337) $ 23 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 35 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued property and casualty premiums, claim and expense payments and recoveries from reinsurers. AFG’s discontinued annuity operations, which were sold in May 2021, typically produced positive net operating cash flows as investment income exceeded 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 (“CLO”)) 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 $133 million during the first nine months of 2022 and reduced cash flows from operating activities by $78 million in the first nine months of 2021, accounting for a $211 million increase in cash flows from operating activities in the 2022 period compared to the 2021 period. As discussed in Note A — “Accounting Policies — Managed Investment Entities” to the financial statements, AFG has no right to use the CLO assets and no obligation to pay the CLO liabilities and such assets and liabilities are shown separately in AFG’s Balance Sheet. Excluding the impact of the managed investment entities, net cash provided by operating activities was $910 million in the first nine months of 2022 compared to $1.50 billion in the first nine months of 2021, a decrease of $593 million reflecting the sale of the annuity operations. Net Cash Used in Investing Activities AFG’s investing activities consist primarily of the investment of funds provided by its property and casualty businesses and, prior to the May 2021 sale, its discontinued annuity operations. Cash proceeds from the sale of the annuity operations in excess of cash and cash equivalents held in the annuity subsidiaries that were sold was a $1.48 billion source of cash provided by investing activities in the first nine months of 2021. 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 $260 million use of cash in the first nine months of 2022 compared to a $99 million source of cash in the comparable 2021 period, accounting for a $359 million increase in net cash used in investing activities in the first nine months of 2022 compared to the same 2021 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note G — “Managed Investment Entities” to the financial statements. Excluding the impact of the sale of the annuity operations and the activity of the managed investment entities, net cash used in investing activities was $802 million in the first nine months of 2022 compared to $1.68 billion in the first nine months of 2021, a decrease of $877 million as the opportunistic investment of cash on hand in the property and casualty operations during the rising interest rate environment in the first nine months of 2022 was more than offset by the absence of investing activities from the disposed annuity operations. Net Cash Used in Financing Activities AFG’s financing activities consist primarily of issuances and retirements of long-term debt, issuances and repurchases of common stock, dividend payments and, prior to the sale of the annuity business, transactions with annuity policyholders. Net cash used in financing activities was $1.32 billion for the first nine months of 2022 compared to $1.30 billion in the first nine months of 2021, an increase of $19 million. Debt retirements were a $436 million use of cash in the first nine months of 2022 compared to no debt retirements in the first nine months of 2021. During the first nine months of 2022, AFG repurchased $10 million of its Common Stock compared to $318 million in the comparable 2021 period, resulting in a $308 million decrease in net cash used in financing activities in the first nine months of 2022 compared to the first nine months of 2021. AFG paid cash dividends totaling $989 million in the first nine months of 2022 compared to $1.48 billion in the first nine months of 2021, resulting in a net $493 million decrease in cash used in financing activities in the first nine months of 2022 compared to the first nine months of 2021. Net annuity receipts exceeded annuity surrenders, benefits, withdrawals and transfers by $477 million in 2021 through the May 31, 2021 effective date of the sale, accounting for a $477 million increase in net cash used in financing activities in the 2022 period compared to the 2021 period. 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 $105 million in the first nine months of 2022 compared to retirements exceeding issuances by $36 million in the first nine months of 2021, accounting for a $141 million decrease in net cash used in financing activities in the 2022 period compared to the 2021 period. See Note A — “Accounting Policies — Managed Investment Entities” and Note G — “Managed Investment Entities” to the financial statements. Parent and Subsidiary Liquidity Parent Holding Company Liquidity Management believes AFG has sufficient resources to meet its liquidity requirements. If funds generated from operations, including dividends, tax payments and borrowings from subsidiaries, are insufficient to meet fixed charges in any period, AFG would be required to utilize parent company cash and investments or to generate cash through borrowings, sales of other assets, or similar transactions. 36 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued AFG’s capital and liquidity was significantly enhanced as a result of the 2021 sale of its annuity business to MassMutual for proceeds of $3.57 billion. By the end of the second quarter of 2022, AFG had deployed the proceeds from this sale primarily through special cash dividends, share repurchases, debt retirements and the purchase of Verikai. Nevertheless, AFG continues to have significant excess capital available for future returns of capital to shareholders in the form of regular and special cash dividends and through opportunistic share repurchases or to be deployed into its property and casualty businesses as management identifies the potential for healthy, profitable organic growth, and opportunities to expand through acquisitions and start-ups that meet target return thresholds. During the first nine months of 2022, AFG repurchased 80,701 shares of its Common Stock for $10 million and paid special cash dividends totaling $850 million ($2.00 per share in March and $8.00 per share in May). In addition, on November 2, 2022, AFG declared a special cash dividend of $2.00 per share, payable on November 22, 2022. The aggregate amount of this special dividend will be approximately $170 million. AFG may, at any time and from time to time, seek to retire or purchase its outstanding debt through cash purchases or exchanges for equity or debt, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as management may determine, and will depend on prevailing market conditions, AFG’s liquidity requirements, contractual restrictions and other factors. During the first nine months of 2022, AFG retired $434 million principal amount of its senior notes for $441 million cash ($5 million of which settled in early October). During 2021, AFG repurchased 2,777,684 shares of its Common Stock for $319 million and paid special cash dividends of $26.00 per share of AFG Common Stock ($14.00 per share in June, $2.00 per share in August, $4.00 per share in October, $4.00 per share in November and $2.00 per share in December) totaling $2.21 billion. In December 2021, AFG acquired Verikai, Inc., a machine learning and artificial intelligence company that utilizes predictive risk tools to assess insurance risk, for $120 million using cash on hand at the parent. AFG can borrow up to $500 million under its revolving credit facility, which expires in December 2025. Amounts borrowed under this agreement bear interest at rates ranging from 1.00% to 1.875% (currently 1.375%) over LIBOR based on AFG’s credit rating. 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 2021 or the first nine months of 2022. Under a tax allocation agreement with AFG, all 80% (or more) 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 The liquidity requirements of AFG’s insurance subsidiaries relate primarily to the policyholder claims and underwriting expenses and payments of dividends and taxes to AFG. 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 marketable securities. In addition, the insurance subsidiaries generally hold a significant amount of highly liquid, short duration investments. AFG believes its insurance subsidiaries maintain sufficient liquidity to pay claims and underwriting 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 economic environment, management believes that the capital levels in AFG’s insurance subsidiaries are adequate to maintain its business and rating agency ratings. Nonetheless, changes in statutory accounting rules, significant declines in the fair value of the insurance subsidiaries’ investment portfolios or significant ratings downgrades on these investments, could create a need for additional capital. Investments At September 30, 2022, AFG’s investment portfolio contained $10.03 billion 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 $30 million in fixed maturities classified as trading with holding gains and losses included in net investment income. In addition, AFG’s investment portfolio includes $692 million in equity securities carried at fair value with holding gains and losses included in realized gains (losses) on securities and $304 million in equity securities carried at fair value with holding gains and losses included in net investment income. 37 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Fair values for AFG’s portfolio are determined by AFG’s internal investment professionals using data from nationally recognized pricing services, non-binding broker quotes and other market information. Fair values of equity securities are generally based on published closing prices. At September 30, 2022, approximately 86% of AFG’s fixed maturity portfolio was priced using pricing services and 8% was priced 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 that an immediate increase of 100 basis points in the interest rate yield curve would have had at September 30, 2022 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional. Fair value of fixed maturity portfolio $ 10,064 Percentage impact on fair value of 100 bps increase in interest rates (3.0 %) Pretax impact on fair value of fixed maturity portfolio $ (302) At September 30, 2022, approximately 91% of the fixed maturities held by AFG were rated “investment grade” (credit rating of AAA to BBB) by nationally recognized rating agencies, 4% were rated “non-investment grade” and 5% were not rated. 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. Municipal bonds represented approximately 12% of AFG’s fixed maturity portfolio at September 30, 2022. AFG’s municipal bond portfolio is high quality, with over 99% of the securities rated investment grade at that date. The portfolio is well diversified across the states of issuance and individual issuers. At September 30, 2022, approximately 92% of the municipal bond portfolio was held in revenue bonds, with the remaining 8% held in general obligation bonds. 38 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Summarized information for the unrealized gains and losses recorded in AFG’s Balance Sheet at September 30, 2022, is shown in the following table (dollars in millions). Approximately $322 million of available for sale fixed maturity securities had no unrealized gains or losses at September 30, 2022. Securities Securities With With Unrealized Unrealized Gains Losses Available for Sale Fixed Maturities Fair value of securities $ 328 $ 9,384 Amortized cost of securities, net of allowance for expected credit losses $ 301 $ 10,112 Gross unrealized gain (loss) $ 27 $ (728) Fair value as % of amortized cost 109 % 93 % Number of security positions 271 1,905 Number individually exceeding $2 million gain or loss 2 69 Concentration of gains (losses) by type or industry (exceeding 5% of unrealized): Mortgage-backed securities $ 22 $ (179) Media 3 (5) States and municipalities 2 (100) Other asset-backed securities — (171) Collateralized loan obligations — (72) Asset managers — (52) Percentage rated investment grade 54 % 94 % The table below sets forth the scheduled maturities of AFG’s available for sale fixed maturity securities at September 30, 2022, 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 Securities With With Unrealized Unrealized Gains Losses Maturity One year or less 11 % 4 % After one year through five years 21 % 26 % After five years through ten years 13 % 9 % After ten years 4 % 3 % 49 % 42 % Collateralized loan obligations and other asset-backed securities (average life of approximately 3.5 years) 14 % 42 % Mortgage-backed securities (average life of approximately 5.5 years) 37 % 16 % 100 % 100 % 39 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued The table below (dollars in millions) summarizes the unrealized gains and losses on fixed maturity securities by dollar amount: Aggregate Aggregate Fair Fair Unrealized Value as Value Gain (Loss) % of Cost Fixed Maturities at September 30, 2022 Securities with unrealized gains: Exceeding $500,000 (12 securities) $ 27 $ 11 169 % $500,000 or less (259 securities) 301 16 106 % $ 328 $ 27 109 % Securities with unrealized losses: Exceeding $500,000 (394 securities) $ 4,478 $ (533) 89 % $500,000 or less (1,511 securities) 4,906 (195) 96 % $ 9,384 $ (728) 93 % 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 Aggregate Fair Fair Unrealized Value as Value Loss % of Cost Securities with Unrealized Losses at September 30, 2022 Investment grade fixed maturities with losses for: Less than one year (1,456 securities) $ 7,806 $ (607) 93 % One year or longer (164 securities) 984 (81) 92 % $ 8,790 $ (688) 93 % Non-investment grade fixed maturities with losses for: Less than one year (219 securities) $ 505 $ (28) 95 % One year or longer (66 securities) 89 (12) 88 % $ 594 $ (40) 94 % 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 as detailed in AFG’s 2021 Form 10-K under Management’s Discussion and Analysis — “Investments.” Based on its analysis, 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 September 30, 2022. 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 — Realized Gains (Losses) on Securities.” Uncertainties Management believes that the areas posing the greatest risk of material loss are the adequacy of its insurance reserves and contingencies arising out of its former railroad and manufacturing operations. See “Asbestos and environmental reserves ” under “ Results of Operations — Property and Casualty Insurance Segment — Net prior year reserve development” for the quarters ended September 30, 2022 and 2021 and Management’s Discussion and Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves ” in AFG’s 2021 Form 10–K. 40 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued MANAGED INVESTMENT ENTITIES Accounting standards require AFG to consolidate its investments in collateralized loan obligation (“CLO”) entities that it manages and owns an interest in (in the form of debt). See Note A — “Accounting Policies — Managed Investment Entities” and Note G — “Managed Investment Entities” to the financial statements. The effect of consolidating these entities is shown in the tables below (in millions). The “Before CLO Consolidation” columns include AFG’s investment and earnings in the CLOs on an unconsolidated basis. CONDENSED CONSOLIDATING BALANCE SHEET Managed Before CLO Investment Consol. Consolidated Consolidation Entities Entries As Reported September 30, 2022 Assets: Cash and investments $ 14,419 $ — $ (97) (*) $ 14,322 Assets of managed investment entities — 5,099 — 5,099 Other assets 10,111 — — (*) 10,111 Total assets $ 24,530 $ 5,099 $ (97) $ 29,532 Liabilities: Unpaid losses and loss adjustment expenses and unearned premiums $ 15,852 $ — $ — $ 15,852 Liabilities of managed investment entities — 5,087 (85) (*) 5,002 Long-term debt and other liabilities 4,746 — — 4,746 Total liabilities 20,598 5,087 (85) 25,600 Shareholders’ equity: Common Stock and Capital surplus 1,443 12 (12) 1,443 Retained earnings 3,091 — — 3,091 Accumulated other comprehensive income (loss), net of tax (602) — — (602) Total shareholders’ equity 3,932 12 (12) 3,932 Total liabilities and shareholders’ equity $ 24,530 $ 5,099 $ (97) $ 29,532 December 31, 2021 Assets: Cash and investments $ 15,821 $ — $ (76) (*) $ 15,745 Assets of managed investment entities — 5,296 — 5,296 Other assets 7,890 — — (*) 7,890 Total assets $ 23,711 $ 5,296 $ (76) $ 28,931 Liabilities: Unpaid losses and loss adjustment expenses and unearned premiums $ 14,115 $ — $ — $ 14,115 Liabilities of managed investment entities — 5,296 (76) (*) 5,220 Long-term debt and other liabilities 4,584 — — 4,584 Total liabilities 18,699 5,296 (76) 23,919 Shareholders’ equity: Common Stock and Capital surplus 1,415 — — 1,415 Retained earnings 3,478 — — 3,478 Accumulated other comprehensive income, net of tax 119 — — 119 Total shareholders’ equity 5,012 — — 5,012 Total liabilities and shareholders’ equity $ 23,711 $ 5,296 $ (76) $ 28,931 (*) Elimination of the fair value of AFG’s investment in CLOs and related accrued interest. 41 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued CONDENSED CONSOLIDATING STATEMENT OF EARNINGS Managed Before CLO Investment Consol. Consolidated Consol. (a) Entities Entries As Reported Three months ended September 30, 2022 Revenues: Property and casualty insurance net earned premiums $ 1,767 $ — $ — $ 1,767 Net investment income 155 — (4) (b) 151 Realized gains (losses) on securities (35) — — (35) Income of managed investment entities: Investment income — 75 — 75 Gain (loss) on change in fair value of assets/liabilities — (5) — (b) (5) Other income 35 — (4) (c) 31 Total revenues 1,922 70 (8) 1,984 Costs and Expenses: Insurance benefits and expenses 1,621 — — 1,621 Expenses of managed investment entities — 70 (8) (b)(c) 62 Interest charges on borrowed money and other expenses 91 — — 91 Total costs and expenses 1,712 70 (8) 1,774 Earnings before income taxes 210 — — 210 Provision for income taxes 45 — — 45 Net earnings $ 165 $ — $ — $ 165 Three months ended September 30, 2021 Revenues: Property and casualty insurance net earned premiums $ 1,529 $ — $ — $ 1,529 Net investment income 174 — (5) (b) 169 Realized gains (losses) on securities (17) — — (17) Income of managed investment entities: Investment income — 45 — 45 Gain (loss) on change in fair value of assets/liabilities — (1) 2 (b) 1 Other income 31 — (4) (c) 27 Total revenues 1,717 44 (7) 1,754 Costs and Expenses: Insurance benefits and expenses 1,371 — — 1,371 Expenses of managed investment entities — 44 (7) (b)(c) 37 Interest charges on borrowed money and other expenses 79 — — 79 Total costs and expenses 1,450 44 (7) 1,487 Earnings from continuing operations before income taxes 267 — — 267 Provision for income taxes 48 — — 48 Net earnings $ 219 $ — $ — $ 219 (a) Includes income of $4 million in the third quarter of 2022 and $5 million in the third quarter of 2021, representing the change in fair value of AFG’s CLO investments and $4 million of income in both the third quarter of 2022 and 2021, in CLO management fees earned. (b) Elimination of the change in fair value of AFG’s investments in the CLOs, including $4 million and $3 million in the third quarter of 2022 and 2021, respectively, in distributions recorded as interest expense by the CLOs. (c) Elimination of management fees earned by AFG. 42 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued CONDENSED CONSOLIDATING STATEMENT OF EARNINGS Managed Before CLO Investment Consol. Consolidated Consol. (a) Entities Entries As Reported Nine months ended September 30, 2022 Revenues: Property and casualty insurance net earned premiums $ 4,462 $ — $ — $ 4,462 Net investment income 539 — 10 (b) 549 Realized gains (losses) on securities (143) — — (143) Income of managed investment entities: Investment income — 175 — 175 Gain (loss) on change in fair value of assets/liabilities — (1) (24) (b) (25) Other income 105 — (12) (c) 93 Total revenues 4,963 174 (26) 5,111 Costs and Expenses: Insurance benefits and expenses 3,934 — — 3,934 Expenses of managed investment entities — 173 (25) (b)(c) 148 Interest charges on borrowed money and other expenses 252 — — 252 Total costs and expenses 4,186 173 (25) 4,334 Earnings before income taxes 777 1 (1) 777 Provision for income taxes 155 — — 155 Net earnings $ 622 $ 1 $ (1) $ 622 Nine months ended September 30, 2021 Revenues: Property and casualty insurance net earned premiums $ 3,952 $ — $ — $ 3,952 Net investment income 538 — (17) (b) 521 Realized gains (losses) on: Securities 103 — — 103 Subsidiaries 4 — — 4 Income of managed investment entities: Investment income — 135 — 135 Gain (loss) on change in fair value of assets/liabilities — 1 8 (b) 9 Other income 82 — (12) (c) 70 Total revenues 4,679 136 (21) 4,794 Costs and Expenses: Insurance benefits and expenses 3,522 — — 3,522 Expenses of managed investment entities — 136 (21) (b)(c) 115 Interest charges on borrowed money and other expenses 267 — — 267 Total costs and expenses 3,789 136 (21) 3,904 Earnings from continuing operations before income taxes 890 — — 890 Provision for income taxes 164 — — 164 Net earnings from continuing operations 726 — — 726 Net earnings from discontinued operations 914 — — 914 Net earnings $ 1,640 $ — $ — $ 1,640 (a) Includes a loss of $10 million in the first nine months of 2022 and income of $17 million in the first nine months of 2021, representing the change in fair value of AFG’s CLO investments and $12 million of income in both the first nine months of 2022 and 2021, in CLO management fees earned. (b) Elimination of the change in fair value of AFG’s investments in the CLOs, including $13 million and $9 million in the first nine months of 2022 and 2021, respectively, in distributions recorded as interest expense by the CLOs. (c) Elimination of management fees earned by AFG. 43 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued RESULTS OF OPERATIONS General AFG’s net earnings, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. In addition to discontinued operations, 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. In addition, special charges related to coverage that AFG no longer writes, such as asbestos and environmental exposures, are excluded from core earnings. AFG recorded $914 million in non-core net earnings from the discontinued annuity operations (sold in May 2021) in the first nine months of 2021, which includes a $656 million after-tax gain on the sale. In the first nine months of 2021, AFG recognized a non-core after-tax gain of $3 million related to contingent consideration received from the December 2020 sale of AFG’s Lloyd’s of London insurer, Neon Underwriting Ltd (“Neon”). 44 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued The following table (in millions, except per share amounts) identifies non-core items and reconciles net earnings 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 September 30, Nine months ended September 30, 2022 2021 2022 2021 Components of net earnings: Core operating earnings before income taxes $ 244 $ 284 $ 930 $ 794 Pretax non-core items: Realized gains (losses) on securities (35) (17) (143) 103 Neon exited lines (*) — — — 4 Gain (loss) on retirement of debt 1 — (10) — Other — — — (11) Earnings before income taxes 210 267 777 890 Provision for income taxes: Core operating earnings 52 53 192 152 Non-core items: Realized gains (losses) on securities (7) (5) (30) 20 Neon exited lines (*) — — — 1 Gain (loss) on retirement of debt — — (3) — Other — — (4) (9) Total provision for income taxes 45 48 155 164 Net earnings from continuing operations 165 219 622 726 Net earnings from discontinued annuity operations — — — 914 Net earnings $ 165 $ 219 $ 622 $ 1,640 Net earnings: Core net operating earnings $ 192 $ 231 $ 738 $ 642 Realized gains (losses) on securities (28) (12) (113) 83 Neon exited lines (*) — — — 3 Gain (loss) on retirement of debt 1 — (7) — Other — — 4 (2) Net earnings from continuing operations 165 219 622 726 Discontinued annuity operations — — — 914 Net earnings $ 165 $ 219 $ 622 $ 1,640 Diluted per share amounts: Core net operating earnings $ 2.24 $ 2.71 $ 8.65 $ 7.48 Realized gains (losses) on securities (0.32) (0.15) (1.32) 0.95 Neon exited lines (*) — — — 0.04 Gain (loss) on retirement of debt 0.01 — (0.09) — Other — — 0.05 (0.02) Diluted per share amounts, continuing operations 1.93 2.56 7.29 8.45 Discontinued annuity operations — — — 10.66 Net earnings $ 1.93 $ 2.56 $ 7.29 $ 19.11 (*) In the first nine months of 2021, AFG recognized a non-core after-tax gain of $3 million related to contingent consideration received on the sale of Neon. Net earnings were $165 million in the third quarter of 2022 compared to $219 million in the third quarter of 2021 reflecting lower core net operating earnings and higher net realized losses on securities in the third quarter of 2022 compared to the third quarter of 2021. Core net operating earnings for the third quarter of 2022 decreased $39 million compared to the third quarter of 2021 reflecting lower underwriting profit, lower net investment income and higher holding company expenses, partially offset by lower interest charges on borrowed money. Realized losses on securities in the third quarter 45 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued of 2022 and 2021 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date. Net earnings were $622 million in the first nine months of 2022 compared to $1.64 billion in the first nine months of 2021. The lower results reflect net earnings from the discontinued annuity operations in the first nine months 2021 and net realized losses on securities in the first nine months of 2022 compared to net realized gains on securities in the first nine months of 2021, partially offset by higher core net operating earnings. The discontinued annuity operations includes an after-tax gain on the sale of the annuity subsidiaries of $656 million. Core net operating earnings for the first nine months of 2022 increased $96 million compared to the first nine months of 2021 reflecting higher underwriting profit, higher net investment income, lower interest charges on borrowed money and lower holding company expenses. Realized gains (losses) on securities in the first nine months of 2022 and 2021 resulted primarily from the change in fair value of equity securities that were still held at the balance sheet date. RESULTS OF OPERATIONS — THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 Segmented Statement of Earnings Subsequent to the sale of its annuity operations, AFG reports its operations as two segments: (i) Property and casualty insurance (“P&C”) and (ii) Other, which includes holding company costs and income and expenses related to the managed investment entities (“MIEs”). 46 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued AFG’s net earnings, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the three months ended September 30, 2022 and 2021 identify such items by segment and reconcile net earnings to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions): Other P&C Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total Three months ended September 30, 2022 Revenues: Property and casualty insurance net earned premiums $ 1,767 $ — $ — $ 1,767 $ — $ 1,767 Net investment income 145 (4) 10 151 — 151 Realized gains (losses) on securities — — — — (35) (35) Income of MIEs: Investment income — 75 — 75 — 75 Gain (loss) on change in fair value of assets/liabilities — (5) — (5) — (5) Other income 2 (4) 33 31 — 31 Total revenues 1,914 62 43 2,019 (35) 1,984 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 1,176 — — 1,176 — 1,176 Commissions and other underwriting expenses 436 — 9 445 — 445 Interest charges on borrowed money — — 19 19 — 19 Expenses of MIEs — 62 — 62 — 62 Other expenses 13 — 60 73 (1) 72 Total costs and expenses 1,625 62 88 1,775 (1) 1,774 Earnings before income taxes 289 — (45) 244 (34) 210 Provision for income taxes 62 — (10) 52 (7) 45 Core Net Operating Earnings 227 — (35) 192 Non-core earnings (loss) (*): Realized gains (losses) on securities, net of tax — — (28) (28) 28 — Gain on retirement of debt, net of tax — — 1 1 (1) — Net Earnings $ 227 $ — $ (62) $ 165 $ — $ 165 47 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Other P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total Three months ended September 30, 2021 Revenues: Property and casualty insurance net earned premiums $ 1,529 $ — $ — $ — $ 1,529 $ — $ 1,529 Net investment income 165 — (5) 9 169 — 169 Realized gains (losses) on securities — — — — — (17) (17) Income of MIEs: Investment income — — 45 — 45 — 45 Gain (loss) on change in fair value of assets/liabilities — — 1 — 1 — 1 Other income 4 — (4) 27 27 — 27 Total revenues 1,698 — 37 36 1,771 (17) 1,754 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 954 — — — 954 — 954 Commissions and other underwriting expenses 407 — — 10 417 — 417 Interest charges on borrowed money — — — 24 24 — 24 Expenses of MIEs — — 37 — 37 — 37 Other expenses 8 — — 47 55 — 55 Total costs and expenses 1,369 — 37 81 1,487 — 1,487 Earnings from continuing operations before income taxes 329 — — (45) 284 (17) 267 Provision for income taxes 64 — — (11) 53 (5) 48 Core Net Operating Earnings 265 — — (34) 231 Non-core earnings (loss) (*): Realized gains (losses) on securities, net of tax — — — (12) (12) 12 — Net Earnings $ 265 $ — $ — $ (46) $ 219 $ — $ 219 (*) See the reconciliation of core earnings to GAAP net earnings under “ Results of Operations — General” for details on the tax impacts of these reconciling items. Property and Casualty Insurance Segment — Results of Operations Performance measures such as underwriting profit or loss and related combined ratios are often used by property and casualty insurers to help users of their financial statements better understand the company’s performance. Underwriting profitability is measured by the combined ratio, which is a sum of the ratios of losses and loss adjustment expenses, and commissions and other underwriting expenses to premiums. A combined ratio under 100% indicates an underwriting profit. The combined ratio does not reflect net investment income, other income, other expenses or federal income taxes. AFG’s property and casualty insurance operations contributed $289 million in pretax earnings in the third quarter of 2022 compared to $329 million in the third quarter of 2021, a decrease of $40 million (12%). The decrease in pretax earnings reflects lower underwriting profit and lower net investment income in the third quarter of 2022 compared to the third quarter of 2021. 48 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued The following table details AFG’s earnings before income taxes from its property and casualty insurance operations for the three months ended September 30, 2022 and 2021 (dollars in millions): Three months ended September 30, 2022 2021 % Change Gross written premiums $ 3,153 $ 2,656 19 % Reinsurance premiums ceded (1,169) (927) 26 % Net written premiums 1,984 1,729 15 % Change in unearned premiums (217) (200) 9 % Net earned premiums 1,767 1,529 16 % Loss and loss adjustment expenses 1,176 954 23 % Commissions and other underwriting expenses 436 407 7 % Underwriting gain 155 168 (8 %) Net investment income 145 165 (12 %) Other income and expenses, net (11) (4) 175 % Earnings before income taxes $ 289 $ 329 (12 %) Three months ended September 30, 2022 2021 Change Combined Ratios: Specialty lines Loss and LAE ratio 66.4 % 62.4 % 4.0 % Underwriting expense ratio 24.7 % 26.6 % (1.9 %) Combined ratio 91.1 % 89.0 % 2.1 % Aggregate — including exited lines Loss and LAE ratio 66.5 % 62.4 % 4.1 % Underwriting expense ratio 24.7 % 26.6 % (1.9 %) Combined ratio 91.2 % 89.0 % 2.2 % AFG reports the underwriting performance of its Specialty property and casualty insurance business in the following sub-segments: (i) Property and transportation, (ii) Specialty casualty and (iii) Specialty financial. To understand the overall profitability of particular lines, the timing of claims payments and the related impact of investment income must be considered. Certain “short-tail” lines of business (primarily property coverages) generally have quick loss payouts, which reduce the time funds are held, thereby limiting investment income earned thereon. In contrast, “long-tail” lines of business (primarily liability coverages and workers’ compensation) generally have payouts that are either structured over many years or take many years to settle, thereby significantly increasing investment income earned on related premiums received. Gross Written Premiums Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $3.15 billion for the third quarter of 2022 compared to $2.66 billion for the third quarter of 2021, an increase of $497 million (19%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions): Three months ended September 30, 2022 2021 GWP % GWP % % Change Property and transportation $ 1,737 55 % $ 1,334 50 % 30 % Specialty casualty 1,184 38 % 1,121 42 % 6 % Specialty financial 232 7 % 201 8 % 15 % $ 3,153 100 % $ 2,656 100 % 19 % 49 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Reinsurance Premiums Ceded Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 37% of gross written premiums for the third quarter of 2022 compared to 35% of gross written premiums for the third quarter of 2021, an increase of 2 percentage points. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions): Three months ended September 30, 2022 2021 Change in Ceded % of GWP Ceded % of GWP % of GWP Property and transportation $ (778) 45 % $ (561) 42 % 3 % Specialty casualty (407) 34 % (389) 35 % (1 %) Specialty financial (56) 24 % (36) 18 % 6 % Other specialty 72 59 $ (1,169) 37 % $ (927) 35 % 2 % Net Written Premiums Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $1.98 billion for the third quarter of 2022 compared to $1.73 billion for the third quarter of 2021, an increase of $255 million (15%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions): Three months ended September 30, 2022 2021 NWP % NWP % % Change Property and transportation $ 959 48 % $ 773 45 % 24 % Specialty casualty 777 39 % 732 42 % 6 % Specialty financial 176 9 % 165 10 % 7 % Other specialty 72 4 % 59 3 % 22 % $ 1,984 100 % $ 1,729 100 % 15 % Net Earned Premiums Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $1.77 billion for the third quarter of 2022 compared to $1.53 billion for the third quarter of 2021, an increase of $238 million (16%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions): Three months ended September 30, 2022 2021 NEP % NEP % % Change Property and transportation $ 857 49 % $ 700 46 % 22 % Specialty casualty 677 38 % 613 40 % 10 % Specialty financial 171 10 % 163 11 % 5 % Other specialty 62 3 % 53 3 % 17 % $ 1,767 100 % $ 1,529 100 % 16 % Gross written premiums for the third quarter of 2022 increased $497 million (19%) compared to the third quarter of 2021 reflecting increased exposures, new business opportunities and renewal rate increases. Overall average renewal rates increased approximately 5% in the third quarter of 2022. Excluding overall rate decreases in the workers’ compensation businesses, renewal rates increased approximately 6%. Property and transportation Gross written premiums increased $403 million (30%) in the third quarter of 2022 compared to the third quarter of 2021. While nearly all businesses in this group reported higher year-over-year premiums, the growth was driven by higher commodity futures pricing in the crop insurance business. Excluding the impact of the crop insurance business, gross and net written premiums increased 14% and 10%, respectively, in the third quarter of 2022 compared to the third quarter of 2021. Average renewal rates increased approximately 5% for this group in the third quarter of 2022. Reinsurance premiums ceded as a percentage of gross written premiums increased 3 percentage points in the third quarter of 2022 compared to the third quarter of 2021 reflecting growth in the crop insurance operations (which 50 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued cede a larger percentage of premiums than the other businesses in the Property and transportation sub-segment), higher cessions in the ocean marine business and the impact of reinstatement premiums related to Hurricane Ian. Specialty casualty Gross written premiums increased $63 million (6%) in the third quarter of 2022 compared to the third quarter of 2021 due primarily to increased exposures resulting from payroll growth in the workers’ compensation businesses and the impact of economic recovery in the social services business. This premium growth was partially offset by lower year-over-year premiums in the mergers and acquisitions liability business. Average renewal rates increased approximately 6% for this group in the third quarter of 2022. Excluding overall rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 7%. Reinsurance premiums ceded as a percentage of gross written premiums decreased 1 percentage point in the third quarter of 2022 compared to the third quarter of 2021 reflecting lower gross written premiums in the mergers and acquisitions liability business (which cedes a larger percentage of premiums than the other businesses in the Specialty casualty sub-segment). Specialty financial Gross written premiums increased $31 million (15%) in the third quarter of 2022 compared to the third quarter of 2021 due primarily to growth in the financial institutions business related to lender-placed mortgage protection insurance. Average renewal rates increased approximately 4% for this group in the third quarter of 2022. Reinsurance premiums ceded as a percentage of gross written premiums increased 6 percentage points in the third quarter of 2022 compared to the third quarter of 2021 reflecting the impact of reinstatement premiums related to Hurricane Ian and higher cessions in the innovative markets business. Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed increased $13 million in the third quarter of 2022 compared to the third quarter of 2021 reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment. 51 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Combined Ratio The table below (dollars in millions) details the components of the combined ratio and underwriting profit for AFG’s property and casualty insurance segment: Three months ended September 30, Three months ended September 30, 2022 2021 Change 2022 2021 Property and transportation Loss and LAE ratio 77.3 % 73.7 % 3.6 % Underwriting expense ratio 18.1 % 19.8 % (1.7 %) Combined ratio 95.4 % 93.5 % 1.9 % Underwriting profit $ 39 $ 45 Specialty casualty Loss and LAE ratio 55.3 % 54.6 % 0.7 % Underwriting expense ratio 27.3 % 27.4 % (0.1 %) Combined ratio 82.6 % 82.0 % 0.6 % Underwriting profit $ 118 $ 110 Specialty financial Loss and LAE ratio 47.2 % 34.2 % 13.0 % Underwriting expense ratio 44.1 % 50.0 % (5.9 %) Combined ratio 91.3 % 84.2 % 7.1 % Underwriting profit $ 15 $ 26 Total Specialty Loss and LAE ratio 66.4 % 62.4 % 4.0 % Underwriting expense ratio 24.7 % 26.6 % (1.9 %) Combined ratio 91.1 % 89.0 % 2.1 % Underwriting profit $ 158 $ 169 Aggregate — including exited lines Loss and LAE ratio 66.5 % 62.4 % 4.1 % Underwriting expense ratio 24.7 % 26.6 % (1.9 %) Combined ratio 91.2 % 89.0 % 2.2 % Underwriting profit $ 155 $ 168 The Specialty property and casualty insurance operations generated an underwriting profit of $158 million in the third quarter of 2022 compared to $169 million in the third quarter of 2021, a decrease of $11 million (7%). This decrease reflects lower underwriting profit in the Property and transportation and Specialty financial sub-segments, partially offset by higher underwriting profit in the Specialty casualty sub-segment. Overall catastrophe losses were $51 million (2.5 points on the combined ratio), including $18 million in net reinstatement premiums, in the third quarter of 2022 compared to $31 million (2.1 points) in the third quarter of 2021. As a result of catastrophe losses incurred in the third quarter of 2022, AFG reduced certain profit-based commissions payable to agents by $12 million, resulting in a net impact from catastrophes of $39 million for the 2022 quarter. Underwriting results for the Specialty property and casualty insurance operations include $3 million (0.1 points on the combined ratio) in COVID-19 related losses in the third quarter of 2021. Property and transportation Underwriting profit for this group was $39 million for the third quarter of 2022 compared to $45 million for the third quarter of 2021, a decrease of $6 million (13%), reflecting lower underwriting profit in the crop operations compared to very strong crop results in 2021. Catastrophe losses were $13 million (1.4 points on the combined ratio), including $4 million in net reinstatement premiums in the third quarter of 2022 compared to catastrophe losses of $14 million (2.1 points) in the third quarter of 2021. Specialty casualty Underwriting profit for this group was $118 million for the third quarter of 2022 compared to $110 million for the third quarter of 2021, an increase of $8 million (7%). This increase reflects higher year-over-year underwriting profit in the executive liability, social services and mergers and acquisitions liability businesses, partially offset by an overall decrease in favorable prior year reserve development. Catastrophe losses were $3 million (0.4 points on the combined ratio), including $1 million in reinstatement premiums in the third quarter of 2022 compared to catastrophe 52 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued losses of $3 million (0.4 points) in the third quarter of 2021. Underwriting results for the Specialty casualty sub-segment include $1 million (0.1 points on the combined ratio) in COVID-19 related losses in the third quarter of 2021. Specialty financial Underwriting profit for this group was $15 million for the third quarter of 2022 compared to $26 million in the third quarter of 2021, a decrease of $11 million (42%). This decrease was primarily the result of catastrophe losses from Hurricane Ian in the financial institutions business. Catastrophe losses were $34 million (15.2 points on the combined ratio), including $13 million in net reinstatement premiums compared to $14 million (8.2 points) in the third quarter of 2021. As a result of the catastrophe losses incurred in the third quarter of 2022, the Specialty financial sub-segment reduced profit-based commissions payable to agents, which had a favorable impact on the combined ratio. Underwriting results for the Specialty financial sub-segment include $2 million (0.9 points on the combined ratio) in COVID-19 related losses in the third quarter of 2021. Other specialty This group reported an underwriting loss of $14 million in the third quarter of 2022 compared to $12 million in the third quarter of 2021, an increase of $2 million (17%). This increase reflects higher losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the third quarter of 2022 compared to the third quarter of 2021. Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment includes adverse prior year reserve development of $3 million and $1 million in the third quarter of 2022 and 2021, respectively, related to business outside the Specialty group that AFG no longer writes. 53 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Losses and Loss Adjustment Expenses AFG’s overall loss and LAE ratio was 66.5% for the third quarter of 2022 compared to 62.4% for the third quarter of 2021, an increase of 4.1 percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions): Three months ended September 30, Amount Ratio Change in 2022 2021 2022 2021 Ratio Property and transportation Current year, excluding COVID-19 related and catastrophe losses $ 669 $ 520 77.7 % 74.1 % 3.6 % Prior accident years development (15) (18) (1.8 %) (2.5 %) 0.7 % Current year COVID-19 related losses — — — % — % — % Current year catastrophe losses including the impact of net reinstatement premiums 9 14 1.4 % 2.1 % (0.7 %) Property and transportation losses and LAE and ratio $ 663 $ 516 77.3 % 73.7 % 3.6 % Specialty casualty Current year, excluding COVID-19 related and catastrophe losses $ 414 $ 387 61.2 % 63.2 % (2.0 %) Prior accident years development (42) (56) (6.3 %) (9.1 %) 2.8 % Current year COVID-19 related losses — 1 — % 0.1 % (0.1 %) Current year catastrophe losses including the impact of net reinstatement premiums 2 3 0.4 % 0.4 % — % Specialty casualty losses and LAE and ratio $ 374 $ 335 55.3 % 54.6 % 0.7 % Specialty financial Current year, excluding COVID-19 related and catastrophe losses $ 70 $ 58 38.3 % 36.3 % 2.0 % Prior accident years development (11) (18) (6.3 %) (11.2 %) 4.9 % Current year COVID-19 related losses — 2 — % 0.9 % (0.9 %) Current year catastrophe losses including the impact of net reinstatement premiums 21 14 15.2 % 8.2 % 7.0 % Specialty financial losses and LAE and ratio $ 80 $ 56 47.2 % 34.2 % 13.0 % Total Specialty Current year, excluding COVID-19 related and catastrophe losses $ 1,196 $ 1,002 67.0 % 65.6 % 1.4 % Prior accident years development (56) (83) (3.1 %) (5.4 %) 2.3 % Current year COVID-19 related losses — 3 — % 0.1 % (0.1 %) Current year catastrophe losses including the impact of net reinstatement premiums 33 31 2.5 % 2.1 % 0.4 % Total Specialty losses and LAE and ratio $ 1,173 $ 953 66.4 % 62.4 % 4.0 % Aggregate — including exited lines Current year, excluding COVID-19 related and catastrophe losses $ 1,196 $ 1,002 67.0 % 65.6 % 1.4 % Prior accident years development (53) (82) (3.0 %) (5.4 %) 2.4 % Current year COVID-19 related losses — 3 — % 0.1 % (0.1 %) Current year catastrophe losses including the impact of net reinstatement premiums 33 31 2.5 % 2.1 % 0.4 % Aggregate losses and LAE and ratio $ 1,176 $ 954 66.5 % 62.4 % 4.1 % Current accident year losses and LAE, excluding COVID-19 related and catastrophe losses The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG’s Specialty property and casualty insurance operations was 67.0% for the third quarter of 2022 compared to 65.6% for the third quarter of 2021, an increase of 1.4 percentage points. 54 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Property and transportation The 3.6 percentage point increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses is due primarily to lower profitability in the crop insurance business compared to very strong results recorded in the 2021 quarter. Specialty casualty The 2.0 percentage point decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects improved results in the workers’ compensation and executive liability businesses. Specialty financial The 2.0 percentage point increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects higher reported losses in the financial institutions business, partially offset by improved results in the fidelity and crime business. Net prior year reserve development AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $56 million in the third quarter of 2022 compared to $83 million in the third quarter of 2021, a decrease of $27 million (33%). Property and transportation Net favorable reserve development of $15 million in the third quarter of 2022 reflects lower than expected claim frequency and severity in the trucking business, lower than anticipated claim frequency in the aviation and ocean marine businesses and in the Singapore operations and lower than expected claim severity in the property and inland marine business. Net favorable reserve development of $18 million in the third quarter of 2021 reflects lower than expected claim severity in the ocean marine business, lower than expected claim frequency in the aviation business and lower than anticipated claim frequency and severity in the trucking business. Specialty casualty Net favorable reserve development of $42 million in the third quarter of 2022 reflects lower than anticipated claim severity in the workers’ compensation businesses, partially offset by higher than anticipated claim severity in the targeted markets and excess and surplus businesses. Net favorable reserve development of $56 million in the third quarter of 2021 reflects lower than anticipated claim severity in the workers’ compensation businesses and lower than expected claim frequency and severity in the excess and surplus business. Specialty financial Net favorable reserve development of $11 million in the third quarter of 2022 reflects lower than anticipated claim frequency in the surety and trade credit businesses. Net favorable reserve development of $18 million in the third quarter of 2021 reflects lower than anticipated claim frequency in the surety and trade credit businesses. Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $12 million in the third quarter of 2022 and $9 million in the third quarter of 2021, reflecting net adverse reserve development associated with AFG’s internal reinsurance program, partially offset by the amortization of the deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001. Asbestos and environmental reserves During the third quarter of 2022, AFG completed an in-depth internal review 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. During the 2022 internal review, no new trends were identified and recent claims activity was generally consistent with AFG’s expectations resulting from AFG’s in-depth internal review in 2021 and most recent external study in 2020. As a result, and consistent with the internal review in the third quarter of 2021, the 2022 review resulted in no net change to AFG’s property and casualty insurance segment’s asbestos and environmental reserves. See Management’s Discussion and Analysis — “Uncertainties — Asbestos and Environmental-related (“A&E”) Insurance Reserves ” and Management’s Discussion and Analysis — “Results of Operations — Holding Company, Other and Unallocated” in AFG’s 2021 Form 10-K. 55 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued At September 30, 2022, the property and casualty insurance segment’s insurance reserves include A&E reserves of $391 million, net of reinsurance recoverables. At September 30, 2022, the property and casualty insurance segment’s three-year survival ratios compare favorably with industry survival ratios published by S&P Global Market Intelligence (as of December 31, 2021, and adjusted for several large industry 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 (9/30/2022) 23.8 29.6 26.0 Industry (12/31/2021) 9.0 7.3 8.5 In addition, the 2022 and 2021 internal reviews encompassed reserves for asbestos and environmental exposures of AFG’s former railroad and manufacturing operations. For a discussion of the minor increases in AFG’s liabilities recorded for those operations, see “ Results of Operations — Holding Company, Other and Unallocated ,” for the quarters ended September 30, 2022 and 2021. Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes net adverse reserve development of $3 million and $1 million in the third quarter of 2022 and the third quarter of 2021, respectively, related to business outside the Specialty group that AFG no longer writes. COVID-19 related losses In the third quarter of 2022, AFG’s Specialty property and casualty insurance operations released $8 million of prior accident year COVID-19 reserves based on improved loss experience in the trade credit and workers’ compensation businesses. In the third quarter of 2021, AFG’s Specialty property and casualty insurance operations recorded $3 million in reserve charges related to COVID-19, primarily related to the economic slowdown impacting the trade credit business, and released approximately $2 million of accident year 2020 reserves based on loss experience. Given the uncertainties surrounding the ultimate number and scope of claims relating to the pandemic, approximately 53% of the $79 million in cumulative COVID-19 related losses are held as incurred but not reported reserves at September 30, 2022. Catastrophe losses AFG generally seeks to reduce its exposure to catastrophes through individual risk selection, including minimizing coastal and known fault-line exposures, and the purchase of reinsurance. Based on data available at December 31, 2021, AFG’s exposure to a catastrophic earthquake or windstorm that industry models indicate should statistically occur once in every 100, 250 or 500 years as a percentage of AFG’s Shareholders’ Equity is shown below: Approximate impact of modeled loss Industry Model on AFG’s Shareholders’ Equity 100-year event 1% 250-year event 1% 500-year event 2% AFG maintains comprehensive property catastrophe reinsurance coverage for its property and casualty insurance operations, including a $20 million per occurrence net retention, for losses up to $125 million in the vast majority of circumstances. In certain unlikely events, AFG’s ultimate loss under this coverage could be as high as $39 million for a single occurrence. AFG’s operating units purchased replacement reinsurance coverage for those layers of catastrophe reinsurance program expected to be affected by Hurricane Ian. AFG further maintains supplemental fully collateralized reinsurance coverage up to 94% of $325 million for catastrophe losses in excess of $125 million of traditional catastrophe reinsurance through a catastrophe bond. Catastrophe losses of $33 million in the third quarter of 2022 (before net reinstatement premiums) resulted primarily from Hurricane Ian. Catastrophe losses of $31 million in the third quarter of 2021 resulted primarily from Hurricane Ida and, to a lesser extent, storms in multiple regions of the United States. Commissions and Other Underwriting Expenses AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $436 million in the third quarter of 2022 compared to $407 million for the third quarter of 2021, an increase of $29 million (7%). AFG’s underwriting expense ratio, calculated as commissions and other underwriting expenses divided by net premiums earned, was 24.7% for the third quarter of 2022 compared to 26.6% for the third quarter of 2021, a decrease of 1.9 percentage points. Detail 56 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions): Three months ended September 30, 2022 2021 Change in U/W Exp % of NEP U/W Exp % of NEP % of NEP Property and transportation $ 155 18.1 % $ 139 19.8 % (1.7 %) Specialty casualty 185 27.3 % 168 27.4 % (0.1 %) Specialty financial 76 44.1 % 81 50.0 % (5.9 %) Other specialty 20 33.4 % 19 34.7 % (1.3 %) $ 436 24.7 % $ 407 26.6 % (1.9 %) Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums decreased 1.7 percentage points in the third quarter of 2022 compared to the third quarter of 2021 reflecting the impact of higher premiums in the crop insurance business on the ratio in the third quarter of 2022 compared to the third quarter of 2021. Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums were comparable in the third quarter of 2022 and the third quarter of 2021. Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums decreased 5.9 percentage points in the third quarter of 2022 compared to the third quarter of 2021 reflecting lower profit-based commissions to agents in the third quarter of 2022 compared to the third quarter of 2021. Property and Casualty Net Investment Income Net investment income in AFG’s property and casualty insurance operations was $145 million in the third quarter of 2022 compared to $165 million in the third quarter of 2021, a decrease of $20 million (12%). The average invested assets and overall yield earned on investments held by AFG’s property and casualty insurance operations are provided below (dollars in millions): Three months ended September 30, 2022 2021 Change % Change Net investment income: Net investment income, excluding alternative investments $ 109 $ 81 $ 28 35 % Alternative investments 36 84 (48) (57 %) Total net investment income $ 145 $ 165 $ (20) (12 %) Average invested assets (at amortized cost) $ 14,105 $ 13,194 $ 911 7 % Yield (net investment income as a % of average invested assets) 4.11 % 5.00 % (0.89 %) Tax equivalent yield (*) 4.21 % 5.10 % (0.89 %) (*) Adjusts the yield on equity securities and tax-exempt bonds to the fully taxable equivalent yield. The decrease in the property and casualty insurance segment’s net investment income for the third quarter of 2022 compared to the third quarter of 2021 reflects lower returns on AFG’s alternative investments portfolio (partnerships and similar investments and AFG-managed CLOs) as compared to the very strong performance of this portfolio in the prior year period, partially offset by higher yields on fixed maturity investments. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 4.11% for the third quarter of 2022 compared to 5.00% for the third quarter of 2021, a decrease of 0.89 percentage points as higher yields on fixed maturity investments were more than offset by lower yields on alternative investments. The annualized return earned on alternative investments was 7.1% in the third quarter of 2022 compared to 20.3% in the comparable prior year period. 57 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Property and Casualty Other Income and Expenses, Net Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $11 million for the third quarter of 2022 compared to $4 million for the third quarter of 2021, an increase of $7 million (175%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions): Three months ended September 30, 2022 2021 Other income: Income (loss) related to the sale of real estate $ — $ (1) Other 2 5 Total other income 2 4 Other expenses: Amortization of intangibles 2 1 Interest expense on funds withheld 8 7 Other (*) 3 — Total other expenses 13 8 Other income and expenses, net $ (11) $ (4) (*) Includes $2 million of expenses in the third quarter of 2022 related to certain technology initiatives. Holding Company, Other and Unallocated — Results of Operations AFG’s net GAAP pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled $44 million in the third quarter of 2022 compared to $45 million in the third quarter of 2021, a decrease of $1 million (2%). AFG’s net core pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled $45 million in both the third quarter of 2022 and the third quarter of 2021. The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance segment for the three months ended September 30, 2022 and 2021 (dollars in millions): Three months ended September 30, 2022 2021 % Change Revenues: Net investment income $ 10 $ 9 11 % Other income — P&C fees 22 21 5 % Other income 11 6 83 % Total revenues 43 36 19 % Costs and Expenses: Property and casualty insurance — loss adjustment and underwriting expenses 9 10 (10 %) Other expense — expenses associated with P&C fees 13 11 18 % Other expenses (*) 47 36 31 % Costs and expenses, excluding interest charges on borrowed money 69 57 21 % Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money (26) (21) 24 % Interest charges on borrowed money 19 24 (21 %) Core loss before income taxes, excluding realized gains and losses (45) (45) — % Pretax non-core gain on retirement of debt 1 — — % GAAP loss from continuing operations before income taxes, excluding realized gains and losses $ (44) $ (45) (2 %) (*) Excludes a pretax non-core gain on retirement of debt of $1 million in the third quarter of 2022. Holding Company and Other — Net Investment Income AFG recorded net investment income on investments held outside of its property and casualty insurance segment of $10 million in the third quarter of 2022 compared to $9 million in the third quarter of 2021, an increase of $1 million (11%), reflecting higher average investment balances and income from directly owned real estate investments. 58 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Holding Company and Other — P&C Fees and Related Expenses Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the third quarter of 2022, AFG collected $20 million for these services compared to $18 million in the third quarter of 2021. Management views this fee income, net of the $13 million in the third quarter of 2022 and $11 million in the third quarter of 2021 in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. In addition, AFG’s property and casualty insurance businesses collected $2 million and $3 million in fees from AFG’s disposed annuity operations during the third quarter of 2022 and the third quarter of 2021, respectively, as compensation for certain services provided under a transition services agreement. The expenses related to providing such services are embedded in property and casualty underwriting expenses. Consistent with internal management reporting, all of these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results. Holding Company and Other — Other Income Other income in the table above includes $4 million in both the third quarter of 2022 and the third quarter of 2021, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under “Results of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance segment of $7 million in the third quarter of 2022 and $2 million the third quarter of 2021, an increase of $5 million (250%) due primarily to $3 million in income from the sale of real estate in the 2022 quarter. Holding Company and Other — Other Expenses AFG’s holding companies and other operations outside of its property and casualty insurance segment recorded other expenses of $47 million in the third quarter of 2022 compared to $36 million in the third quarter of 2021, an increase of $11 million (31%), reflecting slightly higher holding company expenses and charges to increase the liabilities related to the A&E exposures of AFG’s former railroad and manufacturing operations. A&E Reserves As a result of the 2022 and 2021 in-depth internal reviews of A&E exposures discussed under “A sbestos and environmental reserves ” under “ Results of Operations — Property and Casualty Insurance Segment — Net prior year reserve development ,” AFG’s holding companies and other operations outside of its property and casualty insurance operations recorded minor charges in the third quarter of 2022 and the third quarter of 2021 to increase liabilities related to the A&E exposures of AFG’s former railroad and manufacturing operations. Both charges are included in AFG’s core operating earnings. The charges were due primarily to relatively small movements across several sites that reflect changes in the scope and costs of investigation and an increase in estimated ongoing operation and maintenance costs. Holding Company and Other — Interest Charges on Borrowed Money AFG’s holding companies and other operations outside of its property and casualty insurance segment recorded interest expense of $19 million in the third quarter of 2022 compared to $24 million in the third quarter of 2021, a decrease of $5 million (21%) reflecting the retirement of AFG’s $425 million principal amount of 3.50% Senior Notes during the first six months of 2022. Holding Company and Other — Gain on Retirement of Debt During the third quarter of 2022, AFG repurchased $9 million principal amount of its senior notes which resulted in a $1 million pretax gain. 59 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Realized Gains (Losses) on Securities AFG’s realized gains (losses) on securities were net losses of $35 million in the third quarter of 2022 compared to $17 million in the third quarter of 2021, an increase of $18 million (106%). Realized gains (losses) on securities consisted of the following (in millions): Three months ended September 30, 2022 2021 Realized gains (losses) before impairment allowances: Disposals $ (3) $ — Change in the fair value of equity securities (27) (15) Change in the fair value of derivatives (3) (2) (33) (17) Change in allowance for impairments on securities (2) — Realized gains (losses) on securities $ (35) $ (17) The $27 million net realized loss from the change in the fair value of equity securities in the third quarter of 2022 includes losses of $8 million on investments in banks and financing companies, $6 million on investments in media companies, $4 million on investments in retail companies and $2 million on investments in healthcare companies. The $15 million net realized loss from the change in the fair value of equity securities in the third quarter of 2021 includes losses of $5 million on investments in healthcare companies, $4 million on investments in energy and natural gas companies and $4 million on investments in technology companies. Consolidated Income Taxes on Continuing Operations AFG’s consolidated provision for income taxes on continuing operations was $45 million for the third quarter of 2022 compared to $48 million for the third quarter of 2021, a decrease of $3 million (6%). See Note K — “Income Taxes” to the financial statements for an analysis of items affecting AFG’s effective tax rate on continuing operations. 60 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued RESULTS OF OPERATIONS — NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 Segmented Statement of Earnings Subsequent to the sale of its annuity operations, AFG reports its operations as two segments: (i) Property and casualty insurance (“P&C”) and (ii) Other, which includes holding company costs and income and expenses related to the managed investment entities (“MIEs”). AFG’s net earnings, determined in accordance with GAAP, include certain items that may not be indicative of its ongoing core operations. The following tables for the nine months ended September 30, 2022 and 2021 identify such items by segment and reconcile net earnings to core net operating earnings, a non-GAAP financial measure that AFG believes is a useful tool for investors and analysts in analyzing ongoing operating trends (in millions): Other P&C Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total Nine months ended September 30, 2022 Revenues: Property and casualty insurance net earned premiums $ 4,462 $ — $ — $ 4,462 $ — $ 4,462 Net investment income 524 10 15 549 — 549 Realized gains (losses) on securities — — — — (143) (143) Income of MIEs: Investment income — 175 — 175 — 175 Gain (loss) on change in fair value of assets/liabilities — (25) — (25) — (25) Other income 12 (12) 93 93 — 93 Total revenues 4,998 148 108 5,254 (143) 5,111 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 2,643 — — 2,643 — 2,643 Commissions and other underwriting expenses 1,261 — 30 1,291 — 1,291 Interest charges on borrowed money — — 65 65 — 65 Expenses of MIEs — 148 — 148 — 148 Other expenses 38 — 139 177 10 187 Total costs and expenses 3,942 148 234 4,324 10 4,334 Earnings before income taxes 1,056 — (126) 930 (153) 777 Provision for income taxes 222 — (30) 192 (37) 155 Core Net Operating Earnings 834 — (96) 738 Non-core earnings (loss) (*): Realized gains (losses) on securities, net of tax — — (113) (113) 113 — Loss on retirement of debt, net of tax — — (7) (7) 7 — Other, net of tax — — 4 4 (4) — Net Earnings $ 834 $ — $ (212) $ 622 $ — $ 622 61 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Other P&C Annuity Consol. MIEs Holding Co., other and unallocated Total Non-core reclass GAAP Total Nine months ended September 30, 2021 Revenues: Property and casualty insurance net earned premiums $ 3,952 $ — $ — $ — $ 3,952 $ — $ 3,952 Net investment income 467 51 (17) 20 521 — 521 Realized gains (losses) on: Securities — — — — — 103 103 Subsidiary — — — — — 4 4 Income of MIEs: Investment income — — 135 — 135 — 135 Gain (loss) on change in fair value of assets/liabilities — — 9 — 9 — 9 Other income 9 — (12) 73 70 — 70 Total revenues 4,428 51 115 93 4,687 107 4,794 Costs and Expenses: Property and casualty insurance: Losses and loss adjustment expenses 2,335 — — — 2,335 — 2,335 Commissions and other underwriting expenses 1,163 — — 24 1,187 — 1,187 Interest charges on borrowed money — — — 71 71 — 71 Expenses of MIEs — — 115 — 115 — 115 Other expenses 25 1 — 159 185 11 196 Total costs and expenses 3,523 1 115 254 3,893 11 3,904 Earnings from continuing operations before income taxes 905 50 — (161) 794 96 890 Provision for income taxes 177 11 — (36) 152 12 164 Core Net Operating Earnings 728 39 — (125) 642 Non-core earnings (loss) (*): Realized gains (losses) on securities, net of tax — — — 83 83 (83) — Discontinued operations, net of tax — 914 — — 914 — 914 Neon exited lines 3 — — — 3 (3) — Other, net of tax — — — (2) (2) 2 — Net Earnings $ 731 $ 953 $ — $ (44) $ 1,640 $ — $ 1,640 (*) See the reconciliation of core earnings to GAAP net earnings under “Results of Operations — General” for details on the tax impacts of these reconciling items. Property and Casualty Insurance Segment — Results of Operations AFG’s property and casualty insurance operations contributed $1.06 billion in GAAP pretax earnings in the first nine months of 2022 compared to $909 million in the first nine months of 2021, an increase of $147 million (16%). Property and casualty core pretax earnings were $1.06 billion in the first nine months of 2022 compared to $905 million in the first nine months of 2021, an increase of $151 million (17%). The increase in GAAP and core pretax earnings reflects higher underwriting profit and higher net investment income in the first nine months of 2022 compared to the first nine months of 2021. 62 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued The following table details AFG’s GAAP and core earnings before income taxes from its property and casualty insurance operations for the nine months ended September 30, 2022 and 2021 (dollars in millions): Nine months ended September 30, 2022 2021 % Change Gross written premiums $ 7,212 $ 6,209 16 % Reinsurance premiums ceded (2,344) (1,906) 23 % Net written premiums 4,868 4,303 13 % Change in unearned premiums (406) (351) 16 % Net earned premiums 4,462 3,952 13 % Loss and loss adjustment expenses 2,643 2,335 13 % Commissions and other underwriting expenses 1,261 1,163 8 % Core underwriting gain 558 454 23 % Net investment income 524 467 12 % Other income and expenses, net (26) (16) 63 % Core earnings before income taxes 1,056 905 17 % Pretax non-core Neon exited lines (*) — 4 (100 %) GAAP earnings before income taxes $ 1,056 $ 909 16 % (*) In the second quarter of 2021, AFG recognized a non-core pretax gain of $4 million related to contingent consideration received on the sale of Neon. Nine months ended September 30, 2022 2021 Change Combined Ratios: Specialty lines Loss and LAE ratio 59.1 % 59.0 % 0.1 % Underwriting expense ratio 28.3 % 29.4 % (1.1 %) Combined ratio 87.4 % 88.4 % (1.0 %) Aggregate — including exited lines Loss and LAE ratio 59.2 % 59.0 % 0.2 % Underwriting expense ratio 28.3 % 29.4 % (1.1 %) Combined ratio 87.5 % 88.4 % (0.9 %) AFG reports the underwriting performance of its Specialty property and casualty insurance business in the following sub-segments: (i) Property and transportation, (ii) Specialty casualty and (iii) Specialty financial. Gross Written Premiums Gross written premiums (“GWP”) for AFG’s property and casualty insurance segment were $7.21 billion for the first nine months of 2022 compared to $6.21 billion for the first nine months of 2021, an increase of $1.00 billion (16%). Detail of AFG’s property and casualty gross written premiums is shown below (dollars in millions): Nine months ended September 30, 2022 2021 GWP % GWP % % Change Property and transportation $ 3,459 48 % $ 2,705 44 % 28 % Specialty casualty 3,108 43 % 2,922 47 % 6 % Specialty financial 645 9 % 582 9 % 11 % $ 7,212 100 % $ 6,209 100 % 16 % 63 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Reinsurance Premiums Ceded Reinsurance premiums ceded (“Ceded”) for AFG’s property and casualty insurance segment were 33% of gross written premiums for the first nine months of 2022 compared to 31% of gross written premiums for the first nine months of 2021, an increase of 2 percentage points. Detail of AFG’s property and casualty reinsurance premiums ceded is shown below (dollars in millions): Nine months ended September 30, 2022 2021 Change in Ceded % of GWP Ceded % of GWP % of GWP Property and transportation $ (1,367) 40 % $ (965) 36 % 4 % Specialty casualty (1,035) 33 % (1,010) 35 % (2 %) Specialty financial (133) 21 % (97) 17 % 4 % Other specialty 191 166 $ (2,344) 33 % $ (1,906) 31 % 2 % Net Written Premiums Net written premiums (“NWP”) for AFG’s property and casualty insurance segment were $4.87 billion for the first nine months of 2022 compared to $4.30 billion for the first nine months of 2021, an increase of $565 million (13%). Detail of AFG’s property and casualty net written premiums is shown below (dollars in millions): Nine months ended September 30, 2022 2021 NWP % NWP % % Change Property and transportation $ 2,092 43 % $ 1,740 41 % 20 % Specialty casualty 2,073 43 % 1,912 44 % 8 % Specialty financial 512 10 % 485 11 % 6 % Other specialty 191 4 % 166 4 % 15 % $ 4,868 100 % $ 4,303 100 % 13 % Net Earned Premiums Net earned premiums (“NEP”) for AFG’s property and casualty insurance segment were $4.46 billion for the first nine months of 2022 compared to $3.95 billion for the first nine months of 2021, an increase of $510 million (13%). Detail of AFG’s property and casualty net earned premiums is shown below (dollars in millions): Nine months ended September 30, 2022 2021 NEP % NEP % % Change Property and transportation $ 1,805 40 % $ 1,547 39 % 17 % Specialty casualty 1,973 44 % 1,772 45 % 11 % Specialty financial 505 11 % 477 12 % 6 % Other specialty 179 5 % 156 4 % 15 % $ 4,462 100 % $ 3,952 100 % 13 % The $1.00 billion (16%) increase in gross written premiums for the first nine months of 2022 compared to the first nine months of 2021 reflects growth in the crop insurance business. Excluding crop, gross and net written premiums increased 9% and 10%, respectively, compared to the first nine months of 2021 reflecting increased exposures, new business opportunities, and renewal rate increases. Overall average renewal rates increased approximately 5% in the first nine months of 2022. Excluding the workers’ compensation businesses, renewal pricing increased approximately 7%. Property and transportation Gross written premiums increased $754 million (28%) in the first nine months of 2022 compared to the first nine months of 2021 due primarily to growth in the crop insurance business. Excluding crop, gross and net written premiums grew 14% and 13%, respectively, reflecting increased exposures and higher rates. Average renewal rates increased approximately 6% for this group in the first nine months of 2022. Reinsurance premiums ceded as a percentage of gross written premiums increased 4 percentage points in the first nine months of 2022 compared to the first nine months of 2021 reflecting growth in the crop insurance operations (which cede a larger percentage of premiums than the other businesses in the Property and transportation sub-segment), higher cessions in the ocean marine business and the impact of reinstatement premiums related to Hurricane Ian. 64 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Specialty casualty Gross written premiums increased $186 million (6%) in the first nine months of 2022 compared to the first nine months of 2021 due primarily to increased exposures in the excess and surplus business, rate increases and new business opportunities in the targeted markets businesses and increased exposures resulting from payroll growth in the workers’ compensation businesses. This premium growth was partially offset by lower year-over-year premiums in the mergers and acquisitions liability business. Average renewal rates increased approximately 5% for this group in the first nine months of 2022. Excluding overall rate decreases in the workers’ compensation businesses, renewal rates for this group increased approximately 8%. Reinsurance premiums ceded as a percentage of gross written premiums decreased 2 percentage points in the first nine months of 2022 compared to the first nine months of 2021 reflecting lower cessions in the environmental, excess and surplus and excess liability businesses and lower gross written premiums in the mergers and acquisitions liability business (which cedes a larger percentage of premiums than the other businesses in the Specialty casualty sub-segment). Specialty financial Gross written premiums increased $63 million (11%) in the first nine months of 2022 compared to the first nine months of 2021 due primarily to higher premiums in the financial institutions business related to lender-placed mortgage protection insurance, rate increases and new business opportunities in the fidelity and crime business and new business opportunities in the innovative markets business. Average renewal rates increased approximately 5% for this group in the first nine months of 2022. Reinsurance premiums ceded as a percentage of gross written premiums increased 4 percentage points for the first nine months of 2022 compared to the first nine months of 2021 reflecting the impact of reinstatement premiums related to Hurricane Ian and higher cessions in the innovative markets business. Other specialty The amounts shown as reinsurance premiums ceded represent business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty property and casualty insurance sub-segments. Reinsurance premiums assumed increased $25 million (15%) in the first nine months of 2022 compared to the first nine months of 2021, reflecting an increase in premiums retained, primarily from businesses in the Specialty casualty sub-segment. 65 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Combined Ratio The table below (dollars in millions) details the components of the combined ratio and underwriting profit for AFG’s property and casualty insurance segment: Nine months ended September 30, Nine months ended September 30, 2022 2021 Change 2022 2021 Property and transportation Loss and LAE ratio 69.0 % 64.7 % 4.3 % Underwriting expense ratio 23.2 % 24.9 % (1.7 %) Combined ratio 92.2 % 89.6 % 2.6 % Underwriting profit $ 140 $ 163 Specialty casualty Loss and LAE ratio 54.3 % 59.7 % (5.4 %) Underwriting expense ratio 26.8 % 26.9 % (0.1 %) Combined ratio 81.1 % 86.6 % (5.5 %) Underwriting profit $ 372 $ 237 Specialty financial Loss and LAE ratio 34.1 % 33.7 % 0.4 % Underwriting expense ratio 49.8 % 51.2 % (1.4 %) Combined ratio 83.9 % 84.9 % (1.0 %) Underwriting profit $ 81 $ 72 Total Specialty Loss and LAE ratio 59.1 % 59.0 % 0.1 % Underwriting expense ratio 28.3 % 29.4 % (1.1 %) Combined ratio 87.4 % 88.4 % (1.0 %) Underwriting profit $ 563 $ 456 Aggregate — including exited lines Loss and LAE ratio 59.2 % 59.0 % 0.2 % Underwriting expense ratio 28.3 % 29.4 % (1.1 %) Combined ratio 87.5 % 88.4 % (0.9 %) Underwriting profit $ 558 $ 454 The Specialty property and casualty insurance operations generated an underwriting profit of $563 million for the first nine months of 2022 compared to $456 million for the first nine months of 2021, an increase of $107 million (23%), reflecting higher underwriting profit in the Specialty casualty and Specialty financial sub-segments, partially offset by lower underwriting profit in the Property and transportation sub-segment. Underwriting results for the Specialty property and casualty insurance operations include $14 million (0.3 points on the combined ratio) in COVID-19 related losses in the first nine months of 2021. Overall catastrophe losses were $82 million (1.7 points on the combined ratio), including $18 million in net reinstatement premiums, in the first nine months of 2022 compared to catastrophe losses of $73 million (1.8 points), including $12 million in net reinstatement premiums the first nine months of 2021. As a result of catastrophe losses incurred in the third quarter of 2022, AFG reduced certain profit-based commissions payable to agents by $12 million, resulting in a net impact from catastrophes of $70 million for the nine months ended September 30, 2022. Property and transportation Underwriting profit for this group was $140 million for the first nine months of 2022 compared to $163 million for the first nine months of 2021, a decrease of $23 million (14%), reflecting lower underwriting profit in the transportation businesses, primarily the result of lower favorable prior year reserve development. Catastrophe losses were $38 million (2.0 points on the combined ratio), including $4 million in net reinstatement premiums, in the first nine months of 2022 compared to catastrophe losses of $43 million (2.7 points), including $9 million in net reinstatement premiums, in the first nine months of 2021. Specialty casualty Underwriting profit for this group was $372 million for the first nine months of 2022 compared to $237 million for the first nine months of 2021, an increase of $135 million (57%). This increase reflects higher year-over-year underwriting profit in the workers’ compensation, excess and surplus, executive liability and mergers and acquisitions liability businesses. COVID-19 related losses were $8 million (0.4 points on the combined ratio) in the first nine months of 2021. Catastrophe losses were $4 million (0.1 points on the combined ratio), including $1 million in net reinstatement 66 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued premiums, in the first nine months of 2022 compared to catastrophe losses of $7 million (0.4 points), including net reinstatement premiums of $1 million, in the first nine months of 2021. Specialty financial Underwriting profit for this group was $81 million for the first nine months of 2022 compared to $72 million for the first nine months of 2021, an increase of $9 million (13%). This increase reflects higher year-over-year underwriting profit in the trade credit and financial institutions businesses. COVID-19 related losses were $6 million (1.2 points on the combined ratio) in the first nine months of 2021. Catastrophe losses were $39 million (6.0 points on the combined ratio), including $13 million in net reinstatement premiums, in the first nine months of 2022 compared to catastrophe losses of $22 million (4.3 points), including $2 million in net reinstatement premiums, in the first nine months of 2021. As a result of the catastrophe losses incurred in the third quarter of 2022, the Specialty financial sub-segment reduced profit-based commissions payable to agents, which had a favorable impact on the combined ratio. Other specialty This group reported an underwriting loss of $30 million for the first nine months of 2022 compared to $16 million in the first nine months of 2021, an increase of $14 million (88%). This increase reflects higher losses in the business assumed by AFG’s internal reinsurance program from the operations that make up AFG’s other Specialty sub-segments in the first nine months of 2022 compared to the first nine months of 2021. Aggregate Aggregate underwriting results for AFG’s property and casualty insurance segment includes adverse prior year reserve development of $5 million and $2 million in the first nine months of 2022 and 2021, respectively, related to business outside of the Specialty group that AFG no longer writes. 67 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Losses and Loss Adjustment Expenses AFG’s overall loss and LAE ratio was 59.2% for the first nine months of 2022 compared to 59.0% for the first nine months of 2021, an increase of 0.2 percentage points. The components of AFG’s property and casualty losses and LAE amounts and ratio are detailed below (dollars in millions): Nine months ended September 30, Amount Ratio Change in 2022 2021 2022 2021 Ratio Property and transportation Current year, excluding COVID-19 related and catastrophe losses $ 1,291 $ 1,067 71.4 % 68.5 % 2.9 % Prior accident years development (79) (101) (4.4 %) (6.5 %) 2.1 % Current year COVID-19 related losses — — — % — % — % Current year catastrophe losses including the impact of net reinstatement premiums 34 34 2.0 % 2.7 % (0.7 %) Property and transportation losses and LAE and ratio $ 1,246 $ 1,000 69.0 % 64.7 % 4.3 % Specialty casualty Current year, excluding COVID-19 related and catastrophe losses $ 1,209 $ 1,130 61.3 % 63.7 % (2.4 %) Prior accident years development (140) (85) (7.1 %) (4.8 %) (2.3 %) Current year COVID-19 related losses — 8 — % 0.4 % (0.4 %) Current year catastrophe losses including the impact of net reinstatement premiums 3 6 0.1 % 0.4 % (0.3 %) Specialty casualty losses and LAE and ratio $ 1,072 $ 1,059 54.3 % 59.7 % (5.4 %) Specialty financial Current year, excluding COVID-19 related and catastrophe losses $ 185 $ 173 35.9 % 36.2 % (0.3 %) Prior accident years development (39) (38) (7.8 %) (8.0 %) 0.2 % Current year COVID-19 related losses — 6 — % 1.2 % (1.2 %) Current year catastrophe losses including the impact of net reinstatement premiums 26 20 6.0 % 4.3 % 1.7 % Specialty financial losses and LAE and ratio $ 172 $ 161 34.1 % 33.7 % 0.4 % Total Specialty Current year, excluding COVID-19 related and catastrophe losses $ 2,805 $ 2,468 62.6 % 62.2 % 0.4 % Prior accident years development (231) (210) (5.2 %) (5.3 %) 0.1 % Current year COVID-19 related losses — 14 — % 0.3 % (0.3 %) Current year catastrophe losses including the impact of net reinstatement premiums 64 61 1.7 % 1.8 % (0.1 %) Total Specialty losses and LAE and ratio $ 2,638 $ 2,333 59.1 % 59.0 % 0.1 % Aggregate — including exited lines Current year, excluding COVID-19 related and catastrophe losses $ 2,805 $ 2,468 62.6 % 62.2 % 0.4 % Prior accident years development (226) (208) (5.1 %) (5.3 %) 0.2 % Current year COVID-19 related losses — 14 — % 0.3 % (0.3 %) Current year catastrophe losses including the impact of net reinstatement premiums 64 61 1.7 % 1.8 % (0.1 %) Aggregate losses and LAE and ratio $ 2,643 $ 2,335 59.2 % 59.0 % 0.2 % Current accident year losses and LAE, excluding COVID-19 related and catastrophe losses The current accident year loss and LAE ratio, excluding COVID-19 related and catastrophe losses for AFG’s Specialty property and casualty insurance operations was 62.6% for the first nine months of 2022 compared to 62.2% for the first nine months of 2021, an increase of 0.4 percentage points. Property and transportation The 2.9 percentage point increase in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects an increase in the loss and LAE ratios of the crop insurance and property and inland marine businesses in the first nine months of 2022 compared to the first nine months of 2021. 68 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Specialty casualty The 2.4 percentage point decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects improved results in the workers’ compensation and executive liability businesses. Specialty financial The 0.3 percentage point decrease in the loss and LAE ratio for the current year, excluding COVID-19 related and catastrophe losses reflects improved results in the trade credit business. Net prior year reserve development AFG’s Specialty property and casualty insurance operations recorded net favorable reserve development related to prior accident years of $231 million in the first nine months of 2022 compared to $210 million in the first nine months of 2021, an increase of $21 million (10%). Property and transportation Net favorable reserve development of $79 million in the first nine months of 2022 reflects lower than anticipated losses in the crop business, lower than expected claim frequency in the trucking and ocean marine businesses and in the Singapore operations, lower than expected claim frequency and severity in the aviation business and lower than anticipated claim severity in the property and inland marine business. Net favorable reserve development of $101 million in the first nine months of 2021 reflects lower than anticipated claim frequency and severity in the transportation businesses, lower than expected losses in the crop business, lower than expected claim severity in the property and inland marine business and lower than expected claim frequency in the aviation business, partially offset by higher than expected claim frequency and severity in equine business. Specialty casualty Net favorable reserve development of $140 million in the first nine months of 2022 reflects lower than anticipated claim severity in the workers’ compensation businesses, lower than expected claim frequency in the executive liability business and lower than anticipated claim frequency and severity in the excess and surplus business, partially offset by higher than anticipated claim severity in the targeted markets and excess liability businesses. Net favorable reserve development of $85 million in the first nine months of 2021 reflects lower than anticipated claim severity in the workers’ compensation businesses, partially offset by higher than anticipated claim severity in the general liability and targeted markets businesses. Specialty financial Net favorable reserve development of $39 million in the first nine months of 2022 reflects lower than anticipated claim frequency in the surety, trade credit and financial institutions businesses. Net favorable reserve development of $38 million in the first nine months of 2021 reflects lower than anticipated claim frequency in the surety and trade credit businesses and lower than expected claim frequency and severity in the financial institutions business. Other specialty In addition to the development discussed above, total Specialty prior year reserve development includes net adverse reserve development of $27 million in the first nine months of 2022 and $14 million in the first nine months of 2021, reflecting net adverse development associated with AFG’s internal reinsurance program, partially offset by the amortization of the deferred gains on the retroactive reinsurance transactions entered into in connection with the sale of businesses in 1998 and 2001. Aggregate Aggregate net prior accident years reserve development for AFG’s property and casualty insurance segment includes net adverse reserve development of $5 million in the first nine months of 2022 and $2 million in the first nine months of 2021 related to business outside the Specialty group that AFG no longer writes. COVID-19 related losses In the first nine months of 2022, AFG’s Specialty property and casualty insurance operations released $14 million of prior accident year COVID-19 reserves based on improved loss experience in the trade credit and workers’ compensation businesses. Underwriting results for AFG’s Specialty property and casualty insurance operations in the first nine months of 2021 include $14 million in reserve charges related to COVID-19, primarily related to the workers’ compensation and trade credit businesses. AFG released approximately $12 million of accident year 2020 reserves based on loss experience in the first nine months of 2021. Given the uncertainties surrounding the ultimate number and scope of claims relating to the pandemic, approximately 53% of the $79 million in cumulative COVID-19 related losses are held as incurred but not reported reserves at September 30, 2022. Catastrophe losses Catastrophe losses of $64 million in the first nine months of 2022 (before net reinstatement premiums) resulted primarily from Hurricane Ian and storms in multiple regions of the United States. Catastrophe losses of $61 million in the first nine 69 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued months of 2021 (before net reinstatement premiums) resulted primarily from Hurricane Ida and storms in multiple regions of the United States, including the winter storms in Texas. Commissions and Other Underwriting Expenses AFG’s property and casualty commissions and other underwriting expenses (“U/W Exp”) were $1.26 billion in the first nine months of 2022 compared to $1.16 billion for the first nine months of 2021, an increase of $98 million (8%). AFG’s underwriting expense ratio was 28.3% for the first nine months of 2022 compared to 29.4% for the first nine months of 2021, a decrease of 1.1 percentage points. Detail of AFG’s property and casualty commissions and other underwriting expenses and underwriting expense ratios is shown below (dollars in millions): Nine months ended September 30, 2022 2021 Change in U/W Exp % of NEP U/W Exp % of NEP % of NEP Property and transportation $ 419 23.2 % $ 384 24.9 % (1.7 %) Specialty casualty 529 26.8 % 476 26.9 % (0.1 %) Specialty financial 252 49.8 % 244 51.2 % (1.4 %) Other specialty 61 34.7 % 59 37.5 % (2.8 %) $ 1,261 28.3 % $ 1,163 29.4 % (1.1 %) Property and transportation Commissions and other underwriting expenses as a percentage of net earned premiums decreased 1.7 percentage points in the first nine months of 2022 compared to the first nine months of 2021 reflecting the impact of higher premiums in the crop insurance and trucking businesses on the ratio in the first nine months of 2022 compared to the first nine months of 2021. Specialty casualty Commissions and other underwriting expenses as a percentage of net earned premiums were comparable in the first nine months of 2022 and the first nine months of 2021. Specialty financial Commissions and other underwriting expenses as a percentage of net earned premiums decreased 1.4 percentage points in the first nine months of 2022 compared to the first nine months of 2021 reflecting lower profit-based commissions to agents in the first nine months of 2022 compared to the first nine months of 2021. Property and Casualty Net Investment Income Net investment income in AFG’s property and casualty insurance operations was $524 million in the first nine months of 2022 compared to $467 million in the first nine months of 2021, an increase of $57 million (12%). The average invested assets and overall yield earned on investments held by AFG’s property and casualty insurance operations are provided below (dollars in millions): Nine months ended September 30, 2022 2021 Change % Change Net investment income: Net investment income, excluding alternative investments $ 287 $ 243 $ 44 18 % Alternative investments 237 224 13 6 % Total net investment income $ 524 $ 467 $ 57 12 % Average invested assets (at amortized cost) $ 13,981 $ 12,763 $ 1,218 10 % Yield (net investment income as a % of average invested assets) 5.00 % 4.88 % 0.12 % Tax equivalent yield (*) 5.10 % 5.00 % 0.10 % (*) Adjusts the yield on equity securities and tax-exempt bonds to the fully taxable equivalent yield. The increase in the property and casualty insurance segment’s net investment income for the first nine months of 2022 compared to the first nine months of 2021 reflects higher average investments and higher yields on fixed maturities. The property and casualty insurance segment’s overall yield on investments (net investment income as a percentage of average invested assets) was 5.00% for the first nine months of 2022 compared to 4.88% for the first nine months of 2021, an increase of 0.12 percentage points. The annualized return earned on alternative investments (partnerships and similar investments and AFG-managed CLOs) was 16.1% in the first nine months of 2022 compared to 24.4% in the prior year period. 70 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Property and Casualty Other Income and Expenses, Net Other income and expenses, net for AFG’s property and casualty insurance operations was a net expense of $26 million for the first nine months of 2022 compared to $16 million for the first nine months of 2021, an increase of $10 million (63%). The table below details the items included in other income and expenses, net for AFG’s property and casualty insurance operations (in millions): Nine months ended September 30, 2022 2021 Other income: Income (loss) related to the sale of real estate $ 1 $ (2) Other 11 11 Total other income 12 9 Other expenses: Amortization of intangibles 7 5 Interest expense on funds withheld 21 19 Other (*) 10 1 Total other expense 38 25 Other income and expenses, net $ (26) $ (16) (*) Includes $7 million of expenses in the first nine months of 2022 related to certain technology initiatives. Holding Company, Other and Unallocated — Results of Operations AFG’s net GAAP pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled $136 million in the first nine months of 2022 compared to $172 million in the first nine months of 2021, a decrease of $36 million (21%). AFG’s net core pretax loss outside of its property and casualty insurance segment (excluding realized gains and losses) totaled $126 million in the first nine months of 2022 compared to $161 million in the first nine months of 2021, a decrease of $35 million (22%). 71 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued The following table details AFG’s GAAP and core loss before income taxes from operations outside of its property and casualty insurance segment for the nine months ended September 30, 2022 and 2021 (dollars in millions): Nine months ended September 30, 2022 2021 % Change Revenues: Net investment income $ 15 $ 20 (25 %) Other income — P&C fees 67 58 16 % Other income 26 15 73 % Total revenues 108 93 16 % Costs and Expenses: Property and casualty insurance — loss adjustment and underwriting expenses 30 24 25 % Other expense — expenses associated with P&C fees 37 34 9 % Other expenses (*) 102 125 (18 %) Costs and expenses, excluding interest charges on borrowed money 169 183 (8 %) Loss before income taxes, excluding realized gains and losses and interest charges on borrowed money (61) (90) (32 %) Interest charges on borrowed money 65 71 (8 %) Core loss before income taxes, excluding realized gains and losses (126) (161) (22 %) Pretax non-core loss on retirement of debt (10) — Pretax non-core loss on pension settlement — (11) (100 %) GAAP loss from continuing operations before income taxes, excluding realized gains and losses $ (136) $ (172) (21 %) (*) Excludes a pretax non-core loss on retirement of debt of $10 million in the first nine months of 2022 and a pretax non-core loss of $11 million related to the settlement of pension liabilities of a small former manufacturing operation in the second quarter of 2021. Holding Company and Other — Net Investment Income AFG recorded net investment income on investments held outside of its property and casualty insurance segment of $15 million in the first nine months of 2022 compared to $20 million in the first nine months of 2021, a decrease of $5 million (25%). The small portfolio of equity securities held at the holding company that are carried at fair value through net investment income declined in value by $7 million in the first nine months of 2022 compared to increasing in value by $7 million in the first nine months of 2021. Excluding the change in fair value of these equity securities, net investment income outside of AFG’s property and casualty insurance segment improved to $22 million in the first nine months of 2022 compared to $13 million in the first nine months of 2021 reflecting higher average investment balances and income from directly owned real estate investments acquired from the annuity subsidiaries in conjunction with the sale of the annuity business in May 2021. Holding Company and Other — P&C Fees and Related Expenses Summit, a workers’ compensation insurance subsidiary, collects fees from a small group of unaffiliated insurers for providing underwriting, policy administration and claims services. In addition, certain of AFG’s property and casualty insurance businesses collect fees from customers for ancillary services such as workplace safety programs and premium financing. In the first nine months of 2022, AFG collected $60 million in fees for these services compared to $54 million in the first nine months of 2021. Management views this fee income, net of the $37 million in the first nine months of 2022 and $34 million in the first nine months of 2021 in expenses incurred to generate such fees, as a reduction in the cost of underwriting its property and casualty insurance policies. In addition, AFG’s property and casualty insurance businesses collected $7 million and $4 million in fees from AFG’s disposed annuity operations in the first nine months of 2022 and the first nine months of 2021, respectively, as compensation for certain services provided under a transition services agreement. The expenses related to providing such services are embedded in property and casualty underwriting expenses. Consistent with internal management reporting, all of these fees and the related expenses are netted and recorded as a reduction of commissions and other underwriting expenses in AFG’s segmented results. 72 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Holding Company and Other — Other Income Other income in the table above includes $12 million in both the first nine months of 2022 and the first nine months of 2021, in management fees paid to AFG by the AFG-managed CLOs (AFG’s consolidated managed investment entities). The management fees are eliminated in consolidation — see the other income line in the Consolidate MIEs column under “Results of Operations — Segmented Statement of Earnings.” Excluding amounts eliminated in consolidation, AFG recorded other income outside of its property and casualty insurance segment of $14 million in the first nine months of 2022 compared to $3 million in the first nine months of 2021, an increase of $11 million (367%) due primarily to income from the sale of real estate in 2022. Holding Company and Other — Other Expenses AFG’s holding companies and other operations outside of its property and casualty insurance segment recorded other expenses of $102 million in the first nine months of 2022 compared to $125 million the first nine months of 2021, a decrease of $23 million (18%) reflecting lower holding company expenses related to employee benefit plans that are tied to stock market performance, partially offset by charges to increase the liabilities related to the A&E exposures of AFG’s former railroad and manufacturing operations. Holding Company and Other — Interest Charges on Borrowed Money AFG’s holding companies and other operations outside of its property and casualty insurance segment recorded interest expense of $65 million in the first nine months of 2022 compared to $71 million in the first nine months of 2021, a decrease of $6 million (8%), reflecting the retirement of AFG’s 3.50% Senior Notes in the first six months of 2022. Holding Company and Other — Loss on Retirement of Debt During the first nine months of 2022, AFG retired $434 million principal amount of its senior notes, which resulted in a $10 million pretax non-core loss. Holding Company and Other — Loss on Pension Settlement In the second quarter of 2021, AFG settled pension liabilities related to a small former manufacturing operation resulting in a pretax non-core loss of $11 million. Realized Gains (Losses) on Securities AFG’s realized gains (losses) on securities were net losses of $143 million in the first nine months of 2022 compared to net gains of $103 million in the first nine months of 2021, a change of $246 million (239%). Realized gains (losses) on securities consisted of the following (in millions): Nine months ended September 30, 2022 2021 Realized gains (losses) before impairment allowances: Disposals $ (9) $ 2 Change in the fair value of equity securities (122) 104 Change in the fair value of derivatives (11) (4) (142) 102 Change in allowance for impairments on securities (1) 1 Realized gains (losses) on securities $ (143) $ 103 The $122 million net realized loss from the change in the fair value of equity securities in the first nine months of 2022 includes losses of $58 million on investments in banks and financing companies, $15 million on investments in healthcare companies, $14 million on investments in media companies, $10 million on investments in retail companies and $6 million on investments in technology companies, partially offset by gains of $10 million on investments in energy and natural gas companies. The $104 million net realized gain from the change in the fair value of equity securities in the first nine months of 2021 includes gains of $27 million on investments in energy and natural gas companies, $20 million on investments in banks and financing companies, $20 million from investments in media companies and $19 million on investments in healthcare companies. 73 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q Management’s Discussion and Analysis of Financial Condition and Results of Operations — Continued Realized Gain on Subsidiary In the second quarter of 2021, AFG recognized a pretax gain on sale of subsidiary of $4 million related to contingent consideration received on the sale of Neon. Consolidated Income Taxes on Continuing Operations AFG’s consolidated provision for income taxes on continuing operations was $155 million for the first nine months of 2022 compared to $164 million for the first nine months of 2021, a decrease of $9 million (5%). See Note K — “Income Taxes” to the financial statements for an analysis of items affecting AFG’s effective tax rate on continuing operations. Real Estate Entities Acquired from the Annuity Operations Prior to the completion of the sale of its annuity operations in May 2021, AFG parent and its property and casualty insurance operations acquired certain real estate-related partnerships and directly owned real estate from those operations. GAAP pretax earnings from continuing operations for the first six months of 2021 includes the earnings from these entities and certain other expenses that were retained from the annuity operations. The retained real estate entities contributed $51 million in GAAP pretax earnings through the May 31, 2021 effective date of the sale. Discontinued Annuity Operations AFG’s discontinued annuity operations, which were sold in May 2021, contributed $914 million in GAAP net earnings in the first six months of 2021, which includes a $656 million after-tax gain on the sale. ITEM 3. Quantitative and Qualitative Disclosure about Market Risk As of September 30, 2022, there were no material changes to the information provided in Item 7A — Quantitative and Qualitative Disclosures about Market Risk of AFG’s 2021 Form 10-K. The following table demonstrates the sensitivity of fair values to reasonably likely changes in interest rates by illustrating the estimated effect on AFG’s fixed maturity portfolio that an immediate increase of 100 basis points in the interest rate yield curve would have had at September 30, 2022 (dollars in millions). Effects of increases or decreases from the 100 basis points illustrated would be approximately proportional. Fair value of fixed maturity portfolio $ 10,064 Percentage impact on fair value of 100 bps increase in interest rates (3.0 %) Pretax impact on fair value of fixed maturity portfolio $ (302) ITEM 4. Controls and Procedures AFG’s management, with participation of its Co-Chief Executive Officers and its Chief Financial Officer, has evaluated AFG’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based on that evaluation, AFG’s Co-CEOs and CFO concluded that the controls and procedures are effective. There have been no changes in AFG’s internal control over financial reporting during the third fiscal quarter of 2022 that materially affected, or are reasonably likely to materially affect, AFG’s internal control over financial reporting. In the ordinary course of business, AFG and its subsidiaries routinely enhance their information systems by either upgrading current systems or implementing new systems. During the first quarter of 2022, AFG implemented a new general ledger, accounting and financial reporting system. The new general ledger system was implemented in order to provide a consistent system platform for AFG’s subsidiaries, enhance overall efficiency and streamline management reporting and analysis. This change in systems was subject to thorough testing and review both before and after final implementation. This implementation has not materially affected, and management does not expect it to materially affect, AFG’s internal controls. 74 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q PART II OTHER INFORMATION ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities AFG repurchased shares of its Common Stock during 2022 as follows: Total Number Maximum Number of Shares of Shares Total Purchased as that May Number Average Part of Publicly Yet be Purchased of Shares Price Paid Announced Plans Under the Plans Purchased Per Share or Programs or Programs (b) First quarter 35,201 $ 131.05 35,201 7,655,721 Second quarter — — — 7,655,721 Third quarter: July — $ — — 7,655,721 August 2,000 126.76 2,000 7,653,721 September 43,500 122.85 43,500 7,610,221 Total 80,701 $ 126.52 (a) 80,701 (a) AFG declared special dividends of $10.00 per share of its Common Stock in the first nine months of 2022. Adjusted for the special dividends, the average price paid per share was $122.16 for the nine months ended September 30, 2022. (b) Represents the remaining shares that may be repurchased until December 31, 2025 under the Plans authorized by AFG’s Board of Directors in October 2020 and May 2021. In addition, AFG acquired 47,909 shares of its Common Stock (at an average of $135.41 per share) in the first quarter of 2022, 8,400 shares (at an average of $146.32 per share) in the second quarter of 2022, 265 shares (at $133.34 per share) in July 2022 and 621 shares (at an average of $129.15 per share) in September 2022 in connection with its stock incentive plans. 75 Table of Contents AMERICAN FINANCIAL GROUP, INC. 10-Q ITEM 6. Exhibits Number Exhibit Description 31(a) Certification of Co-Chief Executive Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002. 31(b) Certification of Co-Chief Executive Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002. 31(c) Certification of Chief Financial Officer pursuant to section 302(a) of the Sarbanes-Oxley Act of 2002. 32 Certification of Co-Chief Executive Officers and Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. American Financial Group, Inc. November 4, 2022 By: /s/ Brian S. Hertzman Brian S. Hertzman Senior Vice President and Chief Financial Officer 76