Quarterly Operating Results (Unaudited)

The operations of certain AFG business segments are seasonal in nature. While insurance premiums are recognized on a relatively level basis, claim losses related to adverse weather (snow, hail, hurricanes, severe storms, tornadoes, etc.) may be seasonal. The profitability of AFG’s crop insurance business is primarily recognized during the second half of the year as crop prices and yields are determined. Quarterly results necessarily rely heavily on estimates. These estimates and certain other factors, such as the discretionary sales of assets, cause the quarterly results not to be necessarily indicative of results for longer periods of time.

The following are quarterly results of consolidated operations for the two years ended December 31, 2017 (in millions, except per share amounts). Quarterly earnings per share do not add to year-to-date amounts due to changes in shares outstanding.



	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter		Total Year
2017
Revenues	$	1,576	$	1,646	$	1,835	$	1,808	$	6,865
Net earnings, including noncontrolling interests	155		145		11		166		477
Net earnings attributable to shareholders	153		145		11		166		475
Earnings attributable to shareholders per Common Share:
Basic	$	1.76	$	1.64	$	0.13	$	1.88	$	5.40
Diluted	1.72		1.61		0.13		1.84		5.28
Average number of Common Shares:
Basic	87.2		87.8		88.1		88.2		87.8
Diluted	89.3		89.8		90.0		90.1		89.8
2016
Revenues	$	1,475	$	1,581	$	1,705	$	1,737	$	6,498
Net earnings, including noncontrolling interests	104		63		113		388		668
Net earnings attributable to shareholders	101		54		109		385		649
Earnings attributable to shareholders per Common Share:
Basic	$	1.16	$	0.63	$	1.25	$	4.43	$	7.47
Diluted	1.14		0.62		1.23		4.33		7.33
Average number of Common Shares:
Basic	86.9		86.8		86.9		86.9		86.9
Diluted	88.5		88.4		88.5		88.8		88.5

Pretax realized gains on subsidiaries and securities (including other-than-temporary impairments), favorable (adverse) prior year development of AFG’s liability for losses and loss adjustment expenses (“LAE”) and the impact of derivatives related to FIAs were as follows (in millions):



	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total Year
Realized Gains (Losses) on Securities and Subsidiaries
2017	$	3		$	8		$	(12	)	$	6		$	5
2016	(18		)	(14		)	2			51			21

Prior Year Development Favorable (Adverse)
2017	$	28		$	22		$	(52	)	$	66		$	64
2016	28			(28		)	(22		)	(10		)	(32		)

Impact of Derivatives related to Fixed-indexed Annuities
2017	$	(2	)	$	(16	)	$	(4	)	$	(11	)	$	(33	)
2016	(31		)	(26		)	1			29			(27		)

Adverse prior year development for the third quarters of 2017 and 2016 include pretax special charges of $89 million and $36 million, respectively, to strengthen property and casualty insurance A&E reserves. As a result of the Neon reinsurance to close agreement discussed in Note O — “Insurance,” Neon recorded $42 million in favorable development in the fourth quarter of 2017, of which $24 million related to its ongoing lines of business and $18 million related to its exited lines of business. During the second quarter of 2016, AFG recorded a pretax charge of $65 million related to Neon’s claims review of its exited lines of business, including $57 million to increase loss reserves primarily related to its medical malpractice and general liability classes.

Fixed-indexed annuities (“FIAs”) provide policyholders with a crediting rate tied, in part, to the performance of an existing stock market or other financial index. AFG attempts to mitigate the risk in the index-based component of these products through the purchase of call options on the appropriate index. AFG’s strategy is designed so that the change in the fair value of the call option assets will generally offset the economic change in the liabilities from the index participation. Both the index-based component of the annuities and the related call options are considered derivatives that must be marked-to-market through earnings each period. Fluctuations in interest rates and the stock market, among other factors, can cause volatility in the periodic measurement of fair value of the embedded derivative that management believes can be inconsistent with the long-term economics of these products. In the table above, the impact of changes in the fair value of the derivatives related to FIAs is presented net of an estimate of the related acceleration/deceleration of the amortization of deferred policy acquisition costs and deferred sales inducements.

AFG’s property and casualty operations recorded catastrophe losses totaling $140 million in 2017, including $107 million in the third quarter (primarily from Hurricanes Harvey, Irma and Maria and earthquakes in Mexico). Catastrophe losses for 2016 totaling $55 million were spread somewhat evenly across the four quarters.

Results include pretax gains (included in other income) of $13 million from the sale of a hotel in the first quarter of 2017 and$32 million from the sale of an apartment property in the second quarter of 2016.

Results for the third quarter of 2017 and 2016 include pretax special charges of $24 million and $5 million, respectively, to strengthen reserves for A&E exposures related to AFG’s former railroad and manufacturing operations.

In 2017, AFG recorded pretax losses on the retirement of debt of $7 million in the second quarter, $4 million in the third quarter and $40 million in the fourth quarter.

Net earnings in the fourth quarter of 2017 includes $56 million in tax benefits related to the Neon restructuring. Net earnings in the fourth quarter of 2016 includes $177 million in tax benefits related to the NATL merger and Neon restructuring. See Note L — “Income Taxes.”