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Derivatives | 6 Months Ended
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Jun. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | Derivatives As discussed under “Derivatives” in Note A — “Accounting Policies,” AFG uses derivatives to mitigate certain market risks related to its investment portfolio and deferred compensation obligations to employees. The following table presents the classification of derivative assets and liabilities included in AFG’s Balance Sheet at fair value (in millions):
|  |  | June 30, 2023 |  | December 31, 2022
| Balance Sheet Line |  | Asset |  | Liability |  | Asset |  | Liability
Derivatives designated and qualifying as cash flow hedges: |  |  |  |  |  |  |  |  |
Interest rate swaps | Other assets/Other liabilities |  | $ | — |  |  | $ | 41 |  |  | $ | — |  |  | $ | 37 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |
Fixed maturities with embedded derivatives | Fixed maturities |  | 92 |  |  | — |  |  | 40 |  |  | — |
Total return swap | Other assets/Other liabilities |  | 4 |  |  | — |  |  | — |  |  | 5 |
|  |  | $ | 96 |  |  | $ | 41 |  |  | $ | 40 |  |  | $ | 42 |
AFG’s interest rate swaps are designated and qualify as highly effective cash flow hedges to mitigate interest rate risk related to certain floating-rate securities included in AFG’s portfolio of fixed maturity securities. The purpose of each of these swaps is to effectively convert a portion of AFG’s floating-rate fixed maturity securities to fixed rates by offsetting the variability in cash flows attributable to changes in 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 $1.35 billion at June 30, 2023 compared to $1.25 billion at December 31, 2022, reflecting the issuance of four new swaps with a total notional amount of $170 million in the first six months of 2023, partially offset by scheduled amortization. In the second quarter of 2023 and 2022, a loss of $7 million and income of $1 million, respectively, and in the first six months of 2023 and 2022, a loss of $12 million and income of $2 million, respectively, were reclassified from AOCI to net earnings. A collateral receivable supporting these swaps of $68 million and $62 million at June 30, 2023 and December 31, 2022, respectively, is included in other assets in AFG’s Balance Sheet. The fixed maturities with embedded derivatives consist of convertible fixed maturity securities and interest-only and principal-only MBS. AFG records the change in the fair value of these securities in earnings. These investments are part of AFG’s overall investment strategy and represent a small component of AFG’s overall investment portfolio. AFG is exposed to fair value changes from certain equity and fixed maturity market-based exposures related to its deferred compensation obligations to certain employees. To mitigate this risk, AFG entered into a total return swap in 2022. A payable of $3 million to return collateral related to this swap is included in other liabilities in AFG’s Balance Sheet at June 30, 2023 and a collateral receivable of $7 million supporting this swap is included in other assets in AFG’s Balance Sheet at December 31, 2022. The following table summarizes the gains (losses) included in AFG’s Statement of Earnings for changes in the fair value of derivatives for the second quarter and six months ended June 30, 2023 and 2022 (in millions):
|  |  |  | Three months ended June 30, |  | Six months ended June 30,
|  | Statement of Earnings Line |  | 2023 |  | 2022 |  | 2023 |  | 2022
Qualifying cash flow hedges - gains (losses) reclassified from AOCI to net earnings: |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  | Net investment income |  | $ | (7) |  |  | $ | 1 |  |  | $ | (12) |  |  | $ | 2 |
Non-designated hedges - gains (losses) included in net earnings: |  |  |  |  |  |  |  |  |  |
Fixed maturities with embedded derivatives |  | Realized gains (losses) on securities |  | (4) |  |  | (3) |  |  | (3) |  |  | (8) |
Fixed maturities with embedded derivatives |  | Net investment income |  | 7 |  |  | — |  |  | 10 |  |  | — |
Total return swap |  | Other expenses |  | 3 |  |  | (4) |  |  | 9 |  |  | (4) |
Earnings (losses) on non-designated hedges |  |  |  | 6 |  |  | (7) |  |  | 16 |  |  | (12) |
Total earnings (losses) on derivatives |  |  |  | $ | (1) |  |  | $ | (6) |  |  | $ | 4 |  |  | $ | (10) |
Based on forward interest rate curves at June 30, 2023, management estimates that it will reclassify approximately $25 million of pre-tax net losses on interest rate swaps in AOCI to net investment income over the next twelve months. The actual amount will vary based on changes in SOFR.

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