Insurance

Cash and securities owned by U.S.-based insurance subsidiaries, having a carrying value of approximately $1.08 billion at December 31, 2017, were on deposit as required by regulatory authorities. In addition, $205 million was on deposit in support of AFG’s underwriting activities at Lloyd’s. At December 31, 2017, AFG and its subsidiaries had $447 million in undrawn letters of credit (none of which was collateralized) supporting the underwriting capacity of its U.K.-based Lloyd’s insurer, Neon.

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

The process used to determine the total reserve for liabilities involves estimating the ultimate incurred losses and LAE, adjusted for amounts already paid on the claims. The IBNR reserve is derived by first estimating the ultimate unpaid reserve liability and subtracting case reserves for loss and LAE.

In determining management’s best estimate of the ultimate liability, management (with the assistance of Company actuaries) considers items such as the effect of inflation on medical, hospitalization, material, repair and replacement costs, the nature and maturity of lines of insurance, general economic trends and the legal environment. In addition, historical trends adjusted for changes in underwriting standards, policy provisions, product mix and other factors are analyzed using actuarial reserve development techniques. Weighing all of the factors, the management team determines a single or “point” estimate that it records as its best estimate of the ultimate liability. Ranges of loss reserves are not developed by Company actuaries. This reserve analysis and review is completed each quarter and for almost every business within AFG’s property and casualty insurance sub-segments.

Each review includes in-depth analysis of several hundred subdivisions of the business, employing multiple actuarial techniques. For each subdivision, actuaries use informed, professional judgment to adjust these techniques as necessary to respond to specific conditions in the data or within the business.

Some of the standard actuarial methods employed for the quarterly reserve analysis may include (but may not be limited to):


•	Case Incurred Development Method


•	Paid Development Method


•	Bornhuetter-Ferguson Method


•	Incremental Paid LAE to Paid Loss Methods

Management believes that each method has particular strengths and weaknesses and that no single estimation method is most accurate in all situations. When applied to a particular group of claims, the relative strengths and weaknesses of each method can change over time based on the facts and circumstances. Ultimately, the estimation methods chosen are those which management believes produce the most reliable indication for the particular liabilities under review.

The period of time from the occurrence of a loss through the settlement of the liability is referred to as the “tail”. Generally, the same actuarial methods are considered for both short-tail and long-tail lines of business because most of them work properly for both. The methods are designed to incorporate the effects of the differing length of time to settle particular claims. For short-tail lines, management tends to give more weight to the Case Incurred and Paid Development methods, although the various methods tend to produce similar results. For long-tail lines, more judgment is involved, and more weight may be given to the Bornhuetter-Ferguson method. Liability claims for long-tail lines are more susceptible to litigation and can be significantly affected by changing contract interpretation and the legal environment. Therefore, the estimation of loss reserves for these classes is more complex and subject to a higher degree of variability.

The level of detail in which data is analyzed varies among the different lines of business. Data is generally analyzed by major product or by coverage within product, using countrywide data; however, in some situations, data may be reviewed by state or region. Appropriate segmentation of the data is determined based on data credibility, homogeneity of development patterns, mix of business, and other actuarial considerations.

Supplementary statistical information is also reviewed to determine which methods are most appropriate to use or if adjustments are needed to particular methods. Such information includes:


•	Open and closed claim counts


•	Average case reserves and average incurred on open claims


•	Closure rates and statistics related to closed and open claim percentages


•	Average closed claim severity


•	Ultimate claim severity


•	Reported loss ratios


•	Projected ultimate loss ratios


•	Loss payment patterns

Within each business, results of individual methods are reviewed, supplementary statistical information is analyzed, and data from underwriting, operating and claim management are considered in deriving management’s best estimate of the ultimate liability. This estimate may be the result of one method, a weighted average of several methods, or a judgmental selection as the management team determines is appropriate.

The liability for losses and LAE for a very limited number of claims with long-term scheduled payments under certain workers’ compensation policies has been discounted at 4.5% at both December 31, 2017 and 2016, which represents an approximation of long-term investment yields. Because of the limited amount of claims involved, the net impact of discounting did not materially impact AFG’s total liability for unpaid losses and loss adjustment expenses (net reductions from discounting of $15 million and $16 million at December 31, 2017 and 2016, respectively).

The following table provides an analysis of changes in the liability for losses and loss adjustment expenses over the past three years (in millions):



	2017			2016			2015
Balance at beginning of period	$	8,563		$	8,127		$	7,872
Less reinsurance recoverables, net of allowance	2,302			2,201			2,227
Net liability at beginning of period	6,261			5,926			5,645
Provision for losses and LAE occurring in the current year	3,019			2,730			2,662
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges	89			36			67
Neon exited lines charge	(18		)	57			—
Other	(135		)	(61		)	(34		)
Total losses and LAE incurred	2,955			2,762			2,695
Payments for losses and LAE of:
Current year	(942		)	(841		)	(828		)
Prior years	(1,586		)	(1,512		)	(1,575		)
Total payments	(2,528		)	(2,353		)	(2,403		)
Reserves of businesses disposed (*)	—			(40		)	—
Foreign currency translation and other	33			(34		)	(11		)
Net liability at end of period	6,721			6,261			5,926
Add back reinsurance recoverables, net of allowance	2,957			2,302			2,201
Gross unpaid losses and LAE included in the balance sheet	$	9,678		$	8,563		$	8,127


(*)	Reflects the 2016 reinsurance to close transactions at Neon (discussed below).

The net decrease in the provision for claims of prior years in 2017 reflects (i) lower than expected losses in the crop and equine businesses and lower than expected claim severity in the property and inland marine and transportation businesses (all within the Property and transportation sub-segment), (ii) favorable reserve development of $18 million on Neon’s exited lines, as well as additional favorable development on ongoing lines of business within Neon, recorded in connection with the reinsurance to close agreement entered into in December 2017 for the 2015 and prior years of account, lower than anticipated claim severity in the workers’ compensation businesses and lower than expected losses in the executive liability business (all within the Specialty casualty sub-segment) and (iii) lower than anticipated claim severity in the fidelity business and lower than expected claim frequency and severity in the surety business (both within the Specialty financial sub-segment). This favorable development was partially offset by (i) the $89 million special charge to increase asbestos and environmental reserves, (ii) higher than expected claim frequency and severity in the ocean marine business (within the Property and transportation sub-segment), (iii) higher than anticipated claim severity in the targeted markets and general liability businesses and higher than anticipated severity in New York contractor claims (all within the Specialty casualty sub-segment) and (iv) a charge to adjust to the deferred gain on the retroactive reinsurance transaction entered into in connection with the sale of businesses in 1998 (included in Other specialty sub-segment).

The net increase in the provision for claims of prior years in 2016 reflects (i) the $36 million special charge to increase asbestos and environmental reserves, (ii) reserve strengthening at National Interstate and higher than expected claim frequency in the ocean marine business (within the Property and transportation sub-segment), (iii) adverse reserve development at Neon, higher than anticipated severity in New York contractor claims, higher than anticipated claim frequency and severity in general liability insurance and higher than expected claim frequency and severity in the targeted markets business (within the Specialty casualty sub-segment) and (iv) the $57 million special charge to increase loss reserves related to Neon’s exit of its UK and international medical malpractice and general liability lines of business. This adverse development was partially offset by (i) lower than expected losses in the crop business and lower than expected claim severity in the property and inland marine and trucking businesses (all within the Property and transportation sub-segment), (ii) lower than anticipated claim frequency and severity in workers’ compensation business, lower than expected claim severity in directors and officers liability insurance and lower than expected claim frequency and severity in excess liability business (all within the Specialty casualty sub-segment) and (iii) lower than anticipated claim severity in the fidelity and crime business, lower than expected claim frequency and severity in the surety business and lower than anticipated claim frequency in the financial institutions business (within the Specialty financial sub-segment).

The net increase in the provision for claims of prior years in 2015 reflects (i) the $67 million special charge to increase asbestos and environmental reserves, (ii) higher than expected claim severity at National Interstate and higher than anticipated claim frequency in the ocean marine business (all within the Property and transportation sub-segment) and (iii) adverse reserve development at Neon (within the Specialty casualty sub-segment). This adverse development was partially offset by (i) lower than expected claim severity in the property and inland marine business, agricultural operations and a run-off book of homebuilders business (all within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in workers’ compensation business, lower than anticipated claim severity and frequency in excess liability insurance and lower than expected claim severity in directors and officers liability insurance (all within the Specialty casualty sub-segment), and (iii) lower than anticipated claim frequency and severity in the surety business and products for financial institutions and lower than expected claim severity in the fidelity business and run-off collateral value insurance (all within the Specialty financial sub-segment).

In December 2017, the Neon Lloyd’s syndicate entered into a reinsurance to close transaction for the 2015 and prior years of account with StarStone Underwriting Limited, a subsidiary of Enstar Group Limited, which will be effective as of December 31, 2017. In the Lloyd’s market, a reinsurance to close transaction transfers the responsibility for discharging all of the liabilities that attach to the transferred year of account plus the right to any income due to the closing year of account in return for a premium. This transaction provides Neon with finality on its legacy business. As a result of the reinsurance to close agreement, Neon was able to better estimate its ultimate liability for the 2015 and prior years of account resulting in favorable development of $42 million, of which $24 million related to its ongoing lines of business (included in Specialty casualty) and $18 million related to its exited lines of business (discussed below and included in Neon exited lines charge). In November 2016, the Neon Lloyd’s syndicate completed a similar reinsurance to close transaction with StarStone, which covered liabilities relating to the syndicate’s 2007 and prior years of account. That transaction also included a quota share of the Italian public hospital business written in Neon’s 2008 year of account and represented Neon’s complete exit from the Italian public hospital medical malpractice business.

In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance: Disclosures about Short-Duration Contracts. The ASU requires insurance entities to disclose incurred and paid claims development information by accident year, net of reinsurance. All of AFG’s material short-duration insurance contracts are written in its property and casualty insurance segment. The development tables and the associated disclosures are aggregated in the following Specialty sub-segments: Property and transportation, Specialty casualty, Specialty financial and Other specialty. See Note C — “Segments of Operations” to the financial statements for a discussion of these sub-segments.

A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for unpaid losses and LAE, with separate disclosure of reinsurance recoverables on unpaid claims is shown below (in millions):



	2017
Unpaid losses and allocated LAE, net of reinsurance:
Specialty
Property and transportation	$	1,069
Specialty casualty	3,630
Specialty financial	221
Other specialty	278
Total Specialty (excluding foreign reserves)	5,198

Other reserves
Reserves for foreign operations:
Neon Lloyd’s business	480
Other subsidiaries	269
A&E reserves	403
Unallocated LAE	326
Other	45
Total other reserves	1,523
Total reserves, net of reinsurance	6,721

Add back reinsurance recoverables, net of allowance	2,957
Gross unpaid losses and LAE included in the balance sheet	$	9,678

The following claims development tables and associated disclosures related to short-duration insurance contracts are prepared by sub-segment within the property and casualty insurance business for the most recent 10 accident years. AFG determines its claim counts at the claimant or policy feature level depending on the particular facts and circumstances of the underlying claim. While the methodology is generally consistent within each sub-segment, there are minor differences between and within the sub-segments. The methods used to summarize claim counts have not changed significantly over the time periods reported in the tables below.



Property and transportation
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2017
	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	923	$	871	$	852	$	853	$	856	$	854	$	855	$	856	$	854	$	854	$	1	157,164
2009			526		506		523		516		511		511		508		508		508		3		140,532
2010					702		662		668		676		679		679		683		680		6		140,634
2011							830		816		831		845		856		868		865		10		140,418
2012									890		884		897		909		922		918		19		146,630
2013											911		898		902		908		910		22		142,249
2014													868		852		841		843		38		136,882
2015															842		804		798		54		135,029
2016																	771		740		110		122,112
2017																			913		273		128,455
																	Total		$	8,029



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		% (a)
2008	$	352	$	706	$	761	$	799	$	824	$	835	$	846	$	846	$	847	$	848	99.3	%
2009			229		348		413		456		479		493		497		499		502		98.8	%
2010					328		505		556		618		649		660		665		669		98.4	%
2011							373		679		742		787		821		840		847		97.9	%
2012									582		725		793		841		868		883		96.2	%
2013											449		721		784		831		862		94.7	%
2014													337		646		711		765		90.7	%
2015															367		595		683		85.6	%
2016																	299		534		72.2	%
2017																			387		42.4	%
																	Total		$	6,980
									Unpaid losses and LAE — years 2008 through 2017										1,049
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																20
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	1,069



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Supplementary Information and Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Annual	45.9	%	29.9	%	8.4	%	6.3	%	3.7	%	1.9	%	0.9	%	0.3	%	0.4	%	0.1	%
Cumulative	45.9	%	75.8	%	84.2	%	90.5	%	94.2	%	96.1	%	97.0	%	97.3	%	97.7	%	97.8	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2017).



Specialty casualty
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2017
	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	905	$	891	$	874	$	860	$	871	$	856	$	855	$	849	$	855	$	854	$	41	59,991
2009			864		867		845		826		816		811		812		807		803		48		53,192
2010					847		863		864		842		856		846		845		842		65		52,855
2011							831		831		819		828		814		808		806		73		50,851
2012									874		865		859		859		855		849		104		49,836
2013											938		921		915		910		913		132		49,412
2014													1,011		984		984		982		202		52,167
2015															1,057		1,023		1,022		268		52,846
2016																	1,105		1,098		426		50,652
2017																			1,186		715		46,399
																	Total		$	9,355



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		% (a)
2008	$	162	$	355	$	490	$	588	$	653	$	702	$	727	$	751	$	768	$	782	91.6	%
2009			160		366		494		575		636		673		698		713		722		89.9	%
2010					179		393		539		623		676		712		734		748		88.8	%
2011							165		369		506		595		643		674		694		86.1	%
2012									163		368		495		596		658		696		82.0	%
2013											171		377		530		638		698		76.5	%
2014													182		398		556		659		67.1	%
2015															170		398		560		54.8	%
2016																	181		404		36.8	%
2017																			192		16.2	%
																	Total		$	6,155
									Unpaid losses and LAE — years 2008 through 2017										3,200
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																430
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	3,630



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Supplementary Information and Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Annual	18.6	%	23.4	%	16.2	%	11.0	%	6.9	%	4.6	%	2.8	%	2.1	%	1.6	%	1.6	%
Cumulative	18.6	%	42.0	%	58.2	%	69.2	%	76.1	%	80.7	%	83.5	%	85.6	%	87.2	%	88.8	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2017).



Specialty financial
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2017
	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	190	$	207	$	212	$	209	$	203	$	199	$	198	$	197	$	198	$	199	$	1	27,292
2009			193		193		187		184		188		186		187		186		185		—		27,441
2010					139		146		133		133		135		133		130		128		2		21,929
2011							140		158		157		155		148		146		144		11		16,374
2012									164		163		151		139		137		135		11		21,050
2013											141		145		137		131		127		9		28,279
2014													146		157		156		154		16		28,983
2015															156		159		157		21		37,125
2016																	179		183		26		43,484
2017																			212		84		36,116
																	Total		$	1,624



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		% (a)
2008	$	103	$	153	$	185	$	189	$	189	$	191	$	193	$	194	$	194	$	197	99.0	%
2009			112		145		157		166		171		182		185		186		186		100.5	%
2010					61		93		104		122		133		131		128		127		99.2	%
2011							59		113		116		124		131		132		133		92.4	%
2012									71		104		109		117		121		126		93.3	%
2013											70		100		107		114		117		92.1	%
2014													62		108		125		128		83.1	%
2015															72		109		129		82.2	%
2016																	87		141		77.0	%
2017																			119		56.1	%
																	Total		$	1,403
									Unpaid losses and LAE — years 2008 through 2017										221
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																—
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	221



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Supplementary Information and Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Annual	49.8	%	26.3	%	8.3	%	5.7	%	3.6	%	2.0	%	0.2	%	0.1	%	—	%	1.5	%
Cumulative	49.8	%	76.1	%	84.4	%	90.1	%	93.7	%	95.7	%	95.9	%	96.0	%	96.0	%	97.5	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2017).



Other specialty
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2017
	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims (a)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	49	$	49	$	49	$	49	$	48	$	46	$	45	$	45	$	44	$	43	$	3	—
2009			41		41		41		40		37		37		36		38		33		7		—
2010					36		39		40		39		40		40		40		40		2		—
2011							39		43		42		43		43		44		44		4		—
2012									42		40		39		40		41		39		8		—
2013											46		47		46		47		50		5		—
2014													58		57		59		59		16		—
2015															59		60		63		20		—
2016																	61		61		31		—
2017																			63		47		—
																	Total		$	495



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		% (b)
2008	$	10	$	16	$	23	$	31	$	35	$	37	$	37	$	37	$	38	$	39	90.7	%
2009			8		12		15		19		22		22		24		26		25		75.8	%
2010					8		14		21		24		27		33		35		36		90.0	%
2011							12		20		25		28		34		36		37		84.1	%
2012									8		17		21		25		28		30		76.9	%
2013											7		16		22		34		37		74.0	%
2014													13		21		30		36		61.0	%
2015															10		26		31		49.2	%
2016																	9		19		31.1	%
2017																			10		15.9	%
																	Total		$	300
									Unpaid losses and LAE — years 2008 through 2017										195
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																83
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	278



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Supplementary Information and Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Annual	19.8	%	17.3	%	12.5	%	12.8	%	8.9	%	5.9	%	3.3	%	2.9	%	(0.4	%)	2.3	%
Cumulative	19.8	%	37.1	%	49.6	%	62.4	%	71.3	%	77.2	%	80.5	%	83.4	%	83.0	%	85.3	%


(a)	The amounts shown in Other specialty 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. Accordingly, the liability for incurred claims and allocated LAE represents additional reserves held on claims counted in the tables provided for the other sub-segments (above).


(b)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2017).



Total Specialty Group
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2017
	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	2,067	$	2,018	$	1,987	$	1,971	$	1,978	$	1,955	$	1,953	$	1,947	$	1,951	$	1,950	$	46	244,447
2009			1,624		1,607		1,596		1,566		1,552		1,545		1,543		1,539		1,529		58		221,165
2010					1,724		1,710		1,705		1,690		1,710		1,698		1,698		1,690		75		215,418
2011							1,840		1,848		1,849		1,871		1,861		1,866		1,859		98		207,643
2012									1,970		1,952		1,946		1,947		1,955		1,941		142		217,516
2013											2,036		2,011		2,000		1,996		2,000		168		219,940
2014													2,083		2,050		2,040		2,038		272		218,032
2015															2,114		2,046		2,040		363		225,000
2016																	2,116		2,082		593		216,248
2017																			2,374		1,119		210,970
																	Total		$	19,503



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2008–2016 is Supplementary Information and Unaudited)
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		% (a)
2008	$	627	$	1,230	$	1,459	$	1,607	$	1,701	$	1,765	$	1,803	$	1,828	$	1,847	$	1,866	95.7	%
2009			509		871		1,079		1,216		1,308		1,370		1,404		1,424		1,435		93.9	%
2010					576		1,005		1,220		1,387		1,485		1,536		1,562		1,580		93.5	%
2011							609		1,181		1,389		1,534		1,629		1,682		1,711		92.0	%
2012									824		1,214		1,418		1,579		1,675		1,735		89.4	%
2013											697		1,214		1,443		1,617		1,714		85.7	%
2014													594		1,173		1,422		1,588		77.9	%
2015															619		1,128		1,403		68.8	%
2016																	576		1,098		52.7	%
2017																			708		29.8	%
																	Total		$	14,838
									Unpaid losses and LAE — years 2008 through 2017										4,665
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																533
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	5,198



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (Supplementary Information and Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Annual	32.7	%	26.1	%	12.1	%	8.5	%	5.3	%	3.3	%	1.8	%	1.2	%	0.8	%	1.0	%
Cumulative	32.7	%	58.8	%	70.9	%	79.4	%	84.7	%	88.0	%	89.8	%	91.0	%	91.8	%	92.8	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2017).

Closed Block of Long-Term Care Insurance Following the completion of the sale of substantially all of its run-off long-term care insurance business in December 2015, AFG’s remaining long-term care insurance reserves were $39 million at December 31, 2017 and $37 million at December 31, 2016, net of reinsurance recoverables and excluding the impact of unrealized gains on securities. AFG’s remaining outstanding long-term care policies have level premiums and are guaranteed renewable. Premium rates can potentially be increased in reaction to adverse experience; however, any rate increases would require regulatory approval.

FHLB Funding Agreements Great American Life Insurance Company (“GALIC”), a wholly-owned annuity subsidiary, is a member of the Federal Home Loan Bank of Cincinnati (“FHLB”). The FHLB makes advances and provides other banking services to member institutions. Members are required to purchase stock in the FHLB in addition to maintaining collateral deposits that back any funds advanced. GALIC’s $44 million investment in FHLB capital stock at December 31, 2017, is included in other investments at cost. Membership in the FHLB provides the annuity operations with an additional source of liquidity. These advances further the FHLB’s mission of improving access to housing by increasing liquidity in the residential mortgage-backed securities market. In the fourth quarter of 2017, GALIC refinanced the terms on advances totaling $831 million, which lowered the spread over LIBOR. In the fourth quarter of 2017, GALIC also repaid $64 million to the FHLB, decreasing the total amount advanced to $871 million (included in annuity benefits accumulated) at December 31, 2017. Interest rates under the various funding agreements on the advances range from 0.03% to 0.35% over LIBOR (average rate of 1.75% at December 31, 2017). While these advances must be repaid between 2018 and 2020 ($285 million in 2018 and $586 million in 2020), GALIC has the option to prepay all or a portion of the advances. GALIC has invested the proceeds from the advances in fixed maturity securities with similar expected lives as the advances for the purpose of earning a spread over the interest payments due to the FHLB. The advances on these agreements are collateralized by fixed maturity investments, which have a total fair value of $1.04 billion (included in available for sale fixed maturity securities) at December 31, 2017. Interest credited on the funding agreements, which is included in annuity benefits, was $14 million in 2017, $8 million in 2016 and $3 million in 2015.

Statutory Information AFG’s U.S.-based insurance subsidiaries are required to file financial statements with state insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). Net earnings and capital and surplus on a statutory basis for the insurance subsidiaries were as follows (in millions):



	Net Earnings						Capital and Surplus
	2017		2016		2015		2017		2016
Property and casualty companies	$	484	$	461	$	408	$	2,729	$	2,939
Life insurance companies	286		167		399		2,132		1,976

The National Association of Insurance Commissioners’ (“NAIC”) model law for risk based capital (“RBC”) applies to both life and property and casualty insurance companies. RBC formulas determine the amount of capital that an insurance company needs so that it has an acceptable expectation of not becoming financially impaired. Companies below specific trigger points or ratios are subject to regulatory action. At December 31, 2017 and 2016, the capital ratios of all AFG insurance companies substantially exceeded the RBC requirements. AFG’s insurance companies did not use any prescribed or permitted statutory accounting practices that differed from the NAIC statutory accounting practices at December 31, 2017 or 2016.

Payments of dividends by AFG’s insurance companies are subject to various state laws that limit the amount of dividends that can be paid. Under applicable restrictions, the maximum amount of dividends available to AFG in 2018 from its insurance subsidiaries without seeking regulatory approval is $826 million. Additional amounts of dividends require regulatory approval.

AFG paid common stock dividends to shareholders totaling $421 million, $187 million and $178 million in 2017, 2016 and 2015, respectively. Currently, there are no regulatory restrictions on AFG’s retained earnings or net earnings that materially impact its ability to pay dividends. Based on shareholders’ equity at December 31, 2017, AFG could pay dividends in excess of $1 billion without violating its most restrictive debt covenant. However, the payment of future dividends will be at the discretion of AFG’s Board of Directors and will be dependent on many factors including AFG’s financial condition and results of operations, the capital requirements of its insurance subsidiaries, and rating agency commitments.

Reinsurance In the normal course of business, AFG’s insurance subsidiaries cede reinsurance to other companies to diversify risk and limit maximum loss arising from large claims. However, AFG remains liable to its insureds regardless of whether a reinsurer is able to meet its obligations. The following table shows (in millions) (i) amounts deducted from property and casualty written and earned premiums in connection with reinsurance ceded, (ii) written and earned premiums included in income for reinsurance assumed and (iii) reinsurance recoveries, which represent ceded losses and loss adjustment expenses.



	2017			2016			2015
Direct premiums written	$	6,310		$	5,858		$	5,713
Reinsurance assumed	192			123			119
Reinsurance ceded	(1,751		)	(1,595		)	(1,505		)
Net written premiums	$	4,751		$	4,386		$	4,327

Direct premiums earned	$	6,112		$	5,745		$	5,613
Reinsurance assumed	157			118			105
Reinsurance ceded	(1,690		)	(1,535		)	(1,494		)
Net earned premiums	$	4,579		$	4,328		$	4,224

Reinsurance recoveries	$	1,379		$	810		$	936

In June 2017, AFG’s property and casualty insurance subsidiaries entered into a reinsurance agreement to obtain supplemental catastrophe protection through a catastrophe bond structure with Riverfront Re Ltd. (“Riverfront”). The reinsurance agreement provides supplemental reinsurance coverage up to 95% of $200 million (fully collateralized) for catastrophe losses in excess of $100 million (per occurrence and annual aggregate) occurring between June 1, 2017 and December 31, 2020. In connection with the reinsurance agreement, Riverfront issued notes to unrelated investors for the full amount of coverage provided under the reinsurance agreement. Through December 31, 2017, AFG’s incurred catastrophe losses have not reached the level of attachment for the catastrophe bond structure. Riverfront is a variable interest entity in which AFG does not have a variable interest because the variability in Riverfront’s results will be absorbed entirely by the investors in Riverfront. Accordingly, Riverfront is not consolidated in AFG’s financial statements and the reinsurance agreement is accounted for as ceded reinsurance. AFG’s cost for this coverage is approximately $11 million per year.

AFG’s property and casualty insurance operations entered into a similar reinsurance agreement in March 2014 to obtain additional catastrophe protection through a catastrophe bond structure with Riverfront, which provided supplemental reinsurance coverage for catastrophe losses occurring between April 1, 2014 and January 6, 2017.

AFG has reinsured approximately $8.32 billion of its $12.05 billion in face amount of life insurance at December 31, 2017 compared to $10.22 billion of its $13.49 billion in face amount of life insurance at December 31, 2016. Life written premiums ceded were $28 million, $31 million and $40 million for 2017, 2016 and 2015, respectively. Reinsurance recoveries on ceded life policies were $35 million, $41 million and $50 million for 2017, 2016 and 2015, respectively.

Fixed Annuities For certain products, the liability for “annuity benefits accumulated” includes reserves for excess benefits expected to be paid on future deaths and annuitizations (“EDAR”), guaranteed withdrawal benefits and accrued persistency and premium bonuses. The liabilities included in AFG’s Balance Sheet for these benefits, excluding the impact of unrealized gains on securities, were as follows at December 31 (in millions):



	2017		2016
Expected death and annuitization	$	228	$	223
Guaranteed withdrawal benefits	357		278
Accrued persistency and premium bonuses	3		6

Variable Annuities At December 31, 2017, the aggregate guaranteed minimum death benefit value (assuming every variable annuity policyholder died on that date) on AFG’s variable annuity policies exceeded the fair value of the underlying variable annuities by $15 million, compared to $20 million at December 31, 2016. Death benefits paid in excess of the variable annuity account balances were less than $1 million in each of the last three years.