Insurance

Cash and securities owned by U.S.-based insurance subsidiaries, having a carrying value of approximately $1.00 billion at December 31, 2016, were on deposit as required by regulatory authorities. In addition, $215 million was on deposit in support of AFG’s underwriting activities at Lloyd’s. At December 31, 2016, AFG and its subsidiaries had $332 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 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, 2016 and 2015, 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 $16 million and $18 million at December 31, 2016 and 2015, 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):



	2016			2015			2014
Balance at beginning of period	$	8,127		$	7,872		$	6,410
Less reinsurance recoverables, net of allowance	2,201			2,227			2,122
Net liability at beginning of period	5,926			5,645			4,288
Provision for losses and LAE occurring in the current year	2,730			2,662			2,488
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges	36			67			24
Neon exited lines charge	57			—			—
Other	(61		)	(34		)	(18		)
Total losses and LAE incurred	2,762			2,695			2,494
Payments for losses and LAE of:
Current year	(841		)	(828		)	(789		)
Prior years	(1,512		)	(1,575		)	(1,340		)
Total payments	(2,353		)	(2,403		)	(2,129		)
Reserves of businesses acquired (disposed) (*)	(40		)	—			1,028
Foreign currency translation and other	(34		)	(11		)	(36		)
Net liability at end of period	6,261			5,926			5,645
Add back reinsurance recoverables, net of allowance	2,302			2,201			2,227
Gross unpaid losses and LAE included in the balance sheet	$	8,563		$	8,127		$	7,872


(*)	Reflects the November 2016 reinsurance to close transaction at Neon (discussed below) and the acquisition of Summit in April 2014 (discussed in Note B — “Acquisitions and Sale of Businesses”).

The net increase in the provision for claims of prior years in 2016 reflects (i) reserve strengthening at National Interstate (within the Property and transportation sub-segment), (ii) adverse reserve development at Neon and higher than anticipated severity in New York contractor claims (within the Specialty casualty sub-segment), (iii) 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, and (iv) the $36 million special charge to increase asbestos and environmental reserves. This adverse development was partially offset by (i) lower than expected losses in crop operations 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 and lower than expected claim frequency and severity in the surety business (within the Specialty financial sub-segment).

The net increase in the provision for claims of prior years in 2015 reflects (i) 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), (ii) adverse reserve development at Neon (within the Specialty casualty sub-segment), and (iii) the $67 million special charge to increase asbestos and environmental reserves. 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).

Net adverse reserve development in 2014 reflects higher than expected severity in commercial auto liability losses written in the transportation businesses (within the Property and transportation sub-segment), higher than expected claims severity in contractor claims and in a run-off book of casualty business and adverse reserve development at Neon (all within the Specialty casualty sub-segment), and the $24 million special charge to increase asbestos and environmental reserves. This adverse reserve development was offset by (i) lower than expected claim severity in directors and officers liability insurance, lower than expected claim severity and frequency in excess liability insurance and lower than anticipated claim severity in specialty workers’ compensation business (all within the Specialty casualty sub-segment), and (ii) lower than expected claim severity in the surety and fidelity businesses and lower than expected claim frequency and severity in the foreign credit business and products for financial institutions (all within the Specialty financial sub-segment).

In November 2016, the Neon Lloyd’s syndicate completed a reinsurance to close transaction for its 2007 year of account with StarStone Underwriting Limited, a subsidiary of Enstar Group Limited. The transaction included a quota share of the Italian public hospital business written in Neon’s 2008 year of account and represents Neon’s complete exit from the Italian public hospital medical malpractice business. 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.

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):



	2016		2015
Unpaid losses and allocated LAE, net of reinsurance:
Specialty
Property and transportation	$	1,020	$	971
Specialty casualty	3,356		3,170
Specialty financial	228		219
Other specialty	240		240
Total Specialty (excluding foreign reserves)	4,844		4,600

Other reserves
Reserves for foreign operations	710		648
A&E reserves	337		327
Unallocated LAE	310		296
Other	60		55
Total other reserves	1,417		1,326
Total reserves, net of reinsurance	6,261		5,926

Add back reinsurance recoverables, net of allowance	2,302		2,201
Gross unpaid losses and LAE included in the balance sheet	$	8,563	$	8,127

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, 2016
	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
2007	$	657	$	595	$	577	$	572	$	572	$	569	$	569	$	568	$	568	$	568	$	1	126,900
2008			923		871		852		853		856		854		855		856		854		3		157,173
2009					526		506		523		516		511		511		508		508		4		140,530
2010							702		662		668		676		679		679		683		10		140,614
2011									830		816		831		845		856		868		16		140,408
2012											890		884		897		909		922		27		146,584
2013													911		898		902		908		40		142,139
2014															868		852		841		67		137,214
2015																	840		802		106		134,407
2016																			760		250		109,187
																	Total		$	7,714



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		% (a)
2007	$	284	$	450	$	492	$	523	$	539	$	553	$	559	$	562	$	563	$	564	99.3	%
2008			352		706		761		799		824		835		846		846		847		99.2	%
2009					229		348		413		456		479		493		497		499		98.2	%
2010							328		505		556		618		649		660		665		97.4	%
2011									373		679		742		787		821		840		96.8	%
2012											582		725		793		841		868		94.1	%
2013													449		721		784		831		91.5	%
2014															337		646		711		84.5	%
2015																	367		594		74.1	%
2016																			296		38.9	%
																	Total		$	6,715
									Unpaid losses and LAE — years 2007 through 2016										999
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																21
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	1,020



	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	46.5	%	29.5	%	7.9	%	6.1	%	3.6	%	2.1	%	1.0	%	0.3	%	0.1	%	0.2	%
Cumulative	46.5	%	76.0	%	83.9	%	90.0	%	93.6	%	95.7	%	96.7	%	97.0	%	97.1	%	97.3	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2016).



Specialty casualty
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2016
	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
2007	$	1,036	$	957	$	892	$	852	$	828	$	821	$	818	$	794	$	802	$	803	$	40	62,676
2008			905		891		874		860		871		856		855		849		855		48		59,886
2009					864		867		845		826		816		811		812		807		58		53,097
2010							847		863		864		842		856		846		845		74		52,771
2011									831		831		819		828		814		808		89		50,635
2012											874		865		859		859		855		124		49,732
2013													938		921		915		910		159		49,239
2014															1,011		984		984		263		51,808
2015																	1,057		1,023		380		52,001
2016																			1,105		636		47,436
																	Total		$	8,995



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		% (a)
2007	$	166	$	357	$	477	$	563	$	623	$	664	$	692	$	708	$	724	$	733	91.3	%
2008			162		355		490		588		653		702		727		751		768		89.8	%
2009					160		366		494		575		636		673		698		713		88.4	%
2010							179		393		539		623		676		712		734		86.9	%
2011									165		369		506		595		643		674		83.4	%
2012											163		368		495		596		658		77.0	%
2013													171		377		530		638		70.1	%
2014															182		398		556		56.5	%
2015																	170		398		38.9	%
2016																			181		16.4	%
																	Total		$	6,053
									Unpaid losses and LAE — years 2007 through 2016										2,942
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																414
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	3,356



	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	19.0	%	23.7	%	16.1	%	11.0	%	7.0	%	4.7	%	3.0	%	2.2	%	2.0	%	1.1	%
Cumulative	19.0	%	42.7	%	58.8	%	69.8	%	76.8	%	81.5	%	84.5	%	86.7	%	88.7	%	89.8	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2016).



Specialty financial
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2016
	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
2007	$	170	$	165	$	159	$	149	$	145	$	144	$	142	$	141	$	140	$	136	$	1	21,643
2008			190		207		212		209		203		199		198		197		198		1		27,287
2009					193		193		187		184		188		186		187		186		1		27,438
2010							139		146		133		133		135		133		130		3		21,921
2011									140		158		157		155		148		146		14		16,364
2012											164		163		151		139		137		15		21,029
2013													141		145		137		131		15		28,220
2014															146		157		156		22		28,814
2015																	156		159		36		35,880
2016																			179		75		29,464
																	Total		$	1,558



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		% (a)
2007	$	82	$	114	$	126	$	133	$	134	$	135	$	135	$	135	$	136	$	135	99.3	%
2008			103		153		185		189		189		191		193		194		194		98.0	%
2009					112		145		157		166		171		182		185		186		100.0	%
2010							61		93		104		122		133		131		128		98.5	%
2011									59		113		116		124		131		132		90.4	%
2012											71		104		109		117		121		88.3	%
2013													70		100		107		114		87.0	%
2014															62		108		125		80.1	%
2015																	72		109		68.6	%
2016																			87		48.6	%
																	Total		$	1,331
									Unpaid losses and LAE — years 2007 through 2016										227
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																1
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	228



	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	49.9	%	25.3	%	7.7	%	6.1	%	3.3	%	1.4	%	0.1	%	0.3	%	0.4	%	(0.7	%)
Cumulative	49.9	%	75.2	%	82.9	%	89.0	%	92.3	%	93.7	%	93.8	%	94.1	%	94.5	%	93.8	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2016).



Other specialty
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2016
	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims (a)
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
2007	$	45	$	42	$	42	$	42	$	40	$	39	$	36	$	36	$	33	$	30	$	10	—
2008			49		49		49		49		48		46		45		45		44		4		—
2009					41		41		41		40		37		37		36		38		11		—
2010							36		39		40		39		40		40		40		4		—
2011									39		43		42		43		43		44		5		—
2012											42		40		39		40		41		10		—
2013													46		47		46		47		6		—
2014															58		57		59		21		—
2015																	59		60		27		—
2016																			61		44		—
																	Total		$	464



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		% (b)
2007	$	6	$	10	$	12	$	15	$	17	$	18	$	19	$	20	$	21	$	21	70.0	%
2008			10		16		23		31		35		37		37		37		38		86.4	%
2009					8		12		15		19		22		22		24		26		68.4	%
2010							8		14		21		24		27		33		35		87.5	%
2011									12		20		25		28		34		36		81.8	%
2012											8		17		21		25		28		68.3	%
2013													7		16		22		34		72.3	%
2014															13		21		30		50.8	%
2015																	10		26		43.3	%
2016																			9		14.8	%
																	Total		$	283
									Unpaid losses and LAE — years 2007 through 2016										181
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																59
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	240



	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	19.9	%	16.9	%	12.1	%	12.6	%	8.7	%	5.5	%	3.4	%	2.9	%	2.8	%	—	%
Cumulative	19.9	%	36.8	%	48.9	%	61.5	%	70.2	%	75.7	%	79.1	%	82.0	%	84.8	%	84.8	%


(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, 2016).



Total Specialty Group
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2016
	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
2007	$	1,908	$	1,759	$	1,670	$	1,615	$	1,585	$	1,573	$	1,565	$	1,539	$	1,543	$	1,537	$	52	211,219
2008			2,067		2,018		1,987		1,971		1,978		1,955		1,953		1,947		1,951		56		244,346
2009					1,624		1,607		1,596		1,566		1,552		1,545		1,543		1,539		74		221,065
2010							1,724		1,710		1,705		1,690		1,710		1,698		1,698		91		215,306
2011									1,840		1,848		1,849		1,871		1,861		1,866		124		207,407
2012											1,970		1,952		1,946		1,947		1,955		176		217,345
2013													2,036		2,011		2,000		1,996		220		219,598
2014															2,083		2,050		2,040		373		217,836
2015																	2,112		2,044		549		222,288
2016																			2,105		1,005		186,087
																	Total		$	18,731



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2007–2015 is Supplementary Information and Unaudited)
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		% (a)
2007	$	538	$	931	$	1,107	$	1,234	$	1,313	$	1,370	$	1,405	$	1,425	$	1,444	$	1,453	94.5	%
2008			627		1,230		1,459		1,607		1,701		1,765		1,803		1,828		1,847		94.7	%
2009					509		871		1,079		1,216		1,308		1,370		1,404		1,424		92.5	%
2010							576		1,005		1,220		1,387		1,485		1,536		1,562		92.0	%
2011									609		1,181		1,389		1,534		1,629		1,682		90.1	%
2012											824		1,214		1,418		1,579		1,675		85.7	%
2013													697		1,214		1,443		1,617		81.0	%
2014															594		1,173		1,422		69.7	%
2015																	619		1,127		55.1	%
2016																			573		27.2	%
																	Total		$	14,382
									Unpaid losses and LAE — years 2007 through 2016										4,349
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																495
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	4,844



	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	33.0	%	26.1	%	11.8	%	8.5	%	5.3	%	3.4	%	2.0	%	1.3	%	1.1	%	0.6	%
Cumulative	33.0	%	59.1	%	70.9	%	79.4	%	84.7	%	88.1	%	90.1	%	91.4	%	92.5	%	93.1	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2016).

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 $37 million at December 31, 2016 and $34 million at December 31, 2015, 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, 2016, 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 2016, the FHLB advanced GALIC $150 million, increasing the total amount advanced to $935 million (included in annuity benefits accumulated) at December 31, 2016. In the fourth quarter of 2016, GALIC extended the terms on advances totaling $200 million by four years. Interest rates under the various funding agreements on these advances range from 0.03% to 0.53% over LIBOR (average rate of 1.18% at December 31, 2016). While these advances must be repaid between 2018 and 2021 ($285 million in 2018, $500 million in 2020 and $150 million in 2021), GALIC has the option to prepay all or a portion of the advances. The advances on these agreements are collateralized by mortgage-backed securities, which have a total fair value of $1.08 billion (included in available for sale fixed maturity securities) at December 31, 2016 and which have similar expected lives as the advances. Interest credited on the funding agreements, which is included in annuity benefits, was $8 million in 2016, $3 million in 2015 and $1 million in 2014.

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
	2016		2015		2014		2016		2015
Property and casualty companies	$	461	$	408	$	318	$	2,939	$	2,488
Life insurance companies	167		399		349		1,976		1,721

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, 2016 and 2015, 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, 2016 or 2015.

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 2017 from its insurance subsidiaries without seeking regulatory approval is $693 million. Additional amounts of dividends require regulatory approval.

AFG paid common stock dividends to shareholders totaling $187 million, $178 million and $169 million in 2016, 2015 and 2014, respectively. Currently, there are no regulatory restrictions on AFG’s retained earnings or net income that materially impact its ability to pay dividends. Based on shareholders’ equity at December 31, 2016, 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. To the extent that any reinsuring companies are unable to meet obligations under agreements covering reinsurance ceded, AFG’s insurance subsidiaries would remain liable. 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.



	2016			2015			2014
Direct premiums written	$	5,858		$	5,713		$	5,387
Reinsurance assumed	123			119			90
Reinsurance ceded	(1,595		)	(1,505		)	(1,457		)
Net written premiums	$	4,386		$	4,327		$	4,020

Direct premiums earned	$	5,745		$	5,613		$	5,195
Reinsurance assumed	118			105			75
Reinsurance ceded	(1,535		)	(1,494		)	(1,392		)
Net earned premiums	$	4,328		$	4,224		$	3,878

Reinsurance recoveries	$	810		$	936		$	895

In March 2014, AFG’s property and casualty insurance operations entered into a reinsurance agreement to obtain additional catastrophe protection through a catastrophe bond structure with Riverfront Re Ltd. (“Riverfront”). The reinsurance agreement provided supplemental reinsurance coverage for catastrophe losses occurring between April 1, 2014 and January 6, 2017. In connection with the reinsurance agreement, Riverfront issued notes to unrelated investors for the full amount of coverage provided under the reinsurance agreement. At the time of the agreement, AFG concluded that Riverfront is a variable interest entity, but that it did not have a variable interest in the entity because the variability in Riverfront’s results was expected to 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 was approximately $5 million per year.

AFG has reinsured approximately $10.22 billion of its $13.49 billion in face amount of life insurance at December 31, 2016 compared to $11.19 billion of its $14.67 billion in face amount of life insurance at December 31, 2015. Life written premiums ceded were $31 million, $40 million and $41 million for 2016, 2015 and 2014, respectively. Reinsurance recoveries on ceded life policies were $41 million, $50 million and $59 million for 2016, 2015 and 2014, 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):



	2016		2015
Expected death and annuitization	$	223	$	214
Guaranteed withdrawal benefits	278		203
Accrued persistency and premium bonuses	6		11

Variable Annuities At December 31, 2016, 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 $20 million, compared to $27 million at December 31, 2015. Death benefits paid in excess of the variable annuity account balances were less than $1 million in each of the last three years.