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 six months of 2017 and 2016 (in millions):



	Six months ended June 30,
	2017			2016
Balance at beginning of year	$	8,563		$	8,127
Less reinsurance recoverables, net of allowance	2,302			2,201
Net liability at beginning of year	6,261			5,926
Provision for losses and LAE occurring in the current period	1,294			1,268
Net increase (decrease) in the provision for claims of prior years	(50		)	—
Total losses and LAE incurred	1,244			1,268
Payments for losses and LAE of:
Current year	(253		)	(245		)
Prior years	(953		)	(888		)
Total payments	(1,206		)	(1,133		)
Foreign currency translation and other	24			1
Net liability at end of period	6,323			6,062
Add back reinsurance recoverables, net of allowance	2,407			2,141
Gross unpaid losses and LAE included in the balance sheet at end of period	$	8,730		$	8,203

The net decrease in the provision for claims of prior years during the first six months of 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 business (all within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses and at Neon (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 (all within the Specialty financial sub-segment). This favorable development was partially offset by (i) higher than expected claim severity in the ocean marine business (within the Property and transportation sub-segment), (ii) higher than anticipated claim severity in the targeted markets and general liability businesses (all within the Specialty casualty sub-segment) and (iii) an adjustment 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 change in the provision for claims of prior years during the first six months of 2016 reflects (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 severity in workers’ compensation business and in directors and officers liability insurance (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 (all within the Specialty financial sub-segment). This favorable development was offset by (i) adverse reserve development at Neon, higher than anticipated severity in New York contractor claims and higher than anticipated claim severity in the general liability insurance (all within the Specialty casualty sub-segment), (ii) 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 (iii) higher than anticipated claim frequency in the financial institutions business (within the Specialty financial sub-segment).

Reinsurance In June 2017, AFG’s property and casualty insurance subsidiaries entered into a reinsurance agreement to obtain 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. 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.