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 nine months of 2017 and 2016 (in millions):



	Nine months ended September 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	2,237			2,011
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges	89			36
Neon exited lines charge	—			57
Other	(87		)	(71		)
Total losses and LAE incurred	2,239			2,033
Payments for losses and LAE of:
Current year	(530		)	(463		)
Prior years	(1,272		)	(1,206		)
Total payments	(1,802		)	(1,669		)
Foreign currency translation and other	32			(3		)
Net liability at end of period	6,730			6,287
Add back reinsurance recoverables, net of allowance	2,833			2,374
Gross unpaid losses and LAE included in the balance sheet at end of period	$	9,563		$	8,661

The net increase in the provision for claims of prior years during the first nine months of 2017 reflects (i) the $89 million special charge to increase asbestos and environmental reserves, (ii) higher than expected claim 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 (all within the Specialty casualty sub-segment) and (iv) 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). This adverse development was partially offset by (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) 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 (both within the Specialty financial sub-segment).

The net increase in the provision for claims of prior years during the first nine months of 2016 reflects (i) the $36 million special charge to increase asbestos and environmental reserves, (ii) 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), (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) higher than anticipated claim frequency in the financial institutions business (within the Specialty financial sub-segment). 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 severity in workers’ compensation business and 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 business and lower than expected claim frequency and severity in the surety business (all within the Specialty financial sub-segment).

Reinsurance Subsequent to Hurricane Irma, AFG’s property and casualty operations purchased replacement reinsurance coverage for those layers of the catastrophe reinsurance program expected to be affected by Hurricanes Harvey and Irma. The following table presents (by type of coverage) the amount of each loss above the specified retention covered by treaty reinsurance programs in AFG’s property and casualty insurance operations (in millions) as of October 1, 2017:



			Reinsurance Coverage						AFG
	Primary		Coverage		AFG Participation (a)				Maximum
	Retention		Amount		%		$		Loss (b)
U.S.-based operations:
California Workers’ Compensation	$	2	$	148	1	%	$	1	$	3
Other Workers’ Compensation	3		37		—	%	—		3
Commercial Umbrella	1		49		13	%	6		7
Property — General	5		45		—	%	—		5
Property — Catastrophe	15		85		5	%	4		19
Neon Lloyd’s Syndicate	15		210		—	%	—		15
Riverfront Re Ltd. catastrophe bond (c)	100		200		5	%	10		N/A


(a)	Includes the participation of AFG’s internal reinsurance program.


(b)	Maximum loss for claims up to reinsurance coverage limit.


(c)	Includes aggregate coverage. See description below.

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 September 30, 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.