Insurance

Cash and securities owned by U.S.-based insurance subsidiaries, having a carrying value of approximately $1.06 billion at December 31, 2018, were on deposit as required by regulatory authorities. In addition, $118 million was on deposit in support of AFG’s underwriting activities at Lloyd’s. At December 31, 2018, AFG and its subsidiaries had $296 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, 2018 and 2017, 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 $13 million and $15 million at December 31, 2018 and 2017, 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):



	2018			2017			2016
Balance at beginning of period	$	9,678		$	8,563		$	8,127
Less reinsurance recoverables, net of allowance	2,957			2,302			2,201
Net liability at beginning of period	6,721			6,261			5,926
Provision for losses and LAE occurring in the current year	3,195			3,019			2,730
Net increase (decrease) in the provision for claims of prior years:
Special A&E charges	18			89			36
Neon exited lines charge	—			(18		)	57
Other	(210		)	(135		)	(61		)
Total losses and LAE incurred	3,003			2,955			2,762
Payments for losses and LAE of:
Current year	(963		)	(942		)	(841		)
Prior years	(1,639		)	(1,586		)	(1,512		)
Total payments	(2,602		)	(2,528		)	(2,353		)
Reserves of businesses disposed (*)	(319		)	—			(40		)
Foreign currency translation and other	(4		)	33			(34		)
Net liability at end of period	6,799			6,721			6,261
Add back reinsurance recoverables, net of allowance	2,942			2,957			2,302
Gross unpaid losses and LAE included in the balance sheet	$	9,741		$	9,678		$	8,563


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

The net decrease in the provision for claims of prior years in 2018 reflects (i) lower than expected losses in the crop business and lower than expected claim severity at National Interstate (within the Property and transportation sub-segment), (ii) lower than anticipated claim severity in the workers’ compensation businesses, lower than expected emergence in assumed 2017 property catastrophe losses at Neon and lower than expected claim severity in the executive liability business (within the Specialty casualty sub-segment) and (iii) lower than expected claim frequency and severity in the surety business, lower than expected claim severity in the fidelity business and lower than expected claim frequency in run-off businesses (within the Specialty financial sub-segment). This favorable development was partially offset by (i) the $18 million special charge to increase asbestos and environmental reserves and (ii) higher than expected claim frequency and severity in the Singapore branch and aviation operations (within the Property and transportation sub-segment).

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).

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 was effective as of December 31, 2017 and settled in early 2018. 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 as of December 31, 2017, 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.

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):



	2018
Unpaid losses and allocated LAE, net of reinsurance:
Specialty
Property and transportation	$	1,117
Specialty casualty	3,884
Specialty financial	225
Other specialty	280
Total Specialty (excluding foreign reserves)	5,506

Other reserves
Reserves for foreign operations:
Neon Lloyd’s business	265
Other subsidiaries	268
A&E reserves	395
Unallocated LAE	335
Other	30
Total other reserves	1,293
Total reserves, net of reinsurance	6,799

Add back reinsurance recoverables, net of allowance	2,942
Gross unpaid losses and LAE included in the balance sheet	$	9,741

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, 2018
	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	503	$	487	$	505	$	498	$	494	$	494	$	491	$	491	$	491	$	490	$	2	138,248
2010			680		640		646		654		656		657		661		659		657		3		138,235
2011					816		803		819		833		844		856		853		850		6		139,345
2012							875		866		880		892		905		900		897		13		145,636
2013									894		881		884		890		890		890		18		141,293
2014											856		842		831		834		831		25		136,259
2015													831		794		789		789		36		134,484
2016															762		730		733		74		122,623
2017																	904		868		128		140,963
2018																			952		277		119,817
																	Total		$	7,957



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		% (a)
2009	$	219	$	333	$	397	$	440	$	462	$	476	$	480	$	481	$	484	$	485	99.0	%
2010			316		487		536		597		627		638		643		648		650		98.9	%
2011					367		670		732		777		810		828		836		839		98.7	%
2012							574		715		780		826		852		866		892		99.4	%
2013									440		710		769		814		843		859		96.5	%
2014											332		638		702		756		784		94.3	%
2015													361		587		675		717		90.9	%
2016															296		528		590		80.5	%
2017																	383		648		74.7	%
2018																			399		41.9	%
																	Total		$	6,863
									Unpaid losses and LAE — years 2009 through 2018										1,094
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																23
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	1,117



	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	46.2	%	28.7	%	8.6	%	6.5	%	3.7	%	2.0	%	1.4	%	0.4	%	0.5	%	0.2	%
Cumulative	46.2	%	74.9	%	83.5	%	90.0	%	93.7	%	95.7	%	97.1	%	97.5	%	98.0	%	98.2	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2018).



Specialty casualty
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2018
	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	888	$	887	$	864	$	844	$	833	$	828	$	829	$	824	$	820	$	811	$	34	56,985
2010			870		886		887		865		879		868		867		864		853		47		56,411
2011					847		845		833		842		827		822		819		811		52		53,385
2012							890		883		876		876		872		867		838		64		51,885
2013									956		938		933		928		933		913		99		51,620
2014											1,023		994		994		992		966		139		54,494
2015													1,068		1,033		1,031		1,030		185		55,468
2016															1,115		1,108		1,097		313		53,038
2017																	1,196		1,200		539		52,658
2018																			1,257		705		48,996
																	Total		$	9,776



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		% (a)
2009	$	170	$	381	$	510	$	591	$	653	$	691	$	715	$	731	$	740	$	748	92.2	%
2010			191		411		559		644		699		735		756		770		782		91.7	%
2011					172		380		517		606		655		687		707		725		89.4	%
2012							171		378		508		611		674		713		735		87.7	%
2013									180		388		545		656		717		754		82.6	%
2014											187		406		565		668		741		76.7	%
2015													176		406		569		692		67.2	%
2016															184		411		571		52.1	%
2017																	196		414		34.5	%
2018																			207		16.5	%
																	Total		$	6,369
									Unpaid losses and LAE — years 2009 through 2018										3,407
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																477
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	3,884



	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	19.1	%	23.2	%	16.2	%	11.1	%	7.0	%	4.3	%	2.6	%	1.9	%	1.3	%	1.0	%
Cumulative	19.1	%	42.3	%	58.5	%	69.6	%	76.6	%	80.9	%	83.5	%	85.4	%	86.7	%	87.7	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2018).



Specialty financial
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2018
	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	192	$	192	$	186	$	184	$	188	$	186	$	187	$	186	$	185	$	186	$	1	27,431
2010			138		145		132		132		135		133		130		127		126		1		21,922
2011					138		157		155		153		147		144		143		139		6		16,368
2012							163		163		151		139		137		135		132		6		21,064
2013									140		145		137		131		127		126		9		28,449
2014											146		157		156		153		147		9		29,411
2015													156		160		158		153		16		37,483
2016															179		184		187		24		44,820
2017																	212		215		34		46,921
2018																			212		79		36,606
																	Total		$	1,623



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018			% (a)
2009	$	112	$	145	$	157	$	166	$	171	$	181	$	185	$	186	$	186	$	185		99.5	%
2010			61		93		104		122		132		130		128		126		126			100.0	%
2011					58		111		115		123		130		131		131		132			95.0	%
2012							71		104		109		117		121		126		128			97.0	%
2013									70		100		107		113		117		117			92.9	%
2014											62		109		125		128		137			93.2	%
2015													72		110		129		133			86.9	%
2016															88		141		158			84.5	%
2017																	120		169			78.6	%
2018																			112			52.8	%
																	Total		$	1,397
									Unpaid losses and LAE — years 2009 through 2018										226
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																(1		)
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	225



	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	50.5	%	26.4	%	7.5	%	5.8	%	4.7	%	1.7	%	0.5	%	(0.1	%)	—	%	(0.5	%)
Cumulative	50.5	%	76.9	%	84.4	%	90.2	%	94.9	%	96.6	%	97.1	%	97.0	%	97.0	%	96.5	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2018).



Other specialty
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2018
	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims (a)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	41	$	41	$	41	$	40	$	37	$	37	$	36	$	38	$	33	$	32	$	6	—
2010			36		39		40		39		40		40		40		40		40		3		—
2011					39		43		42		43		43		44		44		43		3		—
2012							42		40		39		40		41		39		39		6		—
2013									46		47		46		47		50		53		2		—
2014											58		57		59		59		60		13		—
2015													59		60		63		66		8		—
2016															61		61		65		21		—
2017																	63		65		36		—
2018																			86		62		—
																	Total		$	549



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		% (b)
2009	$	8	$	12	$	15	$	19	$	22	$	22	$	24	$	26	$	25	$	27	84.4	%
2010			8		14		21		24		27		33		35		36		37		92.5	%
2011					12		20		25		28		34		36		37		38		88.4	%
2012							8		17		21		25		28		30		30		76.9	%
2013									7		16		22		34		37		44		83.0	%
2014											13		21		30		36		43		71.7	%
2015													10		26		31		50		75.8	%
2016															9		19		31		47.7	%
2017																	10		19		29.2	%
2018																			12		14.0	%
																	Total		$	331
									Unpaid losses and LAE — years 2009 through 2018										218
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																62
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	280



	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	18.7	%	17.0	%	12.6	%	14.1	%	9.3	%	7.6	%	3.4	%	3.7	%	(0.3	%)	6.3	%
Cumulative	18.7	%	35.7	%	48.3	%	62.4	%	71.7	%	79.3	%	82.7	%	86.4	%	86.1	%	92.4	%


(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, 2018).



Total Specialty Group
(Dollars in Millions)

	Incurred Claims and Allocated LAE, Net of Reinsurance																				As of December 31, 2018
	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)																				Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	1,624	$	1,607	$	1,596	$	1,566	$	1,552	$	1,545	$	1,543	$	1,539	$	1,529	$	1,519	$	43	222,664
2010			1,724		1,710		1,705		1,690		1,710		1,698		1,698		1,690		1,676		54		216,568
2011					1,840		1,848		1,849		1,871		1,861		1,866		1,859		1,843		67		209,098
2012							1,970		1,952		1,946		1,947		1,955		1,941		1,906		89		218,585
2013									2,036		2,011		2,000		1,996		2,000		1,982		128		221,362
2014											2,083		2,050		2,040		2,038		2,004		186		220,164
2015													2,114		2,047		2,041		2,038		245		227,435
2016															2,117		2,083		2,082		432		220,481
2017																	2,375		2,348		737		240,542
2018																			2,507		1,123		205,419
																	Total		$	19,905



	Cumulative Paid Claims and Allocated LAE, Net of Reinsurance
Accident Year	For the Years Ended (2009–2017 is Supplementary Information and Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		% (a)
2009	$	509	$	871	$	1,079	$	1,216	$	1,308	$	1,370	$	1,404	$	1,424	$	1,435	$	1,445	95.1	%
2010			576		1,005		1,220		1,387		1,485		1,536		1,562		1,580		1,595		95.2	%
2011					609		1,181		1,389		1,534		1,629		1,682		1,711		1,734		94.1	%
2012							824		1,214		1,418		1,579		1,675		1,735		1,785		93.7	%
2013									697		1,214		1,443		1,617		1,714		1,774		89.5	%
2014											594		1,174		1,422		1,588		1,705		85.1	%
2015													619		1,129		1,404		1,592		78.1	%
2016															577		1,099		1,350		64.8	%
2017																	709		1,250		53.2	%
2018																			730		29.1	%
																	Total		$	14,960
									Unpaid losses and LAE — years 2009 through 2018										4,945
			Unpaid losses and LAE — 11th year and prior (excluding unallocated LAE)																561
			Unpaid losses and LAE, net of reinsurance (excluding unallocated LAE)																$	5,506



	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	32.6	%	25.5	%	12.2	%	8.8	%	5.5	%	3.2	%	2.0	%	1.2	%	0.8	%	0.7	%
Cumulative	32.6	%	58.1	%	70.3	%	79.1	%	84.6	%	87.8	%	89.8	%	91.0	%	91.8	%	92.5	%


(a)	Represents the cumulative percentage paid of incurred claims and allocated LAE (net of reinsurance, as estimated at December 31, 2018).

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 $45 million at December 31, 2018 and $39 million at December 31, 2017, 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 $47 million investment in FHLB capital stock at December 31, 2018 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 2018, GALIC refinanced the terms on a $40 million advance to extend the maturity and the FHLB advanced GALIC $225 million, increasing the total amount advanced to $1.10 billion (included in annuity benefits accumulated) at December 31, 2018. In 2017, GALIC refinanced the terms on advances totaling $831 million, which lowered the weighted average spread over LIBOR. Interest rates under the various funding agreements on the advances range from 0.15% to 0.24% over LIBOR (average rate of 2.68% at December 31, 2018). While these advances must be repaid between 2019 and 2021 ($445 million in 2019, $40 million in 2020 and $611 million in 2021), 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 $1.28 billion (included in available for sale fixed maturity securities) at December 31, 2018. Interest credited on the funding agreements, which is included in annuity benefits, was $20 million in 2018, $14 million in 2017 and $8 million in 2016.

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
	2018		2017		2016		2018		2017
Property and casualty companies	$	546	$	484	$	461	$	2,867	$	2,729
Life insurance companies	802		286		167		2,701		2,132

In the fourth quarter of 2018, GALIC, AFG’s primary annuity subsidiary, entered into a reinsurance treaty with Hannover Life Reassurance Company of America that transfers the risk of certain surrender activity in GALIC’s fixed-indexed annuity business. This treaty meets the statutory risk transfer rules and resulted in a $510 million increase in statutory surplus (through an after-tax reserve credit), which is reflected in the life insurance companies capital and surplus in the table above. Under GAAP, this transaction does not meet the GAAP insurance risk transfer criteria and did not have a material impact on AFG’s financial statements.

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, 2018 and 2017, 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, 2018 or 2017.

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 2019 from its insurance subsidiaries without seeking regulatory approval is $1.30 billion. Additional amounts of dividends require regulatory approval.

Holding Company Dividends AFG declared and paid common stock dividends to shareholders totaling $397 million, $421 million and $187 million in 2018, 2017 and 2016, 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, 2018, AFG could pay dividends of nearly $2 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.



	2018			2017			2016
Direct premiums written	$	6,626		$	6,310		$	5,858
Reinsurance assumed	214			192			123
Reinsurance ceded	(1,817		)	(1,751		)	(1,595		)
Net written premiums	$	5,023		$	4,751		$	4,386

Direct premiums earned	$	6,472		$	6,112		$	5,745
Reinsurance assumed	204			157			118
Reinsurance ceded	(1,811		)	(1,690		)	(1,535		)
Net earned premiums	$	4,865		$	4,579		$	4,328

Reinsurance recoveries	$	1,249		$	1,379		$	810

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 $104 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, 2018, 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 $7.69 billion of its $10.82 billion in face amount of life insurance at December 31, 2018 compared to $8.32 billion of its $12.05 billion in face amount of life insurance at December 31, 2017. Life written premiums ceded were $22 million, $28 million and $31 million for 2018, 2017 and 2016, respectively. Reinsurance recoveries on ceded life policies were $38 million, $35 million and $41 million for 2018, 2017 and 2016, 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 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):



	2018		2017
Expected death and annuitization	$	229	$	228
Guaranteed withdrawal benefits	472		358
Accrued persistency and premium bonuses	1		3

Variable Annuities At December 31, 2018, 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 $35 million, compared to $15 million at December 31, 2017. Death benefits paid in excess of the variable annuity account balances were less than $1 million in each of the last three years ended December 31, 2018, 2017 and 2016.