Reserves for Losses and Loss Adjustment Expenses

6 Months Ended

Jun. 30, 2020

Reserves for Losses and Loss Adjustment Expenses

The following table provides a reconciliation of reserves for losses and loss adjustment expenses (“LAE”):


	For the Six Months Ended June 30,
(in millions)	2020		2019
Net reserves beginning of the year	$	2,722.7	$	2,562.9
Net AIL reserves acquired	27.9		—

Add:
Losses and LAE incurred during current calendar year, net of reinsurance:
Current accident year	549.6		502.9
Prior accident years	4.5		19.8
Losses and LAE incurred during calendar year, net of reinsurance	554.1		522.7
Deduct:
Losses and LAE payments made during current calendar year, net of reinsurance:
Current accident year	125.3		89.8
Prior accident years	451.5		432.4
Losses and LAE payments made during current calendar year, net of reinsurance:	576.8		522.2
Change in participation interest ⁽¹⁾	33.0		(14.4)
Foreign exchange adjustments	(8.5)		(13.0)
Net reserves - end of period	2,752.4		2,536.0
Add:
Reinsurance recoverables on unpaid losses and LAE, end of period	2,463.9		2,199.7
Gross reserves - end of period	$	5,216.3	$	4,735.7

⁽¹⁾Amount represents the change in reserves due to changing our participation in Syndicates 1200 and 1910.

Reserves for losses and LAE represent the estimated indemnity cost and related adjustment expenses necessary to investigate and settle claims. Such estimates are based upon individual case estimates for reported claims, estimates from ceding companies for reinsurance assumed and actuarial estimates for losses that have been incurred but not yet reported to the insurer. Any change in probable ultimate liabilities is reflected in current operating results.

Underwriting results for the three and six months ended June 30, 2020 included net losses and loss adjustment expenses attributed to the COVID-19 pandemic of $17.4 million and $43.6 million, respectively, primarily resulting from contingency and property exposures in the Company’s International Operations and property exposures in its U.S. Operations. Property losses relate to sub-limited affirmative business interruption coverage, primarily in certain International markets, as well as expected costs associated with claims handling.

The impact from the unfavorable development of prior accident years’ loss and LAE reserves on each reporting segment is presented below:


	For the Six Months Ended June 30,
(in millions)	2020		2019
U.S. Operations	$	2.7	$	(9.1)
International Operations	1.1		27.2
Run-off Lines	0.7		1.7
Total unfavorable prior-year development	$	4.5	$	19.8

The following describes the primary factors behind each segment’s prior accident year reserve development for the six months ended June 30, 2020 and 2019:

Six months ended June 30, 2020:

•U.S. Operations: Unfavorable development in general liability, commercial auto liability and special property partially offset by favorable development in specialty related to our surety business unit.

•International Operations: Unfavorable development in general liability and surety lines offset by favorable development in special property and specialty.

•Run-off Lines: Unfavorable development in other run-off lines partially offset by favorable development in risk management workers compensation.

Six months ended June 30, 2019:

•U.S. Operations: Favorable development in general liability and surety lines, partially offset by unfavorable development in property and commercial multi-peril lines.

•International Operations: Unfavorable development was primarily related to certain liability, property and specialty lines. The liability charges included public utility business in our Bermuda casualty division, which we previously exited, and to a lesser extent our European and Syndicate 1200 operations. As it relates to Europe, the adverse development primarily related to certain cover-holders whose contracts were previously terminated. As it relates to Syndicate 1200, the adverse development related to businesses that we have previously exited or where aggressive remedial underwriting actions have been taken. The International Operations unfavorable development includes $26.4 million recognized during the second quarter of 2019. The timing of recognizing this unfavorable development was primarily due to obtaining additional information on several individual claims, including reports provided by outside counsel, audits of the underlying losses and recent jury awards. The result was an increase in the number of claims with the potential for underlying losses to reach our attachment point, particularly on aggregate treaty contracts within our Bermuda Operations. The second quarter 2019 unfavorable development was also attributable to the results of recent audits, underwriting reviews, and updated data from third party cover-holders, which included the identification of differences from original expectations with regard to the classes written, the distribution of writings by geography, and the rates charged by the cover-holders.

•Run-off Lines: Unfavorable development in other run-off lines, partially offset by favorable development in risk management workers compensation.

In the opinion of management, our reserves represent the best estimate of our ultimate liabilities, based on currently known facts, current law, current technology and reasonable assumptions where facts are not known. Due to the significant uncertainties and related management judgments, there can be no assurance that future favorable or unfavorable loss development, which may be material, will not occur.

The spread of COVID-19 and related economic shutdown has increased the uncertainty that is always present in our estimate of the ultimate cost of loss and settlement expense. Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of June 30, 2020. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite. The industry is experiencing new issues, including the temporary suspension of civil court cases in most states, the extension of certain statutes of limitations and the impact on our insureds from a significant reduction in economic activity. Our booked reserves include consideration of these factors, but legislative, regulatory or judicial actions could result in loss reserve deficiencies and reduce earnings in future periods.