Reserves for Losses and Loss Expenses

The table below provides a reconciliation of the beginning and ending reserve balances:



(In thousands)	2015			2014			2013
Net reserves at beginning of year	$	8,970,641		$	8,683,797		$	8,411,851
Net provision for losses and loss expenses:
Claims occuring during the current year(1)	3,653,561			3,495,825			3,221,393
Decrease in estimates for claims occurring in prior years(2)(3)	(46,713		)	(75,764		)	(78,810		)
Loss reserve discount accretion(4)	49,422			70,506			54,441
Total	3,656,270			3,490,567			3,197,024
Net payments for claims:
Current year	914,637			898,944			822,787
Prior year	2,342,378			2,216,283			2,055,284
Total	3,257,015			3,115,227			2,878,071
Foreign currency translation	(125,024		)	(88,496		)	(47,007		)
Net reserves at end of year	9,244,872			8,970,641			8,683,797
Ceded reserve at end of year	1,424,278			1,399,060			1,397,144
Gross reserves at end of year	$	10,669,150		$	10,369,701		$	10,080,941

_______________________________________


(1)	Claims occurring during the current year are net of loss reserve discounts of $20,357,000, $21,306,000, and $22,680,000 in 2015, 2014 and 2013, respectively.


(2)	The decrease in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $64,971,000, $116,866,000 and $77,430,000 in 2015, 2014 and 2013, respectively.


(3)	For certain retrospectively rated insurance polices and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable reserve development, net of additional and return premiums, was $63 million, $85 million and $98 million in 2015, 2014 and 2013, respectively.


(4)	In 2014, the Company entered into a commutation agreement that resulted in a reduction in prior year workers' compensation reserves of $30 million on an undiscounted basis and $12 million on a discounted basis.

Favorable prior year development (net of additional and return premiums) was $63 million in 2015.

Insurance-Domestic - Reserves for the Insurance-Domestic segment developed favorably by $47 million in 2015. The favorable development was primarily related to workers' compensation and other liability business, and was partially offset by unfavorable development for commercial automobile liability business.

For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2006. In 2015, reported workers' compensation losses were below our expectations for many of our operating units. In addition, overall loss frequency and severity trends emerged better than the assumptions underlying our previous reserve estimates. The long term trend of declining workers' compensation claim frequency continued in 2015. The improvement is attributable to better workplace safety and to benign medical severity trends as we continue to invest in medical case management services and higher usage of preferred provider networks.

For other liability business, favorable development was concentrated in accident years 2007 through 2013. The favorable development was primarily related to our excess and surplus lines casualty business that has benefited from a persistent improvement in claim frequency trends over the past several years.

For commercial automobile business, adverse development was primarily related to large losses for long-haul trucking business and to accident years 2011 through 2014. The higher loss cost trends for the commercial automobile industry are attributable, in part, to the increase in miles driven as the economy has improved and fuel prices have declined over the past several years.

Reinsurance-Global - Reserves for the Reinsurance-Global segment developed favorably by $11 million in 2015. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2005 through 2013. Loss reserves developed favorably for umbrella business and for other liability coverage for contractors.

Insurance-International - Reserves for the Insurance-International segment developed favorably by $5 million in 2015. The favorable development was related primarily to commercial property. The favorable commercial property development was attributable to accident years 2012 through 2014 and was driven by favorable frequency and severity trends on property business written in Lloyd's. The favorable property development was partially offset by unfavorable development for professional indemnity business in the U.K., primarily for accident years 2006 through 2013.

Favorable prior year development (net of additional and return premiums) was $85 million in 2014.

For the Insurance-Domestic segment, favorable development in 2014 of $92 million was driven primarily by other liability business for accident years 2006 through 2010, primarily related to our excess and surplus lines casualty business. Reported losses during these years continued to be below our initial expectations at the time the business was written, largely as a result of persistent improvement in claim frequency trends (i.e., number of reported claims per unit of exposure). As these accident years have matured, the weighting of actuarial methods has shifted from methods based on initial expected losses to methods based on actual reported losses. We believe the favorable claim frequency trends we have seen during this time period are due to changes in the mix of business written and to the general slowdown in the economy. Commercial automobile reported unfavorable development primarily as a result of large losses for long-haul trucking business in 2012 and 2013.

For the Reinsurance-Global segment, favorable reserve development in 2014 of $16 million was driven primarily by assumed professional liability excess of loss and umbrella treaty business, as well as direct facultative business. This was partially offset by adverse development on brokerage facultative business caused by completed operations losses associated with construction projects in accident years prior to 2009.

For the Insurance-International segment, adverse reserve development in 2014 of $23 million was driven primarily by unexpected large losses from accident years 2009-2012 in the professional indemnity line of business in the United Kingdom.

Favorable prior year reserve development (net of additional and return premiums) was $98 million in 2013.

Favorable development in 2013 was primarily attributable to accident years 2006 through 2012 and included favorable development of $39 million for other liability business, $32 million for reinsurance assumed liability business, $22 million for workers’ compensation, $18 million for commercial property and $24 million for other lines of business. The favorable development in 2013 was largely driven by loss cost trends, which were more favorable than originally anticipated. In particular, loss frequency trends have been more favorable than expected for excess & surplus lines casualty business, workers' compensation and excess of loss professional and other liability business.

The 2013 favorable development was partially offset by unfavorable development of $23 million for commercial automobile business and $14 million for products liability business. Commercial automobile development was driven by large losses for long-haul trucking business in 2011 and 2012. Product liability development stemmed from completed operations losses associated with construction projects in accident years prior to 2009.

Environmental and Asbestos — To date, known environmental and asbestos claims have not had a material impact on the Company’s operations, because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental or asbestos exposures prior to 1986 when an absolute exclusion was incorporated into standard policy language.

The Company’s net reserves for losses and loss expenses relating to asbestos and environmental claims was $33 million at December 31, 2015 and $36 million at December 31, 2014. The Company’s gross reserves for losses and loss expenses relating to asbestos and environmental claims were $51 million and $56 million at December 31, 2015 and 2014, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims decreased approximately $2 million in 2015 and increased by approximately $4 million and $5 million in 2014 and 2013, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $2 million in 2015, $3 million in 2014 and $3 million in 2013. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.

Discounting — The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $2,308 million and $2,187 million at December 31, 2015 and December 31, 2014, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $699 million and $746 million at December 31, 2015 and December 31, 2014, respectively. At December 31, 2015, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.9%.

Substantially all of discounted workers’ compensation reserves (98% of total discounted reserves at December 31, 2015) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience.

The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 2% of total discounted reserves at December 31, 2015), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware.