Property Casualty Loss and Loss Expenses

We use actuarial methods, models and judgment to estimate, as of a financial statement date, the property casualty loss and loss expense reserves required to pay for and settle all outstanding insured claims, including incurred but not reported (IBNR) claims, as of that date. The actuarial estimate is subject to review and adjustment by an inter-departmental committee that includes actuarial, claims, underwriting, loss prevention and accounting management. This committee is familiar with relevant company and industry business, claims and underwriting trends, as well as general economic and legal trends that could affect future loss and loss expense payments. The amount we will actually have to pay for claims can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate.

Our reserving process takes into account known facts and interpretations of circumstances and factors including the type of claim, policy provisions pertaining to each claim, potential subrogation or salvage recoverable, large loss activity and trends, new business activity, judicial decisions, economic conditions, changes in law and regulation and product and underwriting changes. There have been no significant changes in methodologies and assumptions used in calculating loss and loss expense reserves for all years presented. There were no material additional premiums or return premiums accrued for as a result of prior-year effects.

Our field claims representatives establish case reserves when claims are reported to provide for our unpaid loss and loss expense obligation associated with individual claims.

For events designated as natural catastrophes, we calculate IBNR reserves directly as a result of estimated claim counts and estimated average dollar amount per claim for each event. Once individual case reserves are established for a catastrophe event, we reduce the IBNR reserves.

Our actuarial staff uses generally accepted actuarial methods and models to derive ultimate loss and IBNR reserve estimates. The time interval between a claims occurrence and its settlement is one of the crucial attributes when estimating ultimate losses and IBNR reserves.

Due to the uncertainties inherent with loss reserves, our ultimate loss experience could prove better or worse than what our carried reserves reflect. To the extent that reserves are inadequate and are required to be increased, the amount of the increase is a charge in that period, raising our loss and loss expense ratio and reducing earnings. To the extent that reserves are redundant and are required to be released, the amount of the release is a credit in that period, reducing our loss and loss expense ratio and increasing earnings.

This table summarizes activity for our consolidated property casualty loss and loss expense reserves:



(Dollars in millions)	Years ended December 31,
	2016			2015			2014
Gross loss and loss expense reserves, January 1	$	4,660		$	4,438		$	4,241
Less reinsurance recoverable	281			282			299
Net loss and loss expense reserves, January 1	4,379			4,156			3,942
Net incurred loss and loss expenses related to:
Current accident year	3,029			2,756			2,725
Prior accident years	(168		)	(184		)	(98		)
Total incurred	2,861			2,572			2,627
Net paid loss and loss expenses related to:
Current accident year	1,260			1,152			1,212
Prior accident years	1,243			1,197			1,201
Total paid	2,503			2,349			2,413

Net loss and loss expense reserves, December 31	4,737			4,379			4,156
Plus reinsurance recoverable	298			281			282
Gross loss and loss expense reserves, December 31	$	5,035		$	4,660		$	4,438

The reserve for loss and loss expense in the consolidated balance sheets also included $50 million, $58 million and $47 million, respectively, for certain life and health loss and loss expense reserves. Additional disclosures for reserves related to these health claims are not material.

During 2016, we experienced $168 million of favorable development on prior accident years including $129 million of favorable development in commercial lines, $4 million of favorable development in personal lines, $34 million of favorable development in excess and surplus lines and $1 million of favorable development in our reinsurance assumed operations. We recognized favorable development of $69 million for the workers' compensation line,

$29 million for the commercial property line, $20 million for the commercial casualty line and $42 million for the other commercial lines due to reduced uncertainty of prior accident year loss and loss expense for these lines. This illustrates the potential for revisions inherent in estimating reserves, especially for long-tail lines such as workers’ compensation. We recognized unfavorable reserve development of $31 million for the commercial auto line and

$18 million for the personal auto line. Both lines developed unfavorable due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.

During 2015, we experienced $184 million of favorable development on prior accident years including $154 million of favorable development in commercial lines, $5 million of adverse development in personal lines and $35 million of favorable development in excess and surplus lines. Favorable development in 2015 was $86 million more than in 2014, due primarily to reduced uncertainty of prior accident year loss and loss expense. This illustrates the potential for revisions inherent in estimating reserves, especially for long-tail lines such as commercial casualty and workers’ compensation. We recognized favorable development of $93 million for the workers' compensation line, largely due to more favorable 2015 workers' compensation trends for estimated payments to be made in future calendar years that were down slightly from 2014. We recognized favorable development of $63 million for the commercial casualty line. Development for products liability was favorable for most prior accident years and development of prior years for commercial umbrella coverage improved slightly better than expected. Therefore, estimated ultimate losses were lowered. Our commercial auto line experienced $31 million of adverse development due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled. We believe we were slow to recognize some of the higher loss cost effects.

During 2014, we experienced $98 million of favorable development on prior accident years including $57 million of favorable development in commercial lines, $12 million of favorable development in personal lines and

$29 million of favorable development in excess and surplus lines. Favorable development in 2014 was $49 million less than in 2013, largely due to the change in prior accident years before catastrophes. We recognized favorable reserve development of $51 million for the workers’ compensation line, $34 million for the commercial property line and $14 million for the homeowner line, due to reduced uncertainty of prior accident year loss and loss expense for these lines. Our commercial casualty line experienced $5 million of adverse development due to an increase in its paid loss and loss expenses for cumulative accident years three or more years old, resulting in an increase recognized in estimates for IBNR losses and loss expenses for all prior accident years in total compared to 2013 and 2012. Our commercial auto line developed unfavorably by $39 million during 2014 due to higher loss cost effects in recent accident years, resulting in an increase of our reserve estimate for claims that have not yet been settled.

Included in our lines of business are asbestos and environmental claims. We carried $85 million of net loss and loss expense reserves for asbestos and environmental claims and $45 million of reserves for mold claims at December 31, 2016, compared with $84 million and $45 million, respectively, at December 31, 2015. The asbestos and environmental claims amounts for each respective year constituted 1.8 percent and 1.9 percent of total net loss and loss expense reserves at these year-end dates.

We believe our exposure to asbestos and environmental claims is limited, largely because our reinsurance retention was $500,000 or below prior to 1987. We also were predominantly a personal lines company in the 1960s and 1970s. During the 1980s and early 1990s, commercial lines grew as a percentage of our overall business and our exposure to asbestos and environmental claims grew accordingly. Over that period, we included an asbestos and environmental exclusion in almost all policies or endorsed the exclusion to the policies. We have not engaged in any mergers or acquisitions through which such a liability could have been assumed. We continue to monitor our claims for evidence of material exposure to other mass tort classes such as silicosis, but we have found no such credible evidence to date.

The following table provides a reconciliation of the property casualty incurred losses and allocated loss adjustment expenses (ALAE) development and paid losses and ALAE development information at December 31, 2016.



(Dollars in millions)	Cumulative incurred losses and ALAE as reported within the triangles, net of reinsurance		Cumulative paid losses and ALAE as reported within the triangles, net of reinsurance		Liabilities for loss and ALAE for accident years not presented in the triangles, net of reinsurance		Total liabilities for loss and ALAE, net of reinsurance		Reinsurance recoverable on unpaid losses		Total liabilities for gross loss and loss expense reserves




Commercial casualty	$	4,160	$	2,421	$	81	$	1,820	$	137	$	1,957
Workers' compensation	2,370		1,686		242		926		75		1,001
Commercial auto	1,768		1,264		12		516		5		521
Commercial property	2,187		1,910		11		288		18		306
Personal auto	1,633		1,388		4		249		31		280
Homeowner	1,452		1,322		2		132		2		134
Excess and surplus	366		144		1		223		6		229
Other short-duration insurance lines											342
Total liabilities for loss and ALAE reserves											4,770
Unallocated loss adjustment expense reserves											265
Gross loss and loss expense reserves											$	5,035

For all lines of business, the claim counts reported are primarily measured by insurance coverages that are triggered when a loss occurs and a reserve is established. For this purpose, coverages are defined as unique combinations of certain attributes such as line of business and cause of loss. Claims that are opened and closed without payment are included in the reported claim counts. Claim counts are presented on a direct basis only and do not reflect any assumed or ceded reinsurance.

In the following tables, commercial casualty and workers' compensation each disclose 10 accident years of loss and ALAE reserves and eight accident years of the cumulative number of reported claims. In 2009, we refined our claim count logic such that the definition of an open claim, a closed claim and a claim that closes without payment was uniform amongst all of our systems, including legacy systems. Therefore, consistent definitions are only available for accident year 2009 and forward. We will increase the commercial casualty and workers’ compensation cumulative number of reported claims by one year in future periods, not to exceed 10 years. Commercial auto, commercial property, personal auto and homeowner each disclose five accident years of loss and ALAE reserves and cumulative number of reported claims as each of these lines have five year cumulative average annual percentage payouts in excess of 95 percent. The excess and surplus lines began operations in 2008 with earned premiums and loss and ALAE reserves being immaterial prior to 2011. Accordingly, we initially disclose six accident years of loss and ALAE reserves and cumulative number of reported claims for the excess and surplus lines, and will disclose additional accident years, not to exceed 10 years.

Commercial Casualty

The following table shows the commercial casualty incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:



(Dollars in millions, reported claims in thousands)																					As of December 31, 2016
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses		Cumulative number of reported claims
	Years ended December 31,
Accident	2007		2008		2009		2010		2011		2012		2013		2014		2015
Year	Unaudited																		2016
2007	$	509	$	447	$	412	$	379	$	352	$	334	$	328	$	338	$	333	$	341		$	5	—
2008			516		458		409		387		362		359		357		357		355			10		—
2009					484		409		412		360		370		365		357		357			21		20
2010							495		394		378		349		347		348		349			31		20
2011									466		404		377		377		375		380			37		19
2012											466		414		417		394		394			48		18
2013													448		443		431		416			96		19
2014															503		496		479			128		20
2015																	533		526			225		19
2016																			563			337		15
Total																			$	4,160

Cumulative paid losses and ALAE, net of reinsurance
2007	$	29	$	92	$	145	$	200	$	248	$	275	$	290	309		$	314	$	324
2008			31		93		158		212		262		293		315		325		331
2009					27		75		151		213		267		295		310		322
2010							33		92		159		203		256		285		300
2011									27		93		149		227		266		298
2012											27		88		170		232		288
2013													35		90		159		232
2014															34		97		172
2015																	38		108
2016																			46
Total																			2,421
All outstanding liabilities before 2007, net of reinsurance																			81
Liabilities for loss and ALAE, net of reinsurance																			$	1,820

The following table shows the average annual percentage payout of incurred losses for the commercial casualty line of business:



Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years	1	2	3	4	5	6	7	8	9	10
Average annual percentage payout	8.0%	15.4%	17.7%	16.5%	13.8%	8.3%	4.7%	4.0%	1.5%	2.9%

Workers’ Compensation

The following table shows the workers’ compensation incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:



(Dollars in millions, reported claims in thousands)																					As of December 31, 2016
Incurred losses and ALAE, net of reinsurance																						Total of incurred but not reported liabilities plus expected development on reported losses		Cumulative number of reported claims
	Years ended December 31,
Accident	2007		2008		2009		2010		2011		2012		2013		2014		2015
Year			Unaudited																2016
2007	$	286	$	281	$	287	$	286	$	277	$	279	$	280	$	277	277		$	275		$	28	—
2008			298		305		310		302		299		299		297		296		296			31		—
2009					307		278		263		238		238		235		234		234			22		27
2010							283		274		248		242		240		239		240			26		26
2011									284		251		246		242		239		236			26		24
2012											265		245		234		220		213			29		21
2013													264		246		221		212			34		20
2014															261		233		214			48		19
2015																	246		220			83		17
2016																			230			106		14
Total																			$	2,370

Cumulative paid losses and ALAE, net of reinsurance
2007	$	67	$	145	$	185	$	206	$	219	$	226	$	230	$	233	$	237	$	238
2008			72		155		195		217		233		242		247		251		254
2009					65		132		163		179		188		193		198		201
2010							67		134		164		181		192		198		202
2011									65		131		161		177		186		190
2012											62		121		147		162		171
2013													61		119		144		157
2014															56		110		134
2015																	47		93
2016																			46
Total																			1,686
All outstanding liabilities before 2007, net of reinsurance																			242
Liabilities for loss and ALAE, net of reinsurance																			$	926

The following table shows the average annual percentage payout of incurred losses for the workers’ compensation line of business:



Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years	1	2	3	4	5	6	7	8	9	10
Average annual percentage payout	25.7%	26.9%	12.7%	7.1%	4.4%	2.4%	1.6%	1.4%	1.2%	0.5%

Commercial Auto

The following table shows the commercial auto incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:



(Dollars in millions, reported claims in thousands)												As of December 31, 2016
Incurred losses and ALAE, net of reinsurance													Total of incurred but not reported liabilities plus expected development on reported losses		Cumulative number of reported claims
	Years ended December 31,
Accident		2012		2013		2014		2015
Year		Unaudited								2016
2012		$	275	$	273	$	285	$	288	$	294		$	2	43
2013				292		305		315		322			9		46
2014						333		346		351			14		51
2015								374		384			38		51
2016										417			81		49
Total										$	1,768

Cumulative paid losses and ALAE, net of reinsurance
2012		$	129	$	184	$	222	$	258	$	278
2013				141		199		246		285
2014						159		223		273
2015								173		244
2016										184
Total										1,264
All outstanding liabilities before 2012, net of reinsurance										12
Liabilities for loss and ALAE, net of reinsurance										$	516

The following table shows the average annual percentage payout of incurred losses for the commercial auto line of business. Commercial auto includes both physical damage and liability losses. A majority of the incurred losses paid after year 2 are the result of liability losses.



Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years	1	2	3	4	5
Average annual percentage payout	44.4%	18.4%	13.9%	12.2%	6.9%

Commercial Property

The following table shows the commercial property incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:



(Dollars in millions, reported claims in thousands)												As of December 31, 2016
Incurred losses and ALAE, net of reinsurance													Total of incurred but not reported liabilities plus expected development on reported losses		Cumulative number of reported claims
	Years ended December 31,
Accident		2012		2013		2014		2015
Year		Unaudited								2016
2012		$	403	$	389	$	388	$	383	$	386		$	—	16
2013				389		359		352		356			2		14
2014						452		444		441			—		17
2015								454		414			5		16
2016										590			38		16
Total										$	2,187

Cumulative paid losses and ALAE, net of reinsurance
2012		$	255	$	356	$	376	$	380	$	383
2013				227		330		344		349
2014						297		412		432
2015								279		388
2016										358
Total										1,910
All outstanding liabilities before 2012, net of reinsurance										11
Liabilities for loss and ALAE, net of reinsurance										$	288

The following table shows the average annual percentage payout of incurred losses for the commercial property line of business:



Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years	1	2	3	4	5
Average annual percentage payout	65.0%	26.8%	4.6%	1.2%	0.9%

Personal Auto

The following table shows the personal auto incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:



(Dollars in millions, reported claims in thousands)												As of December 31, 2016
Incurred losses and ALAE, net of reinsurance													Total of incurred but not reported liabilities plus expected development on reported losses		Cumulative number of reported claims
	Years ended December 31,
Accident		2012		2013		2014		2015
Year		Unaudited								2016
2012		$	260	$	265	$	269	$	270	$	271		$	—	89
2013				280		280		293		298			—		96
2014						317		317		325			—		104
2015								343		356			12		108
2016										383			38		104
Total										$	1,633

Cumulative paid losses and ALAE, net of reinsurance
2012		$	174	$	223	$	250	$	262	$	268
2013				190		245		272		287
2014						210		267		298
2015								229		292
2016										243
Total										1,388
All outstanding liabilities before 2012, net of reinsurance										4
Liabilities for loss and ALAE, net of reinsurance										$	249

The following table shows the average annual percentage payout of incurred losses for the personal auto line of business. Personal auto includes both physical damage and liability losses. A majority of the incurred losses paid after year 2 are the result of liability losses.



Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years	1	2	3	4	5
Average annual percentage payout	64.0%	17.9%	9.6%	4.8%	2.0%

Homeowner

The following table shows the homeowner incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:



(Dollars in millions, reported claims in thousands)												As of December 31, 2016
Incurred losses and ALAE, net of reinsurance													Total of incurred but not reported liabilities plus expected development on reported losses		Cumulative number of reported claims
	Years ended December 31,
Accident		2012		2013		2014		2015
Year		Unaudited								2016
2012		$	344	$	330	$	328	$	330	$	329		$	—	33
2013				252		246		247		247			—		25
2014						297		283		286			—		26
2015								284		275			3		23
2016										315			29		21
Total										$	1,452

Cumulative paid losses and ALAE, net of reinsurance
2012		$	256	$	317	$	324	$	328	$	329
2013				180		236		242		244
2014						224		273		281
2015								203		260
2016										208
Total										1,322
All outstanding liabilities before 2012, net of reinsurance										2
Liabilities for loss and ALAE, net of reinsurance										$	132

The following table shows the average annual percentage payout of incurred losses for the homeowner line of business:



Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years	1	2	3	4	5
Average annual percentage payout	73.8%	19.7%	2.6%	1.0%	0.3%

Excess and Surplus Lines

The following table shows the excess and surplus incurred and paid losses and ALAE development by accident year. The table also shows the IBNR reserves plus expected development on reported losses and claim frequency:



(Dollars in millions, reported claims in thousands)														As of December 31, 2016
Incurred losses and ALAE, net of reinsurance															Total of incurred but not reported liabilities plus expected development on reported losses		Cumulative number of reported claims
	Years ended December 31,
Accident		2011		2012		2013		2014		2015
Year		Unaudited										2016
2011		$	48	$	47	$	44	$	38	$	36	$	35		$	—	1
2012				67		56		49		40		37			2		1
2013						74		64		54		45			9		2
2014								95		82		75			26		2
2015										96		81			40		2
2016												93			54		2
Total												$	366

Cumulative paid losses and ALAE, net of reinsurance
2011		$	8	$	14	$	23	$	27	$	30	$	32
2012				9		15		19		25		29
2013						7		12		20		27
2014								9		17		27
2015										8		19
2016												10
Total												144
All outstanding liabilities before 2011, net of reinsurance												1
Liabilities for loss and ALAE, net of reinsurance												$	223

The following table shows the average annual percentage payout of incurred losses for the excess and surplus lines insurance segment. Excess and surplus lines consist mostly of commercial casualty and commercial property coverages. A majority of the incurred losses paid after year 2 are the result of commercial casualty losses.



Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited)
Years	1	2	3	4	5	6
Average annual percentage payout	15.9%	13.5%	17.4%	13.5%	9.9%	7.4%