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 resulting in losses incurred related to direct premiums, we calculate IBNR reserves directly as a result of an 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,
	2017			2016			2015
Gross loss and loss expense reserves, January 1	$	5,035		$	4,660		$	4,438
Less reinsurance recoverable	298			281			282
Net loss and loss expense reserves, January 1	4,737			4,379			4,156
Net incurred loss and loss expenses related to:
Current accident year	3,257			3,029			2,756
Prior accident years	(119		)	(168		)	(184		)
Total incurred	3,138			2,861			2,572
Net paid loss and loss expenses related to:
Current accident year	1,404			1,260			1,152
Prior accident years	1,439			1,243			1,197
Total paid	2,843			2,503			2,349

Net loss and loss expense reserves, December 31	5,032			4,737			4,379
Plus reinsurance recoverable	187			298			281
Gross loss and loss expense reserves, December 31	$	5,219		$	5,035		$	4,660

In 2017, 2016 and 2015, the reserve for loss and loss expense in the consolidated balance sheets also included $54 million, $50 million and $58 million, respectively, for certain life and health loss and loss expense reserves. Additional disclosures for reserves related to these health claims are not material and therefore not provided.

During 2017, we experienced $119 million of favorable development on prior accident years including $73 million of favorable development in commercial lines, $14 million of favorable development in personal lines, $29 million of favorable development in excess and surplus lines and $3 million of favorable development in our reinsurance assumed operations. We recognized favorable development of $54 million for the workers' compensation line,

$33 million for the commercial property line and $30 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 $33 million for the commercial auto line 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. Commercial casualty developed unfavorably by $11 million due to paid losses or re-estimates of case reserves at higher than expected levels.

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 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. 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. 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.

Included in our lines of business are asbestos and environmental claims. We carried $84 million and $85 million of net loss and loss expense reserves for asbestos and environmental claims at December 31, 2017 and 2016, respectively. The asbestos and environmental claims amounts for each respective year constituted less than

2.0 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 but 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, 2017.



(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	$	4,434	$	2,573	$	83	$	1,944	$	43	$	1,987
Workers' compensation	2,259		1,598		267		928		64		992
Commercial auto	1,955		1,380		16		591		4		595
Commercial property	2,353		2,095		12		270		7		277
Personal auto	1,774		1,503		5		276		31		307
Homeowner	1,466		1,358		3		111		3		114
Excess and surplus	441		195		94		340		3		343
Other lines											315
Total liabilities for loss and ALAE reserves											4,930
Unallocated loss adjustment expense reserves											289
Gross loss and loss expense reserves											$	5,219

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 nine 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 of approximately 95 percent or higher. The excess and surplus lines began operations in 2008 with earned premiums and loss and ALAE reserves being immaterial prior to 2011. Accordingly, we disclosed seven 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 in subsequent annual filings, 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, 2017
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	2008		2009		2010		2011		2012		2013		2014		2015		2016
Year	Unaudited																		2017
2008	$	516	$	458	$	409	$	387	$	362	$	359	$	357	$	357	$	355	$	366		$	11	—
2009			484		409		412		360		370		365		357		357		353			10		20
2010					495		394		378		349		347		348		349		343			19		20
2011							466		404		377		377		375		380		366			17		19
2012									466		414		417		394		394		404			43		18
2013											448		443		431		416		413			64		19
2014													503		496		479		476			82		21
2015															533		526		529			170		20
2016																	563		574			247		19
2017																			610			381		15
Total																			$	4,434

Cumulative paid losses and ALAE, net of reinsurance
2008	$	31	$	93	$	158	$	212	$	262	$	293	$	315	$	325	$	331	$	339
2009			27		75		151		213		267		295		310		322		328
2010					33		92		159		203		256		285		300		314
2011							27		93		149		227		266		298		315
2012									27		88		170		232		288		330
2013											35		90		159		232		286
2014													34		97		172		287
2015															38		108		200
2016																	46		126
2017																			48
Total																			2,573
All outstanding liabilities before 2008, net of reinsurance																			83
Liabilities for loss and ALAE, net of reinsurance																			$	1,944

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	7.9%	14.9%	18.0%	17.7%	13.7%	8.8%	4.8%	3.5%	1.6%	1.8%

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, 2017
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	2008		2009		2010		2011		2012		2013		2014		2015		2016
Year	Unaudited																		2017
2008	$	298	$	305	$	310	$	302	$	299	$	299	$	297	$	296	$	296	$	293		$	28	—
2009			307		278		263		238		238		235		234		234		232			18		27
2010					283		274		248		242		240		239		240		237			22		26
2011							284		251		246		242		239		236		231			22		24
2012									265		245		234		220		213		211			26		21
2013											264		246		221		212		208			28		20
2014													261		233		214		203			31		19
2015															246		220		208			60		17
2016																	230		218			72		16
2017																			218			89		13
Total																			$	2,259

Cumulative paid losses and ALAE, net of reinsurance
2008	$	72	$	155	$	195	$	217	$	233	$	242	$	247	$	251	$	254	$	256
2009			65		132		163		179		188		193		198		201		202
2010					67		134		164		181		192		198		202		204
2011							65		131		161		177		186		190		192
2012									62		121		147		162		171		175
2013											61		119		144		157		164
2014													56		110		134		148
2015															47		93		115
2016																	46		97
2017																			45
Total																			1,598
All outstanding liabilities before 2008, net of reinsurance																			267
Liabilities for loss and ALAE, net of reinsurance																			$	928

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	25.9%	26.9%	12.4%	7.0%	4.2%	2.4%	1.5%	1.4%	0.8%	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, 2017
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		2013		2014		2015		2016
Year		Unaudited								2017
2013		$	292	$	305	$	315	$	322	$	322		$	5	46
2014				333		346		351		358			8		51
2015						374		384		394			15		51
2016								417		430			36		53
2017										451			127		47
Total										$	1,955

Cumulative paid losses and ALAE, net of reinsurance
2013		$	141	$	199	$	246	$	285	$	307
2014				159		223		273		310
2015						173		244		303
2016								184		273
2017										187
Total										1,380
All outstanding liabilities before 2013, net of reinsurance										16
Liabilities for loss and ALAE, net of reinsurance										$	591

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	43.3%	18.7%	14.5%	11.2%	6.7%

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, 2017
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		2013		2014		2015		2016
Year		Unaudited								2017
2013		$	389	$	359	$	352	$	356	$	357		$	1	14
2014				452		444		441		442			2		17
2015						454		414		416			2		17
2016								590		551			7		17
2017										587			24		16
Total										$	2,353

Cumulative paid losses and ALAE, net of reinsurance
2013		$	227	$	330	$	344	$	349	$	352
2014				297		412		432		437
2015						279		388		407
2016								358		504
2017										395
Total										2,095
All outstanding liabilities before 2013, net of reinsurance										12
Liabilities for loss and ALAE, net of reinsurance										$	270

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	66.0%	26.9%	4.4%	1.1%	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, 2017
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		2013		2014		2015		2016
Year		Unaudited								2017
2013		$	280	$	280	$	293	$	298	$	298		$	—	96
2014				317		317		325		324			—		105
2015						343		356		356			—		108
2016								383		384			8		110
2017										412			55		102
Total										$	1,774

Cumulative paid losses and ALAE, net of reinsurance
2013		$	190	$	245	$	272	$	287	$	293
2014				210		267		298		313
2015						229		292		325
2016								243		316
2017										256
Total										1,503
All outstanding liabilities before 2013 net of reinsurance										5
Liabilities for loss and ALAE, net of reinsurance										$	276

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	63.7%	18.1%	9.4%	4.8%	1.9%

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, 2017
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		2013		2014		2015		2016
Year		Unaudited								2017
2013		$	252	$	246	$	247	$	247	$	246		$	—	25
2014				297		283		286		285			1		26
2015						284		275		275			1		24
2016								315		304			3		23
2017										356			8		24
Total										$	1,466

Cumulative paid losses and ALAE, net of reinsurance
2013		$	180	$	236	$	242	$	244	$	246
2014				224		273		281		283
2015						203		260		269
2016								208		283
2017										277
Total										1,358
All outstanding liabilities before 2013, net of reinsurance										3
Liabilities for loss and ALAE, net of reinsurance										$	111

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	74.4%	21.3%	3.0%	0.7%	0.4%

Excess and Surplus Lines

The following table shows the excess and surplus lines 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, 2017
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		2016
Year		Unaudited												2017
2011		$	48	$	47	$	44	$	38	$	36	$	35	$	35		$	1	1
2012				67		56		49		40		37		36			1		1
2013						74		64		54		45		42			4		2
2014								95		82		75		64			16		2
2015										96		81		73			22		2
2016												93		87			34		2
2017														104			64		2
Total														$	441

Cumulative paid losses and ALAE, net of reinsurance
2011		$	8	$	14	$	23	$	27	$	30	$	32	$	34
2012				9		15		19		25		29		31
2013						7		12		20		27		32
2014								9		17		27		37
2015										8		19		29
2016												10		21
2017														11
Total														195
All outstanding liabilities before 2011, net of reinsurance														94
Liabilities for loss and ALAE, net of reinsurance														$	340

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	7
Average annual percentage payout	16.0%	14.1%	17.5%	14.7%	10.7%	7.2%	1.1%