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Claim and Claim Adjustment Expense Reserves
 12 Months Ended
Dec. 31, 2014
Insurance Loss Reserves [Abstract]  
Claim and Claim Adjustment Expense Reserves
Note F. Claim and Claim Adjustment Expense Reserves
The Company's property and casualty insurance claim and claim adjustment expense reserves represent the estimated amounts necessary to resolve all outstanding claims, including IBNR claims as of the reporting date. The Company's reserve projections are based primarily on detailed analysis of the facts in each case, the Company's experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions including inflation and public attitudes. All of these factors can affect the estimation of claim and claim adjustment expense reserves.
Establishing claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the cost of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably estimable than long-tail claims, such as workers' compensation, general liability and professional liability claims. Adjustments to prior year reserve estimates, if necessary, are reflected in the results of operations in the period that the need for such adjustments is determined. There can be no assurance that the Company's ultimate cost for insurance losses will not exceed current estimates.
Catastrophes are an inherent risk of the property and casualty insurance business and have contributed to material period-to-period fluctuations in the Company's results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $156 million, $169 million and $391 million for the years ended December 31, 2014, 2013 and 2012. Catastrophe losses in 2012 included Storm Sandy.
The table below provides a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the life company as of and for the years ended December 31, 2014, 2013 and 2012.
Reconciliation of Claim and Claim Adjustment Expense Reserves
As of and for the years ended December 31
 
 
 
 
 
(In millions)
2014
 
2013
 
2012
Reserves, beginning of year:
 
 
 
 
 
Gross
$
24,089

 
$
24,763

 
$
24,303

Ceded
4,972

 
5,126

 
5,020

Net reserves, beginning of year
19,117

 
19,637

 
19,283

Change in net reserves due to acquisition (disposition) of subsidiaries
(13
)
 
—

 
291

Net incurred claim and claim adjustment expenses:
 
 
 
 
 
Provision for insured events of current year
5,043

 
5,114

 
5,273

Decrease in provision for insured events of prior years
(36
)
 
(115
)
 
(182
)
Amortization of discount
161

 
154

 
145

Total net incurred (a)
5,168

 
5,153

 
5,236

Net payments attributable to:
 
 
 
 
 
Current year events
(945
)
 
(981
)
 
(988
)
Prior year events
(4,355
)
 
(4,588
)
 
(4,280
)
Total net payments
(5,300
)
 
(5,569
)
 
(5,268
)
Foreign currency translation adjustment and other
(45
)
 
(104
)
 
95

Net reserves, end of year
18,927

 
19,117

 
19,637

Ceded reserves, end of year
4,344

 
4,972

 
5,126

Gross reserves, end of year
$
23,271

 
$
24,089

 
$
24,763



(a)
Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Consolidated Statements of Operations due to amounts related to retroactive reinsurance deferred gain accounting, uncollectible reinsurance and loss deductible receivables, and benefit expenses related to future policy benefits and policyholders' funds, which are not reflected in the table above.
The changes in provision for insured events of prior years (net prior year claim and claim adjustment expense reserve development, including unallocated claim and claim adjustment expense) were as follows.
Reserve Development
Years ended December 31
 
 
 
 
 
(In millions)
2014
 
2013
 
2012
Property and casualty reserve development
$
(39
)
 
$
(115
)
 
$
(180
)
Life reserve development in life company
3

 
—

 
(2
)
Total
$
(36
)
 
$
(115
)
 
$
(182
)

The following tables summarize the gross and net carried reserves as of December 31, 2014 and 2013.
Gross and Net Carried Claim and Claim Adjustment Expense Reserves
December 31, 2014
 Specialty
 
 Commercial
 
International
 
Life &
Group Non-Core
 
Corporate
& Other Non-Core
 
Total
(In millions)
 
 
 
 
 
Gross Case Reserves
$
2,136

 
$
5,298

 
$
752

 
$
2,881

 
$
1,189

 
$
12,256

Gross IBNR Reserves
4,093

 
4,216

 
689

 
302

 
1,715

 
11,015

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,229

 
$
9,514

 
$
1,441

 
$
3,183

 
$
2,904

 
$
23,271

Net Case Reserves
$
1,929

 
$
4,947

 
$
598

 
$
2,572

 
$
144

 
$
10,190

Net IBNR Reserves
3,726

 
3,906

 
663

 
271

 
171

 
8,737

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
5,655

 
$
8,853

 
$
1,261

 
$
2,843

 
$
315

 
$
18,927




December 31, 2013
 Specialty
 
 Commercial
 
International
 
Life &
Group Non-Core
 
Corporate
& Other Non-Core
 
Total
(In millions)
 
 
 
 
 
Gross Case Reserves
$
2,001

 
$
5,570

 
$
803

 
$
2,748

 
$
1,140

 
$
12,262

Gross IBNR Reserves
4,057

 
4,521

 
772

 
310

 
2,167

 
11,827

Total Gross Carried Claim and Claim Adjustment Expense Reserves
$
6,058

 
$
10,091

 
$
1,575

 
$
3,058

 
$
3,307

 
$
24,089

Net Case Reserves
$
1,793

 
$
5,119

 
$
629

 
$
2,352

 
$
283

 
$
10,176

Net IBNR Reserves
3,789

 
3,992

 
705

 
271

 
184

 
8,941

Total Net Carried Claim and Claim Adjustment Expense Reserves
$
5,582

 
$
9,111

 
$
1,334

 
$
2,623

 
$
467

 
$
19,117


Net Prior Year Development
Changes in estimates of claim and allocated claim adjustment expense reserves and premium accruals, net of reinsurance, for prior years are defined as net prior year development. These changes can be favorable or unfavorable. The following tables and discussion include the net prior year development recorded for Specialty, Commercial, International and Corporate & Other Non-Core segments for the years ended December 31, 2014, 2013 and 2012.
Favorable net prior year development of $14 million, $9 million and $11 million was recorded in the Life & Group Non-Core segment for the years ended December 31, 2014, 2013 and 2012.
Net Prior Year Development
Year ended December 31, 2014
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(136
)
 
$
176

 
$
(59
)
 
$
(2
)
 
$
(21
)
Pretax (favorable) unfavorable premium development
(13
)
 
(20
)
 
2

 
(1
)
 
(32
)
Total pretax (favorable) unfavorable net prior year development
$
(149
)
 
$
156

 
$
(57
)
 
$
(3
)
 
$
(53
)

Year ended December 31, 2013
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(196
)
 
$
122

 
$
(38
)
 
$
(6
)
 
$
(118
)
Pretax (favorable) unfavorable premium development
(14
)
 
(8
)
 
(21
)
 
1

 
(42
)
Total pretax (favorable) unfavorable net prior year development
$
(210
)
 
$
114

 
$
(59
)
 
$
(5
)
 
$
(160
)

Year ended December 31, 2012
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(93
)
 
$
(25
)
 
$
(74
)
 
$
(13
)
 
$
(205
)
Pretax (favorable) unfavorable premium development
(14
)
 
(36
)
 
3

 
1

 
(46
)
Total pretax (favorable) unfavorable net prior year development
$
(107
)
 
$
(61
)
 
$
(71
)
 
$
(12
)
 
$
(251
)

Premium development can occur in the property and casualty business when there is a change in exposure on auditable policies or when premium accruals differ from processed premium.  Audits on policies usually occur in a period after the expiration date of the policy.
For the year ended December 31, 2013, favorable premium development for International was recorded related to a commutation as discussed later in this note.
Specialty
The following table provides further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the Specialty segment for the years ended December 31, 2014, 2013 and 2012.
Years ended December 31
 
 
 
 
 
(In millions)
2014
 
2013
 
2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
Medical Professional Liability
$
39

 
$
(27
)
 
$
(34
)
Other Professional Liability and Management Liability
(87
)
 
(73
)
 
19

Surety
(82
)
 
(74
)
 
(63
)
Warranty
(2
)
 
(3
)
 
(5
)
Other
(4
)
 
(19
)
 
(10
)
Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(136
)
 
$
(196
)
 
$
(93
)

2014
Unfavorable development for medical professional liability was primarily related to increased frequency of large medical products liability class action lawsuits in accident years 2012 and prior and increased frequency of other large medical professional liability losses in accident years 2011 through 2013.
Overall, favorable development for other professional liability and management liability was related to better than expected severity in accident years 2008 through 2011, including favorable outcomes on individual large claims. Additional favorable development related to lower than expected frequency in accident years 2011 through 2013. Unfavorable development was recorded due to higher than expected severity in financial institution and professional service coverages in accident years 2009 through 2011.
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2012 and prior.
2013
Overall, favorable development for medical professional liability reflects favorable experience in accident years 2009 and prior. Unfavorable development was recorded for accident years 2010 and 2011 due to higher than expected large loss activity.
Overall, favorable development for other professional liability and management liability was related to better than expected loss emergence in accident years 2010 and prior. Unfavorable development was recorded in accident year 2011 related to an increase in severity in management liability.
Favorable development for surety coverages was primarily due to better than expected large loss emergence in accident years 2011 and prior.
Other includes standard property and casualty coverages provided to Specialty customers. Favorable development for other coverages was primarily due to better than expected loss emergence in property coverages primarily in accident years 2010 and subsequent.
2012
Favorable development for medical professional liability was primarily due to better than expected loss emergence in accident years 2008 and prior.
Overall, unfavorable development for other professional liability and management liability was primarily due to increased frequency and severity in our lawyer coverages in accident years 2008 through 2011, a large claim settlement in 2005 related to lawyers and increased frequency of large claims in public company directors and officers coverages related to the financial crisis in accident year 2011. Favorable development was recorded primarily due to better than expected loss emergence in accident years 2003 through 2009.
Favorable development for surety coverages was primarily due to better than expected loss emergence in accident years 2010 and prior.
Overall, favorable development for other coverages was primarily due to favorable loss emergence in property and workers' compensation coverages in accident years 2005 and subsequent. Unfavorable development was recorded in accident year 2009 primarily due to an unfavorable outcome on an individual general liability claim.
Commercial
The following table provides further detail of the development recorded for the Commercial segment for the years ended December 31, 2014, 2013 and 2012.
Years ended December 31



 
 
(In millions)
2014

2013
 
2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
Commercial Auto
$
31

 
$
18

 
$
25

General Liability
45

 
64

 
(66
)
Workers' Compensation
139

 
91

 
15

Property and Other
(39
)
 
(51
)
 
1

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
176

 
$
122

 
$
(25
)

2014
Unfavorable development for commercial auto was primarily related to higher than expected frequency in accident years 2012 and 2013 and higher than expected severity for liability coverages in accident years 2010 through 2013. Favorable development was recorded related to fewer large claims than expected in accident years 2008 and 2009.
Overall, unfavorable development for general liability was primarily related to higher than expected severity in accident years 2010 through 2013. Favorable development was recorded primarily related to lower than expected frequency of large losses in accident years 2005 through 2009.
Overall, unfavorable development for workers’ compensation was primarily due to increased medical severity in accident years 2010 and prior, higher than expected severity related to Defense Base Act (DBA) contractors in accident years 2010 through 2013 and the recognition of losses related to favorable premium development in accident year 2013. Favorable development of $26 million was recorded in accident years 1996 and prior related to the commutation of a workers’ compensation reinsurance pool.
Favorable development for property and other first-party coverages was recorded in accident years 2013 and prior, primarily related to fewer claims than expected and favorable individual claim settlements.
2013
Unfavorable development for commercial auto coverages was primarily due to higher than expected frequency in accident years 2011 and 2012 and large loss emergence in accident years 2009 and 2010.
Unfavorable development for general liability coverages was primarily related to increased incurred loss severity in accident years 2010 through 2012.
Unfavorable development for workers' compensation includes the Company's response to legislation enacted during 2013 related to the New York Fund for Reopened Cases. The law change necessitated an increase in reserves as re-opened workers' compensation claims can no longer be turned over to the state for handling and payment after December 31, 2013. Additional unfavorable development was recorded in accident year 2012 related to increased frequency and severity on claims related to DBA contractors and in accident year 2010 due to higher than expected large losses and increased severity in the state of California.
Favorable development for property and other coverages was primarily related to favorable outcomes on litigated catastrophe claims in accident years 2005 and 2010 as well as favorable loss emergence in non-catastrophe losses in accident years 2010 through 2012.

2012
Unfavorable development for commercial auto coverages was primarily due to higher than expected loss emergence in accident years 2007 and subsequent and higher than expected frequency in accident year 2011.
Overall, favorable development for general liability coverages was primarily due to better than expected loss emergence in accident years 2006 and subsequent related to umbrella business and 2003 and prior related to large account business. Unfavorable development was recorded in accident years 2009 through 2011 related to several large losses.
Overall, unfavorable development for workers' compensation was primarily due to increased medical severity in accident years 2010 and 2011 and the recognition of losses related to favorable premium development in accident year 2011. Favorable development was recorded in accident years 2001 and prior reflecting favorable experience.
International
The following table provides further detail of the development recorded for the International segment for the years ended December 31, 2014, 2013 and 2012.
Years ended December 31
 
 
 
 
 
(In millions)
2014
 
2013
 
2012
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development:
 
 
 
 
 
Medical Professional Liability
$
(7
)
 
$
(7
)
 
$
1

Other Professional Liability
(26
)
 
(30
)
 
(41
)
Liability
(13
)
 
(8
)
 
(2
)
Property & Marine
(14
)
 
13

 
(30
)
Other
(9
)
 
(17
)
 
(2
)
Commutations
10

 
11

 
—

Total pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(59
)
 
$
(38
)
 
$
(74
)

2014
Overall, favorable development for other professional liability was primarily related to better than expected severity in accident years 2012 and prior. Unfavorable development was recorded in accident year 2008 due to financial crisis claims.
Favorable development for liability was primarily related to better than expected frequency and severity in accident years 2009 and subsequent.
Favorable development for property and marine coverages primarily related to better than expected frequency of large claims in accident years 2012 and prior.
Favorable development for other coverages was a result of better than expected frequency in Hardy, primarily in financial institution coverages.
Reinsurance commutations in the first quarter of 2014 reduced ceded losses from prior years. Overall the commutations increased net operating income because of the release of the related allowance for uncollectible reinsurance.
2013
Overall, favorable development for other professional liability was primarily related to better than expected severity in accident years 2011 and prior. Unfavorable development was recorded related to higher than expected severity in accident year 2012.
Overall, unfavorable development for property and marine coverages was primarily due to 2011 catastrophe events, including the Thailand floods and the New Zealand Lyttelton earthquake, and one large non-catastrophe claim. Favorable development was recorded related to better than expected severity in accident years 2008 through 2011.
Favorable development for other coverages was largely a result of better than expected severity in Hardy in accident year 2012.
The commutation of a third-party capital provider's 15% participation in the 2012 year of account resulted in recognition of the 15% share of year of account premiums, losses and expenses.

2012
Favorable development for other professional liability was primarily related to better than expected severity in accident years 2007 and prior.
Favorable development for property and marine coverages related to better than expected severity in accident years 2011 and prior.
A&EP Reserves
In 2010, Continental Casualty Company (CCC) together with several of the Company’s insurance subsidiaries completed a transaction with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which substantially all of the Company’s legacy A&EP liabilities were ceded to NICO (Loss Portfolio Transfer or LPT). Under the terms of the NICO transaction, the Company ceded approximately $1.6 billion of net A&EP claim and allocated claim adjustment expense reserves to NICO under a retroactive reinsurance agreement with an aggregate limit of $4 billion. The $1.6 billion of claim and allocated claim adjustment expense reserves ceded to NICO was net of $1.2 billion of ceded claim and allocated claim adjustment expense reserves under existing third-party reinsurance contracts. The NICO aggregate reinsurance limit also covers credit risk on the existing third-party reinsurance related to these liabilities. The Company paid NICO a reinsurance premium of $2 billion and transferred to NICO billed third-party reinsurance receivables related to A&EP claims with a net book value of $215 million, resulting in total consideration of $2.2 billion.

The following table displays the impact of the Loss Portfolio Transfer on the Consolidated Statements of Operations.

Years ended December 31
 
 
 
 
 
(In millions)
2014
 
2013
 
2012
Net A&EP adverse development before consideration of LPT
$
—

 
$
363

 
$
261

Provision for uncollectible third-party reinsurance on A&EP
—

 
140

 
—

Additional amounts ceded under LPT
—

 
503

 
261

Retroactive reinsurance benefit recognized
(13
)
 
(314
)
 
(261
)
Pretax impact of unrecognized deferred retroactive reinsurance benefit
$
(13
)
 
$
189

 
$
—



During 2013 and 2012, unfavorable development was recorded for accident years 2000 and prior related to A&EP claims due to an increase in ultimate claim severity and higher than anticipated claim reporting, as well as increased defense costs. Additionally, in 2013 the Company recognized a provision for uncollectible third-party reinsurance which increased the expected recovery from NICO. The fourth quarter 2014 A&EP reserve review was not completed. Additional information and analysis on inuring third-party reinsurance recoveries are needed to finalize the review. The Company expects to complete the review in the first half of 2015.
In the fourth quarter of 2013, the cumulative amounts ceded under the Loss Portfolio Transfer of $2.5 billion exceeded the $2.2 billion consideration paid, resulting in a $189 million deferred retroactive reinsurance gain. This deferred benefit is recognized in earnings in proportion to actual recoveries under the Loss Portfolio Transfer. Over the life of the contract, there is no economic impact as long as any additional losses are within the limit under the contract. In 2014, $13 million of the deferred retroactive reinsurance benefit was recognized, and the remaining unrecognized benefit at December 31, 2014 was $176 million.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account at December 31, 2014 was $3.4 billion. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the full aggregate reinsurance limit as well as certain of NICO’s performance obligations under the trust agreement. NICO is responsible for claims handling and billing and collection from third-party reinsurers related to the Company’s A&EP claims.