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Claim and Claim Adjustment Expense Reserves
 3 Months Ended
Mar. 31, 2017
Liability for Claims and Claims Adjustment Expense [Abstract]  
Claim and Claim Adjustment Expense Reserves
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 incurred but not reported (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 claim reserving trends and 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 $34 million and $36 million for three months ended March 31, 2017 and 2016. Catastrophe losses in the first quarter of 2017 related primarily to U.S. weather-related events.
Liability for Unpaid Claim and Claim Adjustment Expenses Rollforward
The following table presents a reconciliation between beginning and ending claim and claim adjustment expense reserves, including claim and claim adjustment expense reserves of the Life & Group Non-Core segment.
For the three months ended March 31
 
 
 
(In millions)
2017
 
2016
Reserves, beginning of year:
 
 
 
Gross
$
22,343

 
$
22,663

Ceded
4,094

 
4,087

Net reserves, beginning of year
18,249

 
18,576

Net incurred claim and claim adjustment expenses:
 
 
 
Provision for insured events of current year
1,207

 
1,224

Decrease in provision for insured events of prior years
(82
)
 
(45
)
Amortization of discount
48

 
48

Total net incurred (1)
1,173

 
1,227

Net payments attributable to:
 
 
 
Current year events
(68
)
 
(76
)
Prior year events
(1,184
)
 
(1,147
)
Total net payments
(1,252
)
 
(1,223
)
Foreign currency translation adjustment and other
14

 
39

Net reserves, end of period
18,184

 
18,619

Ceded reserves, end of period
4,076

 
4,399

Gross reserves, end of period
$
22,260

 
$
23,018


(1)
Total net incurred above does not agree to Insurance claims and policyholders' benefits as reflected on the Condensed 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, which are not reflected in the table above.
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 present the net prior year development recorded for Specialty, Commercial, International and Corporate & Other Non-Core segments.
Three months ended March 31, 2017
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(31
)
 
$
(24
)
 
$
(2
)
 
$
—

 
$
(57
)
Pretax (favorable) unfavorable premium development
(5
)
 
37

 
(7
)
 
—

 
25

Total pretax (favorable) unfavorable net prior year development
$
(36
)
 
$
13

 
$
(9
)
 
$
—

 
$
(32
)
Three months ended March 31, 2016
 
 
 
 
 
 
 
 
 
(In millions)

Specialty
 
 Commercial
 
International
 
Corporate
& Other
Non-Core
 
Total
Pretax (favorable) unfavorable net prior year claim and allocated claim adjustment expense reserve development
$
(34
)
 
$
(14
)
 
$
(4
)
 
$
—

 
$
(52
)
Pretax (favorable) unfavorable premium development
(11
)
 
(2
)
 
(1
)
 
—

 
(14
)
Total pretax (favorable) unfavorable net prior year development
$
(45
)
 
$
(16
)
 
$
(5
)
 
$
—

 
$
(66
)

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. See further information on the premium development in the Commercial segment for the three months ended March 31, 2017 within Note F.
Specialty
The following table presents further detail of the net prior year claim and allocated claim adjustment expense reserve development (development) recorded for the Specialty segment.
Three months ended March 31
 
 
 
(In millions)
2017
 
2016
Pretax (favorable) unfavorable development:
 
 
 
Medical Professional Liability
$
1

 
$
(7
)
Other Professional Liability and Management Liability
(32
)
 
(9
)
Surety
—

 
—

Warranty
—

 
2

Other
—

 
(20
)
Total pretax (favorable) unfavorable development
$
(31
)
 
$
(34
)

2017
Favorable development in other professional liability and management liability was primarily due to favorable settlements on closed claims and lower than expected frequency of large losses related to professional liability in accident years 2011 through 2016.
2016
Favorable development for medical professional liability was due to lower than expected severity in accident years 2011 and prior. This was partially offset by unfavorable development in accident years 2012 and 2013 related to higher than expected large loss emergence and higher than expected severity in accident years 2014 and 2015.
Favorable development in other professional liability and management liability was primarily related to favorable settlements on claims in accident years 2011 through 2013. This was partially offset by unfavorable development related to a specific financial institutions claim in accident year 2014 and continued deterioration on claims in accident year 2009 related to the credit crisis.
Favorable development for other coverages was primarily due to better than expected claim frequency in property coverages provided to Specialty customers in accident year 2015.
Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Three months ended March 31
 
 
 
(In millions)
2017
 
2016
Pretax (favorable) unfavorable development:
 
 
 
Commercial Auto
$
(26
)
 
$
(15
)
General Liability
—

 
(15
)
Workers' Compensation
—

 
4

Property and Other
2

 
12

Total pretax (favorable) unfavorable development
$
(24
)
 
$
(14
)

2017
Favorable development for commercial auto was primarily due to lower than expected severity in accident years 2013 through 2015.
2016
Favorable development for commercial auto was primarily due to favorable settlements on claims in accident years 2011 through 2014.
Favorable development for general liability was primarily due to favorable settlements on claims in accident years 2013 and 2014.
Unfavorable development for property and other was primarily due to higher than expected severity from a 2015 catastrophe event.
International
The following table presents further detail of the development recorded for the International segment.
Three months ended March 31
 
 
 
(In millions)
2017
 
2016
Pretax (favorable) unfavorable development:
 
 
 
Medical Professional Liability
$
—

 
$
—

Other Professional Liability
(1
)
 
(1
)
Liability
—

 
—

Property & Marine
1

 
(4
)
Other
(2
)
 
1

Total pretax (favorable) unfavorable development
$
(2
)
 
$
(4
)
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 through a Loss Portfolio Transfer (LPT). At the effective date of the 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 LPT 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.
Subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves which resulted in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT exceeded the $2.2 billion consideration paid, resulting in the NICO LPT moving into a gain position, requiring retroactive reinsurance accounting. Under retroactive reinsurance accounting, this gain is deferred and only recognized in earnings in proportion to actual paid recoveries under the LPT. Over the life of the contract, there is no economic impact as long as any additional losses incurred are within the limit of the LPT. In a period in which the Company recognizes a change in the estimate of A&EP reserves that increases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is impacted and the change in the deferred gain is recognized in earnings as if the revised estimate of ceded losses was available at the effective date of the LPT. The effect of the deferred retroactive reinsurance benefit is recorded in Insurance claims and policyholders' benefits in the Condensed Consolidated Statement of Operations.
The following table presents the impact of the Loss Portfolio Transfer on the Condensed Consolidated Statements of Operations.
Three months ended March 31
 
 
 
(In millions)
2017
 
2016
Net A&EP adverse development before consideration of LPT
$
60

 
$
200

Retroactive reinsurance benefit recognized
(40
)
 
(73
)
Pretax impact of A&EP reserve development and the LPT
$
20

 
$
127


Based upon the Company's annual A&EP reserve review, net unfavorable prior year development of $60 million and $200 million was recognized before consideration of cessions to the LPT for the three months ended March 31, 2017 and 2016. The 2017 unfavorable development was driven by modestly higher anticipated payouts on claims from known sources of asbestos exposure. The 2016 unfavorable development was driven by an increase in anticipated future expenses associated with determination of coverage, higher anticipated payouts associated with a limited number of historical accounts having significant asbestos exposures and higher than expected severity on pollution claims. While this unfavorable development was ceded to NICO under the LPT, the Company’s Net income in both periods was negatively affected due to the application of retroactive reinsurance accounting.
As of March 31, 2017 and December 31, 2016, the cumulative amounts ceded under the LPT were $2.9 billion and $2.8 billion. The unrecognized deferred retroactive reinsurance benefit was $354 million and $334 million as of March 31, 2017 and December 31, 2016.
NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $2.7 billion and $2.8 billion as of March 31, 2017 and December 31, 2016. In addition, Berkshire Hathaway Inc. guaranteed the payment obligations of NICO up to the 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.