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 historical patterns such as claim reserving trends and settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions and 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 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 our results of operations and/or equity. The Company reported catastrophe losses, net of reinsurance, of $32 million and $128 million for the three and nine months ended September 30, 2019. The Company reported catastrophe losses, net of reinsurance, of $46 million and $106 million for the three and nine months ended September 30, 2018. Net catastrophe losses in 2019 and 2018 related primarily to U.S. weather related events.



For the nine months ended September 30
(In millions)	2019			2018
Reserves, beginning of year:
Gross	$	21,984		$	22,004
Ceded	4,019			3,934
Net reserves, beginning of year	17,965			18,070
Net incurred claim and claim adjustment expenses:
Provision for insured events of current year	3,968			3,866
Increase (decrease) in provision for insured events of prior years	(65		)	(173		)
Amortization of discount	143			136
Total net incurred ⁽¹⁾	4,046			3,829
Net payments attributable to:
Current year events	(599		)	(658		)
Prior year events	(3,547		)	(3,415		)
Total net payments	(4,146		)	(4,073		)
Foreign currency translation adjustment and other	29			(80		)
Net reserves, end of period	17,894			17,746
Ceded reserves, end of period	3,702			3,858
Gross reserves, end of period	$	21,596		$	21,604

Changes in estimates of claim and claim adjustment expense reserves, net of reinsurance, for prior years are defined as net prior year loss reserve development (development). These changes can be favorable or unfavorable. The following table presents development recorded for the Specialty, Commercial, International and Corporate & Other segments.



Periods ended September 30	Three Months						Nine Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Specialty	$	(20	)	$	(53	)	$	(58	)	$	(127	)
Commercial	35			(5		)	15			(27		)
International	1			(2		)	14			(4		)
Corporate & Other	—			(2		)	—			(2		)
Total pretax (favorable) unfavorable development	$	16		$	(62	)	$	(29	)	$	(160	)



Periods ended September 30	Three Months						Nine Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Medical Professional Liability	$	29		$	15		$	59		$	38
Other Professional Liability and Management Liability	(18		)	(45		)	(37		)	(113		)
Surety	(43		)	(20		)	(83		)	(50		)
Warranty	—			(1		)	(7		)	(7		)
Other	12			(2		)	10			5
Total pretax (favorable) unfavorable development	$	(20	)	$	(53	)	$	(58	)	$	(127	)

Unfavorable development in medical professional liability was primarily due to higher than expected indemnity severity in accident years 2016 through 2018 in our aging services business, higher than expected severity in accident year 2013 in our allied healthcare business, unfavorable outcomes on individual claims and higher than expected severity in accident year 2017 in our dentists business.

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency and favorable outcomes on individual claims in accident years 2017 and prior related to financial institutions and lower than expected large claim losses in recent accident years in our public company D&O business.

Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident years 2014 and 2017 in our hospitals business and higher than expected frequency and severity in aging services in accident years 2014 through 2017.

Favorable development in other professional liability and management liability was primarily due to lower than expected claim frequency for accident years 2013 through 2017 related to financial institutions and professional liability errors and omissions (E&O), favorable severity for accident years 2012 and prior related to professional liability E&O, and favorable outcomes on individual claims in financial institutions in accident years 2013 and prior.



Periods ended September 30	Three Months						Nine Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Commercial Auto	$	(16	)	$	1		$	(24	)	$	—
General Liability	43			(5		)	36			13
Workers' Compensation	7			(2		)	2			(14		)
Property and Other	1			1			1			(26		)
Total pretax (favorable) unfavorable development	$	35		$	(5	)	$	15		$	(27	)

The following table presents further detail of the development recorded for the International segment.



Periods ended September 30	Three Months						Nine Months
(In millions)	2019			2018			2019			2018
Pretax (favorable) unfavorable development:
Casualty	$	(6	)	$	(5	)	$	(11	)	$	(11	)
Property	3			2			14			14
Energy and Marine	1			(5		)	9			(10		)
Specialty ⁽¹⁾	3			6			2			3
Total pretax (favorable) unfavorable development	$	1		$	(2	)	$	14		$	(4	)

(1) Effective January 1, 2019 the Healthcare and Technology line of business has been absorbed within the Specialty line of business in the International segment. Prior period information has been conformed to the new line of business presentation.

Unfavorable development in specialty was driven by increased severity in accident year 2017 related to professional indemnity, partially offset by favorable development in healthcare in Europe primarily driven by lower than expected frequency in accident years 2015 and prior.

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.

In years subsequent to the effective date of the LPT, the Company recognized adverse prior year development on its A&EP reserves resulting in additional amounts ceded under the LPT. As a result, the cumulative amounts ceded under the LPT have 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 or decreases the amounts ceded under the LPT, the proportion of actual paid recoveries to total ceded losses is affected 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 on the Condensed Consolidated Statements of Operations.



Periods ended September 30	Three Months						Nine Months
(In millions)	2019			2018			2019			2018
Additional amounts ceded under LPT:
Net A&EP adverse development before consideration of LPT	$	—		$	—		$	—		$	113
Provision for uncollectible third-party reinsurance on A&EP	—			—			—			(16		)
Total additional amounts ceded under LPT	—			—			—			97
Retroactive reinsurance benefit recognized	(7		)	(12		)	(43		)	(84		)
Pretax impact of deferred retroactive reinsurance	$	(7	)	$	(12	)	$	(43	)	$	13

The Company intends to complete its annual A&EP reserve review in the fourth quarter of 2019 and maintain this timing for all future annual A&EP reserve reviews. The Company completed A&EP reserve reviews in both the first and fourth quarters of 2018. Based upon the Company's 2018 first quarter A&EP reserve review, net unfavorable prior year development of $113 million was recognized before consideration of cessions to the LPT for the nine months ended September 30, 2018. The 2018 unfavorable development was driven by higher than anticipated defense costs on direct asbestos and environmental accounts and paid losses on assumed reinsurance exposures. Additionally, in 2018, the Company released a portion of its provision for uncollectible third-party reinsurance.

As of September 30, 2019 and December 31, 2018, the cumulative amounts ceded under the LPT were $3.1 billion. The unrecognized deferred retroactive reinsurance benefit was $331 million and $374 million as of September 30, 2019 and December 31, 2018 and is included within Other liabilities on the Condensed Consolidated Balance Sheets.

NICO established a collateral trust account as security for its obligations to the Company. The fair value of the collateral trust account was $3.3 billion and $2.7 billion as of September 30, 2019 and December 31, 2018. 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 majority of the Company’s A&EP claims.

The Company’s Life & Group segment includes its run-off long term care business as well as structured settlement obligations not funded by annuities related to certain property and casualty claimants. Long term care policies provide benefits for nursing homes, assisted living facilities and home health care subject to various daily and lifetime caps. Generally, policyholders must continue to make periodic premium payments to keep the policy in force and the Company has the ability to increase policy premiums, subject to state regulatory approval.

The Company maintains both claim and claim adjustment expense reserves as well as future policy benefit reserves for policyholder benefits for the Life & Group segment. Claim and claim adjustment expense reserves consist of estimated reserves for long term care policyholders that are currently receiving benefits, including claims that have been incurred but are not yet reported. In developing the claim and claim adjustment expense reserve estimates for long term care policies, the Company’s actuaries perform a detailed claim experience study on an annual basis. The study reviews the sufficiency of existing reserves for policyholders currently on claim and includes an evaluation of expected benefit utilization and claim duration. The Company’s recorded claim and claim adjustment expense reserves reflect management's best estimate after incorporating the results of the most recent study. In addition, claim and claim adjustment expense reserves are also maintained for the structured settlement obligations.

The Company's most recent annual long term care claim experience study was completed in the third quarter of 2019 and resulted in a $56 million pretax reduction in claim and claim adjustment expense reserves primarily due to lower claim severity than anticipated in the reserve estimates. The Company's 2018 annual long term care claim experience study was completed in the third quarter of 2018 and resulted in a $31 million pretax reduction in claim and claim adjustment expense reserves.

Future policy benefit reserves represent the active life reserves related to the Company’s long term care policies which are the present value of expected future benefit payments and expenses less expected future premium. The determination of these reserves is fundamental to the Company’s financial results and requires management to make estimates and assumptions about expected investment and policyholder experience over the life of the contract. Since many of these contracts may be in force for several decades, these assumptions are subject to significant estimation risk.

The actuarial assumptions that management believes are subject to the most variability are morbidity, persistency, discount rate and anticipated future premium rate increases. Morbidity is the frequency and severity of injury, illness, sickness and diseases contracted. Persistency is the percentage of policies remaining in force and can be affected by policy lapses, benefit reductions and death. Discount rate is influenced by the investment yield on assets supporting long term care reserves which is subject to interest rate and market volatility and may also be affected by changes to the Internal Revenue Code. As future premium rate increases are generally subject to regulatory approval, the exact timing and size of the approved rate increases are unknown. As a result of this variability, the Company’s long term care reserves may be subject to material increases if actual experience develops adversely to the Company’s expectations.

Annually, management assesses the adequacy of its long term care future policy benefit reserves by performing a gross premium valuation (GPV) to determine if there is a premium deficiency. Management also uses the GPV process to evaluate the adequacy of its claim and claim adjustment expense reserves for structured settlement obligations. Under the GPV, management estimates required reserves using best estimate assumptions as of the date of the assessment without provisions for adverse deviation. The GPV required reserves are then compared to the existing recorded reserves. If the GPV required reserves are greater than the existing recorded reserves, the existing assumptions are unlocked and future policy benefit reserves are increased to the greater amount. Any such increase is reflected in the Company’s results of operations in the period in which the need for such adjustment is determined. Periodically, management engages independent third parties to assess the appropriateness of its best estimate assumptions. The most recent third party assessment, performed earlier this year, validated the assumption setting process and confirmed the best estimate assumptions appropriately reflected the experience data at that time.

In the third quarter of 2019 the Company performed the GPV for the long term care future policy benefit reserves. This GPV indicated a premium deficiency primarily driven by lower discount rate assumptions. Recognition of the premium deficiency resulted in a $216 million pretax increase in policyholders' benefits reflected in the Company's results of operations.