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Claim and Claim Adjustment Expense Reserves
 6 Months Ended
Jun. 30, 2020
Liability for Claims and Claims Adjustment Expense [Abstract]  
Claim and Claim Adjustment Expense Reserves Claim and Claim Adjustment Expense Reserves
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 $301 million and $376 million for the three and six months ended June 30, 2020. Net catastrophe losses for the three months ended June 30, 2020 included $182 million related to the COVID-19 pandemic, $61 million related to civil unrest and $58 million related primarily to severe weather related events. Net catastrophe losses for the six months ended June 30, 2020 included $195 million related to the COVID-19 pandemic, $61 million related to civil unrest and $120 million related primarily to severe weather related events. The Company reported catastrophe losses, net of reinsurance, of $38 million and $96 million for the three and six months ended June 30, 2019 related primarily to U.S. weather related events.
Liability for Unpaid Claim and Claim Adjustment Expenses
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 segment.
For the six months ended June 30
 
 
 
(In millions)
2020
 
2019
Reserves, beginning of year:
 
 
 
Gross
$
21,720

 
$
21,984

Ceded
3,835

 
4,019

Net reserves, beginning of year
17,885

 
17,965

Net incurred claim and claim adjustment expenses:
 
 
 
Provision for insured events of current year
2,899

 
2,615

Increase (decrease) in provision for insured events of prior years
19

 
(36
)
Amortization of discount
98

 
98

Total net incurred (1)
3,016

 
2,677

Net payments attributable to:
 
 
 
Current year events
(256
)
 
(315
)
Prior year events
(2,342
)
 
(2,519
)
Total net payments
(2,598
)
 
(2,834
)
Foreign currency translation adjustment and other
(35
)
 
55

Net reserves, end of period
18,268

 
17,863

Ceded reserves, end of period
4,002

 
3,866

Gross reserves, end of period
$
22,270

 
$
21,729


(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 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 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 June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Specialty
$
(20
)
 
$
(18
)
 
$
(31
)
 
$
(38
)
Commercial
45

 
(12
)
 
41

 
(20
)
International
(3
)
 
(1
)
 
(3
)
 
13

Corporate & Other
—

 
—

 
—

 
—

Total pretax (favorable) unfavorable development
$
22

 
$
(31
)
 
$
7

 
$
(45
)

Specialty
The following table presents further detail of the development recorded for the Specialty segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Medical Professional Liability
$
—

 
$
15

 
$
10

 
$
30

Other Professional Liability and Management Liability
(9
)
 
(7
)
 
(6
)
 
(19
)
Surety
—

 
(15
)
 
(30
)
 
(40
)
Warranty
(3
)
 
(7
)
 
(3
)
 
(7
)
Other
(8
)
 
(4
)
 
(2
)
 
(2
)
Total pretax (favorable) unfavorable development
$
(20
)
 
$
(18
)
 
$
(31
)
 
$
(38
)

Three Months
2019
Unfavorable development in medical professional liability was primarily due to unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in the Company's dentists business.
Favorable development in surety was due to lower than expected frequency for accident years 2015 and 2016.
Six Months
2020
Unfavorable development in medical professional liability was primarily due to unfavorable outcomes on specific claims in accident years 2015 and 2016 in the Company's aging services business.
Favorable development in surety was primarily due to lower than expected frequency for accident years 2017 and prior.
2019
Unfavorable development in medical professional liability was primarily due to higher than expected severity in accident year 2013 in the Company's allied healthcare business, unfavorable outcomes on individual claims and higher than expected severity emergence in accident year 2017 in the Company's 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.
Favorable development in surety was due to lower than expected frequency for accident years 2016 and prior.
Commercial
The following table presents further detail of the development recorded for the Commercial segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Commercial Auto
$
15

 
$
(3
)
 
$
24

 
$
(8
)
General Liability
50

 
13

 
50

 
(7
)
Workers' Compensation
(61
)
 
(7
)
 
(74
)
 
(5
)
Property and Other
41

 
(15
)
 
41

 
—

Total pretax (favorable) unfavorable development
$
45

 
$
(12
)
 
$
41

 
$
(20
)

Three Months
2020
Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction business in accident years 2017 through 2019.
Unfavorable development in general liability was driven by higher than expected emergence in mass tort exposures, primarily due to New York reviver statute-related claims from accident years prior to 2010.
Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years.
Unfavorable development in property and other was primarily due to higher than expected large loss activity in accident year 2019 in the Company's middle market, national accounts, and marine business units.
2019
Unfavorable development in general liability was primarily due to higher than expected large loss experience in the Company's excess and umbrella business in accident year 2017.
Favorable development in property and other was primarily due to continued lower than expected claim severity from catastrophes in accident year 2017.
Six Months
2020
Unfavorable development in commercial auto was due to unfavorable claim severity in the Company's middle market and construction business in accident years 2017 through 2019.
Unfavorable development in general liability was driven by higher than expected emergence in mass tort exposures, primarily due to New York reviver statute-related claims from accident years prior to 2010.
Favorable development in workers’ compensation was due to favorable medical trends driving lower than expected severity in multiple accident years.
Unfavorable development in property and other was primarily due to higher than expected large loss activity in accident year 2019 in the Company's middle market, national accounts, and marine business units.
International
The following table presents further detail of the development recorded for the International segment.
Periods ended June 30
Three Months
 
Six Months
(In millions)
2020
 
2019
 
2020
 
2019
Pretax (favorable) unfavorable development:
 
 
 
 
 
 
 
Casualty
$
(6
)
 
$
(5
)
 
$
(6
)
 
$
(5
)
Property, Energy and Marine(1)
1

 
5

 
1

 
19

Specialty
2

 
(1
)
 
2

 
(1
)
Total pretax (favorable) unfavorable development
$
(3
)
 
$
(1
)
 
$
(3
)
 
$
13


(1)
Effective January 1, 2020 the Property and Energy and Marine lines of business have been combined in the International segment. Prior period information has been conformed to the new line of business presentation.
Six Months
2019
Unfavorable development in property, energy and marine was driven by higher than expected claims in Hardy on 2018 accident year catastrophes.
Asbestos and Environmental Pollution (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 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 in the Condensed Consolidated Statements of Operations.
The impact of the LPT on the Condensed Consolidated Statements of Operations was the recognition of a retroactive reinsurance benefit of $20 million and $14 million for the three months ended June 30, 2020 and 2019 and $34 million and $36 million for the six months ended June 30, 2020 and 2019. As of June 30, 2020 and December 31, 2019, the cumulative amounts ceded under the LPT were $3.2 billion. The unrecognized deferred retroactive reinsurance benefit was $358 million and $392 million as of June 30, 2020 and December 31, 2019 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 $3.7 billion as of June 30, 2020 and December 31, 2019. 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.