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Insurance Liabilities
9 Months Ended
Sep. 30, 2024
Insurance [Abstract]  
Insurance Liabilities
12. Insurance Liabilities
LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (LOSS RESERVES)
Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and loss adjustment expenses, less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income, except to the extent such adjustment impacts a deferred gain under a retroactive reinsurance agreement, in which case the ceded portion would be amortized into pre-tax income in subsequent periods. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development or reserve releases.
Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.8 billion and $12.1 billion at September 30, 2024 and December 31, 2023, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. Commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. Thus, these recoverable amounts represent a credit exposure to us. At September 30, 2024 and December 31, 2023 we held collateral of approximately $8.6 billion and $8.7 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements. Allowance for credit losses for the unsecured portion of these recoverable amounts was $14 million at both September 30, 2024 and December 31, 2023.
The following table presents the rollforward of activity in loss reserves:
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in millions)2024202320242023
Liability for unpaid loss and loss adjustment expenses, beginning of period$69,783 $70,284 $70,393 $75,167 
Reinsurance recoverable(29,849)(30,226)(30,289)(32,102)
Net Liability for unpaid loss and loss adjustment expenses, beginning of period39,934 40,058 40,104 43,065 
Losses and loss adjustment expenses incurred:
Current year3,749 3,922 10,660 11,651 
Prior years, excluding discount and amortization of deferred gain187 (246)79 (380)
Prior years, discount charge (benefit)49 52 217 200 
Prior years, amortization of deferred gain on retroactive reinsurance(a)
(212)27 (277)(58)
Total losses and loss adjustment expenses incurred3,773 3,755 10,679 11,413 
Losses and loss adjustment expenses paid:
Current year(1,169)(1,190)(2,310)(2,360)
Prior years(2,285)(2,561)(7,739)(9,104)
Total losses and loss adjustment expenses paid(3,454)(3,751)(10,049)(11,464)
Other changes:
Foreign exchange effect891 (583)237 (211)
Losses and loss adjustment expenses recognized within gain on divestitures 316  316 
Retroactive reinsurance adjustment (net of discount)(b)
(107)121 71 180 
Dispositions(5)— (5)— 
Reclassified to held for sale, net of reinsurance recoverables(c)
5 (159) (3,542)
Total other changes784 (305)303 (3,257)
Liability for unpaid loss and loss adjustment expenses, end of period:
Net liability for unpaid losses and loss adjustment expenses41,037 39,757 41,037 39,757 
Reinsurance recoverable(d)
30,029 30,066 30,029 30,066 
Total$71,066 $69,823 $71,066 $69,823 
(a)Includes $3 million and $9 million for the retroactive reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire), covering U.S. asbestos exposures for the three months ended September 30, 2024 and 2023, respectively, and $47 million and $22 million for the nine months ended September 30, 2024 and 2023, respectively.
(b)Includes benefit (charge) from change in discount on retroactive reinsurance of $22 million and $24 million for the three months ended September 30, 2024 and 2023 respectively, and $100 million and $120 million for the nine months ended September 30, 2024 and 2023, respectively.
(c)Represents change in loss reserves included in Liabilities held for sale for the three months ended September 30, 2024 and 2023. For additional information, see Note 4.
(d)Excludes $1.5 billion of Reinsurance recoverable reclassified to Assets held for sale on the Condensed Consolidated Balance Sheets at September 30, 2023.
On January 20, 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the paid losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion. We account for this transaction as retroactive reinsurance. We paid total consideration, including interest, of $10.2 billion. The consideration was placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire has provided a parental guarantee to secure the obligations of NICO under the agreement.
Prior Year Development
During the three months ended September 30, 2024, we recognized unfavorable prior year loss reserve development of $187 million which does not reflect the benefit of recoveries under a retroactive adverse development cover, and excludes discount and amortization of deferred gain. The development in this period was largely driven by adverse development in U.S. Excess Casualty and UK/Europe Casualty and Financial Lines, offset by favorable development in Global Specialty and U.S. Property and Special Risks. During the nine months ended September 30, 2024, we recognized unfavorable prior year loss reserve development of $79 million excluding discount and amortization of deferred gain. The development in this period was largely driven by adverse development in U.S. Excess Casualty and UK/Europe Casualty and Financial Lines, offset by favorable development in Global Specialty, U.S. Property and Special Risks and on our loss sensitive U.S. Workers' Compensation business.
During the three months ended September 30, 2023, we recognized favorable prior year loss reserve development of $246 million excluding discount and amortization of deferred gain. The development in this period was largely driven by favorable development on our U.S. Workers' Compensation business, International Financial Lines in all regions except UK, which was adverse, and Japan Personal Insurance partially offset by unfavorable development on UK/Europe Casualty. During the nine months ended September 30, 2023, we recognized favorable prior year loss reserve development of $380 million excluding discount and amortization of deferred gain. The development in this period was largely driven by favorable development on our U.S. Workers' Compensation business, U.S. Other Casualty and Other Product Lines, partially offset by unfavorable development on UK/Europe Casualty and UK Financial Lines.
Discounting of Loss Reserves
At September 30, 2024 and December 31, 2023, the loss reserves reflect a net loss reserve discount of $1.2 billion and $1.2 billion, respectively, including tabular and non-tabular calculations based upon the following assumptions:
The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York, Pennsylvania and Delaware, and follows the statutory regulations (prescribed or permitted) for each state.
For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns.
The Pennsylvania and Delaware regulators approved use of a consistent benchmark discount rate and spread (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania domiciled and Delaware domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios. In 2020, the regulators also approved that the discount rate will be updated on an annual basis.
The tabular workers’ compensation discount is calculated based on the mortality rate used in the 2007 U.S. Life table and interest rates prescribed or permitted by each state (i.e. New York is based on 5 percent interest rate and Pennsylvania and Delaware are based on U.S. Treasury rate plus a liquidity premium). In the case that applying this tabular discount factor to our nominal reserves produces a tabular discount that is greater than the indemnity portion of our case reserves, the tabular discount is capped at our estimate of the indemnity portion of our cases reserves (45 percent).
The discount for asbestos reserves has been fully accreted.
At September 30, 2024 and December 31, 2023, the discount consists of $280 million and $294 million of tabular discount, respectively, and $922 million and $939 million of non-tabular discount for workers’ compensation, respectively. During the nine months ended September 30, 2024 and 2023, the benefit / (charge) from changes in discount of $(131) million and $(85) million, respectively, were recorded as part of Policyholder benefits and losses incurred in the Condensed Consolidated Statements of Income (Loss).
The following table presents the components of the loss reserve discount discussed above:
(in millions)September 30, 2024December 31, 2023
U.S. workers' compensation$2,206 $2,337 
Retroactive reinsurance(1,004)(1,104)
Total reserve discount(a)(b)
$1,202 $1,233 
(a)Excludes $197 million and $196 million of discount related to certain long-tail liabilities in the UK at September 30, 2024 and December 31, 2023, respectively.
(b)Includes gross discount of $665 million and $687 million, which was 100 percent ceded to Fortitude Re at September 30, 2024 and December 31, 2023, respectively.
The following table presents the net loss reserve discount benefit (charge):
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in millions)2024202320242023
Current accident year$20 $47 $86 $115 
Accretion and other adjustments to prior year discount(49)(52)(217)(200)
Net reserve discount benefit (charge)(29)(5)(131)(85)
Change in discount on loss reserves ceded under retroactive reinsurance22 24 100 120 
Net change in total reserve discount*$(7)$19 $(31)$35 
*Excludes $1 million and $7 million discount related to certain long-tail liabilities in the UK for the three months ended September 30, 2024 and 2023, respectively, and excludes $1 million and $15 million discount related to certain long-tail liabilities in the UK for the nine months ended September 30, 2024 and 2023, respectively.
Amortization of Deferred Gain on Retroactive Reinsurance
Amortization of the deferred gain on retroactive reinsurance includes $209 million and $(36) million related to the adverse development reinsurance cover with NICO for the three months ended September 30, 2024 and 2023, respectively, and $230 million and $36 million related to the adverse development reinsurance cover with NICO for the nine months ended September 30, 2024 and 2023, respectively.
Amounts recognized reflect the amortization of the initial deferred gain at inception, as amended for subsequent changes in the deferred gain due to changes in subject reserves.
FUTURE POLICY BENEFITS
Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of the present value of future benefits less the present value of future net premiums. For traditional and limited pay long-duration products, benefit reserves are accrued and benefit expense is recognized using a net premium ratio methodology for each annual cohort of business.
The following tables present the balances and changes in the liability for future policy benefits and a reconciliation of the net liability for future policy benefits to the liability for future policy benefits in the Condensed Consolidated Balance Sheets:
Nine Months Ended September 30,
(in millions, except for liability durations)20242023
Present value of expected net premiums
Balance, beginning of year$1,702 $1,929 
Effect of changes in discount rate assumptions (AOCI)339 262 
Beginning balance at original discount rate2,041 2,191 
Effect of actual variances from expected experience(7)(44)
Adjusted beginning of year balance2,034 2,147 
Issuances75 100 
Interest accrual22 22 
Net premium collected(268)(160)
Foreign exchange impact(87)(62)
Other (63)
Ending balance at original discount rate1,776 1,984 
Effect of changes in discount rate assumptions (AOCI)(193)(354)
Balance, end of period$1,583 $1,630 
Nine Months Ended September 30,
(in millions, except for liability durations)20242023
Present value of expected future policy benefits
Balance, beginning of year$2,149 $2,380 
Effect of changes in discount rate assumptions (AOCI)441 362 
Beginning balance at original discount rate2,590 2,742 
Effect of actual variances from expected experience(8)(43)
Adjusted beginning of year balance2,582 2,699 
Issuances79 104 
Interest accrual27 27 
Benefit payments(273)(153)
Foreign exchange impact(107)(93)
Other (74)
Ending balance at original discount rate2,308 2,510 
Effect of changes in discount rate assumptions (AOCI)(264)(461)
Balance, end of period$2,044 $2,049 
Net liability for future policy benefits, end of period$461 $419 
Deferred profit liability1 
Other reconciling items(a)
1,009 891 
Future policy benefits1,471 1,311 
Less: Reinsurance recoverable(813)(712)
Net liability for future policy benefits after reinsurance recoverable$658 $599 
Weighted average liability duration of the liability for future policy benefits(b)
9.89.5
(a)Other reconciling items primarily include Accident & Health (short-duration) contracts of $776 million and $661 million at September 30, 2024 and 2023, respectively, of certain long-duration contracts that are 100 percent ceded.
(b)The weighted average liability durations are calculated as the modified duration using projected future net liability cash flows that are aggregated at the segment level, utilizing the segment level weighted average interest rates and current discount rate, which can be found in the table below.
The following table presents the amount of undiscounted expected future benefit payments and undiscounted and discounted expected gross premiums for future policy benefits for nonparticipating contracts:
Nine Months Ended September 30,
(in millions)20242023
Undiscounted expected future benefits and expense$2,820 $3,099 
Undiscounted expected future gross premiums3,881 4,275 
Discounted expected future gross premiums (at current discount rate)2,905 2,963 
The following table presents the amount of revenue and interest recognized in the Condensed Consolidated Statements of Income (Loss) for future policy benefits for nonparticipating contracts:
Nine Months Ended September 30,
(in millions)20242023
Gross premiums$326 $338 
Interest accretion$5 $
The following table presents the weighted-average interest rate for future policy benefits for nonparticipating contracts:
Nine Months Ended September 30,20242023
Weighted-average interest rate, original discount rate1.83 %1.84 %
Weighted-average interest rate, current discount rate3.30 %3.92 %
The weighted average interest rates are calculated using projected future net liability cash flows that are aggregated to the segment level, and are represented as an annual rate.