INSURANCE CLAIM RESERVES

Claims and claim adjustment expense reserves were as follows:



(at December 31, in millions)	2018		2017
Property-casualty	$	50,653	$	49,633
Accident and health	15		17
Total	$	50,668	$	49,650

The following table presents a reconciliation of beginning and ending property casualty reserve balances for claims and claim adjustment expenses:



(at and for the year ended December 31, in millions)	2018			2017			2016
Claims and claim adjustment expense reserves at beginning of year	$	49,633		$	47,929		$	48,272
Less reinsurance recoverables on unpaid losses	8,123			7,981			8,449
Net reserves at beginning of year	41,510			39,948			39,823
Estimated claims and claim adjustment expenses for claims arising in the current year	18,614			17,846			15,675
Estimated decrease in claims and claim adjustment expenses for claims arising in prior years	(406		)	(458		)	(680		)
Total increases	18,208			17,388			14,995
Claims and claim adjustment expense payments for claims arising in:
Current year	7,697			7,335			6,220
Prior years	9,363			8,708			8,576
Total payments	17,060			16,043			14,796
Unrealized foreign exchange loss (gain)	(187		)	217			(74		)
Net reserves at end of year	42,471			41,510			39,948
Plus reinsurance recoverables on unpaid losses	8,182			8,123			7,981
Claims and claim adjustment expense reserves at end of year	$	50,653		$	49,633		$	47,929

Gross claims and claim adjustment expense reserves at December 31, 2018 increased by $1.02 billion over December 31, 2017, primarily reflecting the impacts of (i) higher volumes of insured exposures and loss cost trends for the current accident year and (ii) catastrophe losses in 2018, partially offset by the impacts of (iii) payments related to catastrophe losses incurred in 2017 and (iv) net favorable prior year reserve development. Gross claims and claim adjustment expense reserves at December 31, 2017 increased by $1.70 billion over December 31, 2016, primarily reflecting the impacts of (i) catastrophe losses in the second half of 2017 and (ii) higher volumes of insured exposures and loss cost trends for the current accident year, partially offset by the impacts of (iii) payments related to operations in runoff and (iv) net favorable prior year reserve development.

Reinsurance recoverables on unpaid losses at December 31, 2018 increased by $59 million over December 31, 2017, primarily reflecting the 2018 impacts of catastrophe losses and the asbestos reserve increase, partially offset by cash collections. Reinsurance recoverables on unpaid losses at December 31, 2017 increased by $142 million from December 31, 2016, primarily reflecting the impacts of catastrophe losses and the asbestos reserve increase in the second half of 2017, partially offset by cash collections in 2017, including the settlement of certain disputes as discussed in more detail in note 16.

Included in the claims and claim adjustment expense reserves are reserves for long-term disability and annuity claim payments, primarily arising from workers’ compensation insurance and workers’ compensation excess insurance policies, that are discounted to the present value of the estimated future payments. The discount rate used was 5% at both December 31, 2018 and 2017. Total reserves net of the discount were $2.45 billion and $2.32 billion, and the related amount of discount was $1.16 billion and $1.10 billion, at December 31, 2018 and 2017, respectively. Accretion of the discount is reported as part of “claims and claim adjustment expenses” in the consolidated statement of income and was $49 million, $50 million and $50 million in 2018, 2017 and 2016, respectively.

Prior Year Reserve Development

The following disclosures regarding reserve development are on a “net of reinsurance” basis.

2018

In 2018, estimated claims and claim adjustment expenses incurred included $406 million of net favorable development for claims arising in prior years, including $517 million of net favorable prior year reserve development and $49 million of accretion of discount that impacted the Company's results of operations.

Business Insurance. Net favorable prior year reserve development in 2018 totaled $142 million, primarily driven by better than expected loss experience in the segment’s domestic operations in (i) the workers’ compensation product line for multiple accident years and (ii) the commercial property product line for recent accident years, partially offset by higher than expected loss experience in the segment's domestic operations in (iii) the general liability product line for both primary and excess coverages for multiple accident years, including a $225 million increase to asbestos reserves and a $55 million increase to environmental reserves and (iv) the commercial automobile product line for recent accident years.

Bond & Specialty Insurance. Net favorable prior year reserve development in 2018 totaled $266 million, primarily driven by better than expected loss experience in the segment’s domestic operations in the general liability product line for management liability coverages for multiple accident years.

Personal Insurance. Net favorable prior year reserve development in 2018 totaled $109 million, primarily driven by better than expected loss experience in the segment's domestic operations in the automobile product line for recent accident years.

2017

In 2017, estimated claims and claim adjustment expenses incurred included $458 million of net favorable development for claims arising in prior years, including $592 million of net favorable prior year reserve development and $50 million of accretion of discount that impacted the Company's results of operations.

Business Insurance. Net favorable prior year reserve development in 2017 totaled $439 million, primarily driven by better than expected loss experience in the segment's domestic operations in (i) the workers’ compensation product line for multiple accident years, (ii) the general liability product line (excluding an increase to asbestos and environmental reserves) for both primary and excess coverages for multiple accident years and (iii) the commercial multi-peril product line for liability coverages for multiple accident years, partially offset by (iv) a $225 million increase to asbestos reserves, (v) the impact of higher than expected loss experience in the commercial automobile product line for recent accident years and (vi) a $65 million increase to environmental reserves. The net favorable prior year reserve development in the segment’s domestic operations was partially offset by net unfavorable prior year reserve development in the segment’s international operations in Europe primarily due to the U.K. Ministry of Justice’s “Ogden” discount rate adjustment applied to lump sum bodily injury payouts.

Bond & Specialty Insurance. Net favorable prior year reserve development in 2017 totaled $140 million, primarily driven by better than expected loss experience in the segment’s domestic operations in the general liability product line for management liability coverages for multiple accident years.

Personal Insurance. Net favorable prior year reserve development in 2017 was not significant and totaled $13 million.

2016

In 2016, estimated claims and claim adjustment expenses incurred included $680 million of net favorable development for claims arising in prior years, including $771 million of net favorable prior year reserve development and $50 million of accretion of discount that impacted the Company's results of operations.

Business Insurance. Net favorable prior year reserve development in 2016 totaled $424 million, primarily driven by better than expected loss experience in the Company’s domestic operations in (i) the workers’ compensation product line for multiple accident years and (ii) the general liability product line (excluding an increase to asbestos and environmental reserves), related to both primary and excess coverages for multiple accident years, partially offset by (iii) a $225 million increase to asbestos reserves and (iv) a $82 million increase to environmental reserves, as well as net favorable prior year reserve development in the segment's international operations in Europe.

Bond & Specialty Insurance. Net favorable prior year reserve development in 2016 totaled $350 million, primarily driven by better than expected loss experience in the Company’s domestic operations in (i) the fidelity and surety product line for multiple accident years and (ii) the general liability product line for management liability coverages for multiple accident years.

Personal Insurance. Net unfavorable prior year reserve development in 2016 was not significant and totaled $3 million.

Claims Development

The following is a summary of claims and claim adjustment expense reserves, including certain components, for the Company’s major product lines by reporting segment at December 31, 2018.



(at December 31, 2018, in mllions)	Net Undiscounted Claims and Claim Adjustment Expense Reserves		Discount (Net of Reinsurance)			Subtotal: Net Claims and Claim Adjustment Expense Reserves		Reinsurance Recoverables on Unpaid Losses (4)			Claims and Claim Adjustment Expense Reserves
Business Insurance
General liability	$	7,159	$	(174	)	$	6,985	$	854		$	7,839
Commercial property	973		—			973		429			1,402
Commercial multi-peril	3,535		—			3,535		181			3,716
Commercial automobile	2,861		—			2,861		226			3,087
Workers’ compensation ⁽¹⁾	16,039		(909		)	15,130		698			15,828
Bond & Specialty Insurance
General liability	1,833		—			1,833		152			1,985
Fidelity and surety	419		—			419		7			426
Personal Insurance
Automobile	2,776		—			2,776		480			3,256
Homeowners (excluding Other)	1,376		—			1,376		3			1,379
International - Canada	710		—			710		26			736
Subtotal — claims and allocated claim adjustment expenses for the products presented in the development tables below	37,681		(1,083		)	36,598		3,056			39,654
Other insurance contracts ⁽²⁾	3,762		(5		)	3,757		2,116			5,873
Unallocated loss adjustment expense reserves	2,053		—			2,053		37			2,090
Structured settlements ⁽³⁾	—		—			—		2,990			2,990
Other	63		—			63		(17		)	46
Total property-casualty	43,559		(1,088		)	42,471		8,182			50,653
Accident and health	—		—			—		15			15
Total	$	43,559	$	(1,088	)	$	42,471	$	8,197		$	50,668

___________________________________________


(1)	Net discount amount includes discount of $70 million on reinsurance recoverables for long-term disability and annuity claim payments.


(2)	Primarily includes residual market, international (other than operations in Canada within the Personal Insurance segment) and runoff assumed reinsurance business.


(3)	Includes structured settlements in cases where the Company did not receive a release from the claimant.


(4)	Total reinsurance recoverables (on paid and unpaid losses) at December 31, 2018 were $8.37 billion.

The claim development tables that follow present, by accident year, incurred and cumulative paid claims and allocated claim adjustment expense on a historical basis. This claim development information is presented on an undiscounted, net of reinsurance basis for ten years, or the number of years for which claims incurred typically remain outstanding if less than ten years. The claim development tables also provide the historical average annual percentage payout of incurred claims by age, net of reinsurance, as supplementary information (identified as unaudited in the tables below). For Personal Insurance - International - Canada, the claim development information reflects the acquisition of The Dominion of Canada General Insurance Company (Dominion) in November 2013 on a retrospective basis (includes Dominion data for years prior to the Company’s acquisition of Dominion).

Business Insurance

General Liability



	(dollars in millions)
	For the Years Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	Unaudited
Accident Year																					IBNR Reserves Dec 31, 2018		Cumulative Number of Reported Claims
2009	$	1,060	$	1,071	$	1,028	$	960	$	869	$	837	$	809	$	796	$	783	$	775	$	56	25,702
2010			1,028		1,031		1,021		959		927		912		918		908		911		79		27,911
2011					1,004		1,074		1,065		998		972		935		913		908		80		27,444
2012							989		985		935		913		892		905		917		98		24,801
2013									965		975		958		940		927		933		101		22,446
2014											976		989		983		948		956		177		22,108
2015													998		956		923		967		222		21,033
2016															1,075		1,058		1,087		439		19,190
2017																	1,133		1,143		717		16,464
2018																			1,253		1,080		13,107
																	Total		$	9,850



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year	Unaudited
2009	$	35	$	167	$	314	$	446	$	543	$	613	$	643	$	667	$	689	$	701
2010			35		139		324		487		629		702		756		781		800
2011					47		187		355		539		660		725		762		799
2012							32		150		295		489		589		699		754		Liability for Claims
2013									35		175		363		498		639		745		And Allocated Claim
2014											37		163		321		515		640		Adjustment Expenses,
2015													36		137		336		558		Net of Reinsurance
2016															35		191		421
2017																	40		180		2009 -		Before
2018																			42		2018		2009
																	Total		$	5,640	$	4,210	$	2,949
																			Total net liability				$	7,159



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5		6		7		8		9		10
	3.8	%	13.6	%	19.0	%	19.1	%	13.4	%	9.5	%	5.0	%	3.2	%	2.5	%	1.5	%

Commercial Property



	(dollars in millions)
	For the Years Ended December 31,
	2014		2015		2016		2017		2018
	Incurred Claims and Allocated Claims Adjustment Expenses, Net of Reinsurance
	Unaudited
Accident Year											IBNR Reserves December 31, 2018		Cumulative Number of Reported Claims
2014	$	936	$	860	$	836	$	835	$	834	$	6	21,568
2015			786		750		741		731		6		20,143
2016					896		863		820		22		22,267
2017							1,209		1,177		30		24,855
2018									1,093		73		21,547
							Total		$	4,655



	Cumulative Paid Claims and Allocated Claim
	Adjustment Expenses, Net of Reinsurance
	Unaudited
											Liability for Claims
Accident Year											And Allocated Claim
2014	$	464	$	710	$	775	$	803	$	817	Adjustment Expenses,
2015			376		615		681		699		Net of Reinsurance
2016					441		685		745
2017							618		1,003		2014 -		Before
2018									561		2018		2014
							Total		$	3,825	$	830	$	143
									Total net liability				$	973



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5
	52.9	%	31.2	%	8.0	%	2.9	%	1.7	%

Commercial Multi-Peril



	(dollars in millions)
	For the Years Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	Unaudited
Accident Year																					IBNR Reserves December 31, 2018		Cumulative Number of Reported Claims
2009	$	1,484	$	1,506	$	1,501	$	1,498	$	1,511	$	1,514	$	1,514	$	1,509	$	1,500	$	1,493	$	21	103,448
2010			1,711		1,826		1,832		1,861		1,895		1,892		1,898		1,885		1,881		32		111,931
2011					2,235		2,244		2,269		2,286		2,296		2,287		2,283		2,279		38		125,743
2012							1,885		1,883		1,903		1,888		1,888		1,867		1,859		42		104,800
2013									1,615		1,623		1,620		1,609		1,591		1,600		51		83,667
2014											1,663		1,627		1,625		1,617		1,626		72		78,097
2015													1,568		1,625		1,593		1,597		110		71,242
2016															1,662		1,623		1,598		204		68,024
2017																	1,872		1,928		357		69,218
2018																			1,976		605		58,784
																	Total		$	17,837



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year	Unaudited
2009	$	603	$	958	$	1,121	$	1,264	$	1,360	$	1,408	$	1,436	$	1,449	$	1,457	$	1,466
2010			709		1,180		1,395		1,579		1,698		1,763		1,798		1,819		1,834
2011					1,060		1,573		1,803		1,979		2,088		2,156		2,193		2,222
2012							795		1,246		1,424		1,590		1,699		1,752		1,780		Liability for Claims
2013									644		987		1,167		1,304		1,410		1,475		And Allocated Claim
2014											628		956		1,154		1,328		1,448		Adjustment Expenses,
2015													595		970		1,144		1,310		Net of Reinsurance
2016															585		950		1,133
2017																	716		1,199		2009 -		Before
2018																			792		2018		2009
																	Total		$	14,659	$	3,178	$	357
																			Total net liability				$	3,535



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5		6		7		8		9		10
	39.7	%	23.2	%	11.0	%	9.4	%	6.2	%	3.3	%	1.7	%	1.1	%	0.7	%	0.6	%

Commercial Automobile



	(dollars in millions)
	For the Years Ended December 31,
	2014		2015		2016		2017		2018
	Incurred Claims and Allocated Claims Adjustment
	Expenses, Net of Reinsurance
	Unaudited
Accident Year											IBNR Reserves December 31, 2018		Cumulative Number of Reported Claims
2014	$	1,156	$	1,153	$	1,155	$	1,171	$	1,193	$	36	177,493
2015			1,188		1,202		1,234		1,283		83		173,333
2016					1,278		1,303		1,371		191		182,647
2017							1,386		1,501		401		190,126
2018									1,645		736		185,419
							Total		$	6,993



	Cumulative Paid Claims and Allocated Claim
	Adjustment Expenses, Net of Reinsurance
	Unaudited
											Liability for Claims
Accident Year											And Allocated Claim
2014	$	394	$	611	$	812	$	977	$	1,089	Adjustment Expenses,
2015			405		650		885		1,058		Net of Reinsurance
2016					412		688		931
2017							456		746		2014 -		Before
2018									515		2018		2014
							Total		$	4,339	$	2,654	$	207
									Total net liability				$	2,861



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5
	31.3	%	19.2	%	17.6	%	13.7	%	9.3	%

Workers’ Compensation



	(dollars in millions)
	For the Years Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	Unaudited
Accident Year																					IBNR Reserves December 31, 2018		Cumulative Number of Reported Claims
2009	$	1,799	$	1,778	$	1,746	$	1,753	$	1,753	$	1,766	$	1,775	$	1,750	$	1,736	$	1,728	$	221	104,789
2010			1,886		2,042		2,035		2,056		2,049		2,052		2,055		2,021		2,003		271		117,368
2011					2,284		2,303		2,347		2,350		2,379		2,385		2,363		2,348		356		136,728
2012							2,447		2,456		2,457		2,456		2,445		2,453		2,416		404		137,922
2013									2,553		2,545		2,540		2,506		2,463		2,423		473		132,424
2014											2,554		2,553		2,547		2,476		2,430		563		124,507
2015													2,644		2,585		2,505		2,441		751		122,388
2016															2,768		2,690		2,569		863		122,493
2017																	2,779		2,681		1,179		119,890
2018																			2,744		1,738		109,002
																	Total		$	23,783



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year	Unaudited
2009	$	288	$	623	$	828	$	961	$	1,065	$	1,137	$	1,193	$	1,235	$	1,274	$	1,303
2010			341		750		978		1,133		1,246		1,321		1,385		1,430		1,465
2011					420		911		1,185		1,365		1,487		1,583		1,652		1,696
2012							443		940		1,217		1,394		1,536		1,629		1,689		Liability for Claims
2013									458		954		1,237		1,413		1,525		1,604		And Allocated Claim
2014											455		944		1,224		1,399		1,505		Adjustment Expenses,
2015													430		893		1,154		1,310		Net of Reinsurance
2016															421		873		1,118
2017																	433		890		2009 -		Before
2018																			440		2018		2009
																	Total		$	13,020	$	10,763	$	5,276
																			Total net liability				$	16,039



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5		6		7		8		9		10
	17.4	%	19.5	%	11.2	%	7.3	%	5.3	%	3.8	%	3.0	%	2.2	%	2.0	%	1.7	%

Bond & Specialty Insurance

General Liability



	(dollars in millions)
	For the Years Ended December 31,
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	Unaudited
Accident Year																					IBNR Reserves December 31, 2018			Cumulative Number of Reported Claims
2009	$	592	$	624	$	665	$	686	$	680	$	660	$	655	$	641	$	631	$	626	$	11		6,297
2010			571		612		679		679		661		668		653		653		657		18			5,673
2011					565		596		639		632		601		545		520		508		(12		)	5,212
2012							538		591		614		605		601		599		605		97			4,853
2013									510		565		606		630		654		607		103			4,442
2014											549		571		563		518		473		67			4,335
2015													528		524		486		437		92			4,155
2016															512		511		504		153			4,235
2017																	534		517		266			4,128
2018																			530		406			2,894
																	Total		$	5,464



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year	Unaudited
2009	$	36	$	167	$	310	$	390	$	460	$	497	$	563	$	592	$	595	$	597
2010			33		152		291		396		482		565		597		623		631
2011					33		143		249		324		414		447		476		490
2012							38		160		255		342		383		419		436		Liability for Claims
2013									34		154		252		352		400		434		And Allocated Claim
2014											38		150		239		312		367		Adjustment Expenses,
2015													38		141		234		310		Net of Reinsurance
2016															30		141		233
2017																	38		155		2009 -		Before
2018																			49		2018		2009
																	Total		$	3,702	$	1,762	$	71
																			Total net liability				$	1,833



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5		6		7		8		9		10
	6.8	%	21.4	%	19.4	%	15.3	%	11.4	%	7.3	%	6.0	%	3.7	%	0.9	%	0.2	%

Fidelity and Surety



	(dollars in millions)
	For the Years Ended December 31,
	2014		2015		2016		2017		2018		IBNR Reserves December 31, 2018			Cumulative
	Incurred Claims and Allocated Claims Adjustment													Number of
	Expenses, Net of Reinsurance													Reported
Accident Year	Unaudited													Claims
2014	$	223	$	212	$	165	$	136	$	130	$	(4	)	1,069
2015			217		191		179		145		38			827
2016					226		239		205		12			866
2017							244		271		64			863
2018									220		121			595
							Total		$	971



	Cumulative Paid Claims and Allocated Claim
	Adjustment Expenses, Net of Reinsurance
Accident Year	Unaudited										Liability for Claims
											And Allocated Claim
2014	$	58	$	96	$	111	$	127	$	124	Adjustment Expenses,
2015			32		75		87		86		Net of Reinsurance
2016					54		121		142
2017							70		166		2014 -		Before
2018									64		2018		2014
							Total		$	582	$	389	$	30
									Total net liability				$	419



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5
	29.5	%	31.8	%	9.9	%	6.1	%	(2.7	)%

Personal Insurance

Automobile



	(dollars in millions)
	For the Years Ended December 31,
	2014		2015		2016		2017		2018		IBNR Reserves December 31, 2018		Cumulative
	Incurred Claims and Allocated Claims Adjustment												Number of
	Expenses, Net of Reinsurance												Reported
Accident Year	Unaudited												Claims
2014	$	2,014	$	1,994	$	1,981	$	1,985	$	1,980	$	14	670,431
2015			2,186		2,244		2,236		2,222		35		757,837
2016					2,779		2,791		2,772		126		921,479
2017							3,323		3,256		341		1,059,610
2018									3,281		825		960,293
							Total		$	13,511



	Cumulative Paid Claims and Allocated Claim
	Adjustment Expenses, Net of Reinsurance
Accident Year	Unaudited										Liability for Claims
											And Allocated Claim
2014	$	1,193	$	1,564	$	1,763	$	1,879	$	1,936	Adjustment Expenses,
2015			1,319		1,768		1,985		2,109		Net of Reinsurance
2016					1,610		2,203		2,466
2017							1,912		2,575		2014 -		Before
2018									1,889		2018		2014
							Total		$	10,975	$	2,536	$	240
									Total net liability				$	2,776



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5
	58.8	%	20.2	%	9.8	%	5.7	%	2.9	%

Homeowners (excluding Other)



	(dollars in millions)
	For the Years Ended December 31,
	2014		2015		2016		2017		2018		IBNR Reserves December 31, 2018		Cumulative
	Incurred Claims and Allocated Claims Adjustment												Number of
	Expenses, Net of Reinsurance												Reported
Accident Year	Unaudited												Claims
2014	$	1,515	$	1,450	$	1,453	$	1,457	$	1,451	$	7	151,705
2015			1,438		1,454		1,461		1,452		10		145,088
2016					1,556		1,547		1,525		27		143,797
2017							2,312		2,340		101		168,357
2018									2,610		568		165,780
							Total		$	9,378



	Cumulative Paid Claims and Allocated Claim
	Adjustment Expenses, Net of Reinsurance
Accident Year	Unaudited										Liability for Claims
											And Allocated Claim
2014	$	1,053	$	1,338	$	1,402	$	1,425	$	1,433	Adjustment Expenses,
2015			994		1,333		1,395		1,421		Net of Reinsurance
2016					1,049		1,392		1,455
2017							1,471		2,059		2014 -		Before
2018									1,657		2018		2014
							Total		$	8,025	$	1,353	$	23
									Total net liability				$	1,376



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5
	67.2	%	22.7	%	4.3	%	1.7	%	0.5	%

International - Canada



	(dollars in millions)
	For the Years Ended December 31,																				IBNR Reserves December 31, 2018			Cumulative
	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018					Number of
Accident	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																							Reported
Year	Unaudited																							Claims
2009	$	454	$	442	$	450	$	456	$	464	$	456	$	449	$	449	$	442	$	440	$	—		55,162
2010			463		464		475		488		477		469		465		459		457		5			54,919
2011					436		416		424		420		412		406		401		396		4			55,783
2012							413		393		394		378		377		361		355		12			51,226
2013									461		455		446		435		422		421		14			54,231
2014											408		422		423		412		405		(3		)	52,291
2015													343		342		342		339		16			45,201
2016															343		389		389		32			45,728
2017																	329		362		26			46,545
2018																			418		89			46,883
																	Total		$	3,982



Accident	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year	Unaudited
2009	$	189	$	283	$	323	$	350	$	379	$	403	$	419	$	430	$	433		$	434
2010			182		278		313		351		380		409		425		437			442
2011					167		237		266		299		332		353		370			378
2012							157		219		249		274		300		317			325		Liability for Claims
2013									184		258		289		320		351			368		And Allocated Claim
2014											180		252		287		314			344		Adjustment Expenses,
2015													154		215		241			269		Net of Reinsurance
2016															201		269			294
2017																	173			244		2009 -		Before
2018																				208		2018		2009
																	Total			$	3,306	$	676	$	34
																			Total net liability					$	710



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
	Unaudited
Years	1		2		3		4		5		6		7		8		9		10
	45.2	%	18.7	%	7.8	%	7.4	%	7.3	%	5.2	%	3.5	%	2.2	%	1.0	%	0.2	%

The incurred and paid amounts have been translated from the local currency to U.S. dollars using the December 31, 2018 spot rate for all years presented in the table above in order to isolate changes in foreign exchange rates from loss development.

Methodology for Estimating Incurred But Not Reported (IBNR) Reserves

Claims and claim adjustment expense reserves represent management’s estimate of the ultimate liability for unpaid losses and loss adjustment expenses for claims that have been reported and claims that have been incurred but not yet reported as of the balance sheet date. Claims and claim adjustment expense reserves do not represent an exact calculation of the liability, but instead represent management estimates, primarily utilizing actuarial expertise and projection methods that develop estimates for the ultimate cost of claims and claim adjustment expenses. Because the establishment of claims and claims adjustment expense reserves is an inherently uncertain process involving estimates and judgment, currently estimated claims and claim adjustment expense reserves may change. The Company reflects changes to the reserves in the results of operations in the period the estimates are changed.

Cumulative amounts paid and case reserves held as of the balance sheet date are subtracted from the estimate of the ultimate cost of claims and claim adjustment expenses to derive incurred but not reported (IBNR) reserves. Accordingly, IBNR reserves include the cost of unreported claims, development on known claims and re-opened claims. This approach to estimating IBNR reserves has been in place for many years, with no material changes in methodology in the past year.

Detailed claim data is typically insufficient to produce a reliable indication of the initial estimate for ultimate claims and claim adjustment expenses for an accident year. As a result, the initial estimate for an accident year is generally based on an exposure-based method using either the loss ratio projection or the expected loss method. The loss ratio projection method, which is typically used for guaranteed-cost business, develops an initial estimate of ultimate claims and claim adjustment expenses for an accident year by multiplying earned premium for the accident year by a projected loss ratio. The projected loss ratio is determined by analyzing prior period experience, and adjusting for loss cost trends, rate level differences, mix of business changes and other known or observed factors influencing the accident year relative to prior accident years. The expected loss method, which is typically used for loss sensitive business, develops an initial estimate of ultimate claims and claim adjustment expenses for an accident year by analyzing exposures by account.

For prior accident years, the following estimation and analysis methods are principally used by the Company’s actuaries to estimate the ultimate cost of claims and claim adjustment expenses. These estimation and analysis methods are typically referred to as conventional actuarial methods.


•	The paid loss development method assumes that the future change (positive or negative) in cumulative paid losses for a given cohort of claims will occur in a stable, predictable pattern from year-to-year, consistent with the pattern observed in past cohorts.


•	The case incurred development method is the same as the paid loss development method but is based on cumulative case-incurred losses rather than paid losses.

•

The Bornhuetter-Ferguson method uses an initial estimate of ultimate losses for a given product line reserve component, typically expressed as a ratio to earned premium. The method assumes that the ratio of additional claim activity to earned premium for that component is relatively stable and predictable over time and that actual claim activity to date is not a credible predictor of further activity for that component. The method is used most often for more recent accident years where claim data is sparse and/or volatile, with a transition to other methods as the underlying claim data becomes more voluminous and therefore more credible.

•

The average value analysis combined with the reported claim development method assumes that average claim values are stable and predictable over time for a particular cohort of claims. It is typically limited to analysis at more granular levels, such as coverage or hazard/peril, where a more homogeneous subset of claims produce a more stable and fairly predictable average value. The reported claim development method is the same as the paid loss development method but uses changes in cumulative claim counts to produce estimates of ultimate claim counts rather than ultimate dollars. The resulting estimate of ultimate claim counts by cohort is multiplied by an average value per claim from an average value analysis to obtain estimated ultimate claims and claim adjustment expenses.

While these are the principal methods utilized, the Company’s actuaries have available to them the full range of actuarial methods developed by the casualty actuarial profession. The Company’s actuaries are also continually monitoring developments within the profession for advances in existing techniques or the creation of new techniques that might improve current and future estimates. Most actuarial methods assume that past patterns demonstrated in the data will repeat themselves in the future. For certain reserve components where this assumption may not hold, such as asbestos and environmental reserves, conventional actuarial methods are not utilized by the Company.

Methodology for Determining Cumulative Number of Reported Claims

A claim file is created when the Company is notified of an actual demand for payment, notified of an event that may lead to a demand for payment or when it is determined that a demand for payment could possibly lead to a future demand for payment on another coverage on the same policy or on another policy. Claim files are generally created for a policy at the claimant by coverage level, depending on the particular facts and circumstances of the underlying event.

For Business Insurance and for Personal Insurance, claim file information is summarized such that the Company generally recognizes one count for each policy claim event by internal regulatory line of business, regardless of the number of claimants or coverages involved. The claims counts are then accumulated and reported by product line. While the methodology is generally consistent within each segment for the product lines displayed, there are some minor differences between and within segments. For Bond & Specialty Insurance, the Company generally recognizes one count per coverage per policy claim event and one count per bond per surety claim event.

For purposes of the claims development tables above, claims reported for direct business are counted even if they eventually close with no loss payment, except in the case of (i) deductible business, where the claim is not counted until the case incurred claim estimate is above the deductible, and (ii) International-Canada reported claim counts where claims closed with no loss payment are not counted. Note that claims with zero claim dollars may still generate some level of claim adjustment expenses. Claim counts for assumed business are included only to the extent such counts are available. The Company generally does not receive claim count information for which the underlying claim activity is handled by others, including pools and associations. The Company does not generate claim counts for ceded business. The methods used to summarize claim counts have not changed significantly over the time periods reported in the tables above.

The Company cautions against using the summarized claim count information provided in this disclosure in attempting to project ultimate loss payouts by product line. The Company generally finds claim count data to be useful only on a more granular basis than the aggregated basis disclosed in the claim development tables above, as the risks, average values and other dynamics of the claim process can vary materially by the cause of loss and coverage within product line. For example, in Personal Automobile, the introduction of a new roadside assistance coverage feature several years ago resulted in a significant increase in claim counts with a low average claim cost. For this reason the Company varies its approach to, and in many cases the level of aggregation for, counting claims for internal analysis purposes depending on the particular granular analysis performed.

Asbestos and Environmental Reserves

At December 31, 2018 and 2017, the Company’s claims and claim adjustment expense reserves included $1.62 billion and $1.64 billion, respectively, for asbestos and environmental-related claims, net of reinsurance.

It is difficult to estimate the reserves for asbestos and environmental-related claims due to the vagaries of court coverage decisions, plaintiffs’ expanded theories of liability, the risks inherent in complex litigation and other uncertainties, including, without limitation, those which are set forth below.

Asbestos Reserves. Because each policyholder presents different liability and coverage issues, the Company generally reviews the exposure presented by each policyholder at least annually. Among the factors which the Company may consider in the course of this review are: available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; the potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.

In the third quarter of 2018, the Company completed its annual in-depth asbestos claim review, including a review of active policyholders and litigation cases for potential product and “non-product” liability, and noted the continuation of the following trends:


•	a high level of litigation activity in certain jurisdictions involving individuals alleging serious asbestos-related illness, primarily involving mesothelioma claims;


•	while overall payment patterns have been generally stable, there has been an increase in severity for certain policyholders due to the high level of litigation activity; and


•	a moderate level of asbestos-related bankruptcy activity.

In the home office and field office category, which accounts for the vast majority of policyholders with active asbestos-related claims, the number of policyholders tendering asbestos claims for the first time, the number of policyholders with open asbestos claims and net asbestos-related payments declined slightly when compared to 2017. Payments on behalf of policyholders in this category continue to be influenced by a high level of litigation activity in a limited number of jurisdictions where individuals alleging serious asbestos-related injury, primarily mesothelioma, continue to target defendants who were not traditionally primary targets of asbestos litigation.

The Company’s quarterly asbestos reserve reviews include an analysis of exposure and claim payment patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions. The Company also analyzes developing payment patterns among policyholders in the home office and field office category and the assumed reinsurance and other category as well as projected reinsurance billings and recoveries. In addition, the Company reviews its historical gross and net loss and expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics suggested by the aggregate paid activity. Conventional actuarial methods are not utilized to establish asbestos reserves and the Company’s evaluations have not resulted in a reliable method to determine a meaningful average asbestos defense or indemnity payment.

The completion of these reviews and analyses in 2018, 2017 and 2016 resulted in $225 million increases in each year to the Company’s net asbestos reserves. In each year, the reserve increases were primarily driven by increases in the Company’s estimate of projected settlement and defense costs related to a broad number of policyholders in the home office and field office category. The increase in the estimate of projected settlement and defense costs resulted from payment trends that continue to be higher than previously anticipated due to the impact of the current litigation environment surrounding mesothelioma claims discussed above. Over the past decade, the property and casualty insurance industry, including the Company, has experienced net unfavorable prior year reserve development with regard to asbestos reserves, but the Company believes that over that period there has been a reduction in the volatility associated with the Company’s overall asbestos exposure as the overall asbestos environment has evolved from one dominated by exposure to significant litigation risks, particularly coverage disputes relating to policyholders in bankruptcy who were asserting that their claims were not subject to the aggregate limits contained in their policies, to an environment primarily driven by a frequency of litigation related to individuals with mesothelioma. The Company’s overall view of the current underlying asbestos environment is essentially unchanged from recent periods and there remains a high degree of uncertainty with respect to future exposure to asbestos claims.

Net asbestos paid loss and loss expenses in 2018, 2017 and 2016 were $225 million, $271 million and $708 million, respectively. Net payments in 2016 included the $458 million net payment related to PPG Industries, Inc. Approximately 9%, 4% and 69% of total net paid losses in 2018, 2017 and 2016, respectively, related to policyholders with whom the Company entered into settlement agreements that limit those policyholders' ability to present future claims to the Company.

Environmental Reserves. In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any. These claims are mainly brought pursuant to various state or federal statutes that require a liable party to undertake or pay for environmental remediation. Liability under these statutes may be joint and several with other responsible parties. In the course of its analysis, the Company generally considers the probable liability, available coverage and relevant judicial interpretations. In addition, the Company considers the many variables presented, such as: the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the alleged environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. The evaluation of the exposure presented by a policyholder can change as information concerning that policyholder and the many variables presented is developed. Conventional actuarial methods are not used to estimate these reserves.

The Company continues to receive notices from policyholders tendering claims for the first time, frequently under policies issued prior to the mid-1980s. These policyholders continue to present smaller exposures, have fewer sites and are lower tier defendants. Further, in many instances, clean-up costs have been reduced because regulatory agencies are willing to accept risk-based site analyses and more efficient clean-up technologies. Over the past several years, the Company has experienced generally favorable trends in the number of new policyholders tendering environmental claims for the first time and in the number of pending declaratory judgment actions relating to environmental matters. However, the degree to which those favorable trends have continued has been less than anticipated. In addition, reserve development on existing environmental claims has been greater than anticipated, driven by claims and legal developments in a limited number of jurisdictions. As a result of these factors, in 2018, 2017 and 2016, the Company increased its net environmental reserves by $55 million, $65 million and $82 million, respectively.

Asbestos and Environmental Reserves. As a result of the processes and procedures discussed above, management believes that the reserves carried for asbestos and environmental claims are appropriately established based upon known facts, current law and management’s judgment. However, the uncertainties surrounding the final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos and environmental claims and related litigation. As a result, these reserves are subject to revision as new information becomes available and as claims develop. Changes in the legal, regulatory and legislative environment may impact the future resolution of asbestos and environmental claims and result in adverse loss reserve development. The emergence of a greater number of asbestos or environmental claims beyond that which is anticipated may result in adverse loss reserve development. Changes in applicable legislation and future court and regulatory decisions and interpretations, including the outcome of legal challenges to legislative and/or judicial reforms establishing medical criteria for the pursuit of asbestos claims, could affect the settlement of asbestos and environmental claims. It is also difficult to predict the ultimate outcome of complex coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. As part of its continuing analysis of asbestos and environmental reserves, the Company continues to study the implications of these and other developments.

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the Company’s current reserves. In addition, the Company’s estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results in future periods.

Catastrophe Exposure

The Company has geographic exposure to catastrophe losses, which can be caused by a variety of events, including, among others, hurricanes, tornadoes and other windstorms, earthquakes, hail, wildfires, severe winter weather, floods, tsunamis, volcanic eruptions and other naturally-occurring events, such as solar flares. Catastrophes can also result from terrorist attacks and other intentionally destructive acts including those involving nuclear, biological, chemical and radiological events, cyber events, explosions and destruction of infrastructure. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes and wildfires may produce significant damage in larger areas, especially those that are heavily populated. The Company generally seeks to mitigate its exposure to catastrophes through individual risk selection and the purchase of catastrophe reinsurance.

There are also risks which impact the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes can be affected by the inability of the Company and its insureds to access portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; the impact of demand surge; the potential impact of changing climate conditions, including higher frequency and severity of weather-related events; infrastructure disruption; fraud; the effect of mold damage and business income interruption costs; and reinsurance collectibility. The timing of a catastrophe’s occurrence, such as at or near the end of a reporting period, can also affect the information available to the Company in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge.