Losses and Loss Expenses

Unpaid losses and loss expenses for the indicated years ended December 31 are comprised of:



(U.S. dollars in thousands)	2014		2013
Reserve for reported losses and loss expenses	$	7,461,444	$	8,149,501
Reserve for losses incurred but not reported	11,891,799		12,331,564
Unpaid losses and loss expenses	$	19,353,243	$	20,481,065

Net losses and loss expenses incurred for the years indicated are comprised of:



(U.S. dollars in thousands)	2014			2013			2012
Loss and loss expenses payments	$	4,499,642		$	4,496,802		$	4,673,998
Change in unpaid losses and loss expenses	(514,406		)	(71,901		)	(297,660		)
Change in unpaid losses and loss expenses recoverable	(48,536		)	(24,774		)	279,900
Paid loss recoveries	(678,307		)	(668,663		)	(890,756		)
Net losses and loss expenses incurred	$	3,258,393		$	3,731,464		$	3,765,482

The following table represents an analysis of the Company’s paid and unpaid losses and loss expenses incurred and a reconciliation of the beginning and ending unpaid losses and loss expenses for the years indicated:



(U.S. dollars in thousands)	2014			2013			2012
Unpaid losses and loss expenses at the beginning of the year	$	20,481,065		$	20,484,121		$	20,613,901
Unpaid losses and loss expenses recoverable	3,414,735			3,361,703			3,629,940
Net unpaid losses and loss expenses at the beginning of the year	$	17,066,330		$	17,122,418		$	16,983,961
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
Current year	3,513,469			4,021,353			4,081,376
Prior year	(255,076		)	(289,889		)	(315,894		)
Total net incurred losses and loss expenses	$	3,258,393		$	3,731,464		$	3,765,482
Exchange rate effects	(561,673		)	40,587			156,217
Less net losses and loss expenses paid in respect of losses occurring in:
Current year	381,008			425,254			416,844
Prior year	3,440,327			3,402,885			3,366,398
Total net paid losses	$	3,821,335		$	3,828,139		$	3,783,242
Net unpaid losses and loss expenses at the end of the year	15,941,715			17,066,330			17,122,418
Unpaid losses and loss expenses recoverable	3,411,528			3,414,735			3,361,703
Unpaid losses and loss expenses at the end of the year	$	19,353,243		$	20,481,065		$	20,484,121

(a) Prior year net losses incurred

The following table presents the net (favorable) adverse prior year loss development of the Company’s loss and loss expense reserves for its property and casualty operations by operating segment for each of the years indicated:



(U.S. dollars in thousands)	2014			2013			2012
Insurance segment	$	(99,762	)	$	(102,039	)	$	(140,066	)
Reinsurance segment	(155,314		)	(187,850		)	(175,828		)
Total	$	(255,076	)	$	(289,889	)	$	(315,894	)

The significant developments in prior year loss reserve estimates for each of the years indicated within the Company’s Insurance and Reinsurance segments are discussed below.

Insurance Segment

The following table summarizes the net (favorable) adverse prior year development by line of business relating to the Insurance segment for the indicated years ended December 31:



(U.S. dollars in thousands)	2014			2013			2012
Property	$	(57,470	)	$	(46,387	)	$	(46,735	)
Casualty	38,413			(21,829		)	(61,630		)
Professional	17,094			75,045			(106,360		)
Specialty	(82,756		)	(140,740		)	(61,755		)
Other	(15,043		)	31,872			136,414
Total	$	(99,762	)	$	(102,039	)	$	(140,066	)

Net favorable prior year development of $99.8 million for the Insurance segment for the year ended December 31, 2014 was attributable to the following:


•	For property lines, net prior year development was $57.5 million favorable driven by better than expected loss experience reported for the non-catastrophe exposures predominantly in the 2013 accident year. It was also driven by a reduction of $21.1 million in prior year catastrophe losses primarily in the 2011 accident year.

•

For casualty lines, net prior year development was $38.4 million unfavorable. This was driven by a strengthening of $34.9 million in the U.S. environmental portfolio, $33.3 million in the Lloyd’s middle market book and $26.4 million in the U.S. primary casualty lines mainly as a result of reflecting the worse than expected loss experience reported across the 2008 to 2013 accident years. These deteriorations were partially offset by releases of $28.1 million in the international primary casualty lines and $28.6 million in the excess casualty book driven by better than expected loss experience reported across the 2002 and prior accident years in the case of the former and in aggregate for the latter.

•

For professional lines, net prior year development was $17.1 million unfavorable predominantly as a result of worse than expected loss experience reported in the core U.S. book that drove a strengthening of $40.9 million. This strengthening was partially offset by release of $21.8 million in the core Bermuda book due mainly to better than expected loss experience reported across the 2010 and prior accident years in aggregate.

•

For specialty lines, net prior year development was $82.8 million favorable driven by a release of $61.9 million in the aerospace book due principally to better than expected loss experience reported across the 2012 and prior accident years. It was also driven by a release of $12.2 million in the discontinued international political risk portfolio arising predominantly from a review of the contracts remaining on risk, the contracts that have expired with no claims notified and the single open claim. In addition, our estimate of prior year catastrophe losses was reduced by $5.6 million related primarily to Hurricane Rita in the marine book.


•	For other lines, net prior year development was $15.0 million favorable driven by better than expected loss experience reported across various discontinued lines in aggregate including the favorable settlement of a 2003 claim.

Net favorable prior year reserve development of $102.0 million for the year ended December 31, 2013 was attributable to releases of $140.7 million in specialty, $46.4 million in property, $21.8 million in casualty, partially offset by a strengthening of $75.0 million in professional and $31.9 million in other. Specialty benefited from releases in aerospace, marine and specie, due primarily to reflecting the better than expected loss experience reported predominantly across the 2005 and later accident years, plus a reduction in the Bermuda discontinued political risk book as a result of a review of the open claims and remaining exposure. Better than expected loss experience reported for non-catastrophe exposures primarily in the 2012 accident year led to a release in property, while casualty benefited from better than expected loss experience in the excess casualty book, partially offset by adverse development in the U.S. environmental book and worse than expected loss experience in the Lloyd's middle market book. Worse than expected loss experience in the core U.S. and international professional books led to a strengthening of reserves in professional, as well as deterioration in the discontinued environmental book impacting casualty and the discontinued surety book in other lines.

Net favorable prior year reserve development of $140.1 million for the Insurance segment for the year ended December 31, 2012 was attributable to releases of $106.4 million in professional, $61.8 million in specialty, $61.6 million in casualty and $46.7 million in property, partially offset by a strengthening of $136.4 million in other. Professional benefited from releases in reserves for clash losses (which cover a number of substantially similar claims against multiple policyholders) totaling $120.8 million, partially offset by worse than expected loss experience reported in the design portfolio. Better than expected loss experience reported for the non-catastrophe exposures in the aerospace, specie, product recall and Lloyd’s discontinued political risk books led to the release in specialty, while property benefited from favorable reported loss activity for both the catastrophe and non-catastrophe exposures. The release in casualty was mainly related to better than expected loss experience reported in both the primary and excess books, partially offset by adverse development in U.S. middle markets. Continued worse than expected loss experience reported in the excess and surplus lines, and adverse development in the programs and discontinued surety books drove the strengthening in other lines.

There is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the Company’s historical results.

Reinsurance Segment

The following table summarizes the net (favorable) adverse prior year development by line of business relating to the Reinsurance segment for the indicated years ended December 31:



(U.S. dollars in thousands)	2014			2013			2012
Property and other short-tail lines	$	(85,324	)	$	(136,912	)	$	(107,613	)
Casualty and other	(69,990		)	(50,938		)	(68,215		)
Total	$	(155,314	)	$	(187,850	)	$	(175,828	)

Net favorable prior year reserve development for the Reinsurance segment of $155.3 million for the year ended December 31, 2014 was attributable to the following:


•	Net favorable prior year development for the short-tailed lines totaled $85.3 million. Details of the significant components are as follows:


◦	For property catastrophe lines, net prior year development was $12.4 million unfavorable driven primarily by an increase on catastrophe losses in 2010 and 2013 being partially offset by reductions on other events and better than expected development on attritional losses in the Bermuda portfolio.


◦	For property other lines, net prior year development was $63.4 million favorable primarily due to better than expected development on attritional losses.


◦	For marine and aviation lines, net prior year development was $34.4 million favorable comprising of $37.7 million better than expected development on attritional losses mainly in the International portfolio, partially offset by $3.3 million unfavorable development on major catastrophe and large losses.


•	Net favorable prior year development for the long-tailed lines totaled $70.0 million. Details of the significant components are as follows:


◦	For casualty lines, net prior year development was $44.3 million favorable due to better than expected development on attritional losses mainly in Europe and North America portfolios being partially offset by an increase on large claims and worse than expected development on attritional losses in Latin America.


◦	For other lines, net prior year development was $25.7 million favorable comprising of $22.7 million better than expected development on attritional losses mainly in Bermuda and North America and a $3.0 million favorable development on major catastrophe and large losses.

Net favorable prior year reserve development of $187.9 million for the year ended December 31, 2013 was attributable to releases of $136.9 million for the short-tailed lines and $50.9 million for the long-tailed lines. The short-tailed lines benefited from $60.0 million in favorable property catastrophe development, $57.3 million in favorable property other lines releases and $19.6 million in favorable marine and aviation development. The release in long-tailed lines was due to $72.2 million in favorable casualty development partially offset by $21.3 million in unfavorable other lines development.

Net favorable prior year reserve development of $175.8 million for the year ended December 31, 2012 was attributable to releases of $107.6 million for the short-tailed lines and $68.2 million for the long-tailed lines. The short-tailed lines benefited from $16.5 million in favorable property catastrophe development, $49.0 million in favorable property other lines releases and $42.2 million in favorable marine and aviation development. The release in long-tailed lines was due to $60.3 million in favorable casualty development and an additional $7.9 million in favorable other lines development mainly driven by an $8.4 million release on the Structured Indemnity book.

The nature of the Company’s high excess of loss liability and catastrophe business can result in loss events that are both irregular and significant. Similarly, adjustments to reserves for individual years can be irregular and significant. Such adjustments are part of the normal course of business for the Company. There is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the Company’s historical results.

(b) Loss Reserve Discounting

Except for certain workers’ compensation (including long term disability) liabilities and certain bodily injury liability claims, emanating from U.K. exposures, predominantly from the U.K. motor liability portfolio, the Company does not discount its unpaid losses and loss expenses.

The Company utilizes tabular reserving for workers’ compensation (including long-term disability) unpaid losses that are considered fixed and determinable, and discounts such losses using an interest rate of 5% in 2014 and 2013. The interest rate approximates the average yield to maturity on specific fixed income investments that support these liabilities. The tabular reserving methodology results in applying uniform and consistent criteria for establishing expected future indemnity and medical payments (including an explicit factor for inflation) and the use of mortality tables to determine expected payment periods. The workers' compensation unpaid losses and loss expenses, net of reinsurance, at December 31, 2014 and 2013 on an undiscounted basis were $566.2 million and $609.1 million, respectively. For those claims subject to tabular discounting, the corresponding undiscounted amounts, at December 31, 2014 and 2013, were $515.4 million and $551.6 million, respectively. The tabular discounted unpaid losses and loss expenses were $266.4 million and $274.6 million at December 31, 2014 and 2013, respectively.

The Company records a specific reserve allowance for Periodical Payment Orders (“PPO”) related to bodily injury liability claims. This allowance includes the unpaid losses for claims already settled and notified as PPO at December 31, 2014, as well as the unpaid losses for claims to be settled in the future. The future care element of the unpaid losses was discounted using an interest rate of 1.5% at both December 31, 2014 and 2013. Unpaid losses and loss expenses, net of reinsurance, at December 31, 2014 and 2013 on an undiscounted basis were $249.8 million and $262.0 million, respectively. After discounting the future care element, the unpaid losses and loss expenses were $161.0 million and $165.7 million at December 31, 2014 and 2013, respectively. The decrease in net undiscounted unpaid losses and loss expenses between December 31, 2013 and December 31, 2014 is mainly due to foreign exchange rate movements.

The Company’s reserving process includes a continuing evaluation of the potential impact on unpaid liabilities from exposure to discontinued asbestos and run-off environmental claims, including related loss adjustment expenses. Liabilities are established to cover both known and incurred but not reported claims. The Company’s reserving and exposures to environmental liability business currently written within the NAPC and IPC business groups are not included in this note, which only relates to specific discontinued and/or run-off coverages that were not originally written specifically to cover environmental hazards.

The Company’s exposure to discontinued asbestos and run-off environmental claims arises from the following three sources:


(1)	Reinsurance contracts written, both on a proportional and excess basis, after 1972. The Company discontinued writing contracts with these exposures in 1985. Business written was across many different policies, each with a relatively small contract limit. The Company’s reported asbestos claims relate to both traditional products and premises and operations coverage.


(2)	Winterthur – business of Winterthur purchased by the Company from AXA Insurance (formerly Winterthur Swiss Insurance Company) in 2001. Pursuant to the Sale and Purchase Agreement and related agreements, AXA Insurance reimburses the Company for all asbestos losses.


(3)	During 2006, the Company acquired $40.2 million in losses through a loss portfolio transfer contract of which $18.3 million in losses related to asbestos and environmental claims. Given the terms of the policy, the combined aggregate limit on the total acquired reserves is limited to $60.0 million, not including coverage for claims handling costs over a defined period.

A reconciliation of the opening and closing unpaid losses and loss expenses related to discontinued asbestos and run-off environmental exposure claims for the years indicated is as follows:



Year ended December 31, (U.S. dollars in thousands)	2014		2013		2012
Net unpaid losses and loss expenses at beginning of year	$	80,435	$	78,315	$	77,778
Net incurred losses and loss expenses	8,903		6,257		6,558
Less net paid losses and loss expenses	7,922		4,137		6,021
Net increase (decrease) in unpaid losses and loss expenses	$	981	$	2,120	$	537
Net unpaid losses and loss expenses at end of year	81,416		80,435		78,315
Unpaid losses and loss expenses recoverable at end of year	100,537		115,090		123,799
Gross unpaid losses and loss expenses at end of year	$	181,953	$	195,525	$	202,114

Reserves for incurred but not reported losses, net of reinsurance, included in the above table were $49.3 million, $48.6 million and $52.2 million at December 31, 2014, 2013 and 2012, respectively. Unpaid losses recoverable are net of potential uncollectible amounts.

At December 31, 2014, the Company had 1,399 open claim files for potential discontinued asbestos claims exposures and 459 open claim files for potential run-off environmental claims exposures. Approximately 46%, 37% and 42% of the open claim files are due to precautionary claim notices in 2014, 2013 and 2012, respectively. Precautionary claim notices are submitted by the ceding companies in order to preserve their right to receive coverage under the reinsurance contract. The increase in open claim files during 2014 was largely due to internal changes in how claims reported in previous years were classified, which resulted in a higher number of precautionary claims opened during the year.

Such notices do not contain an incurred loss amount to the Company. The development of the number of open claim files for potential discontinued asbestos and run-off environmental claims, including precautionary claims, is as follows:



	Asbestos Claims		Environmental Claims
Total number of claims outstanding at December 31, 2011	1,038		362
New claims reported in 2012	236		60
Claims resolved in 2012	(201	)	(68	)
Total number of claims outstanding at December 31, 2012	1,073		354
New claims reported in 2013	178		34
Claims resolved in 2013	(154	)	(50	)
Total number of claims outstanding at December 31, 2013	1,097		338
New claims reported in 2014	456		190
Claims resolved in 2014	(154	)	(69	)
Total number of claims outstanding at December 31, 2014	1,399		459

The estimation of loss and loss expense liabilities for discontinued asbestos and run-off environmental exposures is subject to much greater uncertainty than is normally associated with the establishment of liabilities for certain other exposures due to several factors, including: (i) uncertain legal interpretation and application of insurance and reinsurance coverage and liability; (ii) the lack of reliability of available historical claims data as an indicator of future claims development; (iii) an uncertain political climate which may impact, among other areas, the nature and amount of costs for remediating waste sites; and (iv) the potential of insurers and reinsurers to reach agreements in order to avoid further significant legal costs. Due to the potential significance of these uncertainties, the Company believes that no meaningful range of loss and loss expense liabilities beyond recorded reserves can be established. As the Company’s net unpaid loss and loss expense reserves related to discontinued asbestos and run-off environmental exposures are less than 1% of the total net reserves at December 31, 2014 and 2013, further adverse development is not expected to be material to the Company’s overall net loss reserves. The Company believes it has made reasonable provision for its discontinued asbestos and run-off environmental exposures and is unaware of any specific issues that would significantly affect its estimate for loss and loss expenses.