Losses and Loss Expenses

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



(U.S. dollars in thousands)	2017			2016
Unpaid losses and loss expenses at the beginning of the year	$	25,939,571		$	25,439,744
Unpaid losses and loss expenses recoverable at the beginning of the year (1)	5,480,300			5,248,905
Net unpaid losses and loss expenses at the beginning of the year	$	20,459,271		$	20,190,839
Acquired reserves	—			101,315
Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in:
Current year	6,272,852			4,702,321
Prior year	(93,590		)	(195,647		)
Total net incurred losses and loss expenses	$	6,179,262		$	4,506,674
Foreign exchange and other	555,350			(263,342		)
Less net losses and loss expenses paid in respect of losses occurring in:
Current year	654,494			695,256
Prior year	3,505,086			3,139,995
Total net paid losses	$	4,159,580		$	3,835,251
Net unpaid losses and loss expenses at September 30	23,034,303			20,700,235
Unpaid losses and loss expenses recoverable at September 30 (1)	6,954,034			5,470,148
Unpaid losses and loss expenses at September 30	$	29,988,337		$	26,170,383

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(1) Property and Casualty business only, net of provision for uncollectible reinsurance.

The three months ended September 30, 2017 experienced a significant number of natural catastrophe losses. In August, Hurricane Harvey impacted the Western Gulf Coast of the United States. In September, Hurricane Irma impacted the Caribbean and the Eastern Gulf Coast of the United States. Also in September, Hurricane Maria impacted the Caribbean. All three hurricanes caused significant damage. In addition, there were other natural catastrophe losses in the quarter, including the Mexican Earthquakes and Typhoon Hato in Southeast Asia ("Other Cats"). Collectively, Hurricanes Harvey, Irma, Maria and the Other Cats have had a significant impact on the Company's results of operations for the three and nine months ended September 30, 2017.

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:



	Nine Months Ended
	September 30,
(U.S. dollars in thousands)	2017			2016
Insurance segment	$	(30,680	)	$	(67,498	)
Reinsurance segment	(62,910		)	(128,149		)
Total	$	(93,590	)	$	(195,647	)

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 reserve development by product type relating to the Insurance segment for the nine months ended September 30, 2017 and 2016:



	Nine Months Ended
	September 30,
(U.S. dollars in thousands)	2017			2016
Professional	$	(54,833	)	$	(369	)
Casualty	(74,443		)	(45,230		)
Property	91,488			(7,356		)
Specialty	7,108			(14,543		)
Total	$	(30,680	)	$	(67,498	)

Net favorable prior year reserve development was $30.7 million for the nine months ended September 30, 2017 for the Insurance segment, driven by the following:


•	For professional lines, net prior year development was $54.8 million favorable. This was driven by better than expected loss experience in Bermuda regarding the 2015 and 2016 accident years, partially offset by strengthening in the international financial lines management liability book to reflect significant large loss experience.

•

For casualty lines, net prior year development was $74.4 million favorable. This was driven by better than expected loss experience on mature years of a North America excess casualty book resulting in releases of $50.5 million, as well as reductions to reflect better than expected loss experience reported on North America construction and global risk management. This was partially offset by strengthening to reflect worse than expected loss experience reported on the excess and surplus portfolio.


•	For property lines, net prior year development was $91.5 million unfavorable. This was driven by deteriorations in the London wholesale property book which led to strengthening of $49.4 million, and significant adverse large loss experience on the energy property book resulting in strengthening of $38.3 million.


•	For specialty lines, net prior year development was $7.1 million unfavorable. This was driven by worse than expected large loss experience in more recent years in the crisis management and political risk & trade credit portfolios, partially offset by better than expected attritional loss experience in the aerospace book.

Net favorable prior year reserve development totaled $67.5 million for the Insurance segment for the nine months ended September 30, 2016. Professional lines had favorable net prior year development of $0.4 million. Casualty lines favorable net prior year development of $45.2 million was driven by releases in international casualty, primarily to reflect better than expected loss experience reported on the general and professional liability books, and in discontinued casualty primarily due to our reassessment of the losses incurred but not reported provision for the U.S. Casualty risk solutions portfolio, discontinued prior to 2008, following favorable claims resolutions in recent years. For property lines, net prior year development was $7.4 million favorable driven by reflecting better than expected reported non-catastrophe loss experience. Specialty lines had $14.5 million net favorable prior year development driven by releases in discontinued specialty following the expiration of a policy, and due to better than expected loss experience on the cargo, hull and liability businesses in marine lines. This was partially offset by a strengthening in accident and health driven by deteriorations in the U.S. and Switzerland books, and in crisis management relating to deteriorations in large losses.

Reinsurance Segment

The following table summarizes the net (favorable) adverse prior year reserve development by line of business relating to the Reinsurance segment for the nine months ended September 30, 2017 and 2016:



	Nine Months Ended
	September 30,
(U.S. dollars in thousands)	2017			2016
Property and other short-tail lines	$	(124,362	)	$	(69,028	)
Casualty and other long-tail lines	61,452			(59,121		)
Total	$	(62,910	)	$	(128,149	)

Net favorable prior year reserve development was $62.9 million for the nine months ended September 30, 2017 for the Reinsurance segment, driven by the following:


▪	Net favorable prior year development for the short-tail lines totaled $124.4 million. Details of the significant components are as follows:


•	For property lines, net prior year development was $115.0 million favorable, primarily due to better than expected experience on attritional losses and favorable development on catastrophes and other large losses.


•	For specialty lines, net prior year development was $9.4 million favorable, mainly due to better than expected experience on attritional losses, partially offset by unfavorable movement on large losses in the Aviation book.


▪	Net unfavorable prior year development for the long-tail lines totaled $61.5 million. Details of the significant components are as follows:


▪	For casualty lines, net prior year development was $61.0 million unfavorable primarily due to the decrease of the discount rate used to calculate lump sum awards in U.K. bodily injury cases from 2.5% to negative 0.75%, which impacted the Company's carried reserves for relevant lines of business, primarily U.K. motor business.


▪	For other lines, net prior year development was $0.5 million unfavorable mainly due to worse than expected experience on attritional losses on the whole account book, partially offset by a release of large losses in the credit and surety book.

Net favorable prior year reserve development totaled $128.1 million for the nine months ended September 30, 2016. The short-tail lines benefited from $5.1 million in favorable development from property other lines, $54.4 million in favorable development in property catastrophe lines and $9.6 million in favorable development within specialty lines. The release in long-tail lines was due to favorable development of $50.4 million and $8.7 million in casualty and other, respectively.

There is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. Accordingly, the Company's historical results are not indicative of future releases or strengthening.