RESERVE FOR CLAIMS AND CLAIM EXPENSES

The Company uses statistical and actuarial methods to estimate ultimate expected claims and claim expenses. The period of time from the reporting of a claim to the Company and the settlement of the Company’s liability may be many years. During this period, additional facts and trends will be revealed. As these factors become apparent, case reserves will be adjusted, sometimes requiring an increase or decrease in the overall reserve for claims and claim expenses of the Company, and at other times requiring a reallocation of incurred but not reported (“IBNR”) reserves to specific case reserves or additional case reserves. These estimates are reviewed regularly, and such adjustments, if any, are reflected in the results of operations in the period in which they become known and are accounted for as changes in estimates. Adjustments to the Company’s reserve for claims and claim expenses can impact current year net income (loss) by decreasing net income or increasing net loss if the estimates of prior years claims and claim expense reserves prove to be insufficient or by increasing net income or decreasing net loss if the estimates of prior years claims and claim expense reserves prove to be overstated.

The Company’s estimates of claims and claim expenses are also based in part upon the estimation of claims resulting from natural and man-made disasters such as hurricanes, earthquakes, tsunamis, tornadoes, floods, winter storms, terrorist attacks and other catastrophic events. Estimation by the Company of claims resulting from catastrophic events is inherently difficult because of the potential severity of property catastrophe claims. Additionally, the Company has recently increased its specialty reinsurance business but does not have the benefit of a significant amount of its own historical experience in certain of these lines of business. Therefore, the Company uses both proprietary and commercially available models, as well as historical (re)insurance industry claims experience, for purposes of evaluating future trends and providing an estimate of ultimate claims costs.

Activity in the liability for unpaid claims and claim expenses is summarized as follows:




Year ended December 31,	2014			2013			2012
Net reserves as of January 1	$	1,462,705		$	1,686,865		$	1,588,325
Net incurred related to:
Current year	341,745			315,241			483,180
Prior years	(143,798		)	(143,954		)	(157,969		)
Total net incurred	197,947			171,287			325,211
Net paid related to:
Current year	39,830			32,212			84,056
Prior years	275,006			363,235			142,615
Total net paid	314,836			395,447			226,671
Net reserves as of December 31	1,345,816			1,462,705			1,686,865
Reinsurance recoverable as of December 31	66,694			101,025			192,512
Gross reserves as of December 31	$	1,412,510		$	1,563,730		$	1,879,377

The following table details the Company’s prior year development by segment of its liability for unpaid claims and claim expenses:




Year ended December 31,	2014			2013			2012
Catastrophe Reinsurance	$	(65,511	)	$	(102,037	)	$	(110,568	)
Specialty Reinsurance	(55,909		)	(34,111		)	(34,146		)
Lloyd’s	(16,241		)	(8,256		)	(16,202		)
Other	(6,137		)	450			2,947
Total favorable development of prior accident years net claims and claim expenses	$	(143,798	)	$	(143,954	)	$	(157,969	)

Catastrophe Reinsurance Segment

The Company reviews substantially all of its catastrophe reinsurance claims and claim expense reserves quarterly. The Company’s quarterly review procedures include identifying events that have occurred up to the latest balance sheet date, determining the Company’s best estimate of the ultimate expected cost to settle all claims and administrative costs associated with those new events which have arisen during the reporting period, reviewing the ultimate expected cost to settle claims and administrative costs associated with those events which occurred during previous periods, and considering new estimation techniques, such as additional actuarial methods or other statistical techniques, that can assist the Company in developing its best estimate. This process is judgmental in that it involves reviewing changes in paid and reported claims each period and adjusting the Company’s estimates of the ultimate expected claims for each event where there are developments that are different from the Company’s previous expectations. If the Company determines that adjustments to an earlier estimate are appropriate, such adjustments are recorded in the period in which they are identified. The level of the Company’s claims associated with certain catastrophes can be very large. For example, within the Company’s Catastrophe Reinsurance segment, initial estimated ultimate claims associated with the 2005 Hurricanes, Katrina, Rita and Wilma, were over $1.3 billion, the 2008 Hurricanes (Gustav and Ike), were over $530 million and the large losses of 2011 (including the 2011 New Zealand Earthquake, the Tohoku Earthquake, the large U.S. tornadoes, flooding in Australia, certain aggregate losses, Hurricane Irene and the Thailand Floods) were over $1.1 billion. As a result, small percentage changes in the estimated ultimate claims of large catastrophic events can significantly impact the Company’s reserves for claims and claim expenses in subsequent periods.

Specialty Reinsurance Segment

When initially developing reserving techniques for the Company’s specialty reinsurance coverages, the Company considered estimating reserves utilizing several actuarial techniques such as paid and reported claims development methods. The Company elected to use the Bornhuetter-Ferguson actuarial method because this method is appropriate for lines of business, such as its specialty reinsurance business, where there is a lack of historical claims experience. This method allows for greater weight to be applied to expected results in periods where little or no actual experience is available, and, hence, is less susceptible to the potential pitfall of being excessively impacted by one particular year or quarter of actual paid and/or reported claims data. This method uses initial expected claims ratio expectations to the extent that claims are not paid or reported, and it assumes that past experience is not fully representative of the future. As the Company’s reserves for claims and claim expenses age, and actual claims experience becomes available, this method places less weight on expected experience and places more weight on actual experience. This experience, which represents the difference between expected reported claims and actual reported claims is reflected in the respective reporting period as a change in estimate. The Company reevaluates its actuarial reserving techniques on a periodic basis.

The Company reviews substantially all of its specialty reinsurance claims and claim expense reserves quarterly. Typically, the quarterly review procedures include reviewing paid and reported claims in the most recent reporting period, reviewing the development of paid and reported claims from prior periods, and reviewing the Company’s overall experience by underwriting year and in the aggregate. The Company monitors its expected ultimate claims and claim expense ratios and expected claims reporting assumptions on a quarterly basis and compares them to its actual experience. These actuarial assumptions are generally reviewed annually, based on input from the Company’s actuaries, underwriters, claims personnel and finance professionals, although adjustments may be made more frequently if needed. Assumption changes are made to adjust for changes in the pricing and terms of coverage the Company provides, changes in industry results for similar business, as well as its actual experience, to the extent the Company has enough data to rely on its own experience. If the Company determines that adjustments to an earlier estimate are appropriate, such adjustments are recorded in the period in which they are identified.

Lloyd’s Segment

The Company uses the Bornhuetter-Ferguson actuarial method to estimate claims and claim expenses within its Lloyd’s segment for its property and casualty (re)insurance contracts and quota share reinsurance business. The comments discussed above relating to the Company’s reserving techniques and processes for the Company’s Specialty Reinsurance segment also apply to the Company’s Lloyd’s segment. In addition, certain of the Company’s coverages may be impacted by natural and man-made catastrophes. The Company estimates claim reserves for these claims after the event giving rise to these claims occurs, following a process that is similar to the Company’s Catastrophe Reinsurance segment discussed above.

Other Category

The Company uses the Bornhuetter-Ferguson actuarial method to estimate claims and claim expenses within its Other category for its property and casualty insurance contracts and quota share reinsurance business. The comments discussed above relating to the Company’s reserving techniques and processes for its Specialty Reinsurance and Lloyd’s segments also apply to the Company’s Other category. In addition, certain of the Company’s coverages may be impacted by natural and man-made catastrophes. The Company estimates claim reserves for these claims after the event giving rise to these claims occurs, following a process that is similar to the Company’s Catastrophe Reinsurance segment discussed above.

Development of Liability for Unpaid Claims and Claim Expenses

The following table details the development of the Company’s liability for unpaid claims and claim expenses for each of its Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s segments and Other category, for the year ended December 31, 2014 split between catastrophe net claims and claim expenses and attritional net claims and claim expenses:




Year ended December 31, 2014	Catastrophe Reinsurance Segment			Specialty Reinsurance Segment			Lloyd's Segment			Other			Total
Catastrophe net claims and claim expenses
Large catastrophe events
Storm Sandy (2012)	$	(20,104	)	$	—		$	(4,128	)	$	—		$	(24,232	)
April and May U.S. Tornadoes (2011)	(13,939		)	—			—			—			(13,939		)
Thailand Floods (2011)	(9,254		)	(2,500		)	—			—			(11,754		)
LIBOR (2011 and 2012)	—			(10,500		)	(1,250		)	—			(11,750		)
Hurricanes Gustav and Ike (2008)	(6,647		)	—			—			—			(6,647		)
Tohoku Earthquake and Tsunami (2011)	(3,489		)	(1,642		)	—			—			(5,131		)
Hurricane Irene (2011)	(4,506		)	—			—			—			(4,506		)
Windstorm Kyrill (2007)	(3,615		)	—			—			—			(3,615		)
Subprime (2007)	—			5,049			—			—			5,049
New Zealand Earthquake (2010)	24,692			—			—			—			24,692
Other	(10,644		)	(1,826		)	(1,234		)	—			(13,704		)
Total large catastrophe events	(47,506		)	(11,419		)	(6,612		)	—			(65,537		)
Small catastrophe events
European Floods (2013)	(7,552		)	—			—			—			(7,552		)
U.S. PCS 24 Wind and Thunderstorm (2013)	(6,712		)	—			—			—			(6,712		)
U.S. PCS 70 and 73 Wind and Thunderstorm (2012)	13,362			—			—			—			13,362
Other	(17,103		)	—			(2,687		)	(6,137		)	(25,927		)
Total small catastrophe events	(18,005		)	—			(2,687		)	(6,137		)	(26,829		)
Total catastrophe net claims and claim expenses	$	(65,511	)	$	(11,419	)	$	(9,299	)	$	(6,137	)	$	(92,366	)
Attritional net claims and claim expenses
Bornhuetter-Ferguson actuarial method - actual reported claims less than expected claims	$	—		$	(44,490	)	$	(6,942	)	$	—		$	(51,432	)
Total attritional net claims and claim expenses	$	—		$	(44,490	)	$	(6,942	)	$	—		$	(51,432	)
Total favorable development of prior accident years net claims and claim expenses	$	(65,511	)	$	(55,909	)	$	(16,241	)	$	(6,137	)	$	(143,798	)

Catastrophe Reinsurance Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Catastrophe Reinsurance segment in 2014 of $65.5 million was comprised of $47.5 million and $18.0 million related to large and small catastrophe events, respectively. Included in the favorable development of prior accident years net claims and claim expenses related to large catastrophe events was $20.1 million, $13.9 million, $9.3 million and $6.6 million related to Storm Sandy, the 2011 April and May U.S. Tornadoes, the 2011 Thailand Floods and the 2008 Hurricanes (Gustav and Ike), partially offset by adverse development of $24.7 million related to the 2010 New Zealand Earthquake, each principally the result of changes in estimated ultimate losses for each respective event. Included in the favorable development of prior accident years net claims and claim expenses related to small catastrophe events was $7.6 million and $6.7 million related to the 2013 European Floods and a 2013 U.S. wind and thunderstorm event, partially offset by adverse development of $13.4 million related certain 2012 U.S. wind and thunderstorm events, each principally the result of changes in estimated ultimate losses for each respective event.

Specialty Reinsurance Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Specialty Reinsurance segment in 2014 of $55.9 million was comprised of $11.4 million and $44.5 million related to large catastrophe events and attritional net claims and claim expenses, respectively. Included in the favorable development of prior accident years net claims and claim expenses related to large catastrophe events was a $10.5 million reduction in estimated ultimate losses with respect to potential exposure to LIBOR related claims from prior accident years, partially offset by adverse development of $5.0 million from subprime related events from 2007 driven by reported claims from a number of cedants. Favorable development of prior accident years net claims and claim expenses of $44.5 million related to attritional net claims and claim expenses was driven by the application of the Company's formulaic actuarial reserving methodology. There were no actuarial reserving assumption changes during 2014.

Lloyd’s Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Lloyd’s segment of $16.2 million was comprised of $6.6 million, $2.7 million and $6.9 million related to large catastrophe events, small catastrophe events and attritional net claims and claim expenses, respectively. Included in the favorable development of prior accident years net claims and claim expenses is a $4.1 million reduction in the estimated ultimate loss related to Storm Sandy included in large catastrophe events, with the $6.9 million favorable development of prior accident years net claims and claim expenses related to attritional net claims and claim expenses principally due to reported claims activity coming in lower than expected on prior accident years events. There were no actuarial reserving assumption changes during 2014.

Other Category

The favorable development on prior accident years of $6.1 million for 2014 within the Company’s Other category was principally the result of a reduction in the estimated ultimate losses on a proportional property contract.

The following table details the development of the Company’s liability for unpaid claims and claim expenses for each of its Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s segments and Other category, for the year ended December 31, 2013 split between catastrophe net claims and claim expenses and attritional net claims and claim expenses:




Year ended December 31, 2013	Catastrophe Reinsurance Segment			Specialty Reinsurance Segment			Lloyd's Segment			Other			Total
Catastrophe net claims and claim expenses
Large catastrophe events
Storm Sandy (2012)	$	(44,460	)	$	—		$	(3,825	)	$	—		$	(48,285	)
Tohoku Earthquake and Tsunami (2011)	(18,033		)	(1,000		)	—			—			(19,033		)
Hurricanes Gustav and Ike (2008)	(16,261		)	—			—			(404		)	(16,665		)
New Zealand Earthquake (2011)	(10,944		)	—			—			—			(10,944		)
Windstorm Kyrill (2007)	(8,244		)	—			—			—			(8,244		)
Hurricane Isaac (2012)	2,610			—			—			—			2,610
New Zealand Earthquake (2010)	11,040			300			—			—			11,340
Other	(776		)	(1,763		)	(1,442		)	(1,325		)	(5,306		)
Total large catastrophe events	(85,068		)	(2,463		)	(5,267		)	(1,729		)	(94,527		)
Small catastrophe events
U.S. PCS 83 Wind and Thunderstorm (2012)	(3,500		)	—			—			—			(3,500		)
U.S. PCS 76 Wind and Thunderstorm (2012)	(300		)	—			—			—			(300		)
U.S. PCS 70 Wind and Thunderstorm (2012)	8,225			—			—			—			8,225
Other	(21,394		)	—			—			—			(21,394		)
Total small catastrophe events	(16,969		)	—			—			—			(16,969		)
Total catastrophe net claims and claim expenses	$	(102,037	)	$	(2,463	)	$	(5,267	)	$	(1,729	)	$	(111,496	)
Attritional net claims and claim expenses
Bornhuetter-Ferguson actuarial method - actual reported claims less than expected claims	$	—		$	(21,216	)	$	(3,263	)	$	2,179		$	(22,300	)
Actuarial assumption changes	—			(10,432		)	274			—			(10,158		)
Total attritional net claims and claim expenses	$	—		$	(31,648	)	$	(2,989	)	$	2,179		$	(32,458	)
Total favorable development of prior accident years net claims and claim expenses	$	(102,037	)	$	(34,111	)	$	(8,256	)	$	450		$	(143,954	)

Catastrophe Reinsurance Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Catastrophe Reinsurance segment in 2013 of $102.0 million was primarily due to $44.5 million, $18.0 million, $16.3 million and $10.9 million of favorable development related to reductions in the expected ultimate net loss for Storm Sandy, the Tohoku Earthquake, the 2008 Hurricanes (Gustav and Ike) and the 2011 New Zealand Earthquake, respectively, as reported claims came in better than expected, and $34.2 million of net favorable development related to a number of other catastrophes principally the result of reported claims coming in less than expected, resulting in decreases to the ultimate claims for these events through the application of the Company’s formulaic actuarial reserving methodology. Partially offsetting the reductions noted above was adverse development on the 2010 New Zealand Earthquake, U.S. PSC 70 and Hurricane Isaac of $11.0 million, $8.2 million and $2.6 million, respectively, associated with an increase in reported gross ultimate losses.

Specialty Reinsurance Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Specialty Reinsurance segment in 2013 of $34.1 million was primarily driven by $10.4 million associated with actuarial assumption changes, principally in the Company’s casualty clash and casualty risk lines of business, and primarily as a result of revised claim development factors based on actual loss experience, and $23.7 million due to reported claims coming in lower than expected on prior accident years events, as a result of the application of the Company’s formulaic actuarial reserving methodology.

Lloyd’s Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Lloyd’s segment of $8.3 million during 2013 was principally driven by a $5.3 million decrease in the estimated ultimate net claims and claim expenses related to large catastrophes, including $3.8 million related to Storm Sandy, and $3.3 million related to reported claims coming in lower than expected on prior accident years events as a result of the application of the Company’s formulaic actuarial reserving methodology and partially offset by adverse development of $0.3 million related to assumption changes.

Other Category

The net adverse development on prior accident years of $0.5 million for 2013 within the Company’s Other category was principally the result of $2.2 million related to the application of the Company’s formulaic actuarial reserving methodology with the increases being due to actual paid and reported claim activity coming in higher than what was originally anticipated when setting the initial reserves; partially offset by favorable development of $1.7 million related to large catastrophe events.

The following table details the development of the Company’s liability for unpaid claims and claim expenses for each of its Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s segments and Other category, for the year ended December 31, 2012 split between catastrophe net claims and claim expenses and attritional net claims and claim expenses:




Year ended December 31, 2012	Catastrophe Reinsurance Segment			Specialty Reinsurance Segment			Lloyd’s Segment			Other			Total
Catastrophe net claims and claim expenses
Large catastrophe events
Chile Earthquake (2010)	$	(24,575	)	$	—		$	—		$	—		$	(24,575	)
Hurricanes Gustav and Ike (2008)	(17,541		)	—			—			(2,926		)	(20,467		)
U.K. Floods (2007)	(17,271		)	—			—			—			(17,271		)
Hurricanes Katrina, Rita and Wilma (2005)	(6,420		)	(3,000		)	—			1,690			(7,730		)
Hurricane Irene (2011)	(4,630		)	—			(2,500		)	—			(7,130		)
Thailand Floods (2011)	(3,933		)	—			(5,500		)	—			(9,433		)
Tohoku Earthquake and Tsunami (2011)	(3,896		)	—			—			—			(3,896		)
Windstorm Kyrill (2007)	(3,417		)	—			—			—			(3,417		)
New Zealand Earthquake (2010)	3,570			—			—			—			3,570
New Zealand Earthquake (2011)	17,912			—			—			—			17,912
Other	(2,542		)	—			(1,476		)	65			(3,953		)
Total large catastrophe events	(62,743		)	(3,000		)	(9,476		)	(1,171		)	(76,390		)
Small catastrophe events
Danish Floods (2011)	(5,000		)	—			—			—			(5,000		)
U.S. PCS 63 Winter Storm (2011)	(5,000		)	—			—			—			(5,000		)
U.S. PCS 42 Winter Storm (2011)	(2,560		)	—			—			—			(2,560		)
U.S. PCS 53 Winter Storm (2011)	(2,558		)	—			—			—			(2,558		)
Other	(32,707		)	—			—			—			(32,707		)
Total small catastrophe events	(47,825		)	—			—			—			(47,825		)
Total catastrophe net claims and claim expenses	$	(110,568	)	$	(3,000	)	$	(9,476	)	$	(1,171	)	$	(124,215	)
Attritional net claims and claim expenses
Bornhuetter-Ferguson actuarial method - actual reported claims less than expected claims	$	—		$	(16,747	)	$	(8,011	)	$	4,118		$	(20,640	)
Actuarial assumption changes	—			(14,399		)	1,285			—			(13,114		)
Total attritional net claims and claim expenses	$	—		$	(31,146	)	$	(6,726	)	$	4,118		$	(33,754	)
Total favorable development of prior accident years net claims and claim expenses	$	(110,568	)	$	(34,146	)	$	(16,202	)	$	2,947		$	(157,969	)

Catastrophe Reinsurance Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Catastrophe Reinsurance segment in 2012 of $110.6 million was primarily due to net reductions of $84.2 million arising from the estimated ultimate claims of large catastrophe events, including the 2010 Chilean Earthquake, the 2008 Hurricanes (Gustav and Ike), the 2007 U.K. Flooding, the 2005 Hurricanes, Hurricane Irene of 2011, the 2011 Thailand Floods and the Tohoku Earthquake, as reported claims came in better than expected. The remainder of the favorable development of prior accident years net claims and claim expenses of $47.8 million was due to a reduction in ultimate claims on a number of relatively small catastrophes, all principally the result of reported claims coming in less than expected, principally resulting in formulaic decreases to the ultimate claims for these events. Partially offsetting the reductions noted above was a $17.9 million and $3.6 million increase in net claims and claim expenses from the 2011 and 2010 New Zealand Earthquake, respectively, primarily as a result of increased cedant gross ultimate loss estimates.

Specialty Reinsurance Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Specialty Reinsurance segment in 2012 of $34.1 million includes $14.4 million associated with actuarial assumption changes, principally in the Company’s casualty and medical malpractice lines of business, and primarily as a result of revised initial expected claims ratios and claim development factors due to actual experience coming in better than expected, and $16.7 million due to reported claims coming in lower than expected on prior accident years events, as a result of the application of the Company’s formulaic actuarial reserving methodology, and $3.0 million related to reductions in the estimated ultimate losses from the 2005 Hurricanes.

Lloyd’s Segment

The favorable development of prior accident years net claims and claim expenses within the Company’s Lloyd’s segment of $16.2 million during 2012 was principally due to favorable development of $8.0 million due to reported claims coming in lower than expected on a number of prior accident years events, as a result of the application of the Company’s formulaic actuarial reserving methodology, $5.5 million related to the 2011 Thailand Floods, $2.5 million related to Hurricane Irene, and $1.5 million due to lower than expected reported claims for catastrophe losses within the Lloyd’s segment’s property catastrophe reinsurance book of business, partially offset by $1.3 million of adverse development related to actuarial assumption changes.

Other Category

The net adverse development on prior accident years of $2.9 million for 2012 within the Company’s Other category was principally the result of a loss portfolio transfer entered into by the Company on October 1, 2012, in respect of its contractor’s liability book of business within RenaissanceRe Specialty Risks, whereby the Company paid consideration of $36.5 million to transfer net liabilities of $29.1 million, resulting in a loss of $7.4 million which is recorded above as prior accident years attritional net claims and claims expenses in the Company’s Other category, partially offset by reductions in reported losses on certain attritional loss contracts and favorable development related to catastrophe events, primarily the 2008 Hurricanes (Gustav and Ike).

Assumed Reinsurance Contracts Classified As Deposit Contracts

Net claims and claim expenses incurred were reduced by $0.3 million during 2014 (2013 – $0.4 million, 2012 – $0.1 million) related to income earned on assumed reinsurance contracts that were classified as deposit contracts with underwriting risk only. Other loss was decreased by $0.1 million during 2014 (2013 – other loss decreased by $0.1 million, 2012 – other loss decreased by $7.5 million) related to premiums and losses incurred on assumed reinsurance contracts that were classified as deposit contracts with timing risk only. Aggregate deposit liabilities of $39.0 million are included in reinsurance balances payable at December 31, 2014 (2013 – $39.7 million) and aggregate deposit assets of $Nil are included in other assets at December 31, 2014 (2013 – $Nil) associated with these contracts.