Reserve for Claims and Claim Expenses

3 Months Ended

Mar. 31, 2019

RESERVE FOR CLAIMS AND CLAIM EXPENSES

The Company believes the most significant accounting judgment made by management is its estimate of claims and claim expense reserves. Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts the Company sells. The Company establishes its claims and claim expense reserves by taking claims reported to the Company by insureds and ceding companies, but which have not yet been paid (“case reserves”), adding estimates for the anticipated cost of claims incurred but not yet reported to the Company, or incurred but not enough reported to the Company (collectively referred to as “IBNR”) and, if deemed necessary, adding costs for additional case reserves which represent the Company’s estimates for claims related to specific contracts previously reported to the Company which it believes may not be adequately estimated by the client as of that date, or adequately covered in the application of IBNR.

The following table summarizes the Company’s claims and claim expense reserves by segment, allocated between case reserves, additional case reserves and IBNR:




At March 31, 2019	Case Reserves		Additional Case Reserves		IBNR		Total
Property	$	1,243,455	$	1,598,283	$	844,681	$	3,686,419
Casualty and Specialty	1,454,164		121,165		3,125,166		4,700,495
Other	1,404		—		3,166		4,570
Total (1)	$	2,699,023	$	1,719,448	$	3,973,013	$	8,391,484

At December 31, 2018
Property	$	690,718	$	1,308,307	$	1,087,229	$	3,086,254
Casualty and Specialty	771,537		116,877		2,096,979		2,985,393
Other	1,458		—		3,166		4,624
Total	$	1,463,713	$	1,425,184	$	3,187,374	$	6,076,271

(1) Included in the Company’s reserves for claims and claim expenses balance at March 31, 2019 is $2.4 billion of gross reserves for claims and claim expenses, at fair value, acquired as a result of the acquisition of the TMR Group Entities. See “Note 3. Acquisition of Tokio Millennium Re” for additional information related to the acquisition of the TMR Group Entities.

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




Three months ended March 31,	2019			2018
Net reserves as of January 1	$	3,704,050		$	3,493,778
Net incurred related to:
Current year	231,341			203,038
Prior years	(4,306		)	(31,335		)
Total net incurred	227,035			171,703
Net paid related to:
Current year	8,149			9,050
Prior years	300,120			328,129
Total net paid	308,269			337,179
Amounts acquired (1)	1,858,775			—
Foreign exchange	1,550			12,104
Net reserves as of March 31	5,483,141			3,340,406
Reinsurance recoverable as of March 31	2,908,343			1,572,321
Gross reserves as of March 31	$	8,391,484		$	4,912,727

(1) Represents the fair value of the TMR Group Entities reserves for claims and claim expenses, net of reinsurance recoverables, acquired at March 22, 2019. See “Note 3. Acquisition of Tokio Millennium Re” for additional information related to the acquisition of the TMR Group Entities.

Prior Year Development of the Reserve for Net Claims and Claim Expenses

The Company’s estimates of claims and claim expense reserves are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends and other variable factors. Some, but not all, of the Company’s reserves are further subject to the uncertainty inherent in actuarial methodologies and estimates. Because a reserve estimate is simply an insurer’s estimate at a point in time of its ultimate liability, and because there are numerous factors that affect reserves and claims payments that cannot be determined with certainty in advance, the Company’s ultimate payments will vary, perhaps materially, from its estimates of reserves. If the Company determines in a subsequent period that adjustments to its previously established reserves are appropriate, such adjustments are recorded in the period in which they are identified. On a net basis, the Company’s cumulative favorable or unfavorable

development is generally reduced by offsetting changes in its reinsurance recoverables, as well as changes to loss related premiums such as reinstatement premiums and redeemable noncontrolling interest for changes in claims and claim expenses that impact DaVinciRe, all of which generally move in the opposite direction to changes in the Company’s ultimate claims and claim expenses.

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




Three months ended March 31,	2019			2018
	(Favorable) adverse development			(Favorable) adverse development
Property	$	1,877		$	(27,562	)
Casualty and Specialty	(6,202		)	(3,791		)
Other	19			18
Total favorable development of prior accident years net claims and claim expenses	$	(4,306	)	$	(31,335	)

Changes to prior year estimated claims reserves increased the Company’s net income by $4.3 million during the three months ended March 31, 2019, (2018 - increased the Company’s net income by $31.3 million), excluding the consideration of changes in reinstatement, adjustment or other premium items, profit commissions, redeemable noncontrolling interest - DaVinciRe and income tax.

Property Segment

The following tables detail the development of the Company’s liability for unpaid claims and claim expenses for its Property segment, allocated between large and small catastrophe net claims and claim expenses and attritional net claims and claim expenses, included in the other line item:




Three months ended March 31,	2019
	(Favorable) adverse development
Catastrophe net claims and claim expenses
Large catastrophe events
2017 Large Loss Events	$	(10,918	)
Other	(1,374		)
Total large catastrophe events	(12,292		)
Small catastrophe events and attritional loss movements
Other small catastrophe events and attritional loss movements	14,169
Total small catastrophe events and attritional loss movements	14,169
Total net adverse development of prior accident years net claims and claim expenses	$	1,877

The net adverse development of prior accident years net claims and claim expenses within the Company’s Property segment in the three months ended March 31, 2019 of $1.9 million was comprised of net favorable development of $12.3 million related to large catastrophe events and net adverse development of $14.2 million related to small catastrophe events. Included in net favorable development of prior accident years net claims and claim expenses from large events was $10.9 million of net decreases in the estimated ultimate losses associated with Hurricanes Harvey, Irma and Maria, the Mexico City Earthquake, the wildfires in California during the fourth quarter of 2017 and certain losses associated with aggregate loss contracts (collectively, the “2017 Large Loss Events”). The Company’s Property segment also experienced net adverse development of $14.2 million associated number of other small catastrophe events and attritional loss movements primarily driven by increases in the estimated ultimate net claims and claim expenses within the Company’s other property class of business.




Three months ended March 31,	2018
	(Favorable) adverse development
Catastrophe net claims and claim expenses
Large catastrophe events
2017 Large Loss Events	$	(27,109	)
Other	(4,258		)
Total large catastrophe events	(31,367		)
Small catastrophe events and attritional loss movements
Other small catastrophe events and attritional loss movements	3,805
Total small catastrophe events and attritional loss movements	3,805
Total net favorable development of prior accident years net claims and claim expenses	$	(27,562	)

The net favorable development of prior accident years net claims and claim expenses within the Company’s Property segment in the three months ended March 31, 2018 of $27.6 million was comprised of net favorable development of $31.4 million related to large catastrophe events and net adverse development of $3.8 million related to small catastrophe events. Included in net favorable development of prior accident years net claims and claim expenses from large events was $27.1 million of net decreases in the estimated ultimate losses associated with Hurricanes Harvey, Irma and Maria, the Mexico City Earthquake, the wildfires in California during the fourth quarter of 2017 and certain losses associated with aggregate loss contracts (collectively, the “2017 Large Loss Events”). In addition, the Company’s Property segment experienced net favorable development of $0.5 million associated with a number of other large and small catastrophe events.

Casualty and Specialty Segment

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




Three months ended March 31,	2019			2018
	(Favorable) adverse development			(Favorable) adverse development
Actuarial methods	$	(6,202	)	$	(3,791	)
Total favorable development of prior accident years net claims and claim expenses	$	(6,202	)	$	(3,791	)

The net favorable development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment was $6.2 million and $3.8 million in the three months ended March 31, 2019 and 2018, respectively, each driven by reported losses generally coming in lower than expected on attritional net claims and claim expenses and certain assumption changes across a number of lines of business.