Reserve for Claims and Claim Expenses

9 Months Ended

Sep. 30, 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 September 30, 2019	Case Reserves		Additional Case Reserves		IBNR		Total
Property	$	1,170,009	$	1,493,600	$	916,314	$	3,579,923
Casualty and Specialty	1,475,505		151,555		3,389,344		5,016,404
Other	2,944		—		3,166		6,110
Total	$	2,648,458	$	1,645,155	$	4,308,824	$	8,602,437

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

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




Nine months ended September 30,	2019			2018
Net reserves as of beginning of period	$	3,704,050		$	3,493,778
Net incurred related to:
Current year	1,349,448			839,360
Prior years	(14,520		)	(196,980		)
Total net incurred	1,334,928			642,380
Net paid related to:
Current year	128,471			48,075
Prior years	563,539			326,692
Total net paid	692,010			374,767
Amounts acquired (1)	1,858,775			—
Foreign exchange (2)	(41,605		)	(12,952		)
Net reserves as of end of period	6,164,138			3,748,439
Reinsurance recoverable as of end of period	2,438,299			1,204,059
Gross reserves as of end of period	$	8,602,437		$	4,952,498

(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.

(2) Reflects the impact of the foreign exchange revaluation of net reserves denominated in non-U.S. dollars as at the balance sheet date.

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:




Nine months ended September 30,	2019			2018
	(Favorable) adverse development			(Favorable) adverse development
Property	$	5,020		$	(172,872	)
Casualty and Specialty	(19,718		)	(24,020		)
Other	178			(88		)
Total net favorable development of prior accident years net claims and claim expenses	$	(14,520	)	$	(196,980	)

Changes to prior year estimated claims reserves increased net income by $14.5 million during the nine months ended September 30, 2019 (2018 - increased net income by $197.0 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:




Nine months ended September 30,	2019
	(Favorable) adverse development
Catastrophe net claims and claim expenses
Large catastrophe events
2017 Large Loss Events	$	(90,817	)
New Zealand Earthquake (2011)	(7,497		)
Tohoku Earthquake and Tsunami (2011)	(4,693		)
New Zealand Earthquake (2010)	46,741
2018 Large Loss Events	61,592
Other	(10,717		)
Total large catastrophe events	(5,391		)
Small catastrophe events and attritional loss movements
Other small catastrophe events and attritional loss movements	1,166
Total small catastrophe events and attritional loss movements	1,166
Total catastrophe and attritional net claims and claim expenses	(4,225		)
Actuarial assumption changes	9,245
Total net adverse development of prior accident years net claims and claim expenses	$	5,020

The net adverse development of prior accident years net claims and claim expenses within the Company’s Property segment in the nine months ended September 30, 2019 of $5.0 million was comprised of net favorable development of $5.4 million related to large catastrophe events, net adverse development of $1.2 million related to small catastrophe events and attritional loss movements and net adverse development of $9.2 million related to actuarial assumption changes. Included in net favorable development of prior accident years net claims and claim expenses from large catastrophe events was $90.8 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”), partially offset by $61.6 million of net increases in the estimated ultimate losses associated with Typhoons Jebi, Mangkhut and Trami, Hurricane Florence, the wildfires in California during the third and fourth quarters of 2018 and Hurricane Michael (collectively, the “2018 Large Loss Events”) and $46.7 million of net increases in the estimated ultimate losses associated with the 2010 New Zealand Earthquake.




Nine months ended September 30,	2018
	(Favorable) adverse development
Catastrophe net claims and claim expenses
Large catastrophe events
2017 Large Loss Events	$	(151,155	)
Other	(7,313		)
Total large catastrophe events	(158,468		)
Small catastrophe events and attritional loss movements
Other small catastrophe events and attritional loss movements	(8,722		)
Total small catastrophe events and attritional loss movements	(8,722		)
Total catastrophe and attritional net claims and claim expenses	(167,190		)
Actuarial assumption changes	(5,682		)
Total net favorable development of prior accident years net claims and claim expenses	$	(172,872	)

The net favorable development of prior accident years net claims and claim expenses within the Company’s Property segment in the nine months ended September 30, 2018 of $172.9 million was principally comprised of net favorable development of $151.2 million related to the 2017 Large Loss Events and net favorable development of $8.7 million related to small catastrophe events and attritional loss movements. In addition, the Company’s Property segment experienced net favorable development of $5.7 million related to actuarial assumption changes associated with the other property class of business.

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:




Nine months ended September 30,	2019			2018
	(Favorable) adverse development			(Favorable) adverse development
Actuarial methods	$	(54,527	)	$	(16,234	)
Actuarial assumption changes	34,809			(7,786		)
Total net favorable development of prior accident years net claims and claim expenses	$	(19,718	)	$	(24,020	)

The net favorable development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment of $19.7 million in the nine months ended September 30, 2019 was comprised of net favorable development of $54.5 million related to reported losses generally coming in lower than expected on attritional net claims and claim expenses across a number of lines of business, partially offset by net adverse development of $34.8 million associated with certain actuarial assumption changes.

The net favorable development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment was $24.0 million in the nine months ended September 30, 2018 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.