Reserves for Losses and Loss Adjustment Expenses

3 Months Ended

Mar. 31, 2020

Reserves for Losses and Loss Adjustment Expenses

The following table provides a reconciliation of reserves for losses and loss adjustment expenses (“LAE”):


	For the Three Months Ended March 31,
(in millions)	2020		2019
Net reserves beginning of the year	$	2,722.7	$	2,562.9


Add:
Losses and LAE incurred during current calendar year, net of reinsurance:
Current accident year	278.2		240.4
Prior accident years	2.7		(2.5)
Losses and LAE incurred during calendar year, net of reinsurance	280.9		237.9
Deduct:
Losses and LAE payments made during current calendar year, net of reinsurance:
Current accident year	72.6		34.7
Prior accident years	263.8		221.0
Losses and LAE payments made during current calendar year, net of reinsurance:	336.4		255.7
Change in participation interest ⁽¹⁾	32.5		(14.6)
Foreign exchange adjustments	(25.6)		(9.1)
Net reserves - end of period	2,674.1		2,521.4
Add:
Reinsurance recoverables on unpaid losses and LAE, end of period	2,393.5		2,147.5
Gross reserves - end of period	$	5,067.6	$	4,668.9

⁽¹⁾Amount represents the change in reserves due to changing our participation in Syndicates 1200 and 1910.

Reserves for losses and LAE represent the estimated indemnity cost and related adjustment expenses necessary to investigate and settle claims. Such estimates are based upon individual case estimates for reported claims, estimates from ceding companies for reinsurance assumed and actuarial estimates for losses that have been incurred but not yet reported to the insurer. Any change in probable ultimate liabilities is reflected in current operating results.

Underwriting results for the three months ended March 31, 2020 included $26.2 million of net losses and loss adjustment expenses attributed to the COVID-19 pandemic, primarily resulting from contingency and property exposures in the company’s International Operations and property exposures in its U.S. Operations. Property losses relate to sub-limited affirmative business interruption coverage, primarily in certain International markets, as well as expected costs associated with claims handling.

The impact from the unfavorable (favorable) development of prior accident years’ loss and LAE reserves on each reporting segment is presented below:


	For the Three Months Ended March 31,
(in millions)	2020		2019
U.S. Operations	$	3.3	$	(4.0)
International Operations	(0.4)		0.8
Run-off Lines	(0.2)		0.7
Total unfavorable (favorable) prior-year development	$	2.7	$	(2.5)

The following describes the primary factors behind each segment’s prior accident year reserve development for the three months ended March 31, 2020 and 2019:

Three months ended March 31, 2020:

•U.S. Operations: Unfavorable development in professional lines and liability, partially offset by favorable development in specialty related to our surety business unit.

•International Operations: Favorable development in property and assumed reinsurance largely offset by unfavorable development in professional lines.

•Run-off Lines: Favorable development in risk management workers compensation, partially offset by unfavorable development in other run-off lines.

Three months ended March 31, 2019:

•U.S. Operations: Favorable development in liability and specialty lines, partially offset by unfavorable development in workers compensation and commercial multi-peril lines.

•International Operations: Unfavorable development in general liability, partially offset by unfavorable movements in property reinsurance.

•Run-off Lines: Unfavorable development in other run-off lines.

In the opinion of management, our reserves represent the best estimate of our ultimate liabilities, based on currently known facts, current law, current technology and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgments, there can be no assurance that future favorable or unfavorable loss development, which may be material, will not occur.

The spread of COVID-19 and related economic shutdown has increased the uncertainty that is always present in our estimate of the ultimate cost of loss and settlement expense. Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of March 31, 2020. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite. The industry is experiencing new issues, including the temporary suspension of civil court cases in most states, the extension of certain statutes of limitations and the impact on our insureds from a significant reduction in economic activity. Our booked reserves include consideration of these factors, but legislative, regulatory or judicial actions could result in loss reserve deficiencies and reduce earnings in future periods.