Reserves for Losses and Loss Adjustment Expenses

9 Months Ended

Sep. 30, 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 Nine Months Ended September 30,
(in millions)	2020		2019
Net reserves beginning of the year	$	2,722.7	$	2,562.9
Net AIL reserves acquired	27.9		—

Add:
Losses and LAE incurred during current calendar year, net of reinsurance:
Current accident year	876.9		799.9
Prior accident years	6.1		61.6
Losses and LAE incurred during calendar year, net of reinsurance	883.0		861.5
Deduct:
Losses and LAE payments made during current calendar year, net of reinsurance:
Current accident year	188.2		163.6
Prior accident years	632.7		615.8
Losses and LAE payments made during current calendar year, net of reinsurance:	820.9		779.4
Change in participation interest (1)	33.0		(14.4)
Foreign exchange adjustments	23.0		(26.3)
Net reserves - end of period	2,868.7		2,604.3
Add:
Reinsurance recoverables on unpaid losses and LAE, end of period	2,521.3		2,238.2
Gross reserves - end of period	$	5,390.0	$	4,842.5

(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 and nine months ended September 30, 2020 included net losses and loss adjustment expenses attributed to the COVID-19 pandemic of $16.9 million and $60.5 million, respectively, 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 development of prior accident years’ loss and LAE reserves on each reporting segment is presented below:


	For the Nine Months Ended September 30,
(in millions)	2020		2019
U.S. Operations	$	(0.5)	$	(9.8)
International Operations	(4.5)		69.5
Run-off Lines	11.1		1.9
Total unfavorable prior-year development	$	6.1	$	61.6

The following describes the primary factors behind each segment’s prior accident year reserve development for the nine months ended September 30, 2020 and 2019:

Nine months ended September 30, 2020:

•U.S. Operations: Favorable development in surety and commercial multi-peril, partially offset by unfavorable development in general liability, special property and commercial auto liability.

•International Operations: Favorable development in property, specialty and reinsurance, partially offset by unfavorable development in general liability and surety lines.

•Run-off Lines: Unfavorable loss reserve development on prior accident years in asbestos and environmental driven by asbestos claims remaining open longer than expected, higher defense costs and movement on individual environmental claims as well as unfavorable development in other run-off lines, partially offset by favorable development in risk management workers compensation.

Nine months ended September 30, 2019:

•U.S. Operations: Favorable development in general liability and specialty lines, partially offset by unfavorable development in professional and property lines.

•International Operations: Unfavorable development was primarily concentrated in liability and professional lines. The charges impacted our Bermuda casualty and professional divisions, and to a lesser extent our European and Syndicate 1200 operations. The charges stemmed from public utility business in our Bermuda casualty division, which we previously exited, as well as updated estimates on a number of other claims based on new information received in the second and third quarters of 2019. As it relates to Europe, the adverse development primarily related to certain cover-holders whose contracts were previously terminated or where aggressive remedial underwriting actions have been taken. As it relates to Syndicate 1200, the adverse development largely related to businesses that we have previously exited or where aggressive remedial underwriting actions have been taken.

The International Operations unfavorable development includes $68.7 million recognized during the second and third quarters of 2019. This unfavorable development was primarily due to obtaining additional information on several individual claims, including investigations regarding causes of the incidents leading to the losses, reports provided by outside counsel, audits of the underlying losses and recent court decisions, settlements and jury awards. The result was an increase in the number of claims with the potential for underlying losses to reach our attachment point, particularly within our Bermuda Operations. The unfavorable development in the second and third quarters of 2019 was also attributable to the results of ongoing audits, underwriting reviews, and updated data from third-party cover-holders, which included the identification of differences from original expectations with regard to the classes written, the distribution of writings by geography, and the rates charged by the cover-holders. Adverse development in Syndicate 1200 related to large claims involving the marine and energy and liability divisions. Losses on small and medium enterprise package business were also higher than expected.

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

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 reasonable assumptions 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 September 30, 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.