Unpaid Losses and Loss Adjustment Expenses

The following table presents a reconciliation of consolidated beginning and ending reserves for losses and loss adjustment expenses.



	Nine Months Ended September 30,
(dollars in thousands)	2017			2016
Net reserves for losses and loss adjustment expenses, beginning of year	$	8,108,717		$	8,235,288
Foreign currency movements	158,360			(56,741		)
Adjusted net reserves for losses and loss adjustment expenses, beginning of year	8,267,077			8,178,547
Incurred losses and loss adjustment expenses:
Current accident year	2,549,471			1,903,645
Prior accident years	(335,494		)	(327,064		)
Total incurred losses and loss adjustment expenses	2,213,977			1,576,581
Payments:
Current accident year	342,055			319,049
Prior accident years	1,185,689			1,219,755
Total payments	1,527,744			1,538,804
Effect of foreign currency rate changes	10,582			38
Net reserves for losses and loss adjustment expenses of acquired insurance companies	12,702			—
Net reserves for losses and loss adjustment expenses, end of period	8,976,594			8,216,362
Reinsurance recoverable on unpaid losses	2,466,554			2,041,928
Gross reserves for losses and loss adjustment expenses, end of period	$	11,443,148		$	10,258,290

In March 2015, the Company completed a retroactive reinsurance transaction to cede to a third party a portfolio of policies primarily comprised of liabilities arising from asbestos and environmental exposures that originated before 1992. Effective March 31, 2017, the related reserves, which totaled $69.1 million, were formally transferred to the third party by way of a Part VII transfer pursuant to the Financial Services and Markets Act 2000 of the United Kingdom. The Part VII transfer eliminates the uncertainty regarding the potential for adverse development of estimated ultimate liabilities on the underlying policies. Upon completion of the transfer in the first quarter of 2017, the Company recognized a previously deferred gain of $3.9 million, which is included in losses and loss adjustment expenses on the consolidated statement of income (loss) and comprehensive income (loss) for the nine months ended September 30, 2017. This amount is excluded from the prior years' incurred losses and loss adjustment expenses for the nine months ended September 30, 2017 in the above table as the deferred gain was included in other liabilities on the consolidated balance sheet as of December 31, 2016, rather than unpaid losses and loss adjustment expenses.

For the nine months ended September 30, 2016, incurred losses and loss adjustment expenses in the above table exclude $11.7 million of favorable development on prior years loss reserves included in losses and loss adjustment expenses on the consolidated statement of income (loss) and comprehensive income (loss) related to the commutation of a property and casualty deposit contract, for which the underlying deposit liability was included in other liabilities on the consolidated balance sheet as of December 31, 2015, rather than unpaid losses and loss adjustment expenses.

For the nine months ended September 30, 2017, the Company recorded net reserves for losses and loss adjustment expenses of $12.7 million as a result of the acquisition of SureTec.

Underwriting results for the nine months ended September 30, 2017 included $503.0 million of underwriting loss from Hurricanes Harvey, Irma and Maria as well as the earthquakes in Mexico (2017 Catastrophes). The underwriting loss on the 2017 Catastrophes was comprised of $521.2 million of estimated net losses and loss adjustment expenses and $18.2 million of net assumed reinstatement premiums. The estimated net losses and loss adjustment expenses on the 2017 Catastrophes for the nine months ended September 30, 2017 were net of estimated reinsurance recoverables of $464.4 million.

For the nine months ended September 30, 2017, incurred losses and loss adjustment expenses included $335.5 million of favorable development on prior years' loss reserves, which included $302.5 million of loss reserve redundancies on the Company's general liability, personal lines business and worker's compensation product lines within the U.S. Insurance segment, professional liability, general liability and marine and energy product lines within the International Insurance segment, and property and whole account product lines within the Reinsurance segment. Redundancies for the nine months ended September 30, 2017 were partially offset by $85.0 million of adverse development resulting from a decrease in the discount rate, known as the Ogden Rate, used to calculate lump sum awards in United Kingdom (U.K.) bodily injury cases. Effective March 20, 2017, the Ogden Rate decreased from plus 2.5% to minus 0.75%, which represents the first rate change since 2001. The effect of the rate change is most impactful to the Company's U.K. auto casualty exposures through reinsurance contracts written in the Reinsurance segment. In late 2014, the Company ceased writing auto reinsurance in the U.K. The reduction in the Ogden Rate increased the expected claims payments on these exposures, and management increased loss reserves accordingly. The Company's estimate of the ultimate cost of settling these claims is based on many factors, and is subject to increase or decrease as the effect of changes in these factors becomes known over time.

For the nine months ended September 30, 2016, incurred losses and loss adjustment expenses included $327.1 million of favorable development on prior years' loss reserves, which included $263.3 million of loss reserve redundancies on the Company's general liability, property and worker's compensation product lines within the U.S. Insurance segment, professional liability and marine and energy product lines within the International Insurance segment, and property and worker's compensation product lines within the Reinsurance segment. Redundancies for the nine months ended September 30, 2016 were partially offset by $71.4 million of adverse development on our specified medical and medical malpractice product lines within the U.S. Insurance segment.