RESERVE FOR LOSSES AND LOSS EXPENSES

9 Months Ended

Sep. 30, 2011

RESERVE FOR LOSSES AND LOSS EXPENSES [ABSTRACT]

RESERVE FOR LOSSES AND LOSS EXPENSES

5.       RESERVE FOR LOSSES AND LOSS EXPENSES

The following table shows a reconciliation of our beginning and ending gross unpaid losses and loss expenses for the periods indicated:
	Nine months ended September 30,		2011		2010
	Gross reserve for losses and loss expenses, beginning of period	$	7,032,375	$	6,564,133
	Less reinsurance recoverable on unpaid losses, beginning of period		(1,540,633)		(1,381,058)
	Net reserve for losses and loss expenses, beginning of period		5,491,742		5,183,075
	Net incurred losses related to:
	Current year		2,271,284		1,525,564
	Prior years		(179,686)		(231,777)
			2,091,598		1,293,787
	Net paid losses related to:
	Current year		(285,137)		(207,922)
	Prior years		(700,522)		(835,972)
			(985,659)		(1,043,894)
	Foreign exchange and other		(3,949)		(23,208)
	Net reserve for losses and loss expenses, end of period		6,593,732		5,409,760
	Reinsurance recoverable on unpaid losses, end of period		1,741,109		1,524,768
	Gross reserve for losses and loss expenses, end of period	$	8,334,841	$	6,934,528

We write business with loss experience generally characterized as low frequency and high severity in nature, which results in volatility in our financial results. During the nine months ended September 30, 2011, we recognized net loss and loss expenses of $396million and $188million, respectively,in relation to the Christchurch, New Zealand earthquake (including the June aftershock) and theJapanese earthquake and tsunami. During the nine months ended September 30, 2010, we recognized net loss and loss expenses of $130 million and $85 million, respectively, in relation to the Chilean earthquake and the September New Zealand earthquake.

Our estimated net losses in relation to these events were derived from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions andare consistent with our market shares in those regions. We also considered current industry insured loss estimates, market share analyses and catastrophe modeling analyses, when appropriate, in addition to the information available to date from clients, brokers and loss adjusters. Industry-wide insured loss estimates for these events, as well as our own estimatesremain subject to change as additional actual loss data becomes available.

At the time of this report, conditions in New Zealand continue to evolve and significant loss adjustment work remains ongoing; this increases the inherent level of management judgment required to arrive at our estimates of net losses and the associated uncertainty for each of the New Zealand events. In addition, it is expected that there will be some difficulty allocating individual losses amongst the three New Zealand events.

Given the factors noted above, our actual losses for any of the New Zealand events and/or the Japanese earthquake and tsunami may ultimately differ materially from our current estimates.

In addition to factors noted for New Zealand above, uncertainties associated with the Japanese earthquake and tsunami may include, but are not limited to, the magnitude of the event and associated damage, uncertainties about the extent and nature of damages and corresponding coverages (including business interruption and contingent business interruption coverages), the ultimate size of losses to be assumed by Japan's cooperative mutuals and limitations associated with modeled losses.

Net losses and loss expenses incurred include net favorable prior year reserve development of $180 million and $232 million for the nine months ended September 30,2011 and 2010, respectively. Prior year reserve development arises from changes to loss estimates recognized in the current year that relate to losses incurred in previous calendar years.

The following table summarizes net favorable reserve development by segment:
		Three months ended September 30,				Nine months ended September 30,
		2011		2010		2011		2010
	Insurance	$	32,594	$	27,823	$	74,076	$	83,732
	Reinsurance		45,837		43,884		105,610		148,045
	Total	$	78,431	$	71,707	$	179,686	$	231,777

Overall, a large portion of the net favorable prior period reserve development in both 2011 and 2010 was generated from the property, marine, and aviation lines of our insurance segment and the property and catastrophe lines of our reinsurance segment. These lines of business, the majority of which have short-tail exposures, contributed 58% and 44% of the total net favorable reserve development in the third quarters of 2011 and 2010, respectively.For the nine months ended September 30, 2011 and 2010, these short-tail lines contributed 62% and 52%, respectively, of the total net favorable reserve development. The favorable development on these lines of business primarily reflected the recognition of better than expected loss emergence.

Approximately $31 million and $25 million of the net favorable reserve development in the third quarter of 2011 and 2010, respectively, was generated from professional lines insurance and reinsurance business. For the nine months ended September 30, 2011 and 2010, our net favorable development included $68 million and $98 million in relation to this business, respectively. This favorable development was driven by increased incorporation of our own historical claims experience into our estimation of ultimate loss ratios for accident years 2008 and prior, with less weighting being given to information derived from industry benchmarks.