RESERVE FOR LOSSES AND LOSS EXPENSES

6 Months Ended

Jun. 30, 2012

Insurance Loss Reserves [Abstract]

RESERVE FOR LOSSES AND LOSS EXPENSES [Text Block]

6.     RESERVE FOR LOSSES AND LOSS EXPENSES

The following table presents a reconciliation of our beginning and ending gross reserve for losses and loss expenses and net reserve for unpaid losses and loss expenses for the periods indicated:

Six months ended June 30,	2012			2011
Gross reserve for losses and loss expenses, beginning of period	$	8,425,045		$	7,032,375
Less reinsurance recoverable on unpaid losses, beginning of period	(1,736,823		)	(1,540,633		)
Net reserve for unpaid losses and loss expenses, beginning of period	6,688,222			5,491,742
Net incurred losses and loss expenses related to:
Current year	1,098,168			1,686,013
Prior years	(119,840		)	(101,254		)
	978,328			1,584,759
Net paid losses and loss expenses related to:
Current year	(90,041		)	(84,858		)
Prior years	(731,363		)	(472,454		)
	(821,404		)	(557,312		)
Foreign exchange and other	(10,129		)	126,056
Net reserve for unpaid losses and loss expenses, end of period	6,835,017			6,645,245
Reinsurance recoverable on unpaid losses, end of period	1,765,634			1,757,367
Gross reserve for losses and loss expenses, end of period	$	8,600,651		$	8,402,612

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 six months ended June 30, 2011, we recognized aggregate natural catastrophe-related net loss and loss expenses of $627 million in relation to the Japanese earthquake and tsunami, the February and June earthquakes in New Zealand and the first quarter Australian weather events.

Prior year reserve development arises from changes to loss and loss expense estimates recognized in the current year but relating to losses incurred in previous calendar years. Such development is summarized by segment in the following table:

	Three months ended June 30,				Six months ended June 30,
	2012		2011		2012		2011
Insurance	$	35,394	$	26,754	$	50,289	$	41,481
Reinsurance	39,218		24,796		69,551		59,773
Total	$	74,612	$	51,550	$	119,840	$	101,254

The majority of the net favorable prior year reserve development in both 2012 and 2011 related to short-tail lines of business and our professional lines business.

The underlying exposures in the property, marine and aviation reserving classes within our insurance segment and the property reserving class within our reinsurance segment largely relate to short-tail business. Development from these classes contributed $68 million and $29 million of the total net favorable prior year reserve development in the second quarters of 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011, these short-tail lines contributed $87 million and $66 million, respectively, of the total net favorable prior year reserve development. The net favorable development on these lines of business primarily reflected the recognition of better than expected loss emergence.

Approximately $4 million and $22 million of the net favorable prior year reserve development in the second quarter of 2012 and 2011, respectively, was generated from professional lines insurance and reinsurance business. For the six months ended June 30, 2012 and 2011, our net favorable prior year reserve development included $27 million and $38 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 2007 and prior, with less weighting being given to information derived from industry benchmarks.

The frequency and severity of natural catastrophe activity in the 2011 and 2010 calendar years was notably high and our June 30, 2012 net reserve for losses and loss expenses continues to include estimated amounts for numerous natural catastrophe events that occurred during that period, including: the Japanese earthquake and tsunami; the notable 2010 and 2011 earthquakes near Christchurch, New Zealand; flooding across a widespread area of Thailand; and a number of other smaller events. We caution that the magnitude and complexity of losses arising from certain of these events, in particular the Japanese earthquake and tsunami, the New Zealand earthquakes and the Thai floods, inherently increase the level of uncertainty and, therefore, the amount of management judgment involved in arriving at our estimated net reserve for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.

We derive our estimated net losses in relation to catastrophe events such as these from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions. We also consider 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. During the six months endedJune 30, 2012, we continued to monitor paid and incurred loss development for catastrophe events of prior years and updated our estimates of ultimate losses accordingly; in the aggregate, there was no material change.