RESERVE FOR LOSSES AND LOSS EXPENSES

9 Months Ended

Sep. 30, 2020

Insurance [Abstract]

RESERVE FOR LOSSES AND LOSS EXPENSES

Reserve Roll-Forward

The following table presents a reconciliation of the Company's beginning and ending gross reserve for losses and loss expenses and net reserves for unpaid losses and loss expenses:

	Nine months ended September 30,
	2020		2019
Gross reserve for losses and loss expenses, beginning of period	$	12,752,081	$	12,280,769
Less reinsurance recoverable on unpaid losses and loss expenses, beginning of period	(3,877,756)		(3,501,669)
Net reserve for unpaid losses and loss expenses, beginning of period	8,874,325		8,779,100
Net incurred losses and loss expenses related to:
Current year	2,473,363		2,252,424
Prior years	(9,351)		(65,021)
	2,464,012		2,187,403
Net paid losses and loss expenses related to:
Current year	(227,332)		(329,519)
Prior years	(1,831,192)		(1,791,233)
	(2,058,524)		(2,120,752)
Foreign exchange and other	35,992		(53,037)
Net reserve for unpaid losses and loss expenses, end of period	9,315,805		8,792,714
Reinsurance recoverable on unpaid losses and loss expenses, end of period	4,337,683		3,705,793
Gross reserve for losses and loss expenses, end of period	$	13,653,488	$	12,498,507

The Company writes business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in its financial results. During the nine months ended September 30, 2020, the Company recognized catastrophe and weather-related losses, net of reinstatement premiums of $576 million (2019: $206 million).

Estimates for Significant Catastrophe Events

At September 30, 2020, net reserves for losses and loss expenses included estimated amounts for numerous catastrophe events. The magnitude and complexity of losses arising from certain of these events inherently increase the level of uncertainty, and therefore, increase the level of management judgment involved in arriving at estimated net reserves for losses and loss expenses. These events include the COVID-19 pandemic, Hurricanes Laura and Sally, and wildfires across the West Coast of the United States in 2020, Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, and the Australia Wildfires in 2019, Hurricanes Michael and Florence, California Wildfires, and Typhoon Jebi in 2018, and Hurricanes Harvey, Irma and Maria, and the California Wildfires in 2017. Actual losses for these events may ultimately differ materially from the Company's current estimates.

The estimate of net reserves for losses and loss expenses related to the COVID-19 pandemic represented the Company's best estimate of losses and loss adjustment expenses that have been incurred at September 30, 2020. The determination of the Company's net reserves for losses and loss expenses for its insurance segment was based on its ground-up assessment of coverage from individual contracts and treaties, including a review of contracts with potential exposure to the COVID-19 pandemic. The determination of the Company's net reserves for losses and loss expenses for its reinsurance segment was largely based on a range of industry insured loss estimates and market share analyses, supplemented by a review of in-force treaties that may provide coverage and catastrophe modeling analyses, where appropriate. In addition, the Company considered preliminary information received from clients, brokers and loss adjusters.

The estimate of net reserves for losses and loss expenses related to the COVID-19 pandemic was subject to significant uncertainty. This uncertainty was driven by the inherent difficulty in making assumptions around the impact of the COVID-19 pandemic due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts on world-wide economies and the health of the population. These assumptions include:

•the nature and the duration of the pandemic;

•the effects on human health, the economy and the Company's customers;

•the response of government bodies including legislative, regulatory or judicial actions and social influences that could alter the interpretation of the Company's contracts;

•the coverage provided under the Company's contracts;

•the coverage provided by its ceded reinsurance; and

•the evaluation of the loss and impact of loss mitigation actions.

While the Company believes its estimate of net reserves for losses and loss expenses is adequate for losses and loss adjustment expenses that have been incurred at September 30, 2020 based on current facts and circumstances, the Company will continue to monitor the appropriateness of its assumptions as new information comes to light and will adjust its estimate of net reserves for losses and loss adjustment expenses, as appropriate. Actual losses for these events may ultimately differ materially from the Company's current estimates.

The estimate of net reserves for losses and loss expenses related to catastrophe events other than COVID-19 were derived from ground-up assessments of in-force contracts and treaties providing coverage in the affected regions. These assessments took into account the latest information available from clients, brokers and loss adjusters. In addition, the Company considered industry insured loss estimates, market share analyses and catastrophe modeling analyses, where appropriate. Estimates are subject to change as additional loss data becomes available. Actual losses for these events may ultimately differ materially from the Company's current estimates.

The Company continues to monitor paid and incurred loss development for catastrophe events and updates estimates of ultimate losses accordingly.

Prior Year Reserve Development

The Company's net favorable prior year reserve development arises from changes to estimates of losses and loss expenses related to loss events that occurred in previous calendar years. The following table presents net prior year reserve development by segment:

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Insurance	$	270	$	14,609	$	4,521	$	42,849
Reinsurance	314		12,118		4,830		22,172
Total	$	584	$	26,727	$	9,351	$	65,021

The following tables map the Company's lines of business to reserve classes and the expected claim tails:

Insurance segment
	Reserve class and tail
	Property and other	Marine	Aviation	Credit and political risk	Professional lines	Liability
	Short	Short	Short/Medium	Medium	Medium	Long
Reported lines of business
Property	X
Marine		X
Terrorism	X
Aviation			X
Credit and political risk				X
Professional lines					X
Liability						X
Accident and health	X
Discontinued lines - Novae	X				X	X

Reinsurance segment
	Reserve class and tail
	Property and other	Credit and surety	Professional lines	Motor	Liability
	Short	Medium	Medium	Long	Long
Reported lines of business
Catastrophe	X
Property	X
Credit and surety		X
Professional lines			X
Motor				X
Liability					X
Engineering	X
Agriculture	X
Marine and other	X
Accident and health	X
Discontinued lines - Novae	X			X	X

Short-tail business

Short-tail business includes the underlying exposures in property and other, marine and aviation reserve classes in the insurance segment, and the property and other reserve class in the reinsurance segment.

For the three months ended September 30, 2020, these reserve classes contributed net favorable prior year reserve development of $14 million, including net favorable prior year reserve development of $7 million contributed by the insurance property and other reserve class, net favorable prior year development of $4 million contributed by the insurance marine reserve class and net favorable prior year reserve development of $3 million contributed by the reinsurance property and other reserve class.

For the nine months ended September 30, 2020, these reserve classes contributed net favorable prior year reserve development of $44 million, including net favorable prior year reserve development of $43 million contributed by the insurance property and other reserve class and net favorable prior year development of $6 million contributed by the insurance aviation reserve class, partially offset by net adverse prior year reserve development of $5 million recognized by the reinsurance property and other reserve class.

For the three months ended September 30, 2019, these reserve classes contributed net favorable prior year reserve development of $2 million, including net favorable prior year reserve development of $11 million contributed by the insurance property and other reserve class and net favorable prior year reserve development of $3 million contributed by the insurance marine and aviation reserve classes, partially offset by net adverse prior year development of $12 million recognized by the reinsurance property and other reserve class.

For the nine months ended September 30, 2019, these reserve classes recognized net adverse prior year reserve development of $50 million, including net adverse prior year reserve development of $71 million recognized by the reinsurance property and other reserve class and net adverse prior year reserve development of $4 million recognized by the insurance property and other reserve class, partially offset by net favorable prior year reserve development of $24 million contributed by the insurance marine reserve class. The net adverse prior year reserve development of $71 million recognized by the reinsurance property and other reserve class was due to an increase in loss estimates attributable to Typhoons Jebi and Trami consistent with updated industry insured loss estimates, an increase in loss estimates attributable to Hurricane Michael, and reserve strengthening attributable to late reporting of claims bordereaux associated within the European proportional book of business related to the 2018 accident year.

Medium-tail business

Medium-tail business consists primarily of insurance and reinsurance professional lines reserve classes, insurance credit and political risk reserve class and reinsurance credit and surety reserve class.

For the three and nine months ended September 30, 2020, the insurance professional lines reserve class recorded net adverse prior year reserve development of $7 million and $19 million, respectively, reflecting reserve strengthening mainly related to the 2018 and 2019 accident years and an increase in case reserves attributable to a specific large claim related to the 2009 accident year. For the three and nine months ended September 30, 2019, the insurance professional lines reserve class recorded net favorable prior year reserve development of $4 million and $14 million, respectively, reflecting generally favorable experience mainly related to the 2013 to 2015 accident years as the Company continued to transition to more experience based actuarial methods.

For the three and nine months ended September 30, 2020, the reinsurance professional lines reserve class recorded net adverse prior year reserve development of $14 million and $13 million respectively, reflecting an increase in case reserves attributable to a specific large claim related to the 2016 accident year and reserve strengthening mainly related to the 2016 to 2018 accident years. For the three months ended September 30, 2019, the reinsurance professional lines reserve class recorded net adverse prior year reserve development of $7 million reflecting reserve strengthening within the Company's European book of business.

For the nine months ended September 30, 2019, the insurance credit and political risk reserve class recorded net favorable prior year reserve development of $10 million reflecting better than expected loss emergence.

For the three and nine months ended September 30, 2020, the reinsurance credit and surety reserve class recorded net favorable prior year reserve development of $11 million (2019: $6 million) and $28 million (2019: $33 million), respectively, reflecting better than expected loss emergence.

Long-tail business

Long-tail business consists primarily of insurance and reinsurance liability reserve classes and reinsurance motor reserve class.

For the three and nine months ended September 30, 2020, the insurance liability reserve class recognized net adverse prior year reserve development of $4 million (2019: $4 million) and $25 million, respectively, primarily due to reserve strengthening within the primary casualty, U.S. excess casualty and program books of business mainly related to the 2017 and 2018 accident years.

For the nine months ended September 30, 2020, the reinsurance liability reserve class recognized net adverse prior year reserve development of $23 million due to reserve strengthening within the U.S. casualty, the U.S. multiline/regional and the European books of business mainly related to the 2016 through 2019 accident years. For the nine months ended September 30, 2019, the reinsurance liability reserve class contributed net favorable prior year reserve development of $26 million due to increased weight given by management to experience based indications on older accident years.

For the nine months ended September 30, 2020, the reinsurance motor reserve class recognized net favorable prior year reserve development of $19 million (2019: $34 million) primarily attributable to non-proportional treaty business. For the three months ended September 30, 2019, the reinsurance motor reserve class recognized net favorable prior year reserve development of $23 million primarily attributable to non-proportional treaty business.