Unpaid losses and loss expenses

Chubb establishes reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. Reserves include estimates for both claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling these claims. Reserves are recorded in Unpaid losses and loss expenses in the consolidated balance sheets. The process of establishing loss and loss expense reserves for P&C claims can be complex and is subject to considerable uncertainty as it requires the use of informed estimates and judgments. Our estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as laws change. We continually evaluate our estimate of reserves in light of developing information and in light of discussions and negotiations with our insureds. While we believe that our reserves for unpaid losses and loss expenses at December 31, 2015 are adequate, new information or trends may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserves provided. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in our results of operations in the period in which the estimates are changed.

The following table presents a reconciliation of unpaid losses and loss expenses:



	Years Ended December 31
(in millions of U.S. dollars)	2015				2014				2013
Gross unpaid losses and loss expenses, beginning of year		$	38,315			$	37,443			$	37,946
Reinsurance recoverable on unpaid losses⁽¹⁾		(11,307		)		(10,612		)		(11,399		)
Net unpaid losses and loss expenses, beginning of year		27,008				26,831				26,547
Acquisition of subsidiaries		417				320				86
Total		27,425				27,151				26,633
Net losses and loss expenses incurred in respect of losses occurring in:
Current year		10,030				10,176				9,878
Prior years		(546		)		(527		)		(530		)
Total		9,484				9,649				9,348
Net losses and loss expenses paid in respect of losses occurring in:
Current year		4,053				3,975				3,942
Prior years		5,612				5,260				5,035
Total		9,665				9,235				8,977
Foreign currency revaluation and other		(682		)		(557		)		(173		)
Net unpaid losses and loss expenses, end of year		26,562				27,008				26,831
Reinsurance recoverable on unpaid losses⁽¹⁾		10,741				11,307				10,612
Gross unpaid losses and loss expenses, end of year		$	37,303			$	38,315			$	37,443
⁽¹⁾ Net of provision for uncollectible reinsurance.

Net losses and loss expenses incurred includes $546 million, $527 million, and $530 million, of net favorable prior period development (PPD) in the years ended December 31, 2015, 2014, and 2013, respectively. Long-tail lines include lines such as workers’ compensation, general liability, and professional liability; while short-tail lines include lines such as most property lines, energy, personal accident, aviation, marine (including associated liability-related exposures) and agriculture. Significant prior period movements by segment, principally driven by reserve reviews completed during each respective period, are discussed in more detail below. The remaining net development for long-tail and short-tail business for each segment comprises numerous favorable and adverse movements across a number of lines and accident years, none of which is significant individually or in the aggregate.

Insurance – North American P&C

2015

Insurance – North American P&C's active operations experienced net favorable PPD of $239 million in 2015, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $169 million in long-tail business, primarily from:


•	Net favorable development of $108 million in our management and professional liability portfolios, primarily impacting accident years 2010 and prior. Lower than expected paid and reported loss activity led to reductions in our estimates of ultimate loss for these accident years;


•	Favorable development of $32 million in our auto liability excess lines and $26 million in our general liability product lines primarily impacting the 2010 accident year, resulting from lower than expected loss emergence and an increase in weighting applied to experience-based methods;

•

Net favorable development of $21 million in our workers’ compensation lines with favorable development of $52 million in the 2014 accident year related to our annual assessment of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures after the end of the accident year to allow for late reporting or identification of significant losses. Adverse development of $29 million was experienced on the 2009 and prior accident years due to a combination of claim-specific deteriorations and higher than expected loss emergence. There was also adverse development on the 2014 accident year due to revised account-level estimates, which were higher than our original aggregate expectations;


•	Favorable development of $24 million in our surety business due to lower than expected claims emergence primarily in the 2013 accident year; and

•

Net adverse development of $33 million in our commercial umbrella and excess portfolios, primarily impacting accident years 2010 and 2011. Higher than expected reported loss activity, combined with an increase in weighting applied to experience-based methods, led to increased provisions in accident years 2010 and 2011, which was partly offset by the recognition of favorable emergence in the 2009 and prior accident years.


•	Favorable development of $70 million in short-tail business, primarily driven by favorable development of $34 million in our excess property business primarily impacting the 2013 accident year. Paid and reported loss activity was lower than expected leading to reductions in our estimate of ultimate loss.

Insurance – North American P&C's run-off operations incurred adverse PPD of $200 million in our Westchester and Brandywine run-off operations during 2015, which was the result of several adverse movements impacting accident years 1996 and prior, driven by the following principal changes:

•

Adverse development of $170 million related to the completion of reserve reviews during 2015. The development primarily arose from case specific settlements and higher than expected remediation expense and defense costs for environmental claims and increases in indemnity and defense costs on a select number of modeled accounts for asbestos. Further, we experienced higher than expected loss emergence on certain portfolios in our assumed reinsurance book and in other run-off lines; and


•	Adverse development of $30 million on unallocated loss adjustment expenses due to run-off operating expenses paid and incurred during 2015.

2014

Insurance – North American P&C's active operations experienced net favorable PPD of $354 million in 2014 which was the net result of several underlying favorable and adverse movements driven by the following principal changes:


•	Net favorable development of $298 million in long-tail business, primarily from:


•	Favorable development of $104 million in our D&O portfolios, primarily impacting the 2009 and prior accident years. Case incurred loss emergence that was lower than expected combined with an increase in weighting applied to experience-based methods led to a reduction in the estimates of ultimate loss for those years;


•	Favorable development of $55 million in our excess casualty and umbrella businesses. Resolution of a disputed matter on an individual claim led to a release of $42 million in the 2003 accident year, and lower than expected reported activity across a number of accident years drove the remaining improvement;


•	Favorable development of $48 million on an older claim following recent legal developments, after which it was determined that the reserves were no longer required;


•	Favorable development of $40 million in our medical risk operations, primarily impacting the 2009 and 2010 accident years. Paid and case incurred loss emergence that was lower than expected combined with an increase in weighting applied to experience-based methods led to a reduction in the estimate of ultimate loss for those years;


•	Favorable development of $35 million in our financial solutions business, primarily in the 2010 and prior accident years. Net favorable development principally resulted from the recognition of lower than expected loss activity on two large excess liability transactions;


•	Favorable development of $27 million in our surety business, primarily from favorable claims emergence in the 2012 accident year;


•	Net adverse development of $32 million in our workers’ compensation lines, with adverse development in the 2013 accident year and mainly favorable development in accident years 2009 and 2010. Adverse development in the 2013 accident year is being driven by one large account which is experiencing higher than expected claims frequency and severity; and


•	Net favorable development of $21 million in our auto liability excess lines primarily impacting the 2009 accident year. Reported activity on loss and allocated loss expenses was lower than expected based on estimates from our prior review and original pricing assumptions.


•	Favorable development of $56 million in short-tail business, primarily driven by net favorable development of $20 million in our energy and technical risk property business, primarily impacting the 2012 and 2013 accident years. Across most lines, paid and reported loss activity was lower than expected.

Insurance – North American P&C's run-off operations incurred adverse PPD of $247 million in our Westchester and Brandywine run-off operations during 2014, which was a net result of adverse movements impacting accident years 1996 and prior, driven by the following principal changes:


•	Adverse development of $215 million related to the completion of reserve reviews during 2014. The development primarily arose from case specific asbestos and environmental claims related to increased payment activity and the costs associated with certain case settlements in 2014. Further, we experienced higher than expected case incurred activity in our assumed reinsurance portfolio; and


•	Adverse development of $32 million on unallocated loss adjustment expenses due to run-off operating expenses paid and incurred during 2014.

2013

Insurance – North American P&C active operations experienced net favorable PPD of $327 million in 2013, representing 2.1 percent of its beginning of period net unpaid loss and loss expense reserves. Insurance – North American P&C run-off operations incurred net adverse PPD of $193 million in 2013, representing 1.2 percent of its beginning of period net unpaid loss and loss expense reserves.

Insurance – North American Agriculture

Insurance – North American Agriculture experienced net favorable development of $45 million in short-tail lines in 2015, net adverse development of $34 million in 2014 and net favorable development of $13 million in 2013. Actual claim development in 2015 for the 2014 crop year for the Multiple Peril Crop Insurance (MPCI) business was favorable due to better than expected crop yield results in certain states at year-end 2014. Actual claim development in 2014 for the 2013 crop year for the MPCI business was adverse due to worse than expected crop yield results in certain states at year-end 2013. Net favorable development in 2013 was across a number of accident years, none of which was significant individually or in the aggregate.

Insurance – Overseas General

2015

Insurance – Overseas General experienced net favorable PPD of $343 million in 2015, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $166 million in long-tail business, primarily from:


•	Net favorable development of $140 million, primarily in casualty and financial lines with favorable development of $175 million in accident years 2011 and prior, resulting from lower than expected loss emergence, and adverse development of $35 million in accident years 2012 to 2014, primarily due to large loss experience in the U.K. and Europe; and


•	Favorable development of $26 million on an individual legacy liability case reserve take-down. This release follows a legal analysis completed in 2015, based on court opinion in the year and discussions with defense counsel, which concluded that these reserves were no longer required.


•	Favorable development of $177 million in short-tail business primarily from:


•	Favorable development of $90 million in property, technical, energy and marine lines from specific claims and additional credibility assigned to accident years 2013 and prior favorable indications;


•	Favorable development of $34 million in accident and health business primarily in accident year 2013 and 2014 across all regions and products, none of which was individually significant; and


•	Favorable development of $26 million in consumer business primarily in Latin America and Asia Pacific, resulting from favorable development and additional credibility assigned to accident years 2012 and 2013.

2014

Insurance – Overseas General experienced net favorable PPD of $391 million in 2014, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $181 million in long-tail business, primarily from:


•	Net favorable development of $102 million primarily in casualty lines with favorable development of $148 million in accident years 2010 and prior, predominantly due to favorable loss experience in European primary and excess lines, and adverse development of $46 million in accident years 2011 to 2013, predominantly due to large loss experience in the U.K. primary and excess lines;


•	Favorable development of $52 million on an individual liability case reserve take-down. This release follows discussions with defense counsel, a review of key legal briefing, and a coverage analysis, all of which was completed in the third quarter of 2014 and after which it was concluded that the reserves were no longer required; and


•	Net favorable development of $27 million in financial lines with favorable development of $98 million in accident years 2010 and prior due to favorable loss experience and adverse development of $71 million in accident years 2011 to 2013. The adverse development was primarily due to large loss experience in D&O and financial institutions.


•	Favorable development of $210 million in short-tail business, primarily from:


•	Favorable development of $136 million across property, technical and marine lines with favorable development of $44 million in accident year 2013 due to favorable large loss experience, and favorable development of $92 million in accident years 2012 and prior due to favorable development on specific claims and an increase in weighting applied to experience-based methods;


•	Favorable development of $30 million in aviation lines primarily in accident years 2010 and prior in the aviation products, airlines and airport liability lines; and


•	Favorable development of $25 million in personal lines primarily in accident years 2011 to 2013 across all Latin America personal lines and Asia Pacific personal automobile lines.

2013

Insurance – Overseas General experienced net favorable PPD of $299 million in 2013, representing 3.8 percent of the segment's beginning of period net unpaid loss and loss expense reserves.

Global Reinsurance

2015

Global Reinsurance experienced net favorable PPD of $119 million in 2015, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Favorable development of $54 million comprising $42 million in long-tail lines and $12 million in short-tail lines, on an individual legacy liability case reserve take-down. This release follows a legal analysis completed in 2015, based on court opinion and discussions with defense counsel, which concluded that these reserves were no longer required;


•	Favorable development of $33 million in professional liability lines, including medical malpractice business, primarily in treaty years 2010 and prior reflecting favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods; and


•	Favorable development of $23 million in casualty lines, principally in treaty years 2009 and prior reflecting favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods.

2014

Global Reinsurance experienced net favorable PPD of $63 million in 2014, which was the net result of several underlying favorable and adverse movements, driven by the following principal change:


•	Net favorable development of $52 million in long-tail business, primarily from:


•	Favorable development of $34 million in professional liability lines, including medical malpractice business, primarily in treaty years 2009 and prior reflecting favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods; and


•	Favorable development of $25 million in casualty lines, principally in treaty years 2009 and prior reflecting favorable paid and incurred loss trends and an increase in weighting applied to experience-based methods.

2013

Global Reinsurance experienced net favorable PPD of $84 million in 2013, representing 3.6 percent of the segment's beginning of period net unpaid loss and loss expense reserves.

Asbestos and environmental (A&E)

Chubb's exposure to A&E claims principally arises out of liabilities acquired when it purchased Westchester Specialty in 1998 and CIGNA's P&C business in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. The following table presents a roll-forward of consolidated A&E loss reserves, allocated loss expense reserves for A&E exposures, and the provision for uncollectible paid and unpaid reinsurance recoverables:



	Asbestos						Environmental						Total
(in millions of U.S. dollars)	Gross			Net			Gross			Net			Gross			Net
Balance at December 31, 2014	$	1,500		$	892		$	199		$	149		$	1,699		$	1,041
Incurred activity	125			76			118			86			243			162			⁽¹⁾
Paid activity	(274		)	(137		)	(118		)	(86		)	(392		)	(223		)
Balance at December 31, 2015	$	1,351		$	831		$	199		$	149		$	1,550		$	980


⁽¹⁾	Excludes unallocated loss expenses and the net activity reflects third-party reinsurance other than the aggregate excess of loss reinsurance provided by National Indemnity Company (NICO) to Westchester Specialty (see Westchester Specialty section below).

The A&E net loss reserves including allocated loss expense reserves and provision for uncollectible reinsurance at December 31, 2015 and 2014, of $980 million and $1.0 billion shown in the table above comprise $782 million and $837 million, respectively, of reserves held by Brandywine operations, $115 million and $119 million, respectively, of reserves held by Westchester Specialty, and $83 million and $85 million, respectively, of reserves held by other operations, mainly Insurance – Overseas General. For 2015 and 2014, the incurred activity of $162 million and $210 million, respectively, were primarily the result of our annual internal, ground-up review of A&E liabilities.

Brandywine Run-off entities – The Restructuring Plan and uncertainties relating to Chubb's ultimate Brandywine exposure

In 1996, the Pennsylvania Insurance Commissioner approved a plan to restructure INA Financial Corporation and its subsidiaries (the Restructuring) which included the division of Insurance Company of North America (INA) into two separate corporations:

(1) An active insurance company that retained the INA name and continued to write P&C business; and

(2) An inactive run-off company, now called Century Indemnity Company (Century).

As a result of the division, predominantly all A&E and certain other liabilities of INA were ascribed to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA.

As part of the Restructuring, most A&E liabilities of various U.S. affiliates of INA were reinsured to Century. Century and certain other run-off companies having A&E and other liabilities were contributed to Brandywine Holdings.

The U.S.-based ACE INA companies assumed two contractual obligations in respect of the Brandywine operations in connection with the Restructuring: a dividend retention fund obligation and a surplus maintenance obligation in the form of the excess of loss (XOL) agreement.

INA Financial Corporation established and funded a dividend retention fund (the Dividend Retention Fund) consisting of $50 million plus investment earnings. The full balance of the Dividend Retention Fund was contributed to Century as of December 31, 2002. Under the Restructuring Order, while any obligation to maintain the Dividend Retention Fund is in effect, to the extent dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the Dividend Retention Fund to $50 million. During 2011 and 2010, $35 million and $15 million, respectively, were withheld from such dividends and deposited into the Dividend Retention Fund as a result of dividends paid up to the INA Corporation. Capital contributions from the Dividend Retention Fund to Century are not required until the XOL Agreement has less than $200 million of capacity remaining on an incurred basis for statutory reporting purposes. The amount of the capital contribution shall be the lesser of the amount necessary to restore the XOL Agreement remaining capacity to $200 million or the Dividend Retention Fund balance. The Dividend Retention Fund may not be terminated without prior written approval from the Pennsylvania Insurance Commissioner.

In addition, an ACE INA insurance subsidiary provided reinsurance coverage to Century in the amount of $800 million under an XOL, triggered if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due.

Effective December 31, 2004, ACE INA contributed $100 million to Century in exchange for a surplus note. After giving effect to the contribution and issuance of the surplus note, the statutory surplus of Century at December 31, 2015 was $25 million and approximately $335 million in statutory-basis losses have been ceded to the XOL on an inception-to-date basis. Century reports the amount ceded under the XOL in accordance with statutory accounting principles, which differ from GAAP by, among other things, allowing Century to discount its liabilities, including certain asbestos related and environmental pollution liabilities and Century's reinsurance payable to active companies. For GAAP reporting purposes, intercompany reinsurance recoverables related to the XOL are eliminated upon consolidation.

While Chubb believes it has no legal obligation to fund Century losses above the XOL limit of coverage, Chubb's consolidated results would nevertheless continue to include any losses above the limit of coverage for so long as the Brandywine companies remain consolidated subsidiaries of Chubb.

Certain active Chubb companies are primarily liable for asbestos, environmental, and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and placed into rehabilitation or liquidation, some or all of the recoverables due to these active Chubb companies from Century could become uncollectible. At December 31, 2015 and 2014, the aggregate reinsurance recoverables owed by Century to the active Chubb companies were approximately $1.2 billion and $1.1 billion, respectively. Chubb believes the active company intercompany reinsurance recoverables, which relate to direct liabilities payable over many years, are not impaired. At December 31, 2015 and 2014, Century's carried gross reserves (including reserves assumed from the active Chubb companies) were $1.9 billion and $2.1 billion, respectively. Should Century's loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due from Century to the active Chubb companies would be payable only after the payment in full of certain expenses and liabilities, including administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets remaining to pay these recoverables.

Westchester Specialty – impact of NICO contracts on Chubb’s run-off entities

As part of the Westchester Specialty acquisition in 1998, NICO provided a 75 percent pro-rata share of $1 billion of reinsurance protection on losses and loss adjustment expenses incurred on or before December 31, 1996, in excess of a retention of $721 million. At December 31, 2015, the remaining unused incurred limit under the Westchester NICO agreement was $466 million.