5. Unpaid losses and loss expenses

The following table presents a reconciliation of beginning and ending Unpaid losses and loss expenses:



	Nine Months Ended September 30
(in millions of U.S. dollars)	2017			2016
Gross unpaid losses and loss expenses – beginning of period	$	60,540		$	37,303
Reinsurance recoverable on unpaid losses ⁽¹⁾	(12,708		)	(10,741		)
Net unpaid losses and loss expenses – beginning of period	47,832			26,562
Acquisition of subsidiaries	—			21,402
Total	47,832			47,964
Net losses and loss expenses incurred in respect of losses occurring in:
Current year	14,963			13,169
Prior years ⁽²⁾	(781		)	(972		)
Total	14,182			12,197
Net losses and loss expenses paid in respect of losses occurring in:
Current year	3,937			3,865
Prior years	8,389			7,470
Total	12,326			11,335
Foreign currency revaluation and other	596			(155		)
Net unpaid losses and loss expenses – end of period	50,283			48,671
Reinsurance recoverable on unpaid losses ⁽¹⁾	13,870			12,676
Gross unpaid losses and loss expenses – end of period	$	64,153		$	61,347

⁽¹⁾ Net of provision for uncollectible reinsurance.

⁽²⁾ Relates to prior period loss reserve development only and excludes prior period development related to reinstatement premiums, expense adjustments, and earned premiums totaling $110 million and $75 million for the nine months ended September 30, 2017 and 2016, respectively.

The increase in gross and net unpaid losses and loss expenses in 2017 primarily reflects the significant catastrophe events during the third quarter of 2017, principally from hurricanes Harvey, Irma and Maria and the earthquakes in Mexico.

Prior Period Development

Prior period development arises from changes to loss estimates recognized in the current year that relate to loss events that occurred in previous calendar years and excludes the effect of losses from the development of earned premium from previous accident years. 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 lines and short-tail business for each segment and Corporate comprises numerous favorable and adverse movements across a number of lines and accident years, none of which is significant individually or in the aggregate.

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, and agriculture. During the third quarter of 2017, we determined that the classification of loss development for certain businesses, previously grouped within the short-tail discussion below, would be more appropriately classified as long-tail to better align with the classification of these businesses within our loss development tables in the 2016 Form 10-K. We also determined that the loss development for certain other businesses should be reclassified from long-tail to short-tail. We updated our 2016 and year-to-date 2017 discussions below to conform to the current period presentation. These changes to the previously disclosed amount have no impact to our financial condition and results of operations.

North America Commercial P&C Insurance

2017

For the three months ended September 30, 2017, net favorable PPD was $236 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $242 million in long-tail business, primarily from:


•	Favorable development of $140 million in commercial excess and umbrella portfolios primarily in accident years 2011 and prior driven by lower paid and reported loss activity relative to prior expectations as well as an increase in weighting towards experience-based methods;


•	Favorable development of $44 million in workers' compensation business mainly impacting accident years 2013 and prior, driven by lower than expected paid and reported loss activity, and revisions to development patterns used in our loss projection methods for select portfolios; and

•

Net favorable development of $28 million on several large multi-line prospective deals primarily impacting the 2012 and 2013 accident years, due to lower than expected reported loss activity. These structured deals typically cover large clients for multiple product lines and with varying loss limitations; this development is net of premium adjustments of $26 million tied to the loss performance of the particular deals.


•	Net adverse development of $6 million in short-tail business across a number of accident years, none of which were significant individually or in the aggregate.

For the nine months ended September 30, 2017, net favorable PPD was $546 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $431 million in long-tail business, primarily from:

•

Net favorable development of $99 million in our workers’ compensation businesses (excluding excess compensation) with favorable development of $37 million in the 2016 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 close of the accident year to allow for late reporting or identification of significant losses. Net favorable development of $62 million was principally due to lower than expected loss experience and revision to development patterns used in our loss projection methods, mainly impacting accident years 2013 and prior, and partly offset by smaller adverse development in the more recent prior accident years;


•	Net favorable development of $213 million in our commercial excess and umbrella portfolios, primarily in accident years 2011 and prior, driven by lower than expected reported loss activity, and an increase in weighting towards experience-based methods;


•	Favorable development of $27 million in our commercial-multi peril (CMP) and monoline general liability lines, driven by favorable paid and reported loss activity relative to prior expectations, principally in accident years 2008 through 2013;


•	Net favorable development of $30 million in our professional Errors and Omissions (E&O) portfolios, primarily in the 2012 and 2013 accident years, arising from lower than expected reported loss activity, partially offset by claim-specific adverse development; and


•	Favorable development of $28 million in large multi-line accounts due primarily to the same factors experienced for the three months ended September 30, 2017.


•	Net favorable development of $115 million in short-tail business, primarily from:


•	Net favorable development of $45 million in our credit-related business, primarily due to lower than expected claims severity in the 2015 accident year;


•	Favorable development of $43 million in property lines, primarily in our commercial property portfolios, driven by lower than expected loss emergence in the 2014 and 2016 accident years; and


•	Net favorable development of $19 million in our accident & health (A&H) business, primarily due to lower than expected loss emergence in the 2015 and 2016 accident years.

2016

For the three months ended September 30, 2016, net favorable PPD was $187 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $167 million in long-tail business, primarily from favorable development of $127 million in our commercial excess and umbrella portfolios, impacting the 2010 and prior accident years, driven by continued lower than expected reported loss activity and an increase in weighting towards experience-based methods; and


•	Net favorable development of $20 million in short-tail business, principally from our property portfolios, primarily impacting the 2014 and 2015 accident years, resulting from lower than expected loss emergence.

For the nine months ended September 30, 2016, net favorable PPD was $533 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $473 million in long-tail business, primarily from:


•	Favorable development of $272 million in our commercial excess and umbrella portfolios, primarily in accident years 2010 and prior, driven by lower than expected reported loss activity and an increase in weighting towards experience-based methods; in general, the severity of claims has been less than expected;

•

Net favorable development of $134 million in our workers’ compensation lines, including excess lines, with favorable development of $40 million in the 2015 accident year related to our annual assessment of multi-claimant events including industrial accidents. Favorable development of $91 million in accident years 2012 and prior was principally due to lower than expected loss experience and revision to the basis for selecting development patterns used in our loss projection methods;


•	Favorable development of $69 million in our professional E&O portfolios, primarily impacting the 2012 and prior accident years and arising from both lower than expected reported loss activity and re-assessments of remaining claim-specific liabilities for the older accident years;


•	Net favorable development of $20 million in our primary general and package liability lines from favorable development due to lower than expected reported and paid activity, principally in accident years 2007 through 2014; and


•	Net favorable development of $60 million in short-tail business, primarily from net favorable development of $46 million in our property portfolios, primarily impacting the 2014 and 2015 accident years, resulting from lower than expected loss emergence.

North America Personal P&C Insurance

2017

For the three months ended September 30, 2017, net adverse PPD was $32 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net adverse development of $98 million in our homeowners lines, primarily impacting the 2016 accident year, due to higher than expected loss severity; and


•	Net favorable development of $58 million in our personal excess lines primarily impacting the 2014 accident year, due to lower than expected loss experience and an increase weighting towards experience-based methods.

For the nine months ended September 30, 2017, net adverse PPD was $66 million, including adverse development of $105 million in our homeowners lines and favorable development of $58 million in our personal excess lines as described above.

2016

For the three months ended September 30, 2016, net adverse PPD was $38 million, including $28 million adverse development in our homeowners and umbrella lines due to higher than expected loss emergence. Average loss severities were higher than expected, and to a lesser degree, reinsurance and other recoveries were lower than expected.

For the nine months ended September 30, 2016, net adverse PPD was $20 million, due primarily to higher than expected loss emergence in our homeowners and umbrella lines as described above.

North America Agricultural Insurance

2017

For the three months ended September 30, 2017, net favorable PPD was $4 million across a number of accident years, none of which were significant individually or in the aggregate.

For the nine months ended September 30, 2017, net favorable PPD was $83 million. The majority of the claim development relates to our Multiple Peril Crop Insurance (MPCI) business and is favorable due to better than expected crop yield results in certain states at the prior year-end period (i.e., 2017 results based on crop yield results at year-end 2016).

2016

For the three months ended September 30, 2016, net favorable PPD was $11 million across a number of accident years, none of which were significant individually or in the aggregate.

For the nine months ended September 30, 2016, net favorable PPD was $52 million. Actual claim development in the first quarter of 2016 for the 2015 crop year for MPCI business was favorable due to better than expected crop yield results in certain states at year-end 2015.

Overseas General Insurance

2017

For the three months ended September 30, 2017, net favorable PPD was $108 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $109 million in long-tail business, primarily from:


•	Net favorable development of $40 million in casualty lines, with favorable development of $69 million in accident years 2013 and prior, resulting from lower than expected loss emergence, partially offset by adverse development of $29 million in accident years 2014 through 2016, primarily due to large loss experience in U.K. excess lines and wholesale business; and

•

Net favorable development of $34 million in financial lines, with favorable development of $124 million in accident years 2013 and prior, resulting from lower than expected loss emergence including favorable development on specific, litigated claims, and adverse development of $90 million in accident years 2014 through 2016, primarily due to large loss experience in specific Directors and Officers (D&O) portfolios in the U.K., Continental Europe, and Australia and Financial Institutions lines in the U.K. and Continental Europe.

For the nine months ended September 30, 2017, net favorable PPD was $184 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $78 million in long-tail business, primarily from:


•	Favorable development of $34 million in financial lines, driven by the same factors as experienced for the three months ended September 30, 2017 as described above; and


•	Net favorable development of $9 million in casualty lines, driven by the same factors as experienced for the three months ended September 30, 2017, as described above, partially offset by adverse development of $32 million driven by a change in the discount rate in the U.K. (Ogden rate) impacting the 2016 and prior accident years.


•	Net favorable development of $106 million in short-tail business, primarily from:


•	Favorable development of $43 million in technical and energy lines, primarily from favorable loss emergence in accident years 2014 through 2016 primarily in offshore and power generation where experience has been better than expected;


•	Favorable development of $37 million in property and marine (excluding technical lines), primarily in accident years 2013 through 2015, driven mainly by favorable U.K. and Continental Europe loss emergence, including favorable claim-specific loss settlements; and


•	Favorable development of $20 million in A&H lines, primarily from favorable loss emergence in Asia Pacific and Continental Europe in accident years 2014 through 2016.

2016

For the three months ended September 30, 2016, net favorable PPD was $223 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $234 million in long-tail business, primarily from:


•	Net favorable development of $167 million, primarily in casualty and financial lines, with favorable development of $261 million in accident years 2012 and prior, resulting from lower than expected loss emergence, and adverse development of $94 million in accident years 2013 to 2015, primarily due to large loss experience in our D&O portfolio in Asia and financial lines in Europe;


•	Favorable development of $28 million in aviation lines, impacting accident years 2012 and prior due to lower than expected loss emergence and case-specific reserve reductions; and


•	Favorable development of $25 million on an individual legacy liability case reserve take-down. This release follows a legal analysis completed in the third quarter of 2016, based on court opinion in the quarter and discussions with defense counsel, which concluded that these reserves were no longer required.


•	Adverse development of $11 million in short-tail business, none of which was significant individually or in the aggregate.

For the nine months ended September 30, 2016, net favorable PPD was $338 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $235 million in long-tail business due primarily to the same factors experienced for the three months ended September 30, 2016.


•	Net favorable development of $103 million in short-tail business primarily from:


•	Net favorable development of $66 million in property (including technical lines), primarily from favorable Continental Europe loss emergence in accident years 2012 through 2014;


•	Favorable development of $35 million in energy lines, primarily from a claims review of catastrophe impacts on underwriting years 2004 through 2008, as well as favorable loss emergence in accident years 2010 through 2014, primarily in offshore where experience on multi-year construction accounts has been better than expected; and

Global Reinsurance

2017

For the three months ended September 30, 2017, net favorable PPD was $41 million, which was the net result of several underlying favorable and adverse movements, and was driven by net favorable development of $29 million in our professional liability and medical malpractice lines primarily from treaty years 2013 and prior, principally resulting from lower than expected loss emergence in the U.S. portfolio.

For the nine months ended September 30, 2017, net favorable PPD was $64 million, which was the net result of several underlying favorable and adverse movements, and was driven by the following principal changes:


•	Net favorable development of $67 million on long-tail lines of business, primarily from:


•	Favorable development of $66 million in our casualty, professional liability and medical malpractice lines, primarily driven by the same factors as experienced for the three months ended September 30, 2017 as described above; and


•	Net adverse development of $10 million in our motor and excess liability lines, primarily due to adverse development of $9 million driven by a change in the discount rate in the U.K. (Ogden rate) primarily impacting the 2015 and prior treaty years.

2016

For the three months ended September 30, 2016, net favorable PPD was $28 million, primarily from net favorable development of $24 million in professional liability lines primarily impacting treaty years 2011 and prior due to lower than expected loss emergence.

For the nine months ended September 30, 2016, net favorable PPD was $78 million, which was driven by the following principal changes:


•	Net favorable development of $41 million in casualty lines primarily impacting treaty years 2011 and prior, principally resulting from lower than expected loss emergence; and


•	Net favorable development of $30 million in professional liability lines due to the same factors experienced for the three months ended September 30, 2016, as described above.

Corporate

2017

For the three months ended September 30, 2017, adverse development was $87 million, driven principally by development of $77 million in environmental liabilities and $9 million for unallocated loss adjustment expenses due to run-off operating expenses paid and incurred in the respective periods, impacting the 1995 and prior accident years. The development in environmental liabilities was due to case specific settlements and both higher than expected remediation expense and defense costs. These higher costs impacted both large modeled accounts as well as smaller accounts.

For the nine months ended September 30, 2017, adverse development was $140 million, driven principally by development of environmental liabilities as described above, $35 million of development on run-off non-A&E casualty exposures due to higher than expected loss activity, and $28 million of unallocated loss adjustment expenses due to run-off operating expenses paid and incurred in the respective period.

2016

For the three months ended September 30, 2016, adverse development was $62 million, and was driven principally by development of $52 million in environmental liabilities and $10 million for unallocated loss adjustment expenses due to run-off operating expenses paid and incurred in the respective periods, impacting the 1995 and prior accident years. The development in environmental liabilities was due to case specific settlements and both higher than expected remediation expense and defense costs. These higher costs impacted both large modeled accounts as well as smaller accounts.

For the nine months ended September 30, 2016, adverse development was $84 million, and was driven principally by development of environmental liabilities as described above and $27 million of unallocated loss adjustment expenses due to run-off operating expenses paid and incurred in the respective period.