RESERVE FOR CLAIMS AND CLAIM EXPENSES

General Description

The Company believes the most significant accounting judgment made by management is its estimate of claims and claim expense reserves. Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts the Company sells. The Company establishes its claims and claim expense reserves by taking claims reported to the Company by insureds and ceding companies, but which have not yet been paid (“case reserves”), adding estimates for the anticipated cost of claims incurred but not yet reported to the Company, or incurred but not enough reported to the Company (collectively referred to as “IBNR”) and, if deemed necessary, adding costs for additional case reserves which represent the Company’s estimates for claims related to specific contracts previously reported to the Company which it believes may not be adequately estimated by the client as of that date, or adequately covered in the application of IBNR.

On March 2, 2015 the Company acquired Platinum and the transaction was accounted under the acquisition method of accounting in accordance with FASB ASC Topic Business Combinations. Total consideration paid was allocated among acquired assets and assumed liabilities based on their fair values, including Platinum’s claims and claim expense reserves, which totaled $1.4 billion at March 2, 2015, and consisted of $179.7 million and $1.2 billion included in the Company’s Property and Casualty and Specialty segments, respectively. These claims and claim expense reserves are subject to the reserving methodologies for each respective line of business as described below.

The following table summarizes the Company’s claims and claim expense reserves by segment, allocated between case reserves, additional case reserves and IBNR:




At December 31, 2016	Case Reserves		Additional Case Reserves		IBNR		Total
Property	$	214,954	$	186,308	$	226,512	$	627,774
Casualty and Specialty	591,705		105,419		1,498,002		2,195,126
Other	6,935		—		18,459		25,394
Total	$	813,594	$	291,727	$	1,742,973	$	2,848,294

At December 31, 2015
Property	$	298,687	$	165,838	$	241,676	$	706,201
Casualty and Specialty	553,574		129,866		1,349,726		2,033,166
Other	2,071		—		25,607		27,678
Total	$	854,332	$	295,704	$	1,617,009	$	2,767,045

Activity in the liability for unpaid claims and claim expenses is summarized as follows:




Year ended December 31,	2016			2015			2014
Net reserves as of January 1	$	2,632,519		$	1,345,816		$	1,462,705
Net incurred related to:
Current year	694,957			610,685			341,745
Prior years	(164,126		)	(162,447		)	(143,798		)
Total net incurred	530,831			448,238			197,947
Net paid related to:
Current year	83,015			95,747			39,830
Prior years	506,279			425,565			241,286
Total net paid	589,294			521,312			281,116
Amounts acquired (1)	—			1,394,117			—
Foreign exchange	(5,326		)	(34,340		)	(33,720		)
Net reserves as of December 31	2,568,730			2,632,519			1,345,816
Reinsurance recoverable as of December 31	279,564			134,526			66,694
Gross reserves as of December 31	$	2,848,294		$	2,767,045		$	1,412,510

(1) Represents the fair value of Platinum's reserve for claims and claim expenses and reinsurance recoverable acquired at March 2, 2015.

The Company’s reserving methodology for each line of business uses a loss reserving process that calculates a point estimate for its ultimate settlement and administration costs for claims and claim expenses. The Company does not calculate a range of estimates and does not discount any of its reserves for claims and claim expenses. The Company uses this point estimate, along with paid claims and case reserves, to record its best estimate of additional case reserves and IBNR in its consolidated financial statements. Under GAAP, the Company is not permitted to establish estimates for catastrophe claims and claim expense reserves until an event occurs that gives rise to a loss.

Reserving for reinsurance claims involves other uncertainties, such as the dependence on information from ceding companies, the time lag inherent in reporting information from the primary insurer to the Company or to the Company’s ceding companies, and differing reserving practices among ceding companies. The information received from ceding companies is typically in the form of bordereaux, broker notifications of loss and/or discussions with ceding companies or their brokers. This information may be received on a monthly, quarterly or transactional basis and normally includes paid claims and estimates of case reserves. The Company sometimes also receives an estimate or provision for IBNR. This information is often updated and adjusted from time to time during the loss settlement period as new data or facts in respect of initial claims, client accounts, industry or event trends may be reported or emerge in addition to changes in applicable statutory and case laws.

The Company’s estimates of losses from large events are based on factors including currently available information derived from claims information from certain customers and brokers, industry assessments of losses from the events, proprietary models, and the terms and conditions of the Company’s contracts. The uncertainty of the Company’s estimates for large events is also impacted by the preliminary nature of the information available, the magnitude and relative infrequency of the events, the expected duration of the respective claims development period, inadequacies in the data provided to the relevant date by industry participants and the potential for further reporting lags or insufficiencies; and in certain large events, significant uncertainty as to the form of the claims and legal issues, under the relevant terms of insurance and reinsurance contracts. In addition, a significant portion of the net claims and claim expenses associated with certain large events can be concentrated with a few large clients and therefore the loss estimates for these events may vary significantly based on the claims experience of those clients. The contingent nature of business interruption and other exposures will also impact losses in a meaningful way, which may give rise to significant complexity in respect of claims handling, claims adjustment and other coverage issues, over time. Given the magnitude of certain events, there can be meaningful uncertainty regarding total covered losses for the insurance industry and, accordingly, several of the key assumptions underlying the Company's loss estimates. Loss reserve estimation in respect of the Company's retrocessional contracts poses further challenges compared to directly assumed reinsurance. In addition, the Company’s actual net losses from these events may increase if the Company’s reinsurers or other obligors fail to meet their obligations.

Because of the inherent uncertainties discussed above, the Company has developed a reserving philosophy that attempts to incorporate prudent assumptions and estimates, and the Company has generally experienced favorable net development on prior accident years net claims and claim expenses in the last several years. However, there is no assurance that this favorable development on prior accident years net claims and claim expenses will occur in future periods.

The Company establishes a provision for unallocated loss adjustment expenses ("ULAE") when the related reserve for claims and claim expenses is established. ULAE are expenses that cannot be associated with a specific claim but are related to claims paid or in the process of settlement, such as internal costs of the claims function, and are included in the reserve for claims and claim expenses. The determination of the ULAE provision is subject to judgment.

The Company reevaluates its actuarial reserving techniques on a periodic basis. Typically, the quarterly review procedures include reviewing paid and reported claims in the most recent reporting period, reviewing the development of paid and reported claims from prior periods, and reviewing the Company’s overall experience by underwriting year and in the aggregate. The Company monitors its expected ultimate claims and claim expense ratios and expected claims reporting assumptions on a quarterly basis and compares them to its actual experience. These actuarial assumptions are generally reviewed annually, based on input from the Company’s actuaries, underwriters, claims personnel and finance professionals, although adjustments may be made more frequently if needed. Assumption changes are made to adjust for changes in the pricing and terms of coverage the Company provides, changes in industry results for similar business, as well as its actual experience to the extent the Company has enough data to rely on its own experience. If the Company determines that adjustments to an earlier estimate are appropriate, such adjustments are recorded in the period in which they are identified.

Incurred and Paid Claims Development and Reserving Methodology

The information provided herein about incurred and paid accident year claims development for the years ended prior to December 31, 2016 on a consolidated basis and by segment is presented as supplementary information. The Company has applied a retrospective approach with respect to its acquisition of Platinum, presenting all relevant historical information for all periods presented. In addition, included in the incurred claims and claim expenses and cumulated paid claims and claim expenses tables below is a reconciling item that represents the unamortized balance of fair value adjustments recorded in connection with the acquisition of Platinum to reflect an increase in net claims and claim expenses due to the addition of a market based risk margin that represented the cost of capital required by a market participant to assume the net claims and claim expenses of Platinum.

For incurred and paid accident year claims denominated in foreign currency, the Company has used the current year-end balance sheet foreign exchange rate for all periods provided, thereby eliminating the effects of changes in foreign currency translation rates from the incurred and paid accident year claims development information included in the tables below.

The following table details the Company’s consolidated incurred claims and claim expenses and cumulative paid claims and claim expenses as of December 31, 2016, net of reinsurance, as well as IBNR plus ACR included within the net incurred claims amounts.




	Incurred claims and claim expenses, net of reinsurance
	For the year ended December 31,																				At December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		IBNR and ACR
	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
2007	$	1,113,667	$	1,025,247	$	958,206	$	911,337	$	868,747	$	806,487	$	778,185	$	766,845	$	774,396	$	770,219	$	67,726
2008	—		1,469,251		1,429,241		1,408,748		1,390,282		1,317,055		1,294,396		1,272,298		1,262,048		1,247,506		48,658
2009	—		—		704,560		639,182		622,181		582,725		557,623		536,393		527,374		522,566		30,006
2010	—		—		—		988,403		946,271		898,572		867,523		864,328		854,924		863,129		79,809
2011	—		—		—		—		1,611,509		1,533,946		1,454,063		1,377,450		1,349,227		1,314,451		113,383
2012	—		—		—		—		—		862,333		767,534		705,316		679,446		651,764		132,561
2013	—		—		—		—		—		—		614,066		552,965		504,401		465,948		127,969
2014	—		—		—		—		—		—		—		657,958		613,360		600,956		155,602
2015	—		—		—		—		—		—		—		—		635,553		620,623		343,935
2016	—		—		—		—		—		—		—		—		—		675,378		542,083
Total																			$	7,732,540	$	1,641,732

	Cumulative paid claims and claim expenses, net of reinsurance
	For the year ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
2007	$	91,877	$	281,119	$	371,280	$	469,657	$	541,511	$	588,997	$	613,200	$	638,348	$	657,017	$	682,644
2008	—		275,968		591,482		797,242		937,678		1,013,041		1,060,160		1,090,977		1,118,434		1,140,094
2009	—		—		96,378		267,983		319,313		363,190		395,580		434,257		455,919		462,192
2010	—		—		—		126,401		309,807		425,914		495,847		549,898		620,545		709,672
2011	—		—		—		—		249,556		522,071		861,359		1,013,577		1,101,596		1,145,239
2012	—		—		—		—		—		165,581		265,612		356,102		415,911		459,269
2013	—		—		—		—		—		—		86,344		177,423		240,046		283,707
2014	—		—		—		—		—		—		—		110,863		199,632		268,806
2015	—		—		—		—		—		—		—		—		95,712		192,864
2016	—		—		—		—		—		—		—		—		—		79,422
Total																			$	5,423,909
Outstanding liabilities from accident year 2006 and prior, net of reinsurance																			226,695
Claims and claim expenses, net of reinsurance, from the Company's former Bermuda-based insurance operations																			2,114
Adjustment for unallocated claim expenses																			20,256
Unamortized fair value adjustments recorded in connection with the acquisition of Platinum																			11,034
Liability for claims and claim expenses, net of reinsurance																			$	2,568,730

Property Segment

Within the Property segment, the Company principally writes property catastrophe excess of loss reinsurance contracts to insure insurance and reinsurance companies against natural and man-made catastrophes. Under these contracts, the Company indemnifies an insurer or reinsurer when its aggregate paid claims and claim expenses from a single occurrence of a covered peril exceeds the attachment point specified in the contract, up to an amount per loss specified in the contract. The Company's most significant exposure is to losses from hurricanes, earthquakes and other windstorms, although the Company is also exposed to claims arising from other catastrophes, such as tsunamis, winter storms, freezes, floods, fires, tornadoes, explosions and acts of terrorism. The Company's predominant exposure under such coverage is to property damage. However, other risks, including business interruption and other non-property losses, may also be covered under the Company's catastrophe contracts when arising from a covered peril. The Company's coverages are offered on either a worldwide basis or are limited to selected geographic areas.

Coverage can also vary from “all property” perils to limited coverage on selected perils, such as “earthquake only” coverage. The Company also enters into retrocessional contracts that provide property catastrophe coverage to other reinsurers or retrocedants. This coverage is generally in the form of excess of loss retrocessional contracts and may cover all perils and exposures on a worldwide basis or be limited in scope to selected geographic areas, perils and/or exposures. The exposures the Company assumes from retrocessional business can change within a contract term as the underwriters of a retrocedant may alter their book of business after the retrocessional coverage has been bound. The Company also offers dual trigger reinsurance contracts which require the Company to pay claims based on claims incurred by insurers and reinsurers in addition to the estimate of insured industry losses as reported by referenced statistical reporting agencies.

Also included in the Property segment is property per risk, property (re)insurance, binding facilities and regional U.S. multi-line reinsurance. The Company's predominant exposure under such coverage is to property damage. However, other risks, including business interruption and other non-property losses, may also be covered when arising from a covered peril. The Company's coverages are offered on either a worldwide basis or are limited to selected geographic areas. The exposures assumed from retrocessional business can change within a contract term as the underwriters of a retrocedant may alter their book of business after the retrocessional coverage has been bound. The Company offers these products principally through proportional coverage. In a proportional reinsurance arrangement (also referred to as quota share reinsurance or pro rata reinsurance), the reinsurer shares a proportional part of the original premiums and losses of the reinsured.

Claims and claim expenses in the Company's Property segment are generally characterized by loss events of low frequency and high severity. Initial reporting of paid and incurred claims in general, tends to be relatively prompt. The Company considers this business “short-tail” as compared to the reporting of claims for “long-tail” products, which tends to be slower. However, the timing of claims payment and reporting also varies depending on various factors, including: whether the claims arise under reinsurance of primary insurance companies or reinsurance of other reinsurance companies; the nature of the events (e.g., hurricanes, earthquakes or terrorism); the geographic area involved; post-event inflation which may cause the cost to repair damaged property to increase significantly from current estimates, or for property claims to remain open for a longer period of time, due to limitations on the supply of building materials, labor and other resources; complex policy coverage and other legal issues; and the quality of each client’s claims management and reserving practices. Management’s judgments regarding these factors are reflected in the Company's reserve for claims and claim expenses.

Reserving for most of the Company's Property segment generally does not involve the use of traditional actuarial techniques. Rather, claims and claim expense reserves are estimated by management after a catastrophe occurs by completing an in-depth analysis of the individual contracts which may potentially be impacted by the catastrophic event. The in-depth analysis generally involves: 1) estimating the size of insured industry losses from the catastrophic event; 2) reviewing reinsurance contract portfolios to identify contracts which are exposed to the catastrophic event; 3) reviewing information reported by customers and brokers; 4) discussing the event with customers and brokers; and 5) estimating the ultimate expected cost to settle all claims and administrative costs arising from the catastrophic event on a contract-by-contract basis and in aggregate for the event. Once an event has occurred, during the then current reporting period, the Company records its best estimate of the ultimate expected cost to settle all claims arising from the event. The Company's estimate of claims and claim expense reserves is then determined by deducting cumulative paid losses from its estimate of the ultimate expected loss for an event. The Company’s estimate of IBNR is determined by deducting cumulative paid losses, case reserves and additional case reserves from its estimate of the ultimate expected loss for an event. Once the Company receives a notice of loss or payment request under a catastrophe reinsurance contract, it is generally able to process and pay such claims promptly.

Because the events from which claims arise under policies written within the Property segment are typically prominent, public occurrences such as hurricanes and earthquakes, the Company is often able to use independent reports as part of its loss reserve estimation process. The Company also reviews catastrophe bulletins published by various statistical reporting agencies to assist in determining the size of the industry loss, although these reports may not be available for some time after an event.

For smaller events including localized severe weather events such as windstorms, hail, ice, snow, flooding, freezing and tornadoes, which are not necessarily prominent, public occurrences, the Company initially places greater reliance on catastrophe bulletins published by statistical reporting agencies to assist in determining what events occurred during the reporting period than the Company does for large events. This includes reviewing catastrophe bulletins published by Property Claim Services (“PCS”) for U.S. catastrophes. The Company sets its initial estimates of reserves for claims and claim expenses for these smaller events based on a combination of its historical market share for these types of losses and the estimate of the total insured industry property losses as reported by statistical reporting agencies, although management may make significant adjustments based on the Company's current exposure to the geographic region involved as well as the size of the loss and the peril involved. This approach supplements the Company's approach for estimating losses for larger catastrophes, which as discussed above, includes discussions with brokers and ceding companies and reviewing individual contracts impacted by the event. Approximately one year from the date of loss for these small events, the Company typically estimates IBNR for these events by using the paid Bornhuetter-Ferguson actuarial method. The loss development factors for the paid Bornhuetter-Ferguson actuarial method are selected based on a review of the Company's historical experience and these factors are reviewed at least annually. There were no significant changes to the Company's paid loss development factors over the last three years.

In general, reserves for the Company's more recent reinsured catastrophic events are subject to greater uncertainty and, therefore, greater potential variability, and are likely to experience material changes from one period to the next. This is due to the uncertainty as to the size of the industry losses from the event, uncertainty as to which contracts have been exposed to the catastrophic event, uncertainty due to complex legal and coverage issues that can arise out of large or complex catastrophic events, and uncertainty as to the magnitude of claims incurred by the Company's customers. As the Company's claims age, more information becomes available and the Company believes its estimates become more certain.

The following table details the Company’s Property segment incurred claims and claim expenses and cumulative paid claims and claim expenses as of December 31, 2016, net of reinsurance, as well as IBNR plus ACR included within the net incurred claims amounts.




	Incurred claims and claim expenses, net of reinsurance
	For the year ended December 31,																				At December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		IBNR and ACR
	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
2007	$	387,866	$	309,228	$	250,975	$	246,823	$	234,120	$	213,228	$	206,168	$	199,792	$	198,666	$	199,383	$	397
2008	—		851,049		752,349		752,501		748,918		715,285		700,312		691,030		683,658		684,281		919
2009	—		—		218,607		163,124		144,352		138,131		134,013		134,722		134,059		134,359		411
2010	—		—		—		605,753		557,062		522,678		527,126		545,333		549,097		558,982		35,715
2011	—		—		—		—		1,230,463		1,153,960		1,103,441		1,056,822		1,036,122		1,007,368		48,082
2012	—		—		—		—		—		436,244		343,561		310,842		293,136		275,504		38,243
2013	—		—		—		—		—		—		223,542		192,681		170,629		149,197		15,879
2014	—		—		—		—		—		—		—		182,518		153,770		146,689		14,820
2015	—		—		—		—		—		—		—		—		224,669		192,593		62,748
2016	—		—		—		—		—		—		—		—		—		251,774		178,466
Total																			$	3,600,130	$	395,680

	Cumulative paid claims and claim expenses, net of reinsurance
	For the year ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
2007	$	45,530	$	150,938	$	172,512	$	187,998	$	190,603	$	194,327	$	197,533	$	197,735	$	198,654	$	199,893
2008	—		247,162		391,008		538,944		628,673		661,664		675,595		679,303		681,131		682,539
2009	—		—		56,065		99,400		113,279		120,839		126,433		130,858		131,823		132,731
2010	—		—		—		91,585		211,124		289,918		332,275		367,495		393,497		469,028
2011	—		—		—		—		201,650		409,111		716,364		838,968		896,001		921,820
2012	—		—		—		—		—		100,044		144,861		188,744		208,115		218,060
2013	—		—		—		—		—		—		48,550		91,436		115,043		125,744
2014	—		—		—		—		—		—		—		55,101		95,758		118,304
2015	—		—		—		—		—		—		—		—		62,173		108,173
2016	—		—		—		—		—		—		—		—		—		47,480
Total																			$	3,023,772
Outstanding liabilities from accident year 2006 and prior, net of reinsurance																			3,865
Adjustment for unallocated claim expenses																			2,394
Unamortized fair value adjustments recorded in connection with the acquisition of Platinum																			1,419
Liability for claims and claim expenses, net of reinsurance																			$	584,036

Casualty and Specialty Segment

The Company offers its casualty and specialty reinsurance products principally on a proportional basis, and it also provides excess of loss coverage. The Company offers casualty and specialty reinsurance products to insurance and reinsurance companies and provides coverage for specific geographic regions or on a worldwide basis. Principally all of the business is reinsurance, although from time to time, the Company writes direct insurance business.

As with the Company's Property segment, its Casualty and Specialty segment reinsurance contracts can include coverage for relatively large limits or exposures. As a result of the foregoing, the Company's casualty and specialty reinsurance business can be subject to significant claims volatility. In periods of low claims frequency or severity, the Company's results will generally be favorably impacted while in periods of high claims frequency or severity the Company's results will generally be negatively impacted.

More recently, the Company has accepted a wider range of proportional risks, facilitating the Company's efforts to expand its product offerings. In addition, on March 2, 2015 the Company acquired Platinum and recorded $1.4 billion of claims and claim expense reserves related to the acquisition, of which $1.2 billion was recorded in the Casualty and Specialty segment, with the balance recorded in the Company's Property segment. While the Company remains focused on underwriting discipline, and seeks to remain focused on opportunities amenable to stochastic representation and supported by strong data and analytics, the Company's expanded casualty and specialty product suite and the addition of the claims and claim expense reserves acquired through the Platinum transaction, may pose new, unmodelled or unforeseen risks for which the Company may not be adequately compensated and may also result in a higher level of attritional claims and claim expenses and the potential for reserve development, either adverse or favorable.

The Company's processes and methodologies in respect of loss estimation for the coverages offered through its Casualty and Specialty segment differ from those used for its Property segment. For example, the Company's casualty and specialty coverages are more likely to be impacted by factors such as long-term inflation and changes in the social and legal environment, which the Company believes gives rise to greater uncertainty in its reserves for claims and claim expenses. Moreover, in many lines of business the Company does not have the benefit of a significant amount of its own historical experience and may have little or no related corporate reserving history in many of its newer or growing lines of business. The Company believes this makes its Casualty and Specialty segment reserving subject to greater uncertainty than its Property segment.

The Company calculates multiple point estimates for claims and claim expense reserves using a variety of actuarial reserving techniques for many, but not all, of its classes of business for each underwriting year within the Casualty and Specialty segment. The Company does not believe that these multiple point estimates are, or should be considered a range. Rather, the Company considers each class of business and determines the most appropriate point estimate for each underwriting year based on the characteristics of the particular class including: (1) loss development patterns derived from historical data; (2) the credibility of the selected loss development pattern; (3) the stability of the loss development patterns; (4) how developed the underwriting year is; and (5) the observed loss development of other underwriting years for the same class. The Company also considers other relevant factors, including: (1) historical ultimate loss ratios; (2) the presence of individual large losses; and (3) known occurrences that have not yet resulted in reported losses. The Company makes determinations of the most appropriate point estimate of loss for each class based on an evaluation of relevant information and do not ascribe any particular portion of the estimate to a particular factor or consideration. In addition, the Company believes that a review of individual contract information improves the loss estimates for some classes of business.

When developing claims and claims expense reserves for the Company's Casualty and Specialty segment, it considers several actuarial techniques such as the expected loss ratio method, the Bornhuetter-Ferguson actuarial method and the paid and reported chain ladder actuarial method.

For classes of business and underwriting years where the Company has limited historical claims experience, estimates of ultimate losses that are not related to a specific event are generally initially determined based on the loss ratio method applied to each underwriting year and to each class of business. Unless the Company has credible claims experience or unfavorable development, it generally selects an ultimate loss based on its initial view of the loss. The selected ultimate losses are determined by multiplying the initial expected loss ratio by the earned premium. The initial expected loss ratios are key inputs that involve management judgment and are based on a variety of factors, including: (1) contract by contract expected loss ratios developed during the Company’s pricing process; (2) historical loss ratios and combined ratios adjusted for rate change and trend; and (3) industry benchmarks for similar business. These judgments take into account management’s view of past, current and future factors that may influence ultimate losses, including: (1) market conditions; (2) changes in the business underwritten; (3) changes in timing of the emergence of claims; and (4) other factors that may influence ultimate loss ratios and losses.

The determination of when reported losses are sufficient and credible to warrant selection of an ultimate loss ratio different from the initial expected loss ratios also requires judgment. The Company generally makes adjustments for reported loss experience indicating unfavorable variances from initial expected loss ratios sooner than reported loss experience indicating favorable variances. This is because the reporting of losses in excess of expectations tends to have greater credibility than an absence or lower than expected level of reported losses. Over time, as a greater number of claims are reported and the credibility of reported losses improves, actuarial estimates of IBNR are typically based on the Bornhuetter-Ferguson actuarial method or the reported chain ladder actuarial method.

The Bornhuetter-Ferguson method allows for greater weight to be applied to expected results in periods where little or no actual experience is available, and, hence, is less susceptible to the potential pitfall of being excessively swayed by one year or one quarter of actual paid and/or reported loss data, compared to the chain ladder actuarial method. The Bornhuetter-Ferguson method uses initial expected loss ratio expectations to the extent that the expected paid or reported losses are zero, and it assumes that past experience is not fully representative of the future. As the Company’s reserves for claims and claim expenses age, and actual claims experience becomes available, this method places less weight on expected experience and places more weight on actual experience. This experience, which represents the difference between expected reported claims and actual reported claims, is reflected in the respective reporting period as a change in estimate. The utilization of the Bornhuetter-Ferguson method requires the Company to estimate an expected ultimate claims and claim expense ratio and select an expected loss reporting pattern. The Company selects its estimates of the expected ultimate claims and claim expense ratios as described above and selects its expected loss reporting patterns by utilizing actuarial analysis, including management’s judgment, and historical patterns of paid losses and reporting of case reserves to the Company, as well as industry loss development patterns. The estimated expected claims and claim expense ratio may be modified to the extent that reported losses at a given point in time differ from what would be expected based on the selected loss reporting pattern.

The reported chain ladder actuarial method utilizes actual reported losses and a loss development pattern to determine an estimate of ultimate losses that is independent of the initial expected ultimate loss ratio and earned premium. The Company believes this technique is most appropriate when there are a large number of reported losses with significant statistical credibility and a relatively stable loss development pattern. Information that may cause future loss development patterns to differ from historical loss development patterns is considered and reflected in the Company’s selected loss development patterns as appropriate. For certain reinsurance contracts, historical loss development patterns may be developed from ceding company data or other sources.

In addition, certain casualty and specialty coverages may be impacted by natural and man-made catastrophes. The Company estimates reserves for claim and claim expenses for these losses after the event giving rise to these losses occurs, following a process that is similar to its Property segment described above.

The following table details the Company’s Casualty and Specialty segment incurred claims and claim expenses and cumulative paid claims and claim expenses as of December 31, 2016, net of reinsurance, as well as IBNR plus ACR included within the net incurred claims amounts.




	Incurred claims and claim expenses, net of reinsurance
	For the year ended December 31,																				At December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		IBNR and ACR
	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
2007	$	725,801	$	716,019	$	707,231	$	664,514	$	634,627	$	593,259	$	572,017	$	567,053	$	575,730	$	570,836	$	67,329
2008	—		618,202		676,892		656,247		641,364		601,770		594,084		581,268		578,390		563,225		47,739
2009	—		—		485,953		476,058		477,829		444,594		423,610		401,671		393,315		388,207		29,595
2010	—		—		—		382,650		389,209		375,894		340,397		318,995		305,827		304,147		44,094
2011	—		—		—		—		381,046		379,986		350,622		320,628		313,105		307,083		65,301
2012	—		—		—		—		—		426,089		423,973		394,474		386,310		376,260		94,318
2013	—		—		—		—		—		—		390,524		360,284		333,772		316,751		112,090
2014	—		—		—		—		—		—		—		475,440		459,590		454,267		140,782
2015	—		—		—		—		—		—		—		—		410,884		428,030		281,187
2016	—		—		—		—		—		—		—		—		—		423,604		363,617
Total																			$	4,132,410	$	1,246,052

	Cumulative paid claims and claim expenses, net of reinsurance
	For the year ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)		(unaudited)
2007	$	46,347	$	130,181	$	198,768	$	281,659	$	350,908	$	394,670	$	415,667	$	440,613	$	458,363	$	482,751
2008	—		28,806		200,474		258,298		309,005		351,377		384,565		411,674		437,303		457,555
2009	—		—		40,313		168,583		206,034		242,351		269,147		303,399		324,096		329,461
2010	—		—		—		34,816		98,683		135,996		163,572		182,403		227,048		240,644
2011	—		—		—		—		47,906		112,960		144,995		174,609		205,595		223,419
2012	—		—		—		—		—		65,537		120,751		167,358		207,796		241,209
2013	—		—		—		—		—		—		37,794		85,987		125,003		157,963
2014	—		—		—		—		—		—		—		55,762		103,874		150,502
2015	—		—		—		—		—		—		—		—		33,539		84,691
2016	—		—		—		—		—		—		—		—		—		31,942
Total																			$	2,400,137
Outstanding liabilities from accident year 2006 and prior, net of reinsurance																			222,830
Adjustment for unallocated claim expenses																			17,862
Unamortized fair value adjustments recorded in connection with the acquisition of Platinum																			9,615
Liability for claims and claim expenses, net of reinsurance																			$	1,982,580

Prior Year Development of the Reserve for Net Claims and Claim Expenses

The Company’s estimates of claims and claim expense reserves are not precise in that, among other things, they are based on predictions of future developments and estimates of future trends and other variable factors. Some, but not all, of the Company’s reserves are further subject to the uncertainty inherent in actuarial methodologies and estimates. Because a reserve estimate is simply an insurer’s estimate at a point in time of its ultimate liability, and because there are numerous factors that affect reserves and claims payments that cannot be determined with certainty in advance, the Company’s ultimate payments will vary, perhaps materially, from its estimates of reserves. If the Company determines in a subsequent period that adjustments to its previously established reserves are appropriate, such adjustments are recorded in the period in which they are identified. On a net basis, the Company’s cumulative favorable or unfavorable development is generally reduced by offsetting changes in its reinsurance recoverables, as well as changes to loss related premiums such as reinstatement premiums and redeemable noncontrolling interest for changes in claims and claim expenses that impact DaVinciRe, all of which generally move in the opposite direction to changes in the Company’s ultimate claims and claim expenses.

As detailed in the tables and discussion detail below, changes to prior year estimated claims reserves increased the Company’s net income by $164.1 million during the year ended December 31, 2016, (2015 - $162.4 million, 2014 - $143.8 million), excluding the consideration of changes in reinstatement, adjustment or other premium changes, profit commissions, redeemable noncontrolling interest - DaVinciRe and income tax.

The following table details the Company’s prior year development by segment of its liability for unpaid claims and claim expenses:




Year ended December 31,	2016			2015			2014
Property	$	(104,876	)	$	(93,786	)	$	(87,258	)
Casualty and Specialty	(58,140		)	(67,791		)	(50,403		)
Other	(1,110		)	(870		)	(6,137		)
Total favorable development of prior accident years net claims and claim expenses	$	(164,126	)	$	(162,447	)	$	(143,798	)

Property Segment

The following table details the development of the Company’s liability for unpaid claims and claim expenses for its Property segment, allocated between large and small catastrophe net claims and claim expenses and attritional net claims and claim expenses, included in the other line item:




Year ended December 31,	2016			2015			2014
	(Favorable) adverse development			(Favorable) adverse development			(Favorable) adverse development
Catastrophe net claims and claim expenses
Large catastrophe events
Thailand Floods (2011)	$	(15,131	)	$	(18,823	)	$	(11,754	)
Tohoku Earthquake and Tsunami (2011)	(7,314		)	(5,313		)	(5,408		)
New Zealand Earthquake (2011)	1,987			22,754			(3,088		)
2011 International Events	(20,458		)	(1,382		)	(20,250		)
Storm Sandy (2012)	(10,849		)	(12,503		)	(24,232		)
April and May U.S. Tornadoes (2011)	(4,213		)	(10,190		)	(14,272		)
New Zealand Earthquake (2010)	6,904			1,095			24,692
Other	(5,310		)	(11,300		)	(23,947		)
Total large catastrophe events	(33,926		)	(34,280		)	(58,009		)
Small catastrophe events
U.S. PCS 13/14 Wind and Thunderstorm (2013)	(6,286		)	(1,882		)	(4,239		)
Tianjin Explosion (2015)	(5,686		)	—			—
U.S. PCS 15 Wind and Thunderstorm (2013)	(5,648		)	418			2,400
U.S. PCS 81 Wind and Thunderstorm (2015)	(5,098		)	—			—
U.S. PCS 70 and 73 Wind and Thunderstorm (2012)	(3,772		)	(1,220		)	13,362
U.S. PCS 24 Wind and Thunderstorm (2013)	(229		)	(809		)	(6,712		)
European Floods (2013)	(40		)	(2,466		)	(8,496		)
Other	(44,191		)	(52,046		)	(25,564		)
Total small catastrophe events	(70,950		)	(58,005		)	(29,249		)
Total catastrophe net claims and claim expenses	(104,876		)	(92,285		)	(87,258		)
Actuarial assumption changes	—			(1,501		)	—
Total net favorable development of prior accident years net claims and claim expenses	$	(104,876	)	$	(93,786	)	$	(87,258	)

The net favorable development of prior accident years net claims and claim expenses within the Company’s Property segment in 2016 of $104.9 million was principally driven by favorable development of $15.1 million from the 2011 Thailand Floods, $10.8 million from Storm Sandy in 2012, $7.3 million from the 2011 Tohoku Earthquake and Tsunami, and $5.7 million related to the 2015 Tianjin Explosion, partially offset by adverse development of $6.9 million related to the 2010 New Zealand Earthquake, each principally the result of changes in estimated ultimate losses for each respective event. Included in the favorable development of prior accident years net claims and claim expenses related to small catastrophe events were a number of wind and thunderstorm events, primarily from the 2012, 2013 and 2015 accident years totaling $21.0 million, each principally the result of changes in estimated ultimate losses for each respective event, with the remainder due to a number of other large and small catastrophe events related to lines of business where the Company principally estimates net claims and claim expenses using traditional actuarial methods.

The favorable development of prior accident years net claims and claim expenses within the Company’s Property segment in 2015 of $93.8 million was comprised of $34.3 million and $58.0 million related to large and small catastrophe events, respectively. Included in the favorable development of prior accident years net claims and claim expenses related to large catastrophe events was $12.5 million related to Storm Sandy and $10.2 million related to the April and May 2011 U.S. Tornadoes, each principally the result of changes in the Company’s estimated ultimate loss for each respective event. In addition, the Company experienced $69.3 million of favorable development related to a number of other large and small catastrophe events related to lines of business where the Company principally estimates net claims and claim expenses using traditional actuarial methods. Net favorable development of prior accident years net claims and claim expenses related to the 2011 New Zealand Earthquake, the 2011 Thailand Floods and the 2011 Tohoku Earthquake and Tsunami (collectively the “2011 International Events”) was $1.4 million and included reductions in reported losses on the 2011 Thailand Floods and Tohoku Earthquake and Tsunami, offset by a net increase in reported losses on the 2011 New Zealand Earthquake, with each respective movement principally driven by the same counterparties re-allocating losses between the 2011 International Events.

The favorable development of prior accident years net claims and claim expenses within the Company’s Property segment in 2014 of $87.3 million was comprised of $58.0 million and $29.2 million related to large and small catastrophe events, respectively. Included in the favorable development of prior accident years net claims and claim expenses related to large catastrophe events was $24.2 million, $14.3 million and $11.8 million related to Storm Sandy, the 2011 April and May U.S. Tornadoes and the 2011 Thailand Floods, partially offset by adverse development of $24.7 million related to the 2010 New Zealand Earthquake, each principally the result of changes in estimated ultimate losses for each respective event. Included in the favorable development of prior accident years net claims and claim expenses related to small catastrophe events was $8.5 million and $6.7 million related to the 2013 European Floods and a 2013 U.S. wind and thunderstorm event, respectively, partially offset by adverse development of $13.4 million related to certain 2012 U.S. wind and thunderstorm events, each principally the result of changes in estimated ultimate losses for each respective event. In addition, the Company’s Property segment experienced $51.4 million of favorable development related to a number of other large and small catastrophe events.

Casualty and Specialty Segment

The following table details the development of the Company’s liability for unpaid claims and claim expenses for its Casualty and Specialty segment:




Year ended December 31,	2016			2015			2014
	(Favorable) adverse development			(Favorable) adverse development			(Favorable) adverse development
Actuarial methods - actual reported claims less than expected claims	$	(52,601	)	$	(72,551	)	$	(50,403	)
Actuarial assumption changes	(5,539		)	4,760			—
Total favorable development of prior accident years net claims and claim expenses	$	(58,140	)	$	(67,791	)	$	(50,403	)

The favorable development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment in 2016 of $58.1 million was driven by $52.6 million related to the application of the Company’s formulaic actuarial reserving methodology with attritional net claims and claim expenses reported coming in lower than expected on prior accident years events and $5.5 million of favorable development associated with actuarial assumption changes.

The favorable development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment in 2015 of $67.8 million was driven by $72.6 million related to the application of the Company’s formulaic actuarial reserving methodology with attritional net claims and claim expenses reported coming in lower than expected on prior accident years events, partially offset by adverse development of $4.8 million associated with actuarial assumption changes.

The favorable development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment in 2014 of $50.4 million was driven by the application of the Company’s formulaic actuarial reserving methodology with attritional net claims and claim expenses reported coming in lower than expected on prior accident years events. There were no actuarial reserving assumption changes in 2014.

Other

The following table details the development of the Company’s liability for unpaid claims and claim expenses for its Other category:




Year ended December 31,	2016			2015			2014
	(Favorable) adverse development			(Favorable) adverse development			(Favorable) adverse development
Other	$	(1,110	)	$	(870	)	$	(6,137	)

The Company’s Other category experienced net favorable development on prior accident years net claims and claim expense of $1.1 million in 2016 (2015 - $0.9 million; 2014 - $6.1 million). The net favorable development on prior accident years of $6.1 million in 2014 was principally the result of a reduction in the estimated ultimate losses on a proportional property contract.

Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Reserve for Claims and Claim Expenses

The reconciliation of the net incurred and paid claims development tables to the reserve for claims and claim expenses in the consolidated balance sheet is as follows:




At December 31, 2016
Net reserve for claims and claim expenses
Property	$	584,036
Casualty and Specialty	1,982,580
Other	2,114
Total net reserve for claims and claim expenses	2,568,730

Reinsurance recoverable
Property	$	43,738
Casualty and Specialty	212,546
Other	23,280
Total reinsurance recoverable	279,564
Total gross reserve for claims and claim expenses	$	2,848,294

Historical Claims Duration

The following is unaudited supplementary information about average historical claims duration by segment:




	Average annual percentage payout of incurred claims by age, net of reinsurance (number of years)
At December 31, 2016	1		2		3		4		5		6		7		8		9		10
Property	26.5	%	23.7	%	20.9	%	10.2	%	5.0	%	2.9	%	5.3	%	0.3	%	0.3	%	0.6	%
Casualty and Specialty	10.2	%	19.3	%	11.1	%	10.6	%	8.8	%	8.1	%	4.5	%	3.7	%	3.4	%	4.3	%

Claims Frequency

Each of the Company’s reportable segments are broadly considered to be assumed reinsurance, where multiple claims are often aggregated, perhaps multiple times through retrocessional reinsurance, before ultimately being ceded to the Company. In addition, the nature, size, terms and conditions of contracts entered into by the Company changes from one accident year to the next and the quantum of contractual or policy limits, and accordingly the potential amount of claims and claim expenses associated with a reported claim, can range from nominal, to significant. These factors can impact the amount and timing of the claims and claim expenses to be recorded and accordingly, developing claim frequency information is highly subjective and is not prepared or utilized for internal purposes. In addition, the Company does not have direct access to claim frequency information underlying certain of its proportional contracts given the nature of that business. As a result, the Company does not believe providing claim frequency information is practicable as it relates to its proportional contracts.

Notwithstanding the factors noted above, the Company has developed claims frequency information associated with its excess of loss reinsurance contracts. As each accident year develops, the Company would expect the cumulative number of reported claims to increase in certain of its excess of loss reinsurance contracts, most notably in its Casualty and Specialty segment. In determining claims frequency for its excess of loss reinsurance contracts, the Company has made the following assumptions:


•	Claims below the insured layer of a contract are excluded;


•	If an insured loss event results in claims associated with a number of layers of a contract, the Company would consider this to be a single claim; and


•	If an insured loss event results in claims associated with a number of the Company's operating subsidiaries, the Company considers each operating subsidiary to have a reported claim.

The following table details the Company's cumulative number of reported claims for its excess of loss reinsurance contracts allocated by segment:




	At December 31, 2016
	Cumulative number of reported claims
Accident Year	Property	Casualty and Specialty
2007	908	1,388
2008	1,350	1,368
2009	742	1,082
2010	781	1,030
2011	1,178	1,356
2012	667	1,253
2013	622	1,187
2014	523	1,353
2015	555	988
2016	548	365

Assumed Reinsurance Contracts Classified As Deposit Contracts

Net claims and claim expenses incurred were reduced by $0.2 million during 2016 (2015 – $0.3 million, 2014 – $0.3 million) related to income earned on assumed reinsurance contracts that were classified as deposit contracts with underwriting risk only. Other income was increased by $6.2 million during 2016 (2015 – other income increased by $6.2 million, 2014 – other loss decreased by $0.1 million) related to premiums and losses incurred on assumed reinsurance contracts that were classified as deposit contracts with timing risk only. Aggregate deposit liabilities of $25.7 million are included in reinsurance balances payable at December 31, 2016 (2015 – $32.3 million) and aggregate deposit assets of $Nil are included in other assets at December 31, 2016 (2015 – $Nil) associated with these contracts.