RESERVE FOR CLAIMS AND CLAIM EXPENSES

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.

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




At March 31, 2017	Case Reserves		Additional Case Reserves		IBNR		Total
Property	$	212,770	$	171,257	$	231,586	$	615,613
Casualty and Specialty	587,083		139,183		1,574,435		2,300,701
Other	2,255		—		16,119		18,374
Total	$	802,108	$	310,440	$	1,822,140	$	2,934,688

At December 31, 2016
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

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




Three months ended March 31,	2017		2016
Net reserves as of January 1	$	2,568,730	$	2,632,519
Net incurred related to:
Current year	164,075		128,209
Prior years	29,006		(1,604		)
Total net incurred	193,081		126,605
Net paid related to:
Current year	7,729		1,490
Prior years	147,500		124,411
Total net paid	155,229		125,901
Foreign exchange	2,287		11,072
Net reserves as of March 31	2,608,869		2,644,295
Reinsurance recoverable as of March 31	325,819		167,228
Gross reserves as of March 31	$	2,934,688	$	2,811,523

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.

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




Three months ended March 31,	2017			2016
	(Favorable) adverse development			(Favorable) adverse development
Property	$	(928	)	$	(5,928	)
Casualty and Specialty	30,262			4,406
Other	(328		)	(82		)
Total adverse (favorable) development of prior accident years net claims and claim expenses	$	29,006		$	(1,604	)

Changes to prior year estimated claims reserves decreased the Company’s net income by $29.0 million during the three months ended March 31, 2017, (2016 - increased the Company’s net income by $1.6 million), excluding the consideration of changes in reinstatement, adjustment or other premium changes, profit commissions, redeemable noncontrolling interest - DaVinciRe and income tax.

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:




Three months ended March 31,	2017			2016
	(Favorable) adverse development			(Favorable) adverse development
Catastrophe net claims and claim expenses
Large catastrophe events
Other	$	2,586		$	3,778
Total large catastrophe events	2,586			3,778
Small catastrophe events
Fort McMurray Wildfire (2016)	(5,850		)	—
Other	2,336			(9,706		)
Total small catastrophe events	(3,514		)	(9,706		)
Total catastrophe net claims and claim expenses	(928		)	(5,928		)
Total net favorable development of prior accident years net claims and claim expenses	$	(928	)	$	(5,928	)

The net favorable development of prior accident years net claims and claim expenses within the Company’s Property segment in the three months ended March 31, 2017 of $0.9 million was comprised of net adverse development of $2.6 million related to large catastrophe events and net favorable development of $3.5 million related to small catastrophe events. Included in net favorable development of prior accident years net claims and claims expenses from small events was a reduction in the estimated ultimate losses associated with the 2016 Fort McMurray Wildfire of $5.9 million, partially offset by net adverse development associated with a number of other large and small events.

The net favorable development of prior accident years net claims and claim expenses within the Company’s Property segment in the three months ended March 31, 2016 of $5.9 million was comprised of net adverse development of $3.8 million from large catastrophe events due to changes in the estimated ultimate loss for a number of events, and net favorable development of $9.7 million related to small catastrophe events related to lines of business where the Company principally estimates net claims and claim expenses using traditional actuarial methods.

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:




Three months ended March 31,	2017			2016
	(Favorable) adverse development			(Favorable) adverse development
Actuarial methods - actual reported claims lower than expected claims	$	(5,999	)	$	4,406
Ogden Rate change	33,481			—
Actuarial assumption changes	2,780			—
Total adverse development of prior accident years net claims and claim expenses	$	30,262		$	4,406

The net adverse development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment in the three months ended March 31, 2017 of $30.3 million was driven by $33.5 million of adverse development associated with the change in the discount rate used to calculate lump sum awards in U.K. bodily injury cases (the “Ogden Rate”), from 2.5%, to minus 0.75%. Notwithstanding the impact of the Ogden Rate change, we experienced $6.0 million of net favorable development related to actual reported losses coming in lower than expected on attritional net claims and claim expenses across a number of lines of business, partially offset by $2.8 million of adverse development associated with actuarial assumption changes.

The net adverse development of prior accident years net claims and claim expenses within the Company’s Casualty and Specialty segment in the three months ended March 31, 2016 of $4.4 million was driven by $4.4 million related to the application of the Company’s actuarial reserving methodology with reported net claims and claim expenses coming in higher than expected on prior accident years events.