Reserve For Losses LAE And Future Policy Benefit Reserve | 3. RESERVE FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE Reserves for losses and LAE. Activity in the reserve for losses and LAE is summarized for the periods indicated: At December 31, (Dollars in thousands) 2018 2017 2016 Gross reserves at January 1 $ 11,884,321 $ 10,312,313 $ 9,951,798 Less reinsurance recoverables (1,212,649 ) (990,862 ) (881,503 ) Net reserves at January 1 10,671,672 9,321,451 9,070,295 Incurred related to: Current year 5,264,327 4,815,967 3,434,964 Prior years 387,076 (293,386 ) (295,335 ) Total incurred losses and LAE 5,651,403 4,522,581 3,139,629 Paid related to: Current year 1,700,765 1,280,605 745,642 Prior years 3,011,175 2,062,634 2,042,972 Total paid losses and LAE 4,711,940 3,343,239 2,788,614 Foreign exchange/translation adjustment (111,686 ) 170,879 (99,859 ) Net reserves at December 31 11,499,449 10,671,672 9,321,451 Plus reinsurance recoverables 1,619,641 1,212,649 990,862 Gross reserves at December 31 $ 13,119,090 $ 11,884,321 $ 10,312,313 Current year incurred losses were $ 5,264,327 4,815,967 $3,434,964 16.7% 406,992 Incurred prior years' reserves increased by $ 387,076 293,386 295,335 561,197 174,121 The decrease for 2017 was attributable to favorable development in the reinsurance segments of $ 238,378 37,137 55,007 The decrease for 2016 was attributable to favorable development in the reinsurance segments of $ 468,749 60,000 16,720 43,280 173,414 unfavorable development in the insurance segment primarily related to run-off construction liability and umbrella program business. The following is information about incurred and paid claims development as of December 31, 2018, net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities (IBNR) plus expected development on reported claims included within the net incurred claims amounts. Each of the Company's financial reporting segments has been disaggregated into casualty and property business. The casualty and property segregation results in groups that have homogeneous loss development characteristics and are large enough to represent credible trends. Generally, casualty claims take longer to be reported and settled, resulting in longer payout patterns and increased volatility. Property claims on the other hand, tend to be reported and settled quicker and therefore tend to exhibit less volatility. The property business is more exposed to catastrophe losses, which can result in year over year fluctuations in incurred claims depending on the frequency and severity of catastrophes claims in any one accident year. The information about incurred and paid claims development for the years ended December 31, 2012 to December 31, 2017 is presented as supplementary information. These tables present seven years of incurred and paid claims development as it is impracticable to retrospectively create the tables for ten years. For the reinsurance groups, for the years prior to 2012, the total of IBNR plus expected development on reported claims was not prepared on an accident year basis. The Company calculated these IBNR amounts in the aggregate for each business unit in total as of prior year end points in time. While business written in the United States would have been allocated to accident year for regulatory reporting purposes, business written outside of the United States would not have been similarly allocated. Attempting to allocate the non-U.S. business IBNR reserves to accident year currently for older year end valuations would require making assumptions and estimates which may not be in line with assumptions that would have been made at the time. A similar situation applies to insurance where the accumulation of the business lines reported in the regulatory filings are not consistent with the breakout of the tables presented below. As a result of not being able to present the information prior to 2012, prospectively an additional year will be added to the tables each reporting year until a ten year table is presented. The Cumulative Number of Reported Claims is shown only for Insurance Casualty as it is impracticable to provide the information for the remaining groups. The reinsurance groups each include pro rata contracts for which ceding companies provide only summary information via a bordereau. This summary information does not include the number of reported claims underlying the paid and reported losses. Therefore, it is not possible to provide this information. The Insurance Property group includes Accident & Health insurance business. This business is written via a master contract and individual claim counts are not provided. This business represents a significant enough portion of the business in the Insurance Property group so that including the number of reported claims for the remaining business would distort any analytics performed on the group. The Cumulative Number of Reported Claims shown for the Insurance Casualty is determined by claim and line of business. For example, a claim event with three claimants in the same line of business is a single claim. However, a claim event with a single claimant that spans two lines of business contributes two claims. The following tables present the ultimate loss and ALAE and the paid loss and ALAE, net of reinsurance for casualty and property, as well as the average annual percentage payout of incurred claims by age, net of reinsurance for each of our disclosed lines of business. U.S. Reinsurance – Casualty Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 401,071 $ 395,957 $ 329,314 $ 325,429 $ 321,461 $ 321,479 $ 326,806 10,999 N/A 2013 311,025 388,483 385,863 388,568 372,805 365,605 19,447 N/A 2014 367,551 383,763 392,514 375,608 365,466 39,295 N/A 2015 326,374 354,296 346,420 347,972 64,286 N/A 2016 330,366 345,836 347,112 126,677 N/A 2017 337,211 383,183 205,494 N/A 2018 424,578 306,262 N/A $ 2,560,722 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 10,024 $ 38,586 $ 83,172 $ 143,722 $ 187,522 $ 218,966 $ 273,144 2013 14,885 49,047 108,956 171,047 211,503 286,865 2014 18,841 54,321 110,327 164,664 256,790 2015 19,920 53,639 107,033 206,455 2016 18,929 58,309 136,547 2017 25,802 87,654 2018 44,519 $ 1,291,974 All outstanding liabilities prior to 2012, net of reinsurance 766,701 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 2,035,448 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Casualty 6.0% 10.9% 16.7% 19.7% 16.7% 15.4% 16.6% U.S. Reinsurance – Property Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 937,847 $ 724,114 $ 622,599 $ 609,592 $ 609,221 $ 605,617 $ 588,422 447 N/A 2013 622,319 548,468 495,300 456,379 449,359 445,910 388 N/A 2014 641,682 550,695 474,136 438,584 432,638 563 N/A 2015 679,227 544,371 488,878 463,808 9,543 N/A 2016 966,373 791,526 763,544 26,165 N/A 2017 1,583,224 1,370,879 80,155 N/A 2018 2,510,226 1,018,868 N/A $ 6,575,427 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 242,393 $ 402,441 $ 493,375 $ 529,745 $ 547,202 $ 564,014 $ 566,019 2013 234,591 323,178 381,893 405,980 420,329 426,444 2014 218,743 321,677 370,142 396,142 406,522 2015 226,256 327,633 389,474 417,755 2016 286,110 552,068 641,815 2017 570,824 946,466 2018 923,030 $ 4,328,051 All outstanding liabilities prior to 2012, net of reinsurance 44,374 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 2,291,749 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Property 41.1% 26.9% 13.0% 5.9% 2.9% 2.2% 0.3% International – Casualty Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 222,133 $ 144,930 $ 134,301 $ 134,537 $ 117,757 $ 119,753 118,521 12,511 N/A 2013 182,248 166,761 164,076 145,345 142,454 140,933 22,458 N/A 2014 193,655 186,565 169,129 167,361 167,300 38,937 N/A 2015 192,112 178,898 173,427 176,819 50,962 N/A 2016 182,864 180,313 194,754 82,359 N/A 2017 190,450 212,683 112,439 N/A 2018 213,696 139,575 N/A $ 1,224,708 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 18,951 $ 30,257 $ 46,283 $ 56,773 $ 66,611 $ 77,658 $ 84,250 2013 17,931 41,532 54,912 68,095 76,594 87,864 2014 25,920 45,022 62,968 74,571 87,331 2015 24,324 49,039 70,370 83,888 2016 26,556 51,325 73,376 2017 26,751 65,352 2018 42,745 $ 524,806 All outstanding liabilities prior to 2012, net of reinsurance 134,507 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 834,410 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Casualty 15.0% 14.1% 11.4% 8.1% 7.3% 8.6% 5.6% Interrnational – Property Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 560,846 $ 513,661 $ 460,161 $ 464,190 $ 464,468 $ 465,344 464,331 1,684 N/A 2013 488,693 439,340 403,169 394,940 394,770 394,293 2,327 N/A 2014 585,885 528,957 482,816 427,469 419,651 4,077 N/A 2015 560,099 427,930 426,695 415,349 5,363 N/A 2016 525,694 495,804 473,262 6,494 N/A 2017 898,568 735,824 63,579 N/A 2018 900,443 283,147 N/A $ 3,803,153 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 199,774 $ 325,557 $ 393,284 $ 417,136 $ 430,438 $ 441,346 $ 445,139 2013 133,577 268,313 321,289 351,447 365,252 371,349 2014 160,761 279,587 345,699 376,890 388,877 2015 143,474 259,981 328,818 364,391 2016 154,471 284,995 375,090 2017 275,487 481,665 2018 331,806 $ 2,758,317 All outstanding liabilities prior to 2012, net of reinsurance 71,452 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 1,116,288 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Property 36.8% 28.7% 16.0% 7.1% 3.1% 2.0% 0.8% Bermuda – Casualty Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 281,244 $ 259,000 $ 238,059 $ 227,918 $ 234,498 $ 234,752 $ 239,750 41,516 N/A 2013 225,224 255,280 249,831 258,408 247,754 236,753 59,324 N/A 2014 208,813 241,109 258,275 254,844 243,331 89,698 N/A 2015 272,058 299,304 305,728 309,221 116,863 N/A 2016 290,327 348,318 358,604 165,626 N/A 2017 349,666 401,587 273,964 N/A 2018 465,351 407,072 N/A $ 2,254,597 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 12,858 $ 24,498 $ 50,981 $ 75,262 $ 101,357 $ 129,265 $ 148,732 2013 16,852 33,681 51,906 76,711 102,137 124,532 2014 13,555 24,904 42,751 67,476 93,245 2015 13,827 59,746 93,949 128,983 2016 46,440 84,942 123,837 2017 30,073 70,228 2018 26,304 $ 715,862 All outstanding liabilities prior to 2012, net of reinsurance 396,191 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 1,934,926 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Casualty 7.1% 9.5% 9.4% 10.6% 10.7% 10.6% 8.1% Bermuda – Property Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 235,647 $ 178,542 $ 163,046 $ 158,650 $ 159,011 $ 159,810 $ 158,772 44 N/A 2013 205,875 148,275 130,693 121,612 121,024 120,638 93 N/A 2014 180,617 158,678 132,743 129,395 129,403 1,345 N/A 2015 190,578 156,407 143,576 149,560 5,773 N/A 2016 204,475 173,515 183,022 14,247 N/A 2017 397,639 326,371 68,179 N/A 2018 417,933 211,999 N/A $ 1,485,698 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 45,230 $ 84,263 $ 115,420 $ 141,232 $ 147,802 $ 150,694 $ 152,352 2013 31,476 68,081 107,590 114,644 116,653 117,649 2014 28,654 82,208 101,831 121,289 123,600 2015 32,878 72,123 109,036 132,327 2016 26,771 76,426 128,948 2017 39,296 130,013 2018 76,805 $ 861,694 All outstanding liabilities prior to 2012, net of reinsurance 35,767 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 659,771 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Property 18.9% 28.9% 24.2% 13.5% 2.7% 1.4% 1.0% Insurance – Casualty Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 349,247 $ 351,052 $ 346,636 $ 347,954 $ 353,113 $ 343,717 $ 346,604 26,417 15,746 2013 393,165 393,076 392,513 392,818 351,105 344,070 24,697 21,314 2014 430,475 456,454 453,994 460,074 396,313 48,264 25,112 2015 518,596 526,974 534,548 540,769 160,787 26,729 2016 552,091 554,468 578,911 211,614 31,120 2017 615,187 601,464 309,285 33,822 2018 701,774 526,090 27,224 $ 3,509,905 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 33,158 $ 101,253 $ 157,822 $ 213,349 $ 246,274 $ 271,891 $ 294,202 2013 33,301 117,013 176,273 224,548 260,075 285,680 2014 41,181 124,856 201,527 256,586 297,317 2015 44,296 134,644 218,475 291,468 2016 54,707 164,012 268,510 2017 53,869 171,978 2018 63,379 $ 1,672,535 All outstanding liabilities prior to 2012, net of reinsurance 354,740 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 2,192,111 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Casualty 9.2% 19.7% 17.3% 14.2% 10.0% 7.4% 6.4% Insurance – Property Business At December 31, 2018 Total of IBNR Liabilites Incurred Claims and Allocated Claim Adjustment Expenses, Net of reinsurance Plus Expected Years Ended December 31, Development Cumulative 2012 2013 2014 2015 2016 2017 2018 on Reported Number of Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Claims Reported Claims (Dollars in thousands) 2012 $ 106,216 $ 88,892 $ 81,671 $ 82,369 $ 81,945 $ 81,729 $ 81,906 103 N/A 2013 111,910 97,831 91,017 91,921 92,011 92,171 499 N/A 2014 131,473 123,455 119,753 119,296 119,105 464 N/A 2015 172,467 152,521 143,558 146,356 695 N/A 2016 300,481 273,901 278,813 1,185 N/A 2017 523,669 485,125 27,538 N/A 2018 416,396 86,295 N/A $ 1,619,872 (Some amounts may not reconcile due to rounding.) Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance Years Ended December 31, 2012 2013 2014 2015 2016 2017 2018 Accident Year (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (Dollars in thousands) 2012 $ 56,497 $ 81,700 $ 80,394 $ 81,674 $ 81,818 $ 81,609 $ 81,747 2013 68,649 92,914 91,618 91,888 91,498 91,537 2014 81,755 115,890 118,060 118,043 118,375 2015 101,975 140,960 142,089 144,823 2016 161,993 248,555 270,765 2017 206,334 408,176 2018 254,270 $ 1,369,694 All outstanding liabilities prior to 2012, net of reinsurance 330 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 250,508 (Some amounts may not reconcile due to rounding.) Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited) Years 1 2 3 4 5 6 7 Property 63.4% 30.8% 3.2% 1.0% 0.1% 0.1% 0.2% Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows. December 31, 2018 (Dollars in thousands) Net outstanding liabilities U.S. Reinsurance Casualty $ 2,035,448 U.S. Reinsurance Property 2,291,749 International Casualty 834,410 International Property 1,116,288 Bermuda Casualty 1,934,926 Bermuda Property 659,771 Insurance Casualty 2,192,111 Insurance Property 250,508 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 11,315,210 Reinsurance recoverable on unpaid claims U.S. Reinsurance Casualty 395,446 U.S. Reinsurance Property 232,957 International Casualty 100,335 International Property 99,430 Bermuda Casualty (25 ) Bermuda Property 143,752 Insurance Casualty 520,754 Insurance Property 126,992 Total reinsurance recoverable on unpaid claims 1,619,641 Insurance lines other than short-duration - Unallocated claims adjustment expenses 144,554 Other 39,685 184,239 Total gross liability for unpaid claims and claim adjustment expense $ 13,119,090 (Some amounts may not reconcile due to rounding.) Reserving Methodology The Company maintains reserves equal to our estimated ultimate liability for losses and loss adjustment expense (LAE) for reported and unreported claims for our insurance and reinsurance businesses. Because reserves are based on estimates of ultimate losses and LAE by underwriting or accident year, the Company uses a variety of statistical and actuarial techniques to monitor reserve adequacy over time, evaluate new information as it becomes known, and adjust reserves whenever an adjustment appears warranted. The Company considers many factors when setting reserves including: (1) exposure base and projected ultimate premium; (2) expected loss ratios by product and class of business, which are developed collaboratively by underwriters and actuaries; (3) actuarial methodologies which analyze loss reporting and payment experience, reports from ceding companies and historical trends, such as reserving patterns, loss payments, and product mix; (4) current legal interpretations of coverage and liability; and (5) economic conditions. Insurance and reinsurance loss and LAE reserves represent the Company's best estimate of its ultimate liability. Actual loss and LAE ultimately paid may deviate, perhaps substantially, from such reserves. Net income (gain or loss) will be impacted in a period in which the change in estimated ultimate loss and LAE is recorded. The detailed data required to evaluate ultimate losses for the Company's insurance business is accumulated from its underwriting and claim systems. Reserving for reinsurance requires evaluation of loss information received from ceding companies. Ceding companies report losses in many forms depending on the type of contract and the agreed or contractual reporting requirements. Generally, pro rata contracts require the submission of a monthly/quarterly account, which includes premium and loss activity for the period with corresponding reserves as established by the ceding company. This information is recorded into the Company's records. For certain pro rata contracts, the Company may require a detailed loss report for claims that exceed a certain dollar threshold or relate to a particular type of loss. Excess of loss and facultative contracts generally require individual loss reporting with precautionary notices provided when a loss reaches a significant percentage of the attachment point of the contract or when certain causes of loss or types of injury occur. Experienced claims staff handles individual loss reports and supporting claim information. Based on evaluation of a claim, the Company may establish additional case reserves in addition to the case reserves reported by the ceding company. To ensure ceding companies are submitting required and accurate data, Everest's Underwriting, Claim, Reinsurance Accounting, and Internal Audit Departments perform various reviews of ceding companies, particularly larger ceding companies, including on-site audits. The Company segments both reinsurance and insurance reserves into exposure groupings for actuarial analysis. The Company assigns business to exposure groupings so that the underlying exposures have reasonably homogeneous loss development characteristics and are large enough to facilitate credible estimation of ultimate losses. The Company periodically reviews its exposure groupings and may change groupings over time as business changes. The Company currently uses approximately 200 The Company uses a variety of actuarial methodologies, such as the expected loss ratio method, chain ladder methods, and Bornhuetter-Ferguson methods, supplemented by judgment where appropriate, to estimate ultimate loss and LAE for each exposure group. Expected Loss Ratio Method: The expected loss ratio method uses earned premium times an expected loss ratio to calculate ultimate losses for a given underwriting or accident year. This method relies entirely on expectation to project ultimate losses with no consideration given to actual losses. As such, it may be appropriate for an immature underwriting or accident year where few, if any, losses have been reported or paid, but less appropriate for a more mature year. Chain Ladder Method: Chain ladder methods use a standard loss development triangle to project ultimate losses. Age-to-age development factors are selected for each development period and combined to calculate age-to-ultimate development factors which are then applied to paid or reported losses to project ultimate losses. This method relies entirely on actual paid or reported losses to project ultimate losses. No other factors such as changes in pricing or other expectations are taken into account. It is most appropriate for groups with homogeneous, stable experience where past development patterns are expected to continue in the future. It is least appropriate for groups which have changed significantly over time or which are more volatile. Bornhuetter-Ferguson Method: The Bornhuetter-Ferguson method is a combination of the expected loss ratio method and the chain ladder method. Ultimate losses are projected based partly on actual paid or reported losses and partly on expectation. Incurred but not reported (IBNR) reserves are calculated using earned premium, an a priori loss ratio, and selected age-to-age development factors and added to actual reported (paid) losses to determine ultimate losses. It is more responsive to actual reported or paid development than the expected loss ratio method but less responsive than the chain ladder method. The reliability of the method depends on the accuracy of the selected a priori loss ratio. Although the Company uses similar actuarial methods for both short tail and long tail lines, the faster reporting of experience for the short tail lines allows the Company to have greater confidence in its estimates of ultimate losses for short tail lines at an earlier stage than for long tail lines. As a result, the Company utilizes, as well, exposure-based methods to estimate its ultimate losses for longer tail lines, especially for immature underwriting or accident years. For both short and long tail lines, the Company supplements these general approaches with analytically based judgments. Key actuarial assumptions contain no explicit provisions for reserve uncertainty nor does the Company supplement the actuarially determined reserves for uncertainty. Carried reserves at each reporting date are the Company's best estimate of ultimate unpaid losses and LAE at that date. The Company completes detailed reserve studies for each exposure group annually for both reinsurance and insurance operations. The completed annual reserve studies are "rolled-forward" for each accounting period until the subsequent reserve study is completed. Analyzing the roll-forward process involves comparing actual reported losses to expected losses based on the most recent reserve study. The Company analyzes significant variances between actual and expected losses and post adjustments to its reserves as warranted. The Company continues to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. Environmental claims typically assert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company's reserves include an estimate of the Company's ultimate liability for A&E claims. The Company's A&E liabilities emanate from Mt. McKinley's direct insurance business and Everest Re's assumed reinsurance business. All of the contracts of insurance and reinsurance, under which the Company has received claims during the past three years, expired more than 20 years ago. There are significant uncertainties surrounding the Company's reserves for its A&E losses. A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses with respect to A&E reserves on both a gross and net of reinsurance basis for the periods indicated: At December 31, (Dollars in thousands) 2018 2017 2016 Gross basis: Beginning of period reserves $ 448,994 $ 441,111 $ 433,117 Incurred losses (2,473 ) 90,009 73,336 Paid losses (99,026 ) (82,126 ) (65,342 ) End of period reserves $ 347,495 $ 448,994 $ 441,111 Net basis: Beginning of period reserves $ 318,081 $ 319,072 $ 319,620 Incurred losses - 37,137 53,909 Paid losses (56,624 ) (38,128 ) (54,457 ) End of period reserves $ 261,456 $ 318,081 $ 319,072 In 2015, the Company sold Mt. McKinley, a Delaware domiciled insurance company and wholly-owned subsidiary of the Company to Clearwater Insurance Company, a Delaware domiciled insurance company. Concurrently with the closing, the Company entered into a retrocession treaty with an affiliate of Clearwater Insurance Company. Per the retrocession treaty, the Company retroceded 100 140,279 440,279 300,000 Reinsurance Receivables. Reinsurance receivables for both paid and recoverable on unpaid losses totaled $ 1,787,648 1,348,226 683,775 38.3 125,519 7.0 122,050 6.8 103,052 5.8 5 Future Policy Benefit Reserve. Activity in the reserve for future policy benefits is summarized for the periods indicated: At December 31, (Dollars in thousands) 2018 2017 2016 Balance at beginning of year $ 51,014 $ 55,074 $ 58,910 Liabilities assumed 110 115 175 Adjustments to reserves 806 (437 ) 303 Benefits paid in the current year (5,151 ) (3,738 ) (4,315 ) Balance at end of year $ 46,778 $ 51,014 $ 55,074 (Some amounts may not reconcile due to rounding.) |