Notes to financial statements
Note 7: Reserves For Losses, Loss Adjustment Expenses
And Life Policy Benefits
Reconciliation of Loss Reserves - The following table represents a reconciliation of beginning and ending consolidated property-liability insurance loss and loss adjustment expense (LAE) reserves for each of the last three years.
(In thousands)
Year ended December 31
1998
1997
1996
Loss and LAE reserves at beginning of year, as reported
$18,153,080
$17,888,536
$16,559,200
Less reinsurance recoverables on unpaid losses at beginning of year
(2,867,732)
(2,826,942)
(3,053,425)
Net loss and LAE reserves at beginning of year
15,020,804
13,732,258
15,099,655
Net reserves of acquired companies
140,710
1,033,443
-
Provision for losses and LAE for claims incurred:
Current year
5,874,522
5,720,662
5,567,703
Prior years
(627,141)
(414,138)
(270,961)
Total incurred
5,603,561
5,093,521
5,153,565
Losses and LAE payments for claims incurred:
Current year
(1,840,328)
(1,709,512)
(1,864,832)
Prior years
(3,453,073)
(3,029,833)
(3,653,865)
Total paid
(5,494,193)
(5,162,585)
(4,894,665)
Unrealized foreign exchange loss (gain)
7,205
(3,797)
(14,916)
Net loss and LAE reserves at end of year
15,099,655
15,020,804
15,194,107
Plus reinsurance recoverables on unpaid losses at end of year
3,053,425
2,867,732
3,263,814
Loss and LAE reserves at end of year, as reported
$18,457,921
$18,153,080
$17,888,536
In 1998, we recorded pretax loss and loss adjustment expenses of $250 million to reflect the application of our loss reserving policies to USF&G's loss and loss adjustment expense reserves subsequent to the merger. In the foregoing table, $60.7 million of the charge is reflected in the provision for current year losses and LAE, and the remaining $189.3 million is reflected in the provision for prior year losses and LAE.Prior to the merger, both companies, in accordance with generally accepted accounting principles, recorded their best estimate of reserves within a range of estimates bounded by a high point and a low point. Subsequent to the consummation of the merger in April 1998, we obtained the raw data underlying, and documentation supporting, USF&G's Dec. 31, 1997 reserve analysis. Our actuaries reviewed such information and concurred with the reasonableness of USF&G's range of estimates for their reserves. However, applying their judgment and interpretation to the range, our actuaries, who would be responsible for setting reserve amounts for the combined entity, concluded that strengthening the reserves would be appropriate, resulting in the $250 million adjustment. The adjustment was allocated to the following business segments: Commercial Lines ($196.7 million); Personal Insurance ($35.1 million); and Specialty Commercial ($18.2 million).
Life Benefit Reserves - The following table shows our life insurance operations future policy benefit reserves by type.
Year ended December 31
(In thousands)
1998
1997
Single Premium Annuities:
Deferred
$1,366,137
$1,373,519
Immediate
1,118,586
1,047,744
Other annuities
1,031,871
367,475
Universal/term/group life
625,683
1,027,312
Gross balance
4,142,277
3,816,050
Reinsurance recoverables
713,975
785,626
Total future policy
benefit reserves
$3,428,302
$3,030,424
Environmental and Asbestos Reserves - Our underwriting operations continue to receive claims under policies written many years ago alleging injuries from environmental pollution or alleging covered property damages for the cost to clean up polluted sites. We have also received asbestos claims arising out of product liability coverages under general liability policies.
The following table summarizes the environmental and asbestos reserves reflected in our consolidated balance sheet at Dec. 31, 1998 and 1997. Amounts in the "net" column are reduced by reinsurance.
December 31
(In thousands)
1998
1997
Gross
Net
Gross
Net
Environmental
$783,000
$645,000
$867,000
$677,000
Asbestos
402,000
277,000
397,000
279,000
Total environmental and asbestos reserves
$1,185,000
$922,000
$1,264,000
$956,000
