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Management’s Discussion (Continued)<br />
Property and casualty losses (Continued)<br />
General Re (Continued)<br />
international proportional reserve cells) would produce a net increase in our nominal IBNR reserves and a corresponding<br />
reduction in pre-tax earnings of approximately $978 million. We believe it is reasonably possible for the tails of the expected<br />
loss emergence patterns and expected loss ratios to increase at these rates in any of the individual aforementioned reserve cells.<br />
However, given the diversification in worldwide business, more likely outcomes are believed to be less than $978 million.<br />
In 2013, our property results included estimated losses incurred of $400 million from significant catastrophe events during<br />
the year. In 2013, reported claims for prior years’ property loss events were less than expected, and we reduced our estimated<br />
ultimate liabilities by $375 million. However, the nature of property loss experience tends to be more volatile because of the<br />
effect of catastrophes and large individual property losses.<br />
In certain reserve cells within excess directors and officers and errors and omissions (“D&O and E&O”) coverages, IBNR<br />
reserves are based on estimated ultimate losses without consideration of expected emergence patterns. These cells often involve<br />
a spike in loss activity arising from recent industry developments making it difficult to select an expected loss emergence<br />
pattern. For our large D&O and E&O reserve cells, an increase of ten points in the tail of the expected emergence pattern (for<br />
those cells where emergence patterns are considered) and an increase of ten percent in the expected loss ratios would produce a<br />
net increase in nominal IBNR reserves and a corresponding reduction in pre-tax earnings of approximately $153 million. We<br />
believe it is reasonably possible for the tail of the expected loss emergence patterns and expected loss ratios to increase at these<br />
rates.<br />
Overall industry-wide loss experience data and informed judgment are used when internal loss data is of limited reliability,<br />
such as in setting the estimates for mass tort, asbestos and hazardous waste (collectively, “mass tort”) claims. Gross unpaid<br />
mass tort liabilities at December 31, 2013 and 2012 were approximately $1.5 billion and $1.6 billion, respectively and net of<br />
reinsurance, were approximately $1.2 billion at the end of each of the last two years. Mass tort net claims paid were $72 million<br />
in 2013. In 2013, ultimate loss estimates for asbestos and environmental claims were increased by $30 million. In addition to the<br />
previously described methodologies, we consider “survival ratios” based on average net claim payments in recent years versus<br />
net unpaid losses as a rough guide to reserve adequacy. The survival ratio based on claim payments made over the last three<br />
years was approximately 15.6 years as of December 31, 2013. The reinsurance industry’s survival ratio for asbestos and<br />
pollution reserves was approximately 14.5 years based on the three years ending December 31, 2012. Estimating mass tort<br />
losses is very difficult due to the changing legal environment. Although such reserves are believed to be adequate, significant<br />
reserve increases may be required in the future if new exposures or claimants are identified, new claims are reported or new<br />
theories of liability emerge.<br />
BHRG<br />
BHRG’s unpaid losses and loss adjustment expenses as of December 31, 2013 are summarized as follows. Amounts are<br />
in millions.<br />
Property Casualty Total<br />
Reported case reserves ........................................................... $2,090 $ 3,202 $ 5,292<br />
IBNR reserves .................................................................. 2,542 4,896 7,438<br />
Retroactive .................................................................... — 17,716 17,716<br />
Gross reserves .................................................................. $4,632 $25,814 30,446<br />
Deferred charges and ceded reserves ................................................ (5,132)<br />
Net reserves .................................................................... $25,314<br />
In general, the methodologies we use to establish loss reserves vary widely and encompass many of the common<br />
methodologies employed in the actuarial field today. Certain traditional methodologies such as paid and incurred loss<br />
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