Note 5.

Reserves for Losses and Loss Adjustment Expenses

Insurance companies and Lloyd’s syndicates are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses for all lines of business. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for losses and LAE for the Insurance Companies and the Lloyd’s Operations is dependent upon the receipt of information from the agents and brokers, which produce the insurance business for us. Generally, there is a lag between the time premiums are written and related losses and loss adjustment expenses are incurred, and the time such events are reported to the agents and brokers and, subsequently, the Insurance Companies and the Lloyd’s Operations.

Case reserves are established by our Insurance Companies and Syndicate 1221 for reported claims when notice of the claim is first received. Reserves for such reported claims are established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the line of business, and the policy provisions relating to the type of claim. Reserves for IBNR are determined in part on the basis of statistical information, in part on industry experience and in part on the judgment of our senior corporate officers. Indicated reserves are calculated by our actuaries using several standard actuarial methodologies, including the paid and incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses, such as frequency/severity analyses, are performed for certain books of business.

Total loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting our loss reserve estimates, we review statistical data covering several years, analyze patterns by line of business and consider several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. Using the aforementioned actuarial methods and different underlying assumptions, our actuaries produce a number of point estimates for each class of business. After reviewing the appropriateness of the underlying assumptions, management selects the carried reserve for each class of business. The numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves include: interpreting loss development activity, emerging economic and social trends, inflation, changes in the regulatory and judicial environment and changes in our operations, including changes in underwriting standards and claims handling procedures. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s income statement. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual strengthening or release of reserves is affected by many factors, some of which are interdependent. To the extent that reserves are strengthened or released, the amount of such strengthening or release is treated as a charge or credit to earnings in the period in which the strengthening or release is recognized.

The following table summarizes our Company’s reserves for losses and LAE activity for the years ended December 31, 2014, 2013 and 2012:


	Year Ended December 31,
In thousands	2014			2013			2012
Net reserves for losses and LAE at beginning of year	$	1,222,633		$	1,216,909		$	1,237,234
Provision for losses and LAE for claims occurring in the current year		601,041			520,227			542,724
Increase (decrease) in estimated losses and LAE for claims occurring in prior years		(55,812	)		(1,266	)		(45,291	)

Incurred losses and LAE		545,229			518,961			497,433
Losses and LAE paid for claims occurring during:
Current year		(164,199	)		(147,758	)		(110,373	)
Prior years		(295,527	)		(365,479	)		(407,385	)

Losses and LAE payments		(459,726	)		(513,237	)		(517,758	)

Net reserves for losses and LAE at end of year		1,308,136			1,222,633			1,216,909
Reinsurance recoverables on unpaid losses and LAE		851,498			822,438			880,139

Gross reserves for losses and LAE at end of year	$	2,159,634		$	2,045,071		$	2,097,048

The segment and line of business breakdowns of prior period net reserve strengthening (releases) for the years ended December 31, 2014, 2013 and 2012 are as follows:


	Year Ended December 31,
In thousands	2014			2013			2012
Insurance Companies:
Marine	$	(41,388	)	$	(15,227	)	$	(10,010	)
Property Casualty		14,612			18,466			4,293
Professional Liability		(3,536	)		10,191			7,613

Insurance Companies	$	(30,312	)	$	13,430		$	1,896


Lloyd’s Operations:
Marine	$	(21,336	)	$	(2,998	)	$	(30,735	)
Property Casualty		(1,500	)		(14,574	)		(6,890	)
Professional Liability		(2,664	)		2,876			(9,562	)

Lloyd’s Operations	$	(25,500	)	$	(14,696	)	$	(47,187	)



Total strengthening (releases)	$	(55,812	)	$	(1,266	)	$	(45,291	)

The following is a discussion of relevant factors related to the $55.8 million prior period net reserve releases recorded for the year ended December 31, 2014:

The Insurance Companies recorded $30.3 million of net prior year reserve releases, primarily driven by our Marine business, in connection with $41.4 million of net favorable loss emergence due to a lesser amount of large losses and improved underwriting over the past couple of years across all core product lines, inclusive of $13.4 million from Marine Liability, $7.2 million from Craft/Fishing vessels, $6.4 million from P&I, $4.7 million from Inland Marine, $1.1 million from Bluewater Hull and $0.7 million from Cargo.

The Insurance Companies’ Marine reserve releases were partially offset by $14.6 million of net reserve strengthening from our Property Casualty business which is driven by $23.2 million of prior year reserve strengthening from our Primary Casualty division resulting entirely from unfavorable activity on pre-2010 California construction defect liability claims, partially offset by $6.1 million of reserve releases due to favorable loss emergence from our Excess Casualty division.

The Insurance Companies’ Professional Liability business recorded $3.5 million of net prior year reserve releases primarily driven by $4.5 million of favorable loss emergence from our Management Liability division due to a cash settlement of a contract dispute with a former third party administrator, partially offset by unfavorable loss emergence from our Errors and Omissions (“E&O”) division due to our small lawyers’ product lines, which are in runoff.

The Lloyds Operations recorded $25.5 million of net prior year reserve releases primarily driven by $21.3 million of Marine releases in connection with favorable loss emergence across all core product lines, inclusive of $11.0 million from Marine Liability, $3.7 million from Specie, $1.3 million from Transport, $1.0 million from Cargo, $2.3 million from Energy Liability and $2.0 million from Marine Assumed.

The Lloyd’s Operations Property Casualty line recorded prior year releases of $1.5 million due to favorable loss emergence on our Onshore Energy book. Additionally, the Professional Liability business reserve releases on older underwriting years (“UWYs”) was due to favorable loss emergence on both our E&O book by $1.0 million and Excess D&O by $1.7 million.

The following is a discussion of relevant factors related to the $1.3 million prior period net reserve releases recorded for the year ended December 31, 2013:

The Insurance Companies recorded $13.4 million of net strengthening primarily driven by our Property Casualty and Professional Liability businesses. Within the Property Casualty business, we reported net prior period reserve strengthening of $18.5 million, which includes $13.2 million of net strengthening from our Assumed Reinsurance division mostly attributable to our excess-of-loss A&H treaty lines in connection with UWYs 2012 and 2011, $10.4 million of strengthening from our Primary Casualty division related to our general liability coverage for general and artisan contractors, and a total of $2.1 million of strengthening for business in run-off. The aforementioned net prior period reserve strengthening was partially offset by $8.0 million of net prior period reserve releases from our Energy & Engineering division in connection with favorable emergence on our Offshore Energy lines written by our UK Branch.

Our Insurance Companies Professional Liability business reported net prior period reserve strengthening of $10.2 million largely attributable to $6.1 million reserve strengthening from our Management Liability division related to specific large claims for UWYs 2010 and prior, and $4.4 million reserve strengthening from our E&O division related to specific large claims from our insurance agents, miscellaneous Professional Liability, and small lawyer lines from UWYs 2011 and prior.

The aforementioned net prior period reserve strengthening from our Insurance Companies Property Casualty and Professional Liability were partially offset by $15.2 million of net reserve releases from our Insurance Companies Marine business in connection with favorable emergence from our Marine Liability lines for UWYs 2012 and prior.

Our Lloyd’s Operations recorded $14.7 million of net reserve releases driven by our Property Casualty and Marine businesses partially offset by strengthening in our Professional Liability business. Within our Lloyd’s Operations Property Casualty business, we reported net prior period reserve releases of $14.6 million primarily from our Energy & Engineering division. Within our Lloyd’s Operations Marine business, we reported prior period reserve releases of $3.0 million driven by our Marine Liability product. Within our Lloyd’s Operations Professional Liability business, we reported strengthening of $2.9 million, inclusive of $6.1 million of strengthening in our E&O division partially offset by $3.2 million of favorable emergence from our Management Liability division.

The following is a discussion of relevant factors related to the $45.3 million prior period net reserve releases recorded for the year ended December 31, 2012:

The Insurance Companies recorded $1.9 million net strengthening. The Marine business had $10.0 million of net reserve releases, which were primarily driven by:

•

An IBNR adjustment of $4.0 million to reflect the actual emergence of claims for UWY 2010, which was more favorable than the expected emergence.

•

Case reserve releases of $3.4 million due to the favorable settlement of several large losses; and

•

A favorable IBNR adjustment of $2.6 million attributable to changes in our assumptions for salvage and subrogation from our short tail Marine lines that was based on our observation of a consistent and persistent historical pattern of favorable savings attributable to salvage and subrogation.

The Marine reserve releases were partially offset by net strengthening of $7.6 million from the small lawyer and accountants lines within our Professional Liability business. This strengthening was primarily driven by several large losses that caused the actual claims emergence for these lines to exceed the expected losses. We also incurred net reserve strengthening of $4.3 million within our Property Casualty segment, which were primarily attributable to two large hemophiliac claims from UWY 2011 arising from our A&H product lines.

Our Lloyd’s Operations recorded $47.2 million of net prior period reserve releases across all businesses and divisions. In connection with our Company’s implementation of the Solvency II technical provisions in its Lloyd’s Operations, our Company’s actuaries undertook a comprehensive review during 2012 of the historical claims emergence patterns for all lines of business underwritten through Syndicate 1221. As a result of this review, our Company updated the loss emergence patterns used to project ultimate losses for all such lines of business, aligning these loss emergence factors with the historical median. This caused a reduction in ultimate loss estimates for all Lloyd’s Operations segments other than certain lines of business in Property Casualty segment, which increased. The Lloyd’s Operations also experienced significant reserve redundancies in several large claims. The amount of reserve redundancies attributable to these settlements was $5.0 million, consisting of $4.1 million from the Marine business and $0.9 million from Professional Liability business. A summary of the resulting prior period redundancies for each business within our Lloyd’s Operations by prior UWY is set forth below:


In thousands	Marine		Property Casualty		Professional Liability		Total
2010	$	3,492	$	378	$	1,157	$	5,027
2009		14,792		4,170		6,072		25,034
2008 and Prior		12,451		2,342		2,333		17,126

Total Redundancy	$	30,735	$	6,890	$	9,562	$	47,187

Management believes that the reserves for losses and loss adjustment expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims. We continue to review our reserves on a regular basis.