17. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company regularly updates its reserve estimates as new information becomes available and further events occur which may impact the resolution of unsettled claims. Reserve adjustments are reflected in results of operations as adjustments to losses and LAE. Often these adjustments are recognized in periods subsequent to the period in which the underlying policy was written and loss event occurred. These types of subsequent adjustments are described as “prior years’ loss reserves”. Such development can be either favorable or unfavorable to the Company’s financial results and may vary by line of business.

The following table provides a reconciliation of the gross beginning and ending reserve for unpaid losses and loss adjustment expenses.


YEARS ENDED DECEMBER 31		2015		2014		2013
(in millions)
Gross loss and LAE reserves, beginning of year	$	6,391.7	$	6,231.5	$	6,197.0
Reinsurance recoverable on unpaid losses		1,983.0		2,030.4		2,074.3
Net loss and LAE reserves, beginning of year		4,408.7		4,201.1		4,122.7
Net incurred losses and LAE in respect of losses occurring in:
Current year		2,978.4		3,026.6		2,837.4
Prior years		(94.3)		(99.1)		(76.3)
Total incurred losses and LAE		2,884.1		2,927.5		2,761.1
Net payments of losses and LAE in respect of losses occurring in:
Current year		1,245.6		1,328.7		1,213.5
Prior years		1,418.4		1,398.9		1,469.8
Total payments		2,664.0		2,727.6		2,683.3
Commutation of Chaucer Flagstone reinsurance agreement		-		85.7		-
Transfer of U.K. motor business		(300.6)		-		-
Effect of foreign exchange rate changes		(34.6)		(78.0)		0.6
Net reserve for losses and LAE, end of year		4,293.6		4,408.7		4,201.1
Reinsurance recoverable on unpaid losses		2,280.8		1,983.0		2,030.4
Gross reserve for losses and LAE, end of year	$	6,574.4	$	6,391.7	$	6,231.5

As part of an ongoing process, reserves have been re-estimated for all prior accident years and were decreased by $94.3 million, $99.1 million and $76.3 million in 2015, 2014 and 2013, respectively. For the years ended December 31, 2015, 2014 and 2013, these amounts include favorable loss and LAE reserve development of $120.1 million, $104.6 million and $94.6 million, respectively, for Chaucer. As a result of the Company’s year-end 2015 reserve review of domestic commercial and personal lines of business, carried reserves were adjusted between several of these lines of business impacting the prior year development by line. These adjustments had no impact on aggregate domestic carried reserves.

Chaucer’s favorable development during 2015 was primarily the result of lower than expected losses in the energy line of $39.9 million, primarily in the 2012 through 2014 accident years, and $29.6 million in the marine and aviation lines, primarily in the 2010, 2012 and 2013 accident years. Additionally, Chaucer experienced lower than expected losses within casualty and other lines, specifically the specialist and international liability lines, of $21.9 million primarily in the 2008, 2011 and 2013 accident years, and in the property line, primarily in the 2012 through 2014 accident years. Chaucer’s favorable development was also partially attributable to the favorable impact of foreign exchange rate movements on prior years’ loss reserves. For Commercial and Personal Lines, the net unfavorable loss and LAE development during 2015 of $25.8 million was primarily the result of higher than expected losses in Other Commercial Lines of $53.7 million, which includes the AIX Holdings, Inc. (“AIX”) program business. This was driven by AIX commercial automobile and general liability lines in accident years 2011 through 2013, primarily from programs which have since been terminated. The Company also experienced higher than expected losses within the general liability lines, primarily in accident years 2009 through 2012. These losses were partially offset by lower than expected losses in the commercial umbrella line in accident years 2012 through 2014, and lower than expected losses in the healthcare line in accident years 2010 through 2014, both within Other Commercial Lines. Development in 2015 also included higher than expected losses within the commercial automobile line of $23.4 million, primarily related to liability coverage in accident years 2011 through 2013, and in the commercial multiple peril lines, primarily in accident years 2008, 2009 and 2011. Partially offsetting the unfavorable development was lower than expected losses of $46.9 million within the workers’ compensation line, primarily related to accident years 2005 through 2014, in the homeowners’ line, primarily related to accident years 2010 through 2013, and in the personal automobile line, primarily related to accident year 2014.

The $99.1 million favorable loss and LAE reserve development during the year ended December 31, 2014 included favorable loss and LAE reserve development of $104.6 million for Chaucer. Chaucer’s favorable development during 2014 was primarily the result of lower than expected losses in the marine and aviation lines of $40.1 million, primarily in the 2011 through 2013 accident years. Additionally, Chaucer experienced lower than expected losses within casualty and other lines, specifically the specialty liability lines of $21.4 million, primarily in the 2010 and 2013 accident years and $21.5 million in the property line, primarily in the 2010 through 2013 accident years. Chaucer’s favorable development was also partially attributable to the favorable impact of foreign exchange rate movements on prior years’ loss reserves. For Commercial and Personal Lines, the unfavorable loss and LAE development during 2014 was primarily the result of higher than expected large losses within the commercial automobile coverages of $23.1 million, which includes the AIX program business, primarily related to liability coverage in the 2009 through 2012 accident years. Partially offsetting the unfavorable development was lower than expected losses within the personal automobile line, primarily related to the 2013 accident year, workers’ compensation line, primarily related to the 2007 through 2012 accident years, and commercial multiple peril line, primarily related to the 2012 and 2013 accident years.

The $76.3 million favorable loss and LAE reserve development during the year ended December 31, 2013 included favorable loss and LAE reserve development of $94.6 million for Chaucer. Chaucer’s favorable development during 2013 was primarily the result of lower than expected losses in the energy line of $30.4 million, primarily in the 2009 through 2012 accident years, and $27.3 million in the property line, primarily in the 2011 and 2012 accident years. Additionally, Chaucer experienced lower than expected losses within casualty and other lines, specifically the specialty liability lines of $21.6 million, primarily in the 2008 accident year, and $21.3 million in the marine and aviation line, primarily in the 2010 through 2012 accident years. For Commercial and Personal Lines, the unfavorable loss and LAE development during 2013 was primarily the result of higher than expected losses within the personal automobile line, due to severity in bodily injury coverage in the 2010 through 2012 accident years, commercial automobile line, primarily related to liability coverage in the 2009 through 2011 accident years, and other commercial lines, primarily in the 2010 through 2012 accident years. Partially offsetting the unfavorable development was lower than expected losses within the workers’ compensation line, primarily in the 2006 through 2011 accident years and lower involuntary pool losses, including a $3.2 million benefit from the settlement of a legal proceeding, and commercial multi-peril line, primarily in the 2012 accident year.

Loss and LAE reserves related to asbestos and environmental damage liability were $57.7 million, $60.6 million and $61.9 million as of December 31, 2015, 2014 and 2013, respectively, comprised of both direct and run-off voluntary assumed reinsurance pools business. Ending loss and LAE reserves for all direct business written by the Company related to asbestos and environmental damage liability, included in the reserve for losses and LAE, were $9.5 million, $10.1 million and $11.5 million, net of reinsurance of $20.5 million, $21.4 million and $20.6 million as of December 31, 2015, 2014 and 2013, respectively. As a result of the Company’s historical direct underwriting mix of Commercial Lines policies toward smaller and middle market risks, past asbestos and environmental damage liability loss experience has remained minimal in relation to the Company’s total loss and LAE incurred experience. Loss and LAE reserves related to the run-off voluntary assumed reinsurance pool business with asbestos and environmental damage liability were $27.7 million, $29.1 million and $29.8 million at December 31, 2015, 2014 and 2013, respectively. These reserves relate to pools in which the Company has terminated its participation; however, the Company continues to be subject to claims related to years in which it was a participant. Because of the inherent uncertainty regarding the types of claims in these pools, the Company cannot provide assurance that its reserves will be sufficient.

The Company estimates its ultimate liability for asbestos, environmental and toxic tort liability claims, whether resulting from direct business, or assumed reinsurance and pool business, based upon currently known facts, reasonable assumptions where the facts are not known, current law and methodologies currently available. Although these outstanding claims are not significant, their existence gives rise to uncertainty and are discussed because of the possibility that they may become significant. The Company believes that, notwithstanding the evolution of case law expanding liability in asbestos and environmental claims, recorded reserves related to these claims are adequate. The asbestos, environmental and toxic tort liability could be revised in the near term if the estimates used in determining the liability are revised, and any such revisions could have a material adverse effect on the Company’s results of operations for a particular quarterly or annual period or on its financial position.