Reserves for Unpaid Losses and Loss Adjustment Expenses

Insurance Operations

White Mountains establishes loss and LAE reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.

Loss and LAE reserves are typically comprised of (1) case reserves for claims reported and (2) IBNR reserves, which include a provision for expected future development on case reserves and for losses that have occurred but for which claims have not yet been reported. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.

Ultimate loss and LAE are generally determined by extrapolation of claim emergence and settlement patterns observed in the past that can reasonably be expected to persist into the future. In forecasting ultimate loss and LAE with respect to any line of business, past experience with respect to that line of business is the primary resource, but cannot be relied upon in isolation. White Mountains’s own experience, particularly claims development experience, such as trends in case reserves, payments on and closings of claims, as well as changes in business mix and coverage limits, is the most important information for estimating its reserves. External data, available from organizations such as statistical bureaus, consulting firms and reinsurance companies, is sometimes used to supplement or corroborate White Mountains’s own experience. External data can be especially useful for estimating costs on newer lines of business (e.g., Programs and Surety).

For some lines of business, such as “long-tail” coverages discussed below, claims data reported in the most recent accident or report year or years is often too limited to provide a meaningful basis for analysis due to the typical delay in reporting and settling of claims. For this type of business, White Mountains uses an expected loss ratio method for the initial accident year or years. This is a standard and accepted actuarial reserve estimation method in these circumstances in which the loss ratio is selected based upon information used in pricing policies for that line of business, as well as any publicly available industry data, such as industry pricing, experience and trends, for that line of business.

Uncertainties in estimating ultimate loss and LAE are magnified by the time lag between when a claim actually occurs and when it is reported and eventually settled. This time lag is sometimes referred to as the “claim-tail”. The claim-tail for most property coverages is typically short (usually a few days up to a few months). The claim-tail for casualty coverages, such as automobile liability, general liability including the liability portion of multiple peril coverage, workers compensation, and professional liability can be especially long as claims are often reported and ultimately paid or settled years, even decades, after the related loss events occur. During the long claims reporting and settlement period, additional facts regarding coverages written in prior accident years, as well as about actual claims and trends may become known that cause White Mountains to adjust its reserves. If management determines that an adjustment is appropriate, the adjustment is booked in the accounting period in which such determination is made. Accordingly, should reserves need to be increased or decreased in the future from amounts currently established, future results of operations would be negatively or positively impacted.

In determining ultimate loss and LAE, the cost to indemnify claimants, provide needed legal defense and other services for insureds and administer the investigation and adjustment of claims are considered. These claim costs are influenced by many factors that change over time, such as expanded coverage definitions as a result of new court decisions, inflation in costs to repair or replace damaged property, inflation in the cost of medical services, and legislated changes in statutory benefits, as well as by the particular, unique facts that pertain to each claim. As a result, the rate at which claims arose in the past and the costs to settle them may not always be representative of what will occur in the future. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple and conflicting interpretations. Changes in coverage terms or claims handling practices may also cause future experience and/or development patterns to vary from the past. A key objective of actuaries in developing estimates of ultimate loss and LAE and resulting IBNR reserves is to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them so that the future can be projected more reliably. Because of the factors previously discussed, this process requires the use of informed judgment and is inherently uncertain.

White Mountains’s actuaries use several generally accepted actuarial methods to evaluate its loss reserves, each of which has its own strengths and weaknesses. Management places more or less reliance on a particular method based on the facts and circumstances at the time the reserve estimates are made. These methods generally fall into one of the following categories or are hybrids of one or more of the following categories:

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Historical paid loss development methods: These methods use historical loss payments over discrete periods of time to estimate future losses. Historical paid loss development methods assume that the ratio of losses paid in one period to losses paid in an earlier period will remain constant. These methods necessarily assume that factors that have affected paid losses in the past, such as inflation or the effects of litigation, will remain constant in the future. Because historical paid loss development methods do not use case reserves to estimate ultimate losses, they can be more reliable than the other methods discussed below that look to case reserves (such as actuarial methods that use incurred losses) in situations where there are significant changes in how case reserves are established by a company’s claims adjusters. However, historical paid loss development methods are more leveraged, meaning that small changes in payments have a larger impact on estimates of ultimate losses, than actuarial methods that use incurred losses because cumulative loss payments take much longer to approach the expected ultimate losses than cumulative incurred amounts. In addition, and for similar reasons, historical paid loss development methods are often slow to react to situations when new or different factors arise than those that have affected paid losses in the past.

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Historical incurred loss development methods: These methods, like historical paid loss development methods, assume that the ratio of losses in one period to losses in an earlier period will remain constant in the future. However, instead of using paid losses, these methods use incurred losses (i.e., the sum of cumulative historical loss payments plus outstanding case reserves) over discrete periods of time to estimate future losses. Historical incurred loss development methods can be preferable to historical paid loss development methods because they explicitly take into account open cases and the claims adjusters’ evaluations of the cost to settle all known claims. However, historical incurred loss development methods necessarily assume that case reserving practices are consistently applied over time. Therefore, when there have been significant changes in how case reserves are established, using incurred loss data to project ultimate losses can be less reliable than other methods.

•

Expected loss ratio methods: These methods are based on the assumption that ultimate losses vary proportionately with premiums. Expected loss ratios are typically developed based upon the information used in pricing, and are multiplied by the total amount of premiums earned to calculate ultimate losses. Expected loss ratio methods are useful for estimating ultimate losses in the early years of long-tailed lines of business, when little or no paid or incurred loss information is available.

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Bornhuetter-Ferguson methods: These methods are a blend of the expected loss ratio and loss development methods. The percent of incurred (or paid) loss to ultimate loss implied by the selected development pattern from the incurred (or paid) loss development method is used to determine the percentage of ultimate loss yet to be developed. Inception to date losses are added to losses yet to be developed, yielding an estimate of ultimate for each accident year.

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Adjusted historical paid and incurred loss development methods: These methods take traditional historical paid and incurred loss development methods and adjust them for the estimated impact of changes from the past in factors such as inflation, the speed of claim payments or the adequacy of case reserves. Adjusted historical paid and incurred loss development methods are often more reliable methods of predicting ultimate losses in periods of significant change, provided the actuaries can develop methods to reasonably quantify the impact of changes.

White Mountains performs an actuarial review of its recorded reserves each quarter. As part of that review, White Mountains’s actuaries compare the previous quarter’s projections of incurred, paid and case reserve activity, including amounts incurred but not reported, to amounts experienced in the quarter. Differences between previous estimates and actual experience are evaluated to determine whether a given actuarial method for estimating loss and LAE should be relied upon to a greater or lesser extent than it had been in the past. While some variance is expected each quarter due to the inherent uncertainty in loss and LAE, persistent or large variances would indicate that prior assumptions and/or reliance on certain reserving methods may need to be revised going forward.

Upon completion of each quarterly review, White Mountains’s actuaries select indicated reserve levels based on the results of the actuarial methods described previously, which are the primary consideration in determining management's best estimate of required reserves. However, in making its best estimate, management also considers other qualitative factors that may lead to a difference between held reserves and the actuarial central estimate of reserves. Typically, these factors exist when management and our actuaries conclude that there is insufficient historical incurred and paid loss information or that trends included in the historical incurred and paid loss information are unlikely to repeat in the future. Such factors include, among others, recent entry into new markets or new products, improvements in the claims department that are expected to lessen future ultimate loss costs, legal and regulatory developments, or other volatilities that may arise.

OneBeacon Reserve Estimation by Line of Business

The process of establishing loss and LAE reserves, including amounts incurred but not reported, is complex and imprecise as it must consider many variables that are subject to the outcome of future events. As a result, informed subjective estimates and judgments as to the ultimate exposure to losses are an integral component of the loss and LAE reserving process. OneBeacon categorizes and tracks insurance reserves by “line of business”, which are summarized herein as either property short-tailed lines, casualty long-tailed lines, or other (accident, surety, and credit) lines.

OneBeacon regularly reviews the appropriateness of reserve levels at the line of business level, considering the variety of trends that impact the ultimate settlement of claims for the subsets of claims in each particular line of business.

For loss and allocated LAE reserves, the key assumption as of December 31, 2016 was that the impact of the various reserving factors, as described below, on future paid losses would be similar to the impact of those factors on the historical loss data with the exception of severity trends. Severity trends have been relatively stable over the relevant historical period. The actuarial methods used would project losses assuming continued stability in severity trends. OneBeacon has considered a range of assumptions regarding future increases in loss severity trends, including the impact of inflation, in making its reserve selections.

The major causes of material uncertainty (“reserving factors”) generally will vary for each line, as well as for each separately analyzed component of the line. The following section details reserving factors by product line. Also, reserving factors can have offsetting or compounding effects on estimated reserves. For example, in workers compensation, the use of expensive medical procedures that result in medical cost inflation may enable workers to return to work faster, thereby lowering indemnity costs. Thus, in almost all cases, it is impossible to discretely measure the effect of a single reserving factor and construct a meaningful sensitivity expectation. Actual results will likely vary from expectations for each of these assumptions, resulting in an ultimate claim liability that is different from that being estimated currently.

Additional causes of material uncertainty exist in most product lines and may impact the types of claims that could occur within a particular underwriting unit or book of business. Examples where reserving factors, within an underwriting unit or book of business, are subject to change include changing types of insured (e.g. type of insured vehicle, size of account, industry insured, jurisdiction, etc.), changing underwriting standards, or changing policy provisions (e.g. deductibles, policy limits, or endorsements).

Following is a detailed description of the reserve factors and consideration for each of the major product lines.

Property

The property short-tailed lines represent lines for which the payout of the claim liability occurs shortly after the occurrence of the loss. Reserving for property lines generally involves less uncertainty given the short-tailed nature of these lines.

Property lines, including the property portion of the multiple peril coverage and Inland Marine, cover losses to a business' premises, inventory and equipment as a result of weather, fire, theft and other causes. Claims associated with property coverage generally take a relatively short period of time to close. The reserve risk is driven by occasional catastrophic events or large single losses. The relatively high attachment points and insured values of the property policies underwritten in the Specialty Property underwriting units present a potentially longer tail and greater uncertainty than our standard property business. Property also includes the comprehensive and collision coverages of automobile policies characterized by low severity payments that are made quickly. Additionally, Property includes all of the Ocean Marine products. Ocean Marine has property and liability exposure related to commercial hull, marine, and cargo products. The exposure is generally low severity and short to medium tailed.

Casualty

The casualty long-tailed lines represent lines for which the loss may not be paid, or even reported, until well after the loss occurred. As a result, the amount of liability may not be known at the date of the loss. Reserving for casualty lines generally involves more uncertainty given these factors.

Casualty lines cover a variety of losses associated with policies that cover general liability, the liability portion of commercial multiple peril, professional liability, workers compensation, and commercial automobile liability lines. Losses associated with casualty coverage generally take a longer period of time to close claims. Most of the general reserving factors for casualty are applicable across these underwriting units, while certain underwriting units have additional reserving factors.

Casualty policies can generally be written on either a claims made or occurrence form. Most professional liability, management liability, and medical professional policies are written on a claims made basis, under which the trigger of loss is based on the date the loss is discovered or the loss is reported to OneBeacon. Professional liability policies cover the defense expenses and damages related to negligence claims brought against the insured professional services firm or government entity. The coverage focuses on damages resulting from an alleged failure to perform, error or omission in the product or service provided by the policyholder. OneBeacon liability policies cover the defense expenses and damages related to alleged wrongful acts committed by the directors and officers of the insured organization. Medical professional liability policies cover the defense expenses and damages related to negligence claims brought against the insured health care institution or provider. The coverage focuses on damages resulting from an alleged failure to perform, error or omission in the service provided by the policyholder.

Most general liability policies are written on an occurrence basis under which the trigger of loss is based on the date the loss happened. They cover businesses for any liability resulting from bodily injury and property damage arising from general business operations, accidents on business premises and the products manufactured or sold. Reserves for these policies generally include two components: bodily injury and property damage. Bodily injury payments reimburse the claimant for damages pertaining to physical injury as a result of the policyholder's legal obligation arising from non-intentional acts such as negligence, subject to the insurance policy provisions. In some cases the damages can include future wage loss, which is a function of future earnings power and wage inflation, and future medical treatment costs. Property damage payments result from damages to the claimant’s private property arising from the policyholder's legal obligation for non-intentional acts. In most cases, property damage losses are a function of costs as of the loss date or soon thereafter. Defense costs are also a part of the insured costs covered by liability policies and can be significant, sometimes greater than the cost of the actual paid claims, though for some products this risk is mitigated by policy language such that the insured portion of defense costs erodes the amount of policy limit available to pay the claim.

Casualty coverages are generally considered long-tail line business, as it takes a relatively long period of time to finalize and settle claims from a given accident year. The speed of claim reporting and claim settlement is a function of the specific coverage provided and the jurisdiction, among other factors. There are numerous components underlying these product lines. Some of these have relatively moderate payment patterns, with most of the claims for a given accident year closed within 5 to 7 years, while others can have extreme lags in both reporting and payment of claims (e.g., a reporting lag of a decade for construction defect claims).

Examples of common reserving factors across casualty lines that can change and, thus, affect estimated casualty reserves include:


•	Changes in claim handling philosophies (e.g., case reserving standards), including the use of third party claims administrators


•	Changes in the pattern of underlying claims, including frequency and severity


•	Changes in policy provisions or court interpretations of such provisions


•	New theories of liability (e.g., cyber related claims)


•	Trends in litigation or jury awards, including the propensity to sue


•	Changes in statutes of limitations


•	Shifts in lawsuit mix between federal and state courts


•	Changes in tort or case law


•	Distortions from losses resulting from large single accounts or single issues


•	Subrogation opportunities

While these reserving factors are applicable to most casualty reserving product lines, there are certain underwriting units within the casualty major product line that have additional unique reserving factors. These include commercial automobile liability and workers compensation.

Commercial automobile liability coverage insures relatively short-tailed property damage liability claims and longer-tailed, more difficult to estimate, bodily injury claims. In general, claim reporting lags are minor, claim complexity is not a major issue, and the line is viewed as high frequency, low to moderate severity. In addition to the examples of common reserving factors related to casualty described above, other examples that affect estimated commercial automobile liability reserves include:


•	Frequency of claims with payment capped by policy limits


•	Change in average severity of accidents, or proportion of severe accidents


•	Frequency of visits to health providers


•	Number of medical procedures given during visits to health providers


•	Types of health providers used


•	Types of medical treatments received


•	Changes in cost of medical treatments


•	Degree of patient responsiveness to treatment

Workers compensation covers an employer's liability for injuries, disability or death of employees, without regard to fault, as prescribed by state workers compensation law and other statutes. Workers compensation is a long-tail coverage as it takes a relatively long period of time to finalize claims from a given accident year. While certain payments such as initial medical treatment or temporary wage replacement for the injured worker are made quickly, some other payments are made over the course of several years, such as awards for permanent partial injuries. In addition, some payments can run as long as the injured worker's life, such as permanent disability benefits and ongoing medical care. Despite the possibility of long payment tails, the reporting lags are generally short, settlements are generally not complex, and most of the claims can be considered high frequency with moderate severity. The largest reserve risk generally comes from the low frequency, high severity claims providing lifetime coverage for medical expenses arising from a worker's injury. Examples of common reserving factors that can change and, thus, affect the estimated workers compensation reserves include:


•	Changes in the type, frequency of utilization or cost of medical treatments (e.g. changes in the use of pharmaceutical drugs, types of health providers used, use of preferred provider networks and other medical cost containment practices)


•	Availability of new medical processes and equipment


•	Degree of patient responsiveness to treatment


•	Mortality trends of injured workers with lifetime indemnity and medical treatment benefits


•	Degree of cost shifting between workers compensation and health insurance


•	Time required to recover from the injury and return to regular or transitional work


•	Future wage inflation for states that index benefits

Other lines

Other lines represent lines that do not fall into either the property or casualty definition. These lines have unique characteristics that are taken into consideration during the reserving process.

Accident includes accidental death and dismemberment, occupational accident, sports accident, non-truckers liability and other accident coverages. It has a short to medium tailed development pattern and moderate severity profile.

Credit represents primarily the Tuition Reimbursement underwriting operating segment which provides insurance protection for schools and parents from the financial consequences of a student's withdrawal or dismissal. The reserve risk for this line is relatively low given the extremely short-tailed and low severity nature.

Surety, which also has a significant credit risk component, is a short-tailed but high severity coverage. As a newer business, lack of historical data means external data is heavily relied upon where available and applicable. Surety reserving factors that can change and, thus, affect estimated surety reserves include size of payment (severity) which is impacted by the bond limit, the ability of the principal (insured) or OneBeacon to mitigate the loss, or amount and collectability of assets or other collateral available to mitigate loss.

Cumulative Number of Reported Claims

OneBeacon counts a claim for each unique combination of individual claimant and major coverage (e.g. auto liability - bodily injury, auto liability - property damage, auto physical damage, etc.). The claim is counted only if, net of any applicable deductibles, a payment has been made or a case reserve has been recorded. As a point of clarification, it is counted if a case reserve is established and the claim is later closed with no payment. For a relatively small amount of bulk-coded assumed reinsurance and pools & association losses there are no claim counts available.

Discount

OneBeacon discounts its long-term workers compensation loss and LAE reserves, as such liabilities constitute unpaid but settled claims under which the payment pattern and ultimate costs are fixed and determinable on an individual basis. OneBeacon discounts these reserves using the statutory rate (2.5% as of both December 31, 2016 and 2015). For the years ended December 31, 2016 and 2015, reserves for unpaid loss and LAE were reduced by $1.6 million and $1.1 million. Changes in loss and LAE reserves resulting from a change in the average long-term workers compensation discount rate is recorded within incurred loss and LAE expense.

Loss and Loss Adjustment Expense Reserve Summary

The following table summarizes the loss and LAE reserve activities of White Mountains’s insurance subsidiaries for the years ended December 31, 2016, 2015 and 2014:



	Year Ended December 31,
Millions	2016			2015			2014
Gross beginning balance	$	1,389.8		$	1,342.2		$	1,054.3
Less beginning reinsurance recoverable on unpaid losses	(186.0		)	(161.6		)	(80.2		)
Net loss and LAE reserves	1,203.8			1,180.6			974.1

Loss and LAE reserves consolidated - SSIE	—			—			13.6

Add: SSIE reserves held for sale at the beginning of the period⁽¹⁾	5.5			7.7			—

Losses and LAE incurred relating to:
Current year losses	649.2			712.9			732.0
Prior year losses	14.8			(4.0		)	92.0
Total incurred losses and LAE	664.0			708.9			824.0

Loss and LAE paid relating to:
Current year losses	(192.8		)	(208.8		)	(202.6		)
Prior year losses	(483.1		)	(479.1		)	(420.8		)
Total loss and LAE payments	(675.9		)	(687.9		)	(623.4		)

Less: SSIE reserves held for sale at the end of the period⁽¹⁾	4.7			5.5			7.7

Net ending balance	1,192.7			1,203.8			1,180.6
Plus ending reinsurance recoverable on unpaid losses	172.9			186.0			161.6
Gross ending balance	$	1,365.6		$	1,389.8		$	1,342.2

⁽¹⁾See Note 22 - “Held for Sale and Discontinued Operations”.

Loss and LAE development —2016

During the year ended December 31, 2016, White Mountains experienced $14.8 million of net unfavorable loss reserve development, which consisted of $15.4 million of net unfavorable loss reserve development at OneBeacon partially offset by $0.6 million of net favorable loss reserve development at SSIE. The net unfavorable loss reserve development at OneBeacon was primarily due to unfavorable net loss reserve development in the Healthcare ($40.7 million) and Programs ($13.3 million) underwriting units, partially offset by favorable net loss reserve development in the Accident ($16.1 million), Entertainment ($9.4 million), Technology ($9.3 million) and Financial Services ($8.2 million) underwriting units.

The $40.7 million unfavorable net loss reserve development from OneBeacon’s Healthcare business was principally related to the complex risk business, which provides professional liability coverage to hospitals, physicians, and physician groups as well as physicians’ extended reporting period coverage, and the senior living business, which provides medical malpractice and general liability insurance for extended care facilities, including assisted living, memory care and continuing care facilities. As a result of the continuing loss activity experienced in these areas, OneBeacon management conducted in-depth claim file and actuarial reviews and determined that increased frequency in the more recent prior accident years and adverse loss trends in the more high-risk categories of business within the senior living business warranted an increase to its best estimate of prior accident year loss reserves. OneBeacon management also increased its loss provisions for the current accident year based on the updated actuarial indications. In addition, also within OneBeacon’s Healthcare business, there were two large claims within the managed care errors and omissions business related to unexpected outcomes from mediation and extended costs associated with claim defense, which contributed to the unfavorable development in prior accident years.

Despite the reserve actions taken through the first three quarters of 2016, case incurred loss activity continued to exceed expectations during the fourth quarter of 2016. The adverse development was driven by recent prior accident years spread across the complex risks, extended care, managed care errors and omissions, and medical excess businesses.

Loss and LAE development —2015

During the year ended December 31, 2015, White Mountains experienced $4.0 million of net favorable loss reserve development, which consisted of $1.8 million of net favorable loss reserve development at OneBeacon and $2.2 million of net favorable loss reserve development at SSIE. The OneBeacon net favorable loss reserve development was primarily attributable to favorable loss reserve development in Technology, Collector Cars and Boats, Specialty Property and Financial Services businesses, offset by unfavorable net loss reserve development from the Entertainment and Ocean Marine businesses.

Loss and LAE development —2014

During the year ended December 31, 2014, White Mountains experienced $92.0 million of net unfavorable loss reserve development, which consists of $89.8 million of net unfavorable loss reserve development at OneBeacon, of which $75.5 million related to the 2014 fourth quarter reserve increase described below, and $2.2 million of net unfavorable loss reserve development at SSIE.

OneBeacon 2014 Fourth Quarter Loss and LAE Reserve Increase

Through the first nine months of 2014, OneBeacon recorded $14.3 million of unfavorable loss and LAE reserve development, driven by greater-than-expected large losses in several underwriting units, primarily in the professional and management liability lines within Professional Insurance. In 2015, Professional Insurance was reorganized into Other Professional Lines, Management Liability, Financial Services and Healthcare. This large loss activity, which occurred mostly during the second and third quarters of 2014, also impacted the current accident year loss and LAE estimates. Additionally, OneBeacon incurred higher-than-usual claim coverage determination costs, a component of LAE expenses, during the first nine months of 2014. Other underwriting units also reported increased claim activity, including the Entertainment, Government Risks, and Accident underwriting units.

Since the increased level of loss and LAE activity continued into the early part of the fourth quarter of 2014, the high level of activity in the second and third quarters no longer seemed to be isolated occurrences. As such, during the fourth quarter of 2014, OneBeacon enhanced its actuarial and claims review in several areas. OneBeacon isolated the recent large loss activity in each of its underwriting units and examined the emergence of large losses relative to the timing and amounts of expected large losses. OneBeacon also conducted additional analyses in the lawyers’ professional liability line within Professional Insurance. These new analyses included a claim level review and the application of additional actuarial methods and loss development assumptions. The results of these analyses indicated that the assumed tail risk included in the loss development patterns used to record IBNR reserves for this line were insufficient and needed to be increased for remaining long-tail exposures. OneBeacon’s claims and actuarial staff also conducted an in-depth review of coverage determination, litigation and other claim-specific adjusting expenses as a result of an emerging trend of increased expenses in these areas over recent quarters, particularly coverage determination expenses. This review concluded that the ultimate costs of these loss adjustment expenses were larger than previously estimated, causing management to record an increase in estimated LAE expenses, primarily in Professional Insurance. Finally, OneBeacon also recorded unfavorable prior year development in other underwriting units, including Entertainment and Government Risks. The unfavorable loss development in Entertainment and Government Risks resulted from heavier than expected claim activity during the fourth quarter, predominantly in the general liability and commercial auto liability lines.

In order to fully reflect these recent trends, OneBeacon recorded a $109.2 million increase in loss and LAE reserves, which included a $75.5 million increase in prior accident year loss and LAE reserves and a $33.7 million increase in the current accident year loss and LAE reserves recorded at September 30, 2014.

The components of the 2014 fourth quarter loss and LAE reserve increase and the net loss and LAE development for the full year are provided below:



Underwriting Unit	2014 Fourth Quarter Reserve Increases								Full Year 2014
Millions	Current Accident Year			Prior Accident Year			Total		Net Prior Year Development
Professional Insurance ⁽¹⁾	$	22.9		$	46.4		$	69.3	$	59.1
Specialty Property	(1.1		)	5.7			4.6		1.1
Crop Business	3.8			—			3.8		—
Other	2.8			(.4		)	2.4		1.6
Specialty Products	28.4			51.7			80.1		61.8
Entertainment	1.5			11.6			13.1		13.5
Government Risks	1.2			7.1			8.3		8.5
Accident	—			3.5			3.5		6.0
Other	2.6			1.6			4.2		—
Specialty Industries	5.3			23.8			29.1		28.0
Total	$	33.7		$	75.5		$	109.2	$	89.8

⁽¹⁾Professional Insurance includes Other Professional Lines, Management Liability, Financial Services and Healthcare.

As noted above, OneBeacon increased its provision for current accident year losses and LAE by $33.7 million in the fourth quarter of 2014. In making its loss and LAE reserve picks for the 2014 accident year, OneBeacon considered the results of the enhanced actuarial and claim review and the fact that reported large claims were approaching estimated ultimate held reserves for large losses sooner than originally expected. $3.8 million of the increase is related to higher-than-expected reports of Crop Business losses that emerged in the fourth quarter. The remaining $29.9 million of the increase reflects an increase in management’s best estimate of current losses and LAE as of December 31, 2014 from those recorded in the first nine months of 2014. This increase primarily affected the Professional Insurance underwriting unit, which represented $22.9 million of the total provision.

Reconciliation of liabilities for unpaid loss and LAE

The following table reconciles loss and LAE reserves determined on a statutory basis to loss and LAE reserves determined in accordance with GAAP as of December 31, 2016 and 2015 as follows:



	December 31,
Millions	2016		2015
Statutory reserves (unaudited)	$	1,192.7	$	1,203.8
Reinsurance recoverable on unpaid losses and LAE ⁽¹⁾	172.9		186.0
GAAP reserves	$	1,365.6	$	1,389.8


⁽¹⁾	Represents adjustments made to add back reinsurance recoverables on unpaid losses and LAE included with the presentation of reserves under statutory accounting.

The following table summarizes the ending liabilities for unpaid loss and LAE, net of reinsurance for each of OneBeacon’s major lines of business by underwriting group as of December 31, 2016:



Liabilities for unpaid claims and claims adjustment expenses, net of reinsurance Millions	As of December 31, 2016
Specialty Products - Property	$	30.2
Specialty Industries - Property	108.5
Specialty Products - Casualty	568.7
Specialty Industries - Casualty	360.0
Specialty Products - Other	38.2
Specialty Industries - Other	47.4
Total unpaid and undiscounted loss and allocated LAE reserves, net of reinsurance	1,153.0
Less: Discount on workers compensation reserves	(1.6		)
Total unpaid loss and allocated LAE reserves, net of reinsurance	1,151.4
Plus: Unallocated LAE	41.3
Total unpaid loss and LAE reserves, net of reinsurance	1,192.7
Plus: Reinsurance recoverables on unpaid losses
Specialty Products - Property	40.9
Specialty Industries - Property	13.2
Specialty Products - Casualty	64.0
Specialty Industries - Casualty	19.9
Specialty Products - Other	16.0
Specialty Industries - Other	.6
Investing, Financing and Corporate ⁽¹⁾	18.3
Plus: Total Reinsurance recoverables on unpaid losses	172.9
Total unpaid loss and LAE reserves	$	1,365.6

⁽¹⁾OneBeacon’s subsidiary, Atlantic Specialty Insurance Company (“ASIC”) , entered into a 100% quota share reinsurance agreement with OBIC, an entity sold to Armour, as part of the sale of the Runoff Business. See Note 22 — “Held for Sale and Discontinued Operations”. As of December 31, 2016, $18.3 is included in reinsurance recoverables on unpaid losses within Investing, Financing, and Corporate resulting from that agreement.

The following six table groupings, reflecting one table each for the Property, Casualty and Other major lines of business for each of the Specialty Products and Specialty Industries underwriting groups and include three sections.

The first table (top section) presents, for each of the previous 10 accident years (1) cumulative total undiscounted incurred loss and allocated LAE, net of reinsurance, as of each of the previous 10 year-end evaluations, (2) total IBNR plus expected development on reported claims as of December 31, 2016, and (3) the cumulative number of reported claims as of December 31, 2016.

The second table (middle section) presents cumulative paid loss and allocated LAE, net of reinsurance, for each of the previous 10 accident years as of each of the previous 10 year-end evaluations. Also included in this table is a calculation of the liability for loss and allocated LAE as of December 31, 2016 which is then included the reconciliation to the consolidated balance sheet presented above. The liability as of December 31, 2016 is calculated as the cumulative incurred loss and allocated LAE from the first table less the cumulative paid loss and allocated from the second table, plus any outstanding liabilities from accident years prior to 2007.

The third table (bottom section) is supplementary information about the average historical claims duration as of December 31, 2016. It shows the weighted average annual percentage payout of incurred loss and allocated LAE by accident year as of each age. For example, the first column is calculated as the incremental paid loss and allocated LAE in the first calendar year for each given accident year (e.g. calendar year 2008 for accident year 2008, calendar year 2009 for accident year 2009) divided by the cumulative incurred loss and allocated LAE as of December 31, 2016 for that accident year. The resulting ratios are weighted together using cumulative incurred loss and allocated LAE as of December 31, 2016.



Specialty Products - Property
$ in millions
	Incurred Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,																				As of December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		Total IBNR plus expected development on reported claims		Cumulative number of reported claims
	Unaudited
2007	$	12.0	$	11.1	$	9.1	$	7.6	$	7.6	$	7.7	$	8.7	$	8.6	$	8.6	$	8.6	$	—	250
2008	—		31.3		29.2		25.4		25.6		26.6		26.8		26.8		26.8		26.8		—		3,466
2009	—		—		55.2		52.1		52.9		53.3		52.9		52.6		52.5		51.6		—		8,768
2010	—		—		—		51.0		49.5		55.6		56.7		55.9		55.8		55.8		—		10,170
2011	—		—		—		—		58.7		59.8		60.2		60.6		60.8		60.7		.2		11,121
2012	—		—		—		—		—		79.9		86.7		92.9		92.2		92.2		.2		12,405
2013	—		—		—		—		—		—		36.4		27.6		27.6		27.7		.3		5,267
2014	—		—		—		—		—		—		—		37.5		32.1		31.6		.4		1,227
2015	—		—		—		—		—		—		—		—		28.3		25.7		1.1		2,186
2016	—		—		—		—		—		—		—		—				24.5		5.2		1,825
																	Total		$	405.2



Specialty Products - Property
$ in millions
	Cumulative Paid Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	Unaudited
2007	$	1.8	$	3.7	$	6.8	$	7.0	$	7.0	$	7.0	$	8.7	$	8.6	$	8.6	$	8.6
2008	—		15.5		23.5		25.2		25.5		26.0		26.8		26.8		26.8		26.8
2009	—		—		41.5		47.3		51.2		51.9		51.9		51.6		51.6		51.6
2010	—		—		—		43.1		47.9		53.3		55.2		55.7		55.7		55.7
2011	—		—		—		—		51.8		59.0		59.7		60.1		60.4		60.5
2012	—		—		—		—		—		58.8		72.5		78.3		79.0		78.8
2013	—		—		—		—		—		—		24.3		26.9		27.1		27.4
2014	—		—		—		—		—		—		—		19.8		28.2		31.2
2015	—		—		—		—		—		—		—		—		15.0		22.1
2016	—		—		—		—		—		—		—		—		—		12.3
																	Total		375.0
All outstanding liabilities before 2007, net of reinsurance																			—
Liabilities for loss and allocated LAE, net of reinsurance																			$	30.2



Specialty Products - Property
	Average Annual Percentage Payout of Incurred Losses and Allocated LAE by Age, Net of Reinsurance
	Unaudited
Years	1	2	3	4	5	6	7	8	9	10
	70.1%	14.6%	5.9%	1.1%	0.3%	0.2%	0.4%	—%	—%	—%



Specialty Industries - Property
$ in millions
	Incurred Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,																				As of December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		Total IBNR plus expected development on reported claims		Cumulative number of reported claims
	Unaudited
2007	$	110.0	$	104.8	$	101.3	$	94.9	$	95.1	$	95.3	$	95.1	$	95.1	$	95.1	$	94.9	$	—	4,828
2008	—		147.3		137.6		129.6		129.3		132.0		132.7		130.0		129.8		129.7		.1		6,603
2009	—		—		124.5		118.6		118.2		117.9		118.8		118.6		118.7		118.6		.1		6,718
2010	—		—		—		131.4		131.5		127.2		130.0		129.7		131.4		131.2		—		8,617
2011	—		—		—		—		138.5		141.5		141.1		143.5		143.2		142.5		.3		9,704
2012	—		—		—		—		—		126.9		123.8		126.7		130.4		130.1		.8		9,697
2013	—		—		—		—		—		—		125.1		127.0		142.9		143.6		1.9		8,085
2014	—		—		—		—		—		—		—		123.9		123.5		130.1		3.9		8,352
2015	—		—		—		—		—		—		—		—		142.3		138.9		10.2		8,607
2016	—		—		—		—		—		—		—		—		—		120.3		32.8		7,429
																	Total		$	1,279.9



Specialty Industries - Property
$ in millions
	Cumulative Paid Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	Unaudited
2007	$	42.2	$	70.9	$	82.7	$	87.6	$	91.7	$	93.4	$	94.2	$	94.5	$	94.5	$	94.6
2008	—		62.5		101.4		116.8		123.4		129.5		129.1		129.2		129.3		129.3
2009	—		—		50.4		85.9		105.4		111.0		115.5		117.2		118.0		118.4
2010	—		—		—		69.0		106.2		118.2		122.8		125.9		129.3		130.8
2011	—		—		—		—		72.5		117.4		130.7		138.0		139.5		141.4
2012	—		—		—		—		—		64.2		103.1		116.4		128.5		131.9
2013	—		—		—		—		—		—		59.8		101.5		126.1		137.7
2014	—		—		—		—		—		—		—		56.5		94.6		111.6
2015	—		—		—		—		—		—		—		—		68.6		114.4
2016	—		—		—		—		—		—		—		—		—		61.3
																	Total		$	1,171.4
All outstanding liabilities before 2007, net of reinsurance																			—
Liabilities for loss and allocated LAE, net of reinsurance																			$	108.5



Specialty Industries - Property
	Average Annual Percentage Payout of Incurred Losses and Allocated LAE by Age, Net of Reinsurance
	Unaudited
Years	1	2	3	4	5	6	7	8	9	10
	47.4%	27.3%	9.9%	4.1%	1.8%	0.7%	0.2%	0.1%	—%	—%



Specialty Products - Casualty
$ in millions
	Incurred Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,																				As of December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		Total IBNR plus expected development on reported claims		Cumulative number of reported claims
	Unaudited
2007	$	138.3	$	120.2	$	97.3	$	90.7	$	70.5	$	70.1	$	61.8	$	58.3	$	57.1	$	56.5	$	2.5	1,236
2008	—		145.6		128.6		118.2		100.8		98.3		95.5		95.3		97.3		96.8		3.3		2,199
2009	—		—		169.5		186.2		194.9		193.2		192.0		194.9		195.0		195.5		4.9		4,002
2010	—		—		—		211.5		225.4		226.2		225.0		232.3		234.9		240.0		7.8		6,029
2011	—		—		—		—		194.9		189.8		205.4		214.2		214.8		214.9		9.4		6,661
2012	—		—		—		—		—		213.5		220.1		246.1		248.8		249.4		14.4		6,794
2013	—		—		—		—		—		—		205.2		233.1		229.6		247.9		20.3		5,866
2014	—		—		—		—		—		—		—		240.5		235.9		258.9		44.4		6,504
2015	—		—		—		—		—		—		—		—		206.9		213.4		78.5		9,710
2016	—		—		—		—		—		—		—		—		—		202.8		142.8		9,093
																	Total		$	1,976.1



Specialty Products - Casualty
$ in millions
	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	Unaudited
2007	$	6.8	$	24.8	$	32.4	$	41.7	$	44.4	$	50.7	$	51.9	$	53.6	$	54.0	$	54.0
2008	—		8.8		32.3		50.8		65.4		77.6		83.1		85.3		88.1		91.5
2009	—		—		26.5		81.8		124.0		147.8		161.4		169.9		178.3		187.8
2010	—		—		—		32.0		107.0		157.8		180.5		196.3		213.6		220.3
2011	—		—		—		—		25.8		88.9		131.3		163.7		186.2		192.5
2012	—		—		—		—		—		25.8		86.7		157.7		193.6		219.8
2013	—		—		—		—		—		—		26.4		86.3		143.1		194.2
2014	—		—		—		—		—		—		—		34.3		95.2		156.7
2015	—		—		—		—		—		—		—		—		19.9		78.4
2016	—		—		—		—		—		—		—		—		—		16.5
																	Total		1,411.7
All outstanding liabilities before 2007, net of reinsurance																			4.3
Liabilities for loss and allocated LAE, net of reinsurance																			$	568.7



Specialty Products - Casualty
	Average Annual Percentage Payout of Incurred Losses and Allocated LAE by Age, Net of Reinsurance
	Unaudited
Years	1	2	3	4	5	6	7	8	9	10
	11.3%	24.0%	17.8%	9.6%	4.7%	2.2%	0.9%	0.7%	0.2%	—%



Specialty Industries - Casualty
$ in millions
	Incurred Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,																				As of December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		Total IBNR plus expected development on reported claims		Cumulative number of reported claims
	Unaudited
2007	$	24.9	$	24.3	$	21.7	$	34.0	$	34.9	$	35.1	$	35.1	$	36.0	$	37.1	$	36.9	$	.3	1,770
2008	—		26.3		26.2		30.4		26.4		25.8		25.2		23.7		22.2		22.1		.5		1,835
2009	—		—		51.0		51.1		51.5		49.6		54.8		53.6		51.6		51.0		1.0		2,982
2010	—		—		—		80.8		72.4		69.3		69.4		73.3		75.5		77.2		3.5		4,791
2011	—		—		—		—		88.1		87.5		90.2		100.5		111.8		112.2		3.8		5,254
2012	—		—		—		—		—		118.8		103.4		102.0		101.8		98.8		7.9		6,298
2013	—		—		—		—		—		—		121.9		131.5		133.6		138.2		18.0		7,107
2014	—		—		—		—		—		—		—		135.6		127.4		124.2		35.7		7,633
2015	—		—		—		—		—		—		—		—		146.3		127.7		61.8		7,315
2016	—		—		—		—		—		—		—		—		—		129.9		98.4		5,701
																	Total		$	918.2



Specialty Industries - Casualty
$ in millions
	Cumulative Paid Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	Unaudited
2007	$	2.8	$	5.5	$	7.9	$	13.8	$	27.9	$	29.9	$	32.4	$	32.9	$	34.3	$	35.9
2008	—		3.2		6.9		11.5		14.2		17.3		19.9		21.2		20.8		20.9
2009	—		—		5.1		16.6		25.0		34.5		42.9		46.3		46.3		47.4
2010	—		—		—		8.7		21.1		37.3		51.4		57.5		65.3		68.9
2011	—		—		—		—		11.1		34.2		53.7		69.8		88.9		96.4
2012	—		—		—		—		—		12.9		31.9		50.6		67.8		79.7
2013	—		—		—		—		—		—		18.6		45.5		72.7		96.6
2014	—		—		—		—		—		—		—		16.6		40.2		61.4
2015	—		—		—		—		—		—		—		—		13.6		39.3
2016	—		—		—		—		—		—		—		—		—		11.8
																	Total		$	558.3
All outstanding liabilities before 2007, net of reinsurance																			.1
Liabilities for loss and allocated LAE, net of reinsurance																			$	360.0



Specialty Industries - Casualty
	Average Annual Percentage Payout of Incurred Losses and Allocated LAE by Age, Net of Reinsurance
	Unaudited
Years	1	2	3	4	5	6	7	8	9	10
	11.4%	16.2%	12.9%	9.7%	6.8%	2.5%	0.8%	0.1%	0.2%	0.2%



Specialty Products - Other
$ in millions
	Incurred Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,																				As of December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		Total IBNR plus expected development on reported claims		Cumulative number of reported claims
	Unaudited
2007	$	26.8	$	26.7	$	26.8	$	28.6	$	28.6	$	28.6	$	28.6	$	28.6	$	28.6	$	28.6	$	—	5,073
2008	—		31.7		31.5		31.2		31.2		31.2		31.2		31.2		31.2		31.2		—		5,192
2009	—		—		33.8		31.4		31.3		30.8		30.9		30.9		30.9		30.9		—		5,138
2010	—		—		—		34.7		34.3		32.5		32.6		32.5		32.5		32.5		—		5,182
2011	—		—		—		—		33.2		35.5		35.4		35.4		35.4		35.4		—		5,306
2012	—		—		—		—		—		36.6		36.9		36.9		36.9		37.0		—		5,324
2013	—		—		—		—		—		—		39.6		40.6		39.2		39.2		—		5,510
2014	—		—		—		—		—		—		—		96.6		90.8		92.9		—		9,971
2015	—		—		—		—		—		—		—		—		75.5		73.2		1.8		10,704
2016	—		—		—		—		—		—		—		—		—		77.1		33.8		4,306
																	Total		$	478.0



Specialty Products - Other
$ in millions
	Cumulative Paid Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	Unaudited
2007	$	19.8	$	28.4	$	28.6	$	28.6	$	28.6	$	28.6	$	28.6	$	28.6	$	28.6	$	28.6
2008	—		21.3		31.1		31.2		31.2		31.2		31.2		31.2		31.2		31.2
2009	—		—		21.6		30.8		30.8		30.9		30.9		30.9		30.9		30.9
2010	—		—		—		22.4		32.4		32.5		32.5		32.5		32.5		32.5
2011	—		—		—		—		25.2		35.2		35.4		35.4		35.4		35.4
2012	—		—		—		—		—		26.1		36.8		36.9		36.9		37.0
2013	—		—		—		—		—		—		27.4		39.0		39.2		39.2
2014	—		—		—		—		—		—		—		46.2		88.5		90.3
2015	—		—		—		—		—		—		—		—		41.7		70.6
2016	—		—		—		—		—		—		—		—		—		44.2
																	Total		$	439.9
All outstanding liabilities before 2007, net of reinsurance																			.1
Liabilities for loss and allocated LAE, net of reinsurance																			$	38.2



Specialty Products - Other
	Average Annual Percentage Payout of Incurred Losses and Allocated LAE by Age, Net of Reinsurance
	Unaudited
Years	1	2	3	4	5	6	7	8	9	10
	61.9%	29.5%	0.6%	—%	—%	—%	—%	—%	—%	—%



Specialty Industries - Other
$ in millions
	Incurred Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,																				As of December 31, 2016
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		Total IBNR plus expected development on reported claims		Cumulative number of reported claims
	Unaudited
2007	$	4.3	$	4.6	$	4.5	$	4.4	$	4.4	$	4.4	$	4.4	$	4.4	$	4.4	$	4.4	$	—	291
2008	—		10.4		10.8		12.2		11.9		11.9		11.8		12.1		12.1		12.3		—		975
2009	—		—		19.1		19.2		19.0		19.3		20.9		21.4		21.5		21.7		.2		1,763
2010	—		—		—		25.6		26.6		27.1		27.9		28.2		28.4		28.4		—		2,449
2011	—		—		—		—		35.1		36.0		37.7		38.5		38.2		38.2		.2		3,638
2012	—		—		—		—		—		42.0		39.6		40.1		41.1		41.6		.3		3,861
2013	—		—		—		—		—		—		41.1		41.2		42.2		42.5		.7		4,245
2014	—		—		—		—		—		—		—		42.6		40.4		40.6		1.9		3,497
2015	—		—		—		—		—		—		—		—		46.6		31.9		4.9		3,301
2016	—		—		—		—		—		—		—		—		—		33.2		19.4		2,222
																	Total		$	294.8



Specialty Industries - Other
$ in millions
	Cumulative Paid Loss and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
	Unaudited
2007	$	1.2	$	4.0	$	4.3	$	4.3	$	4.3	$	4.3	$	4.3	$	4.4	$	4.4	$	4.4
2008	—		3.8		9.0		11.1		11.7		11.8		11.7		12.0		12.0		12.2
2009	—		—		6.3		14.6		17.7		18.3		19.2		21.2		21.4		21.4
2010	—		—		—		8.3		22.9		25.1		26.9		27.6		28.0		28.1
2011	—		—		—		—		13.5		29.4		34.6		36.5		37.2		37.3
2012	—		—		—		—		—		13.2		30.7		35.8		38.3		39.1
2013	—		—		—		—		—		—		13.0		29.3		37.2		39.6
2014	—		—		—		—		—		—		—		12.6		28.9		34.8
2015	—		—		—		—		—		—		—		—		9.8		22.2
2016	—		—		—		—		—		—		—		—		—		8.0
																	Total		$	247.1
All outstanding liabilities before 2007, net of reinsurance																			(.3		)
Liabilities for loss and allocated LAE, net of reinsurance																			$	47.4



Specialty Industries - Other
	Average Annual Percentage Payout of Incurred Losses and Allocated LAE by Age, Net of Reinsurance
	Unaudited
Years	1	2	3	4	5	6	7	8	9	10
	30.4%	37.0%	10.8%	3.3%	1.1%	0.9%	0.2%	—%	0.1%	—%