7. LOSSES AND LOSS ADJUSTMENT EXPENSES


	March 31, 2014								December 31, 2013
	Non-life Run-off			Active Underwriting		Total			Non-life Run-off			Active Underwriting		Total
Outstanding	$	2,445,619		$	78,755	$	2,524,374		$	2,541,934		$	79,826	$	2,621,760
Incurred but not reported		1,625,177			104,514		1,729,691			1,717,870			98,583		1,816,453
Fair value adjustment		(248,918	)		36,983		(211,935	)		(255,291	)		36,983		(218,308	)

	$	3,821,878		$	220,252	$	4,042,130		$	4,004,513		$	215,392	$	4,219,905

Refer to Note 8 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for more information on establishing reserves.

The total net (reduction) increase in ultimate losses and loss adjustment expense liabilities by the Company’s non-life run-off and active underwriting segments for the three months ended March 31, 2014 and 2013 was as follows:


	Three Months Ended March 31,
	2014								2013
	Non-life Run-off			Active Underwriting		Total			Non-life Run-off			Active Underwriting		Total
Net losses paid	$	87,687		$	12,835	$	100,522		$	83,674		$	—	$	83,674
Net change in case and LAE reserves		(62,398	)		775		(61,623	)		(57,500	)		—		(57,500	)
Net change in IBNR reserves		(37,348	)		3,469		(33,879	)		(2,702	)		—		(2,702	)

(Reduction) increase in estimates of net ultimate losses		(12,059	)		17,079		(5,020	)		23,472			—		23,472
Reduction in provisions for unallocated loss adjustment expense liabilities		(13,359	)		52		(13,307	)		(16,404	)		—		(16,404	)
Amortization of fair value adjustments		(3,764	)		—		(3,764	)		2,093			—		2,093

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities	$	(29,182	)	$	17,131	$	(12,051	)	$	9,161		$	—	$	9,161

Non-Life Run-off Segment

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses for the three months ended March 31, 2014 and 2013 of the non-life run-off segment (losses incurred and paid are reflected net of reinsurance recoverables):


	Non-Life Run-off
	Three Months Ended March 31,
	2014			2013
Balance as at January 1⁽¹⁾	$	4,004,513		$	3,650,127
Less: total reinsurance reserves recoverable		1,121,533			876,220

		2,882,980			2,773,907
Net (reduction) increase in ultimate losses and loss adjustment expense liabilities:
Current period		1,432			28,533
Prior periods		(30,614	)		(19,372	)

Total net (reduction) increase in ultimate losses and loss adjustment expense liabilities		(29,182	)		9,161

Net losses paid:
Current period		(532	)		(2,540	)
Prior periods		(87,155	)		(81,134	)

Total net losses paid		(87,687	)		(83,674	)

Effect of exchange rate movement		(1,025	)		(25,952	)
Acquired on purchase of subsidiaries		—			479,982
Assumed business		28,630			42,624

Net balance as at March 31		2,793,716			3,196,048
Plus: total reinsurance reserves recoverable		1,028,162			947,750

Balance as at March 31	$	3,821,878		$	4,143,798

(1)

The Company has reclassified outstanding losses and loss adjustment expenses of $11.0 million to policy benefits for life and annuity contracts as at January 1, 2013 to conform to the current period presentation. This amount is associated with Laguna, which now forms part of the Company’s life and annuities segment that was established following the acquisition of the Pavonia companies.

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the non-life run-off segment for the three months ended March 31, 2014 and 2013 was as follows:


	Non-Life Run-off
	Three Months Ended March 31,
	2014								2013
	Prior Period			Current Period		Total			Prior Period			Current Period		Total
Net losses paid	$	87,155		$	532	$	87,687		$	81,134		$	2,540	$	83,674
Net change in case and LAE reserves		(63,249	)		851		(62,398	)		(62,745	)		5,245		(57,500	)
Net change in IBNR reserves		(37,397	)		49		(37,348	)		(23,450	)		20,748		(2,702	)

(Reduction) increase in estimates of net ultimate losses		(13,491	)		1,432		(12,059	)		(5,061	)		28,533		23,472
Reduction in provisions for unallocated loss adjustment expense liabilities		(13,359	)		—		(13,359	)		(16,404	)		—		(16,404	)
Amortization of fair value adjustments		(3,764	)		—		(3,764	)		2,093			—		2,093

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities	$	(30,614	)	$	1,432	$	(29,182	)	$	(19,372	)	$	28,533	$	9,161

Net (reduction) increase in case and loss adjustment expense reserves (“LAE reserves”) comprises the movement during the period in specific case reserve liabilities as a result of claims settlements or changes advised to the Company by its policyholders and attorneys, less changes in case reserves recoverable advised by the Company to its reinsurers as a result of the settlement or movement of assumed claims. Net change in IBNR represents the change in the Company’s actuarial estimates of losses incurred but not reported.

Three Months Ended March 31, 2014

The net reduction in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2014 of $29.2 million included losses incurred related to current period premium of $1.4 million related to SeaBright Holdings, Inc. (“SeaBright”). Excluding SeaBright’s current period incurred losses of $1.4 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $30.6 million, which was attributable to a reduction in estimates of net ultimate losses of $13.5 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $13.3 million, relating to 2014 run-off activity, and amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $3.8 million.

Excluding the impact of current period losses incurred of $1.4 million relating to SeaBright, the reduction in estimates of net ultimate losses was $13.5 million, which was primarily related to:

(i)

the Company’s quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimated aggregate value of approximately $6.8 million; and

(ii)

favorable claims settlements during the three months ended March 31, 2014 resulting in a reduction in estimates of net ultimate losses of approximately $6.7 million.

Three Months Ended March 31, 2013

The net increase in ultimate losses and loss adjustment expense liabilities for the three months ended March 31, 2013 of $9.2 million included losses incurred of $28.5 million related to SeaBright. Excluding SeaBright’s incurred losses related to current period premium of $28.5 million, ultimate losses and loss adjustment expenses relating to prior periods were reduced by $19.4 million, which was attributable to a reduction in estimates of net ultimate losses of $5.1 million and a reduction in provisions for unallocated loss adjustment expense liabilities of $16.4 million, relating to 2013 run-off activity, partially offset by amortization of fair value adjustments over the estimated payout period relating to companies acquired amounting to $2.1 million.

Excluding the impact of current period losses incurred of $28.5 million relating to SeaBright, the reduction in estimates of net ultimate losses was $5.1 million, and was primarily related to:

(i)

the Company’s quarterly review of historic case reserves for which no updated advices had been received for a number of years. This review identified the redundancy of a number of advised case reserves with an estimate aggregate value of approximately $8.3 million; partially offset by

(ii)

net incurred loss development of $26.7 million (excluding redundant case reserve reductions of $8.3 million), largely offset by reductions in IBNR reserves of $23.5 million.

Active Underwriting

The Company did not have an active underwriting segment for the three months ended March 31, 2013, as the Company began reporting this segment in the fourth quarter of 2013 following the acquisition of Atrium.

The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses of the active underwriting segment for the three months ended March 31, 2014 (losses incurred and paid are reflected net of reinsurance recoverables):


	Active Underwriting
	Three Months Ended March 31, 2014
Balance as at January 1	$	215,392
Less: total reinsurance reserves recoverable		25,055

		190,337
Net increase (reduction) in ultimate losses and loss adjustment expense liabilities:
Current period		21,314
Prior periods		(4,183	)

Total net increase in ultimate losses and loss adjustment expense liabilities		17,131

Net losses paid:
Current period		(4,684	)
Prior periods		(8,151	)

Total net losses paid		(12,835	)

Effect of Exchange rate movement		(7	)

Net balance as at March 31		194,626
Plus: total reinsurance reserves recoverable		25,626

Balance as at March 31	$	220,252

The net (reduction) increase in ultimate losses and loss adjustment expense liabilities in the active underwriting segment for the three months ended March 31, 2014 was as follows:


	Active Underwriting
	Three Months Ended March 31, 2014
	Prior Period			Current Period		Total
Net losses paid	$	8,151		$	4,684	$	12,835
Net change in case and LAE reserves		(3,985	)		4,760		775
Net change in IBNR reserves		(8,401	)		11,870		3,469

(Reduction) increase in estimates of net ultimate losses		(4,235	)		21,314		17,079
Reduction in provisions for unallocated loss adjustment expense liabilities		52			—		52

Net (reduction) increase in ultimate losses and loss adjustment expense liabilities	$	(4,183	)	$	21,314	$	17,131