Reserves for Unpaid Losses and Loss Adjustment Expenses

9 Months Ended

Sep. 30, 2012

Reserves for Unpaid Losses and Loss Adjustment Expenses

Reserves for Unpaid Losses and Loss Adjustment Expenses

NOTE 3. Reserves for Unpaid Losses and Loss Adjustment Expenses

The following table summarizes the loss and LAE reserve activities of OneBeacon’s insurance subsidiaries for the three and nine months ended September 30, 2012 and 2011:

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
	($ in millions)
Gross beginning balance	$	3,175.3		$	3,131.5		$	3,358.6		$	3,295.5
Less beginning reinsurance recoverable on unpaid losses	(2,040.7		)	(1,825.9		)	(2,167.5		)	(1,893.2		)
Net loss and LAE reserves	1,134.6			1,305.6			1,191.1			1,402.3
Loss and LAE incurred relating to:
Current year losses	167.0			155.7			460.1			435.7
Prior year losses	(2.3		)	(6.0		)	(7.6		)	(14.4		)
Total incurred loss and LAE from continuing Operations	164.7			149.7			452.5			421.3
Loss and LAE paid relating to:
Current year losses	(59.6		)	(62.2		)	(123.0		)	(132.9		)
Prior year losses	(73.4		)	(64.5		)	(266.2		)	(244.7		)
Total loss and LAE payments from continuing operations	(133.0		)	(126.7		)	(389.2		)	(377.6		)
Net loss and LAE reserves	1,166.3			1,328.6			1,254.4			1,446.0
Total incurred loss and LAE from discontinued operations	27.7			12.9			48.4			37.7
Total loss and LAE payments from discontinued operations	(67.4		)	(63.7		)	(177.1		)	(205.9		)
Net loss and LAE reserves	1,126.6			1,277.8			1,125.7			1,277.8
Net loss and LAE reserves reclassified to held for sale related to Runoff (1)	(256.3		)	—			(256.3		)	—
Net loss and LAE reserves reclassified (to) from held for sale related to AutoOne (2)	—			(58.0		)	64.7			(58.0		)
Net loss and LAE reserves sold as part of the AutoOne Transaction (3)	—			—			(63.8		)	—
Net ending balance	870.3			1,219.8			870.3			1,219.8
Plus ending reinsurance recoverable on unpaid Losses	41.3			1,939.3			41.3			1,939.3
Gross ending balance	$	911.6		$	3,159.1		$	911.6		$	3,159.1

(1)In the three and nine months ended September 30, 2012, $256.3 million of net loss and LAE reserves related to the Runoff business were reclassified to held for sale.

(2)In the three and nine months ended September 30, 2011, $58.0 million of net loss and LAE reserves related to the AutoOne Transaction were reclassified to held for sale. In the nine months ended September 30, 2012, $64.7 million of net loss and LAE reserves related to the AutoOne Transaction were reclassified from held for sale immediately prior to the closing of the transaction which occurred on February 22, 2012.

(3)In the nine months ended September 30, 2012, $63.8 million of net loss and LAE reserves related to the AutoOne Transaction were sold.

During the three months ended September 30, 2012, OneBeacon experienced $2.3 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on losses related to professional liability lines, multiple peril liability lines and other general liability lines. During the three months ended September 30, 2011, OneBeacon recorded $6.0 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on losses related to professional liability lines, multiple peril liability lines and other general liability lines.

During the nine months ended September 30, 2012, OneBeacon experienced $7.6 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on losses related to professional liability lines, multiple peril liability lines and general liability lines. During the nine months ended September 30, 2011, OneBeacon experienced $14.4 million of favorable loss and LAE reserve development on prior accident year loss reserves due to lower than expected severity on non-catastrophe losses related to professional liability lines, multiple peril liability lines and other general liability lines.

In connection with purchase accounting for the OneBeacon Acquisition, OneBeacon was required to adjust to fair value the loss and LAE reserves and the related reinsurance recoverables on the balance sheet. As of September 30, 2012 and December 31, 2011, the remaining fair value reductions to both loss and LAE reserves and reinsurance recoverable on unpaid losses were $153.4 million and $163.3 million, respectively. As a result of the Runoff Transaction, this adjustment is reflected in the amounts held for sale on the September 30, 2012 balance sheet and the net reduction to loss and LAE reserves associated with this adjustment is being accreted through an income statement charge within discontinued operations ratably with and over the period the claims are settled.