Note 9. Reserves for Losses and Loss Expenses

The table below provides a roll forward of reserves for losses and loss expenses for beginning and ending reserve balances:

($ in thousands)		2011	2010	2009
Gross reserves for losses and loss expenses, at beginning of year	$	2,830,058	2,745,799	2,640,973
Less: reinsurance recoverable on unpaid loss and loss expenses, at beginning of year		313,739	271,610	224,192
Net reserves for losses and loss expenses, at beginning of year		2,516,319	2,474,189	2,416,781
Incurred losses and loss expenses for claims occurring in the:
Current year		1,113,733	1,025,707	1,001,333
Prior years		(38,746)	(43,589)	(29,428)
Total incurred losses and loss expenses		1,074,987	982,118	971,905
Paid losses and loss expenses for claims occurring in the:
Current year		440,786	378,650	330,006
Prior years		569,944	561,338	584,491
Total paid losses and loss expenses		1,010,730	939,988	914,497
Acquisition of MUSIC loss and loss expense reserves		14,858	-	-
Net reserves for losses and loss expenses, at end of year		2,595,434	2,516,319	2,474,189
Add: Reinsurance recoverable on unpaid loss and loss expenses, at end of year¹		549,490	313,739	271,610
Gross reserves for losses and loss expenses at end of year	$	3,144,924	2,830,058	2,745,799

¹Includes $44.0 million related to the acquisition of MUSIC.

The net loss and loss expense reserves increased by $79.1 million in 2011, $42.1 million in 2010, and $57.4 million in 2009. The loss reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $67.6 million for 2011, $55.0 million for 2010, and $58.8 million for 2009. The changes in the net loss and loss expense reserves were the result of elevated catastrophe losses in 2011, growth in exposures, anticipated loss trends, changes in reinsurance retentions, as well as normal reserve development inherent in the uncertainty in establishing reserves for losses and loss expenses. As additional information is collected in the loss settlement process, reserves are adjusted accordingly. These adjustments are reflected in the consolidated statements of income in the period in which such adjustments are recognized. These changes could have a material impact on the results of operations of future periods when the adjustments are made.

In 2011, we experienced favorable loss development of approximately $39 million, which was primarily driven by favorable loss development of approximately $60 million in accident years 2006, 2008, and 2009, partially offset by unfavorable loss development in accident year 2010 of approximately $24 million. The main driver of this development was favorable prior year development in our commercial automobile, general liability, and business owners' policy lines of business, partially offset by unfavorable development in our workers compensation line. Commercial automobile experienced favorable development of approximately $13 million, primarily in accident years 2007 through 2009. This represents a continued trend driven by lower frequencies in those years. General liability experienced favorable development of approximately $12 million. This was driven by favorable development on our premises and operations coverages for accident years 2009 and prior, largely offset by adverse development in our products business. Our business owners' policy line had favorable development of approximately $11 million. This was driven by favorable development on liability coverage for accident years 2008 through 2010. Workers compensation experienced unfavorable prior year development of approximately $7 million, primarily driven by increases in the 2010 accident year, partially offset by various earlier accident years This increase represents a continued trend related to increased severity in recent years. Our remaining lines of business collectively experienced approximately $10 million of favorable development, largely driven by prior year catastrophe development.

In 2010, we experienced favorable loss development of approximately $44 million, which was primarily driven by favorable loss development in accident years 2004 through 2007, partially offset by unfavorable loss development in accident years 2008 to 2009 of approximately $24 million. The main driver of this development was favorable prior year development in our commercial automobile and general liability lines of business, partially offset by unfavorable development in our workers compensation line. Commercial automobile experienced favorable development of approximately $28 million driven by lower than anticipated severity emergence primarily in accident years 2004 to 2009. General liability experienced favorable development of approximately $26 million, driven by favorable loss emergence for accident years 2006 and prior, partially offset by adverse development in our products/completed operations business. Workers compensation experienced unfavorable prior year development of approximately $22 million, primarily driven by increases in accident years 2008 and 2009, which have experienced increases in average severity. Our remaining lines of business collectively experienced approximately $11 million of favorable development. While there were some offsetting impacts among these lines, homeowners contributed $6 million of favorable development towards the total development. This was due to lower than expected liability losses in accident years 2008 and 2009.

In 2009, we experienced favorable loss development of approximately $29 million, which was primarily driven by favorable loss development in accident years 2007 and prior, partially offset by unfavorable loss development in accident year 2008 of $29 million. The main driver of this development was favorable prior year development in our workers compensation, commercial automobile, and general liability lines of business. Workers compensation experienced favorable prior year development of approximately $11 million primarily driven by favorable development of $36 million in accident years 2005 to 2007, reflecting the on-going impact from a series of improvement strategies for this line in recent years, partially offset by adverse development of approximately $22 million due to higher than expected severity in accident year 2008. Commercial automobile experienced favorable development of approximately $10 million, driven by lower than anticipated severity emergence, primarily in accident year 2007. General liability experienced favorable development of approximately $8 million, driven by favorable loss emergence for accident years 2004 through 2007, partially offset by adverse development in our products/completed operations business.

Reserves established for liability insurance include exposure to environmental claims, both asbestos and non-asbestos. These claims have arisen primarily from insured exposures in municipal government, small non-manufacturing commercial risk, and homeowners policies. The emergence of these claims is slow and highly unpredictable. There are significant uncertainties in estimating our exposure to environmental claims (for both case and IBNR reserves) resulting from lack of historical data, long reporting delays, uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues that arise in environmental cases include federal or state venue, choice of law, causation, admissibility of evidence, allocation of damages and contribution among joint defendants, successor and predecessor liability, and whether direct action against insurers can be maintained. Coverage issues that arise in environmental cases include the interpretation and application of policy exclusions, the determination and calculation of policy limits, the determination of the ultimate amount of a loss, the extent to which a loss is covered by a policy, if at all, the obligation of an insurer to defend a claim and the extent to which a party can prove the existence of coverage. Courts have reached different and sometimes inconsistent conclusions on these legal and coverage issues. We do not discount to present value that portion of our loss reserves expected to be paid in future periods.

The following table details our exposures to various environmental claims:


		2011
($ in millions)		Gross	Net
Asbestos	$	8.4	6.6
Landfill sites		16.4	11.5
Other¹		21.7	20.3
Total	$	46.5	38.4

¹ Consists of leaking underground storage tanks and other latent environmental exposures.

IBNR reserve estimation is often difficult because, in addition to other factors, there are significant uncertainties associated with critical assumptions in the estimation process such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, insurer litigation costs, insurer coverage defenses, and potential changes to state and federal statutes. Moreover, normal historically based actuarial approaches are difficult to apply because relevant history is not available. In addition, while models can be applied, such models can produce significantly different results with small changes in assumptions.

The following table provides a roll forward of gross and net environmental incurred losses and loss expenses and related reserves thereon:


		2011		2010		2009
($ in thousands)		Gross	Net	Gross	Net	Gross	Net
Asbestos
Reserves for losses and loss expenses at beginning of year	$	9,979	8,167	11,056	9,244	14,269	12,969
Incurred losses and loss expenses		2,014	2,000	(338)	(338)	(2,418)	(2,930)
Less: losses and loss expenses paid		(3,581)	(3,581)	(739)	(739)	(795)	(795)
Reserves for losses and loss expenses at the end of year	$	8,412	6,586	9,979	8,167	11,056	9,244

Non-Asbestos
Reserves for losses and loss expenses at beginning of year	$	37,312	31,282	39,418	32,358	37,246	31,124
Incurred losses and loss expenses		6,243	6,250	1,999	2,776	8,115	6,405
Less: losses and loss expenses paid		(5,492)	(5,738)	(4,105)	(3,852)	(5,943)	(5,171)
Reserves for losses and loss expenses at the end of year	$	38,063	31,794	37,312	31,282	39,418	32,358

Total Environmental Claims
Reserves for losses and loss expenses at beginning of year	$	47,291	39,449	50,474	41,602	51,515	44,093
Incurred losses and loss expenses		8,257	8,250	1,661	2,438	5,697	3,475
Less: losses and loss expenses paid		(9,073)	(9,319)	(4,844)	(4,591)	(6,738)	(5,966)
Reserves for losses and loss expenses at the end of year	$	46,475	38,380	47,291	39,449	50,474	41,602