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)	2014			2013		2012
Gross reserves for losses and loss expenses, at beginning of year	$	3,349,770		4,068,941		3,144,924
Less: reinsurance recoverable on unpaid losses and loss expenses, at beginning of year	540,839			1,409,755		549,490
Net reserves for losses and loss expenses, at beginning of year	2,808,931			2,659,186		2,595,434
Incurred losses and loss expenses for claims occurring in the:
Current year	1,216,770			1,147,263		1,146,591
Prior years	(59,269		)	(25,525	)	(25,601	)
Total incurred losses and loss expenses	1,157,501			1,121,738		1,120,990
Paid losses and loss expenses for claims occurring in the:
Current year	468,478			399,559		424,496
Prior years	592,062			572,434		632,742
Total paid losses and loss expenses	1,060,540			971,993		1,057,238
Net reserves for losses and loss expenses, at end of year	2,905,892			2,808,931		2,659,186
Add: Reinsurance recoverable on unpaid losses and loss expenses, at end of year	571,978			540,839		1,409,755
Gross reserves for losses and loss expenses at end of year	$	3,477,870		3,349,770		4,068,941

The net losses and loss expense reserves increased by $97.0 million in 2014, $149.7 million in 2013, and $63.8 million in 2012. The losses and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $65.1 million for 2014, $61.0 million for 2013, and $62.2 million for 2012. The changes in the net losses and loss expense reserves were the result of growth in exposures, particularly associated with our E&S Lines of business, anticipated loss trends, changes in reinsurance retentions, and normal reserve changes 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 2014, we experienced overall favorable loss development of approximately $59.3 million, compared to $25.5 million in both 2013 and 2012. The following table summarizes the prior year development by line of business:



(Favorable)/Unfavorable Prior Year Development
($ in millions)	2014			2013		2012
General Liability	$	(43.9	)	(20.0	)	2.5
Commercial Automobile	(4.1		)	(4.5	)	(8.5	)
Workers Compensation	—			23.5		2.5
Businessowners' Policies	1.9			(9.5	)	(9.0	)
Commercial Property	(2.1		)	(7.5	)	(3.5	)
Homeowners	(4.0		)	(2.5	)	(9.0	)
Personal Automobile	(10.8		)	(3.0	)	0.5
E&S	3.7			(2.0	)	—
Other	—			—		(1.0	)
Total	$	(59.3	)	(25.5	)	(25.5	)

The 2014 prior year favorable development of $59.3 million includes $48.2 million of favorable casualty development and $11.1 million of favorable property development. The property development was primarily related to a prior year reinsurance recoverable. The favorable casualty development was largely driven by the general liability and personal automobile lines of business. These lines have both experienced increasingly favorable development in recent years. Conversely, businessowners’ policies and our E&S Lines experienced unfavorable emergence in 2014, which was a reversal from 2013. Our workers compensation line had no development in 2014, after experiencing unfavorable development of $23.5 million last year.

By accident year, the majority of the favorable development was attributable to accident years 2010 through 2012, although earlier accident years also developed favorably. General liability, commercial automobile, and personal automobile all contributed to this development, partially offset by businessowners’ liability. The general liability line of business was the primary driver of this favorable development, which was partially driven by lower severities in the 2010 through 2012 accident years, within both the premises and operations and products liability coverages. In addition, accident years 2011 and 2012 continue to show lower than expected claim counts. The overall favorable development for accident years 2012 and prior was partially offset by unfavorable development in accident year 2013, which was largely attributable to commercial automobile liability, and partially E&S casualty.

The 2013 prior year favorable development of $25.5 million includes $14.5 million of favorable casualty development and $11.0 million of favorable property development. The property development was primarily related to favorable non-catastrophe loss activity, mostly in the 2012 accident year. The casualty lines were driven largely by favorable development in accident years 2006 through 2010, with lower than expected severities in general liability and commercial automobile. Partially offsetting this favorable development was: (i) unfavorable development in our workers compensation line driven by assisted living claims; and (ii) unfavorable development in accident year 2012 in our commercial automobile line of business driven by higher than expected severities.

The 2012 prior year favorable development of $25.5 million includes $18.0 million of casualty development and $7.5 million of property development. The property development was primarily related to the favorable non-catastrophe loss activity that occurred in the first quarter of 2012 mostly in the 2011 accident year. The casualty lines were driven by favorable development in the 2007 through 2009 accident years, partially offset by unfavorable development in accident year 2011. The favorable development was driven by lower than expected severities in all of the major casualty lines, which represents a consistent trend in recent years. The unfavorable development in accident year 2011 was driven by: (i) higher than expected severities in the workers compensation and general liability lines; and (ii) higher than expected frequencies in the commercial auto line. This was partially offset by continued favorable development in the homeowners' liability line, due to lower expected severity for this year.

Reserves established for liability insurance include exposure to asbestos and environmental claims. 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 asbestos and environmental claims (for both case and IBNR reserves) resulting from lack of relevant historical data, the delayed and inconsistent reporting patterns associated with these claims, and uncertainty as to the number and identity of claimants and complex legal and coverage issues. Legal issues that arise in asbestos and 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 asbestos and 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 losses and loss expense reserves expected to be paid in future periods.

The following table details our losses and loss expense reserves for various asbestos and environmental claims:



	2014
($ in millions)	Gross		Net
Asbestos	$	8.8	7.3
Landfill sites	11.5		6.6
Leaking underground storage tanks	10.4		9.1
Total	$	30.7	23.0

Estimating IBNR reserves for asbestos and environmental claims is difficult because of the delayed and inconsistent reporting patterns associated with these claims. In addition, there are significant uncertainties associated with estimating critical assumptions, such as average clean-up costs, third-party costs, potentially responsible party shares, allocation of damages, litigation and coverage costs, and potential state and federal legislative changes. Normal historically based actuarial approaches cannot be applied to asbestos and environmental claims because past loss history is not indicative of future potential asbestos and environmental losses. In addition, while certain alternative 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 asbestos and environmental incurred losses and loss expenses and related reserves thereon:



	2014					2013				2012
($ in thousands)	Gross			Net		Gross		Net		Gross		Net
Asbestos
Reserves for losses and loss expenses at beginning of year	$	8,897		7,518		9,170		7,791		8,412		6,586
Incurred losses and loss expenses	60			—		—		—		1,696		2,000
Less: losses and loss expenses paid	(206		)	(204	)	(273	)	(273	)	(938	)	(795	)
Reserves for losses and loss expenses at the end of year	$	8,751		7,314		8,897		7,518		9,170		7,791

Environmental
Reserves for losses and loss expenses at beginning of year	$	23,867		17,649		26,405		19,978		27,600		21,330
Incurred losses and loss expenses	107			—		347		68		1,363		1,000
Less: losses and loss expenses paid	(2,072		)	(1,969	)	(2,885	)	(2,397	)	(2,558	)	(2,352	)
Reserves for losses and loss expenses at the end of year	$	21,902		15,680		23,867		17,649		26,405		19,978

Total Asbestos and Environmental Claims
Reserves for losses and loss expenses at beginning of year	$	32,764		25,167		35,575		27,769		36,012		27,916
Incurred losses and loss expenses	167			—		347		68		3,059		3,000
Less: losses and loss expenses paid	(2,278		)	(2,173	)	(3,158	)	(2,670	)	(3,496	)	(3,147	)
Reserves for losses and loss expenses at the end of year	$	30,653		22,994		32,764		25,167		35,575		27,769