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)	2015			2014		2013
Gross reserves for losses and loss expenses, at beginning of year	$	3,477,870		3,349,770		4,068,941
Less: reinsurance recoverable on unpaid losses and loss expenses, at beginning of year	571,978			540,839		1,409,755
Net reserves for losses and loss expenses, at beginning of year	2,905,892			2,808,931		2,659,186
Incurred losses and loss expenses for claims occurring in the:
Current year	1,217,550			1,216,770		1,147,263
Prior years	(69,009		)	(59,269	)	(25,525	)
Total incurred losses and loss expenses	1,148,541			1,157,501		1,121,738
Paid losses and loss expenses for claims occurring in the:
Current year	446,550			468,478		399,559
Prior years	641,174			592,062		572,434
Total paid losses and loss expenses	1,087,724			1,060,540		971,993
Net reserves for losses and loss expenses, at end of year	2,966,709			2,905,892		2,808,931
Add: Reinsurance recoverable on unpaid losses and loss expenses, at end of year	551,019			571,978		540,839
Gross reserves for losses and loss expenses at end of year	$	3,517,728		3,477,870		3,349,770

Our net losses and loss expense reserves increased by $60.8 million in 2015, $97.0 million in 2014, and $149.7 million in 2013. The losses and loss expense reserves are net of anticipated recoveries for salvage and subrogation claims, which amounted to $62.1 million for 2015, $65.1 million for 2014, and $61.0 million for 2013. 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, 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 2015, we experienced overall favorable loss development of $69.0 million, compared to $59.3 million in 2014, and $25.5 million in 2013. The following table summarizes the prior year development by line of business:



(Favorable)/Unfavorable Prior Year Development
($ in millions)	2015			2014		2013
General Liability	$	(51.0	)	(43.9	)	(20.0	)
Commercial Automobile	2.4			(4.1	)	(4.5	)
Workers Compensation	(37.0		)	—		23.5
Businessowners' Policies	2.2			1.9		(9.5	)
Commercial Property	(3.0		)	(2.1	)	(7.5	)
Homeowners	1.5			(4.0	)	(2.5	)
Personal Automobile	0.4			(10.8	)	(3.0	)
E&S	15.5			3.7		(2.0	)
Total	$	(69.0	)	(59.3	)	(25.5	)

The prior accident year development during 2015 was favorable by $69.0 million, which included $67.0 million of favorable casualty development and $2.0 million of favorable property development. The favorable casualty reserve development was largely driven by the general liability and workers compensation lines of business. For workers compensation, this was a significant change from 2014, during which period this line experienced no development. Our E&S Lines experienced unfavorable development of $15.5 million.

By accident year, the majority of the favorable development was attributable to accident years 2009 through 2013, driven by general liability and workers compensation. This favorable development was partially offset by unfavorable development in accident years 2012 through 2014, which was attributable to our E&S Lines.

The prior accident year development during 2014 was favorable by $59.3 million, which included $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 reserve development was largely driven by the general liability and personal automobile lines of business. These lines 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.

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 prior accident year development during 2013 was favorable by $25.5 million, which included $14.5 million of favorable casualty development and $11.0 million of 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 lines of business driven by higher than expected severities.

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:



	2015
($ in millions)	Gross		Net
Asbestos	$	8.0	6.8
Landfill sites	13.1		8.3
Leaking underground storage tanks	9.3		8.1
Total	$	30.4	23.2

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:



	2015					2014				2013
($ in thousands)	Gross			Net		Gross		Net		Gross		Net
Asbestos
Reserves for losses and loss expenses at beginning of year	$	8,751		7,314		8,897		7,518		9,170		7,791
Incurred losses and loss expenses	(428		)	(77	)	60		—		—		—
Less: losses and loss expenses paid	(299		)	(444	)	(206	)	(204	)	(273	)	(273	)
Reserves for losses and loss expenses at the end of year	$	8,024		6,793		8,751		7,314		8,897		7,518

Environmental
Reserves for losses and loss expenses at beginning of year	$	21,902		15,680		23,867		17,649		26,405		19,978
Incurred losses and loss expenses	3,396			3,397		107		—		347		68
Less: losses and loss expenses paid	(2,911		)	(2,709	)	(2,072	)	(1,969	)	(2,885	)	(2,397	)
Reserves for losses and loss expenses at the end of year	$	22,387		16,368		21,902		15,680		23,867		17,649

Total Asbestos and Environmental Claims
Reserves for losses and loss expenses at beginning of year	$	30,653		22,994		32,764		25,167		35,575		27,769
Incurred losses and loss expenses	2,968			3,320		167		—		347		68
Less: losses and loss expenses paid	(3,210		)	(3,153	)	(2,278	)	(2,173	)	(3,158	)	(2,670	)
Reserves for losses and loss expenses at the end of year	$	30,411		23,161		30,653		22,994		32,764		25,167