9. Reserves for Losses and Loss Adjustment Expenses

The following table provides a reconciliation of reserves for losses and loss adjustment expenses (“LAE”), net of reinsurance, to the gross amounts reported in the Consolidated Balance Sheets. Reinsurance recoverables in this note exclude paid loss recoverables of $106.5 million and $148.5 million as of September 30, 2012 and 2011, respectively:


	For the Nine Months Ended September 30,
(in millions)	2012			2011
Net reserves beginning of the year	$	2,336.7		$	2,253.0
Add:
Net reserves from assumed retroactive insurance contract ⁽¹⁾		13.0			0.0
Losses and LAE incurred during current calendar year, net of reinsurance:
Current accident year		545.7			662.8
Prior accident years		(17.8	)		1.6

Losses and LAE incurred during calendar year, net of reinsurance		527.9			664.4

Deduct:
Losses and LAE payments made during current calendar year, net of reinsurance:
Current accident year		111.9			153.2
Prior accident years		450.1			417.1

Losses and LAE payments made during current calendar year, net of reinsurance:		562.0			570.3

Change in participation interest ⁽²⁾		(3.1	)		31.2
Foreign exchange adjustments		5.4			12.0

Net reserves - end of period		2,317.9			2,390.3
Add:
Reinsurance recoverables on unpaid losses and LAE, end of period		910.0			959.3

Gross reserves - end of period	$	3,227.9		$	3,349.6

⁽¹⁾	Amount represents reserves assumed resulting from participation in Brazilian Motor Third-Party Liability Insurance Pool effective January 1, 2012.

⁽²⁾	Amount represents (decrease) increase in reserves due to change in syndicate participation.

Included in losses and LAE for the nine months ended September 30, 2012 was $17.8 million in favorable prior years’ loss reserve development comprised of the following: $33.5 million of favorable development in the Excess and Surplus Lines segment primarily driven by $23.6 million of favorable development in the general and products liability lines of business in accident years 2009 and prior, $3.1 million of favorable development in the property lines, primarily in accident year 2010 and $2.4 million of favorable development in the automobile liability lines of business, primarily in accident year 2009; $18.6 million of net unfavorable development in the Commercial Specialty segment driven by $24.9 million of unfavorable development in general liability due to increases in claim severity, $3.8 million of unfavorable development in the automobile liability lines of business, partially offset by $7.7 million of favorable development in workers compensation and $2.4 million of favorable development in short-tail lines; $4.5 million of net favorable development in the International Specialty segment primarily driven by $5.0 million of favorable development attributable to short-tail non-catastrophe losses, $0.3 million of favorable development in long-tail professional liability, partially offset by $0.8 million of unfavorable development related to short-tail catastrophe losses primarily due to the 2011 catastrophe events; $4.4 million of net favorable development in the Syndicate 1200 segment primarily driven by favorable development in the property facultative class of business, partially offset by unfavorable development in the general liability class of business; and $6.0 million of net unfavorable development in the Run-off Lines segment primarily due to $5.5 million of unfavorable development in asbestos driven by increasing defense costs, unfavorable development in other run-off lines, partially offset by favorable development in workers compensation and legacy PXRE claims.

Included in losses and LAE for the nine months ended September 30, 2011 was $1.6 million in unfavorable prior years’ loss reserve development comprised of the following: $17.8 million of favorable development in the Excess and Surplus Lines segment resulting from $13.2 million of favorable development in the general and products liability lines of business, $3.4 million of favorable development in the automobile liability lines of business and $1.2 million of favorable development primarily in the professional liability and property lines of business; $4.7 million of net unfavorable development in the Commercial Specialty segment primarily driven by $12.1 million of unfavorable development in general liability due primarily to increases in claim severity, partially offset by $4.1 million of favorable development in workers compensation and $3.7 million of favorable development in an assumed Directors and Officers program; $3.6 million of net favorable development in the International Specialty segment comprised of $3.9 million of favorable development attributable to short-tail non-catastrophe losses, $1.1 million of favorable development related to 2005 Hurricanes Ike and Gustav, partially offset by $1.4 million of unfavorable development attributable to the 2010 New Zealand earthquake; $14.8 million of unfavorable development in the Syndicate 1200 segment primarily attributable to $10.1 million of unfavorable development in the liability lines of business driven by deterioration in the professional indemnity and general liability classes of business related to a small number of specific claims and a reduction in the estimate of future reinsurance recoveries, coupled with $4.6 million of unfavorable development related to property lines of business where the claims experience was worse than expected; and $3.5 million of net unfavorable development in the Run-off Lines segment primarily due to $11.7 million of unfavorable development in asbestos and environmental lines, partially offset by the collection of a contribution settlement from another insurer for a California workers compensation indemnity claim, and favorable development in other lines. The asbestos and environmental unfavorable development is primarily attributable to $8.2 million for asbestos losses driven by increasing severities, defense costs and the settlement of a disputed reinsurance recoverable matter, and $3.5 million for environmental losses driven by one significant enviromental loss.

In the opinion of management, our reserves represent the best estimate of our ultimate liabilities, based on currently known facts, current law, current technology and assumptions considered reasonable where facts are not known. Due to the significant uncertainties and related management judgments, there can be no assurance that future loss development, favorable or unfavorable, will not occur.