3. RESERVE FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE

Reserves for losses and LAE.

Activity in the reserve for losses and LAE is summarized for the periods indicated:


	At December 31,
(Dollars in thousands)	2011			2010			2009
Gross reserves at January 1	$	9,340,183		$	8,937,858		$	8,840,660
Less reinsurance recoverables		(689,445	)		(641,269	)		(690,509	)
Net reserves at January 1		8,650,738			8,296,589			8,150,151

Incurred related to:
Current year		3,722,513			2,976,578			2,245,220
Prior years		3,691			(30,866	)		128,838
Total incurred losses and LAE		3,726,204			2,945,712			2,374,058

Paid related to:
Current year		810,530			568,330			388,172
Prior years		2,008,307			1,988,749			1,997,216
Total paid losses and LAE		2,818,837			2,557,079			2,385,388

Foreign exchange/translation adjustment		(15,888	)		(34,484	)		157,768

Net reserves at December 31		9,542,217			8,650,738			8,296,589
Plus reinsurance recoverables		580,998			689,445			641,269
Gross reserves at December 31	$	10,123,215		$	9,340,183		$	8,937,858

Prior years' reserves increased by $3,691 thousand, decreased by $30,866 thousand and increased by $128,838 thousand for the years ended December 31, 2011, 2010 and 2009, respectively. The increase for 2011 was attributable to a $113,833 thousand increase in insurance and U.S. reinsurance business, primarily related to development on contractors' liability, excess casualty and California workers compensation reserves, partially offset by the $110,142 thousand decrease in non-US reinsurance business, primarily related to favorable development on non-catastrophe property reserves.

The decrease for 2010 was attributable to a $140,760 thousand decrease in non-US reinsurance business (Bermuda and International), partially offset by the $109,894 thousand increase in insurance and U.S. reinsurance business. The decrease in the non-U.S. reinsurance business was due to reserve studies that indicated net favorable reserve development, as well as reductions in loss estimates for prior year catastrophes. The increase in the US reinsurance is primarily due to reserve strengthening in casualty lines for construction liability claims and the increase in the insurance business is due to reserve strengthening on several terminated programs.

The increase for 2009 was attributable to a $59,019 thousand increase in the insurance business, primarily contractor liability exposures and $69,819 thousand in the reinsurance business, in both domestic and international, as a result of losses from sub-prime exposures and property, partially offset by favorable development on other casualty lines.

Reinsurance Receivables. Reinsurance receivables for both paid and recoverable on unpaid losses totaled $580,339 thousand and $684,718 thousand at December 31, 2011 and 2010, respectively. At December 31, 2011, $213,601 thousand, or 36.8% was receivable from C.V. Starr (Bermuda); $66,268 thousand, or 11.4%, was receivable from Transatlantic Reinsurance Company; $56,895 thousand, or 9.8%, was receivable from Berkley Insurance Company and $39,852 thousand, or 6.9%, was receivable from Munich Reinsurance Company. The receivable from C.V. Starr is fully collateralized by a trust agreement. No other retrocessionaire accounted for more than 5% of our receivables.

The Company continues to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. Environmental claims typically assert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.

The Company's reserves include an estimate of the Company's ultimate liability for A&E claims. The Company's A&E liabilities emanate from Mt. McKinley's direct insurance business and Everest Re's assumed reinsurance business. All of the contracts of insurance and reinsurance under which the Company has received claims during the past three years expired more than 20 years ago. There are significant uncertainties surrounding the Company's reserves for its A&E losses.

A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses with respect to A&E reserves on both a gross and net of reinsurance basis for the periods indicated:


	At December 31,
(Dollars in thousands)	2011			2010			2009
Gross basis:
Beginning of period reserves	$	554,790		$	638,674		$	786,843
Incurred losses		752			-			-
Paid losses		(55,631	)		(83,884	)		(148,169	)
End of period reserves	$	499,911		$	554,790		$	638,674

Net basis:
Beginning of period reserves	$	532,906		$	613,121		$	749,070
Incurred losses		764			-			429
Paid losses		(53,510	)		(80,215	)		(136,378	)
End of period reserves	$	480,160		$	532,906		$	613,121

At December 31, 2011, the gross reserves for A&E losses were comprised of $145,571 thousand representing case reserves reported by ceding companies, $102,934 thousand representing additional case reserves established by the Company on assumed reinsurance claims, $40,555 thousand representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $210,851 thousand representing IBNR reserves.

With respect to asbestos only, at December 31, 2011, the Company had gross asbestos loss reserves of $479,729 thousand, or 96.0%, of total A&E reserves, of which $382,334 thousand was for assumed business and $97,395 thousand was for direct business.

Future Policy Benefit Reserve.

Activity in the reserve for future policy benefits is summarized for the periods indicated:


	At December 31,
(Dollars in thousands)	2011			2010			2009
Balance at beginning of year	$	63,002		$	64,536		$	66,172
Liabilities assumed		176			172			324
Adjustments to reserves		8,449			2,944			8,835
Benefits paid in the current year		(4,440	)		(4,650	)		(10,795	)
Balance at end of year	$	67,187		$	63,002		$	64,536