RESERVE FOR LOSSES AND LOSS EXPENSES

The reserve for losses and loss expenses consists of the following:



	June 30, 2014		December 31, 2013
Outstanding loss reserves	$	1,543,506	$	1,520,867
Reserves for losses incurred but not reported	4,392,172		4,245,662
Reserve for losses and loss expenses	$	5,935,678	$	5,766,529

The table below is a reconciliation of the beginning and ending liability for unpaid losses and loss expenses. Losses incurred and paid are reflected net of reinsurance recoverables.



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Gross liability at beginning of period	$	5,856,798		$	5,673,220		$	5,766,529		$	5,645,549
Reinsurance recoverable at beginning of period	(1,280,525		)	(1,163,503		)	(1,234,504		)	(1,141,110		)
Net liability at beginning of period	4,576,273			4,509,717			4,532,025			4,504,439
Net losses incurred related to:
Current year	359,994			323,556			684,141			622,804
Prior years	(45,139		)	(48,428		)	(94,000		)	(92,498		)
Total incurred	314,855			275,128			590,141			530,306
Net paid losses related to:
Current year	23,065			21,003			26,808			24,584
Prior years	235,335			241,764			463,929			482,885
Total paid	258,400			262,767			490,737			507,469
Foreign exchange revaluation	1,208			(4,738		)	2,507			(9,936		)
Net liability at end of period	4,633,936			4,517,340			4,633,936			4,517,340
Reinsurance recoverable at end of period	1,301,742			1,179,525			1,301,742			1,179,525
Gross liability at end of period	$	5,935,678		$	5,696,865		$	5,935,678		$	5,696,865

For the three months ended June 30, 2014, the Company had net unfavorable prior year reserve development in the U.S. insurance segment and recorded net favorable prior year reserve development in the international insurance and reinsurance segments. The net unfavorable prior year reserve development in the U.S. insurance segment related primarily to the healthcare line of business, as well as adverse development on reported claims in the lawyers errors and omissions ("E&O") and primary casualty classes of business. The net favorable prior year reserve development in the international insurance and reinsurance segments was due to actual loss emergence being lower than initially expected.

For the six months ended June 30, 2014, the Company had net unfavorable prior year reserve development in the U.S. insurance segment and recorded net favorable prior year reserve development in the international insurance and reinsurance segments. The net unfavorable prior year reserve development in the U.S. insurance segment related to the healthcare line of business due to higher than expected loss frequency and severity in the medical malpractice class of business. The U.S. insurance segment also experienced adverse development on reported claims in the lawyers E&O class of business and the primary casualty class of business in the 2013 loss year. The net favorable prior year reserve development in the international insurance and reinsurance segments was due to actual loss emergence being lower than initially expected.

For the three months ended June 30, 2013, the Company had net favorable reserve development in each of its segments due to actual loss emergence being lower than initially expected. The majority of the net favorable reserve development was recognized in the 2007 through 2010 loss years across most lines of business. In addition, the reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years.

For the six months ended June 30, 2013, the Company had net favorable reserve development in its international and reinsurance segments due to actual loss emergence being lower than initially expected, primarily for loss years 2004 to 2008. The reinsurance segment recognized net favorable reserve development for the 2012 loss year due to the low level of reported property losses. This was partially offset by adverse development in the U.S. insurance segment in the 2011 and 2012 loss years for certain E&O and director’s and officers’ classes of business.

While the Company at times has experienced favorable reserve development in its insurance and reinsurance lines, there is no assurance that conditions and trends that have affected the development of liabilities in the past will continue. It is not appropriate to extrapolate future redundancies based on prior years’ development. The methodology of estimating loss reserves is periodically reviewed to ensure that the key assumptions used in the actuarial models continue to be appropriate.