LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES

The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company. Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.



	Six months ended June 30,
($ in thousands)	2017			2016
Gross reserves at beginning of year	$	690,532		$	678,774
Re-valuation due to foreign currency exchange rates	(1,913		)	(2,475		)
Less ceded reserves at beginning of year	20,664			23,477
Net reserves at beginning of year	671,781			657,772

Incurred losses and settlement expenses related to:
Current year	216,710			203,800
Prior years	(13,197		)	(15,871		)
Total incurred losses and settlement expenses	203,513			187,929

Paid losses and settlement expenses related to:
Current year	66,662			57,389
Prior years	119,270			118,287
Total paid losses and settlement expenses	185,932			175,676

Net reserves at end of period	689,362			670,025
Plus ceded reserves at end of period	20,430			22,409
Re-valuation due to foreign currency exchange rates	(301		)	(1,596		)
Gross reserves at end of period	$	709,491		$	690,838

There is an inherent amount of uncertainty involved in the establishment of insurance liabilities. This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years. For this reason, carried reserves for these accident years reflect prudently conservative assumptions. As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur. However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial.

During the third quarter of 2016, management implemented a new reserving methodology for the determination of direct bulk reserves in the property and casualty insurance segment. The new methodology, which is referred to as the accident year ultimate estimate approach, better conforms to industry practices and provides increased transparency of the drivers of the property and casualty insurance segment's performance.

Changes in reserve estimates are reflected in net income in the year such changes are recorded. Following is an analysis of the reserve development the Company experienced during the six months ended June 30, 2017 and 2016. Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.

2017 Development

For the property and casualty insurance segment, the June 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $9.3 million from the estimate at December 31, 2016. This decrease represents 1.9% of the December 31, 2016 gross carried reserves and is primarily attributed to reductions in prior year ultimate loss and settlement ratios for most lines of business except commercial auto liability. The other liability line of business was the largest contributor to favorable development. The ultimate loss and settlement ratios for accident years 2004 through 2016 were decreased slightly due to declines in expected ultimate claim frequency and/or severity. Due to increases in projected ultimate claim frequency and severity, the ultimate loss and settlement ratios in the commercial auto line of business were increased for accident years 2012 through 2016, producing adverse reserve development for that line of business. Prior years' asbestos settlement expense reserves in the other liability line of business increased during the first six months of 2017 in connection with the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured.

For the reinsurance segment, the June 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $3.9 million from the estimate at December 31, 2016. This decrease represents 1.9% of the December 31, 2016 gross carried reserves and is primarily attributed to prior year reserve releases in the casualty excess and property/casualty global excess contract types.

2016 Development

For the property and casualty insurance segment, the June 30, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $9.8 million from the estimate at December 31, 2015. This decrease represented 2.0 percent of the December 31, 2015 gross carried reserves and was primarily attributed to better than expected outcomes for all lines of business except commercial auto liability and commercial property (workers' compensation, personal auto liability and other liability lines of business were the largest contributors to favorable development). Commercial auto liability experienced adverse development on both claims which had been reported in prior years and emerged incurred but not reported (IBNR) claims, while commercial property experienced adverse development on emerged IBNR claims. Prior years' asbestos loss and settlement expense reserves were also strengthened during the first quarter of 2016, producing some adverse reserve development in the other liability line of business.

For the reinsurance segment, the June 30, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $6.1 million from the estimate at December 31, 2015. This decrease represented 3.1 percent of the December 31, 2015 gross carried reserves, with slightly less than half of the favorable development coming from the Mutual Reinsurance Bureau underwriting association (MRB), which included a decrease in bulk reserves.