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.



	Nine months ended September 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	340,706			325,211
Prior years	(17,617		)	(29,109		)
Total incurred losses and settlement expenses	323,089			296,102

Paid losses and settlement expenses related to:
Current year	120,053			112,283
Prior years	173,986			161,888
Total paid losses and settlement expenses	294,039			274,171

Net reserves at end of period	700,831			679,703
Plus ceded reserves at end of period	25,348			21,983
Re-valuation due to foreign currency exchange rates	282			(1,121		)
Gross reserves at end of period	$	726,461		$	700,565

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.

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 nine months ended September 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 September 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $15.6 million from the estimate at December 31, 2016. This decrease represents 3.2 percent of the December 31, 2016 gross carried reserves and is primarily attributed to reductions in prior year ultimate loss ratios for every line of business except commercial auto liability. The other liability line of business was the largest contributor to favorable development. The ultimate loss ratios for this line were decreased slightly for most accident years from 2003 through 2016 due to declines in expected ultimate claim frequency and/or severity. Due to increases in projected ultimate claim frequency and severity, the ultimate loss ratios in the commercial auto line of business were increased for accident years 2013 through 2016, producing adverse reserve development for that line of business. Included in the development amount is adverse development experienced in the other liability line of business stemming from the settlement of claims for past and future legal fees and losses on a multi-year asbestos exposure associated with a former insured, and a slight strengthening of remaining reserves.

For the reinsurance segment, the September 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $2.1 million from the estimate at December 31, 2016. This decrease represents 1.0 percent of the December 31, 2016 gross carried reserves and is primarily attributed to prior year reserve releases in the per risk excess, property/casualty global excess and property/casualty global pro rata contract types.

2016 Development

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. In connection with this change in reserving methodology, there was a reallocation of incurred but not reported (IBNR) loss and allocated settlement expense reserves from prior accident years to the current accident year in multiple lines of business. This change resulted in the movement of approximately $5.6 million of reserves from prior accident years to the current accident year that is reported as favorable development; however, this development is "mechanical in nature", and did not have an impact on earnings because the total amount of carried reserves did not change.

For the property and casualty insurance segment, the September 30, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $22.2 million from the estimate at December 31, 2015. Excluding the $5.6 million of "mechanical" favorable development that resulted from the change in reserving methodology noted above, the implied amount of favorable development that had an impact on earnings was approximately $16.6 million. This decrease represented 3.5 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, commercial property and homeowners (workers' compensation and other liability lines of business were the largest contributors to favorable development). As noted above, the change in bulk reserving methodology implemented on September 30, 2016 resulted in the movement of a significant amount of settlement expense reserves to loss reserves, and a reallocation of reserves between current and prior accident years. Other liability accounted for most of the favorable development on settlement expense reserves.

For the reinsurance segment, the September 30, 2016 estimate of loss and settlement expense reserves for accident years 2015 and prior decreased $6.9 million from the estimate at December 31, 2015. This decrease represented 3.5 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.