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.



	Three months ended March 31,
($ in thousands)	2018			2017
Gross reserves at beginning of year	$	732,612		$	690,532
Re-valuation due to foreign currency exchange rates	525			(1,913		)
Less ceded reserves at beginning of year	30,923			20,664
Net reserves at beginning of year	701,164			671,781

Incurred losses and settlement expenses related to:
Current year	116,204			111,189
Prior years	(5,576		)	(14,904		)
Total incurred losses and settlement expenses	110,628			96,285

Paid losses and settlement expenses related to:
Current year	24,262			22,923
Prior years	81,877			69,826
Total paid losses and settlement expenses	106,139			92,749

Net reserves at end of period	705,653			675,317
Plus ceded reserves at end of period	30,549			20,788
Re-valuation due to foreign currency exchange rates	853			(976		)
Gross reserves at end of period	$	737,055		$	695,129

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 three months ended March 31, 2018 and 2017. 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.

2018 Development

For the property and casualty insurance segment, the March 31, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $2.1 million from the estimate at December 31, 2017. This decrease represents 0.4 percent of the December 31, 2017 gross carried reserves and is primarily attributed to decreases in the ultimate loss ratios for several accident years, including 2017, due to reductions in expected ultimate frequency and/or severity in the workers' compensation line of business. The commercial auto liability of business experienced adverse development due to higher than expected severity in the 2017 accident year.

For the reinsurance segment, the March 31, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $3.4 million from the estimate at December 31, 2017. This decrease represents 1.5 percent of the December 31, 2017 gross carried reserves and is primarily attributed to lower ultimate loss estimates impacting accident years 2014-2017 for the property pro rata, catastrophe and per risk excess, and property-casualty global excess lines of business. The favorable development was partially offset by adverse development on casualty excess contracts for years 2007, 2012, 2014 and 2017, whose ultimates were increased in response to higher than expected reported losses.

2017 Development

For the property and casualty insurance segment, the March 31, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $8.5 million from the estimate at December 31, 2016. This decrease represented 1.7 percent of the December 31, 2016 gross carried reserves and was primarily attributed to reductions in prior year ultimate loss ratios for most lines of business except commercial auto liability. The other liability and workers' compensation lines of business were the largest contributors to favorable development. The ultimate loss ratios for accident years 2001 through 2016 in the other liability line of business were decreased slightly due to declines in expected ultimate claim frequency and/or severity, while in workers' compensation the favorable development was concentrated in accident year 2016 as reported losses to date were materially less than anticipated in the original claim frequency and severity assumptions. 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 2012 through 2014 and 2016, producing adverse reserve development for that line of business. Prior years' asbestos settlement expense reserves were also strengthened producing adverse reserve development.

For the reinsurance segment, the March 31, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $6.4 million from the estimate at December 31, 2016. This decrease represented 3.2 percent of the December 31, 2016 gross carried reserves and was primarily attributed to favorable prior year reserve development in the casualty excess and property/casualty global excess contract types.