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)	2019			2018
Gross reserves at beginning of year	$	777,190		$	732,612
Re-valuation due to foreign currency exchange rates	(593		)	525
Less ceded reserves at beginning of year	36,595			30,923
Net reserves at beginning of year	741,188			701,164

Incurred losses and settlement expenses related to:
Current year	118,259			116,204
Prior years	(13,290		)	(5,576		)
Total incurred losses and settlement expenses	104,969			110,628

Paid losses and settlement expenses related to:
Current year	23,608			24,262
Prior years	76,412			81,877
Total paid losses and settlement expenses	100,020			106,139

Net reserves at end of period	746,137			705,653
Plus ceded reserves at end of period	34,927			30,549
Re-valuation due to foreign currency exchange rates	(671		)	853
Gross reserves at end of period	$	780,393		$	737,055

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. 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, 2019 and 2018. 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.

2019 Development

For the property and casualty insurance segment, the March 31, 2019 estimate of loss and settlement expense reserves for accident years 2018 and prior decreased $9.6 million from the estimate at December 31, 2018. This decrease represents 1.8 percent of the December 31, 2018 gross carried reserves and is primarily attributed to reductions in prior year ultimate loss ratios for most lines of business except personal auto liability and homeowners. The commercial auto liability and workers' compensation lines of business were the largest contributors to favorable development. Favorable development in the commercial auto liability line of business was a result of decreases in ultimate severity estimates for accident years 2014, 2016, 2017 and 2018. Favorable development in the workers compensation line of business is the result of a decrease in estimated ultimate frequency and severity for accident year 2018, and decreases in estimated ultimate severity for several prior accident years except 2015 and 2016, which experienced adverse development. Personal auto liability and homeowners experienced adverse development as estimated ultimate severity increased for accident year 2018.

For the reinsurance segment, the March 31, 2019 estimate of loss and settlement expense reserves for accident years 2018 and prior decreased $3.6 million from the estimate at December 31, 2018. This decrease represents 1.5 percent of the December 31, 2018 gross carried reserves and is primarily attributed to lower ultimate losses impacting accident years 2003-2015 and 2018 for casualty excess contracts and accident years 2016-2018 for property-casualty global excess contracts.

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 represented 0.4 percent of the December 31, 2017 gross carried reserves and was 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 line 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 increased $3.4 million from the estimate at December 31, 2017. This increase represented 1.5 percent of the December 31, 2017 gross carried reserves and was 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.