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)	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	243,103			235,806
Prior years	(15,617		)	(6,087		)
Total incurred losses and settlement expenses	227,486			229,719

Paid losses and settlement expenses related to:
Current year	68,394			65,714
Prior years	135,560			139,625
Total paid losses and settlement expenses	203,954			205,339

Net reserves at end of period	764,720			725,544
Plus ceded reserves at end of period	34,642			31,148
Re-valuation due to foreign currency exchange rates	(656		)	177
Gross reserves at end of period	$	798,706		$	756,869

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 six months ended June 30, 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 June 30, 2019 estimate of loss and settlement expense reserves for accident years 2018 and prior decreased $14.6 million from the estimate at December 31, 2018. This decrease represents 2.7 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 workers' compensation and commercial auto liability lines of business were the largest contributors to favorable development. Favorable development in the workers' compensation line of business is the result of a decrease in estimated ultimate average severity for accident years 2002-2018, excluding 2015. Favorable development in the commercial auto liability line of business was a result of decreases in ultimate frequency and severity estimates for accident years 2016-2018. Personal auto liability experienced adverse development as estimated ultimate severity increased in accident years 2014-2018, and homeowners experienced adverse development as estimated ultimate severity increased in accident years 2015-2018, with 2018 also seeing an increase in estimated ultimate frequency.

For the reinsurance segment, the June 30, 2019 estimate of loss and settlement expense reserves for accident years 2018 and prior decreased $1.0 million from the estimate at December 31, 2018. This decrease represents 0.4 percent of the December 31, 2018 gross carried reserves and is primarily attributed to better than expected experience on global excess contracts, partially offset by adverse development on several large losses under a 2018 property per risk excess contract, adverse development on a 2014 casualty pro rata contract, and a small amount of adverse development on Mutual Re business.

2018 Development

For the property and casualty insurance segment, the June 30, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $5.3 million from the estimate at December 31, 2017. This decrease represented 1.1 percent of the December 31, 2017 gross carried reserves and was primarily attributed to decreases in the ultimate loss and settlement expense ratios for several accident years in the other liability line of business due to reductions in expected ultimate frequency and/or severity. The auto physical damage, workers' compensation and homeowners lines of business had relatively small amounts of adverse development. The adverse development in the auto physical damage line of business was the result of an increase in the accident year 2017 ultimate loss and settlement expense ratio after observing higher than expected reported severity for non-storm claims, while the adverse development in the workers' compensation line of business was driven by an upwards adjustment to the accident year 2017 ultimate loss and settlement expense ratio following a second quarter revision in the ultimate frequency and severity assumptions.

For the reinsurance segment, the June 30, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $801,000 from the estimate at December 31, 2017. This decrease represented 0.3 percent of the December 31, 2017 gross carried reserves and was primarily attributed to lower ultimate loss estimates impacting accident years 2013-2017 for the catastrophe and per risk excess, property pro rata and ocean marine pro rata lines of business. The favorable development was partially offset by adverse development on casualty excess, property/casualty global excess and pro rata, and aggregate excess contracts for years 2004, 2007, 2012, 2014 and 2017, whose ultimates were increased in response to higher than expected reported losses.