RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:

Reserves for unpaid losses and loss adjustment expenses on MPL, property and casualty and workers’ compensation business represent management’s estimate of ultimate losses and loss adjustment expenses and fall within an actuarially determined range of reasonably expected ultimate unpaid losses and loss adjustment expenses. Reserves for unpaid losses and loss adjustment expenses are estimated based on both company-specific and industry experience, and assumptions and projections as to claims frequency, severity, and inflationary trends and settlement payments. Such estimates may vary significantly from the eventual outcome. In management’s judgment, information currently available has been appropriately considered in estimating the loss reserves and reinsurance recoverable of the insurance subsidiaries.

Management prepares its statutory financial statements of Physicians in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance. Conversely, management prepares its statutory financial statements for Citation in accordance with accounting practices prescribed or permitted by the California Department of Insurance. Prescribed statutory accounting practices include guidelines contained in various publications of the National Association of Insurance Commissioners, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The prescribed accounting practices of the Ohio Department of Insurance do not allow for discounting of claim liabilities.

Activity in the reserve for unpaid claims and claim adjustment expenses was as follows for each of the years ended December 31 (in thousands):



	2011			2010			2009
Balance at January 1	$	22,816		$	24,175		$	27,773
Less reinsurance recoverable	(13,987		)	(14,527		)	(15,877		)
Net balance at January 1	8,829			9,648			11,896
Incurred loss and loss adjustment expense (recovery) for prior accident year claims	(223		)	128			(1,345		)
Payments for claims occurring during prior accident years	(606		)	(947		)	(903		)
Net change for the year	(829		)	(819		)	(2,248		)
Net balance at December 31	8,000			8,829			9,648
Plus reinsurance recoverable	15,292			13,987			14,527
Balance at December 31	$	23,292		$	22,816		$	24,175

Physicians did not report any material development in its reserves during 2011 or 2010 but reported positive development of $1.3 million during 2009, in its medical professional line of business. There were no material changes in reserves within Citation during 2011 or 2010. However, in 2009, Citation’s property and casualty line reported positive development of $2.3 million offset by adverse development in its workers’ compensation line of $2.3 million.