Reserves for Losses and Loss Expenses

The table below provides a reconciliation of the beginning and ending reserve balances:



(In thousands)	2014			2013			2012
Net reserves at beginning of year	$	8,683,797		$	8,411,851		$	8,172,112
Net provision for losses and loss expenses:
Claims occuring during the current year(1)	3,495,825			3,221,393			2,997,995
Decrease in estimates for claims occurring in prior years(2)(3)	(75,764		)	(78,810		)	(102,571		)
Loss reserve discount accretion(4)	70,506			54,441			53,055
Total	3,490,567			3,197,024			2,948,479
Net payments for claims:
Current year	898,944			822,787			698,834
Prior year	2,216,283			2,055,284			2,010,101
Total	3,115,227			2,878,071			2,708,935
Foreign currency translation	(88,496		)	(47,007		)	195
Net reserves at end of year	8,970,641			8,683,797			8,411,851
Ceded reserve at end of year	1,399,060			1,397,144			1,339,235
Gross reserves at end of year	$	10,369,701		$	10,080,941		$	9,751,086

_______________________________________


(1)	Claims occurring during the current year are net of loss reserve discounts of $21,306,000, $22,680,000, and $26,078,000 in 2014, 2013 and 2012, respectively.


(2)	The decrease in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $116,866,000, $77,430,000 and $100,667,000 in 2014, 2013 and 2012, respectively.


(3)	For certain retrospectively rated insurance polices and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable reserve development, net of additional and return premiums, was $85 million, $98 million and $103 million in 2014, 2013 and 2012, respectively.


(4)	In 2014, the Company entered into a commutation agreement that resulted in a reduction in prior year workers' compensation reserves of $30 million on an undiscounted basis and $12 million on a discounted basis.

For the year ended December 31, 2014, estimates for claims occurring in prior years (net of additional and return premiums) decreased by $85 million. The favorable reserve development in 2014 was primarily attributable to domestic other liability business for accident years 2006 through 2010, primarily related to excess and surplus lines casualty business. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

Favorable development in 2013 was primarily attributable to accident years 2006 through 2012 and included favorable development of $39 million for other liability business, $32 million for reinsurance assumed liability business, $22 million for workers’ compensation, $18 million for commercial property and $24 million for other lines of business. The 2013 favorable development was partially offset by unfavorable development of $23 million for commercial automobile business and $14 million for products liability business.

Favorable reserve development in 2012 was primarily attributable to improved claim frequency (i.e., number of reported claims per unit of exposure), especially in the excess and surplus casualty business.

Environmental and Asbestos — To date, known environmental and asbestos claims have not had a material impact on the Company’s operations, because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental or asbestos exposures prior to 1986 when an absolute exclusion was incorporated into standard policy language.

The Company’s net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims was $36 million at December 31, 2014 and 2013. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $56 million and $59 million at December 31, 2014 and 2013, respectively. Increases in net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $4 million, $5 million and $2 million in 2014, 2013 and 2012, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $3 million in 2014, $3 million in 2013 and $2 million in 2012. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.

Discounting — The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. At December 31, 2014, the discount rates by year ranged from 2.0% to 6.5% with a weighted average discount rate of 4.2%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $746 million, $837 million and $867 million at December 31, 2014, 2013 and 2012, respectively.