9.	Liability for Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:


	Years Ended December 31,
(Dollars in thousands)	2014			2013			2012
Balance at beginning of period	$	779,466		$	879,114		$	971,377
Less: Ceded reinsurance receivables		192,491			240,566			283,652

Net balance at beginning of period		586,975			638,548			687,725
Incurred losses and loss adjustment expenses related to:
Current year		153,994			140,873			149,183
Prior years		(16,433	)		(7,882	)		4,445

Total incurred losses and loss adjustment expenses		137,561			132,991			153,628

Paid losses and loss adjustment expenses related to:
Current year		55,485			50,732			52,164
Prior years		116,780			133,832			150,641

Total paid losses and loss adjustment expenses		172,265			184,564			202,805

Net balance at end of period		552,271			586,975			638,548
Plus: Ceded reinsurance receivables		123,201			192,491			240,566

Balance at end of period	$	675,472		$	779,466		$	879,114

When analyzing loss reserves and prior year development, the Company considers many factors, including the frequency and severity of claims, loss trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.

During 2014, the Company reduced its prior accident year loss reserves by $16.4 million, which consisted of a $12.5 million decrease related to Insurance Operations and a $3.9 million decrease related to Reinsurance Operations.

The $12.5 million reduction of prior accident year loss reserves related to Insurance Operations primarily consisted of the following:

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Property: A $2.1 million increase due to higher than expected emergence on non-catastrophe claims primarily in accident years 2007, 2012, and 2013.

•

General Liability: A $3.1 million reduction due to less than anticipated frequency in accident year 2001 and less than anticipated frequency and severity on claims from accident years 2007 through 2010 partially offset by greater than anticipated loss emergence in accident year 2013.

•

Asbestos and Environmental: A $7.1 million increase related to policies written prior to 1990 as a result of recent severity being higher than expected due to faster erosion of underlying policy limits.

•

Professional: A $19.4 million reduction primarily due to expected loss emergence being much less than anticipated for accident years 2007 through 2011.

•

Umbrella: A $2.7 million decrease primarily driven by less than anticipated frequency in accident years 2002 through 2007.

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Commercial Auto: A $3.6 million increase primarily related to accident years 2011 through 2013. Larger vehicles were written prior to 2014 and industry loss development factors were used to project losses.

The $3.9 million reduction of prior accident year loss reserves related to Reinsurance Operations was primarily due to better than anticipated loss emergence on property lines partially offset by adverse development related to commercial auto and higher than anticipated severity on the Company’s marine product.

During 2013, the Company reduced its prior accident year loss reserves by $7.9 million, which consisted of a $7.6 million decrease related to Insurance Operations and a $0.3 million decrease related to Reinsurance Operations.

The $7.6 million reduction of prior accident year loss reserves related to Insurance Operations primarily consisted of the following:

•

Property: A $9.2 million reduction primarily driven by better than expected development from accident years 2010, 2011, and 2012 related primarily to lower than expected non-catastrophe severity.

•

General Liability: A $6.7 million reduction primarily due to better than expected emergence in nearly all accident years between 2003 through 2011 partially offset by an increase to accident years 1998 through 2002 and 2012 due to higher than anticipated loss emergence.

•

Asbestos and Environmental: A $6.8 million increase primarily related to policies written prior to 1990.

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Professional: A $0.7 million increase primarily driven by $2.2 million increase in aggregate from unexpected loss emergence in accident years 2006 to 2008 and 2010 offset by $1.5 million of favorable emergence from accident years 1998 and 2011.

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Umbrella: A $1.1 million decrease primarily driven by better than expected loss emergence in accident years 2002 to 2010 offset by increases in 2011 and 2012.

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Commercial Auto: A $0.9 million increase primarily related to accident year 2011.

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Marine: A $0.9 million increase primarily related to accident years 2011 and 2012.

The $0.3 million reduction of prior accident year loss reserves related to Reinsurance Operations was primarily due to better than anticipated loss emergence on property lines partially offset by adverse development on director and officer, general liability, automobile, and marine.

During 2012, the Company increased its prior accident year loss reserves by $4.4 million, which consisted of a $4.2 million decrease related to Insurance Operations and an $8.7 million increase related to Reinsurance Operations.

The $4.2 million reduction of prior accident year loss reserves related to Insurance Operations primarily consisted of the following:

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General liability: A $6.3 million reduction primarily due to favorable emergence of $4.7 million on small business binding and $3.3 million on casualty brokerage exposures primarily in accident years 2002 through 2005. Partially offsetting these reductions were increases of $2.0 million on construction defect reserves in accident year 2007. The Company also decreased its reinsurance allowance by $0.7 million in this line due to changes in its reinsurance exposure on specifically identified claims and general decreases in ceded reserves.

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Umbrella: A $0.7 million reduction primarily due to continued favorable emergence. Umbrella coverage typically attaches to other coverage lines, so these net decreases follow the decreases in general liability above.

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Property: A $1.2 million increase primarily related to accident year 2011 due to greater than expected loss emergence on a large sinkhole claim.

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Commercial Auto: A $1.2 million increase primarily driven by continued loss emergence on casualty brokerage exposures.

The $8.7 million increase in prior accident year loss reserves related to Reinsurance Operations primarily consisted of the following:

•

Workers’ Compensation: An $8.3 million increase in workers’ compensation lines primarily related to accident years 2009 and 2010 driven by increased frequency and severity. As a result of these increased losses, the Company recorded $6.0 million in additional premium related to these treaties.

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Marine: A $2.7 million increase in marine lines primarily related to accident year 2011 primarily due to higher than expected reported losses.

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Commercial Auto: A $1.3 million increase in auto liability lines primarily related to accident year 2009 resulting from further unexpected development on non-standard auto treaties which were not renewed.

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Property: A $3.4 million decrease in property lines primarily related to accident years 2009 and 2011 as a result of further development on worldwide catastrophe treaties.

Prior to 2001, the Company underwrote multi-peril business insuring general contractors, developers, and sub-contractors primarily involved in residential construction that has resulted in significant exposure to construction defect (“CD”) claims. The Company’s reserves for CD claims ($69.8 million and $70.5 million as of December 31, 2014 and 2013, net of reinsurance, respectively) are established based upon management’s best estimate in consideration of known facts, existing case law and generally accepted actuarial methodologies. However, due to the inherent uncertainty concerning this type of business, the ultimate exposure for these claims may vary significantly from the amounts currently recorded.

The Company has exposure to asbestos & environmental (“A&E”) claims. The asbestos exposure primarily arises from the sale of product liability insurance, and the environmental exposure arises from the sale of general liability and commercial multi-peril insurance. In establishing the liability for unpaid losses and loss adjustment expenses related to A&E exposures, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated regularly. Case law continues to evolve for such claims, and uncertainty exists about the outcome of coverage litigation and whether past claim experience will be representative of future claim experience. Included in net unpaid losses and loss adjustment expenses as of December 31, 2014, 2013, and 2012 were IBNR reserves of $26.4 million, $18.2 million, and $14.6 million, respectively, and case reserves of approximately $4.8 million, $4.8 million, and $5.5 million, respectively, for known A&E-related claims.

The following table shows the Company’s gross reserves for A&E losses:


	Years Ended December 31,
(Dollars in thousands)	2014		2013		2012
Gross reserve for A&E losses and loss adjustment expenses—beginning of period	$	50,155	$	44,767	$	50,601
Plus: Incurred losses and loss adjustment expenses—case reserves		4,333		2,154		7,687
Plus: Incurred losses and loss adjustment expenses—IBNR		7,340		5,961		(5,860	)
Less: Payments		5,293		2,727		7,661

Gross reserves for A&E losses and loss adjustment expenses—end of period	$	56,535	$	50,155	$	44,767

The following table shows the Company’s net reserves for A&E losses:


	Years Ended December 31,
(Dollars in thousands)	2014		2013		2012
Net reserve for A&E losses and loss adjustment expenses—beginning of period	$	23,038	$	20,134	$	25,285
Plus: Incurred losses and loss adjustment expenses—case reserves		2,754		1,351		6,934
Plus: Incurred losses and loss adjustment expenses—IBNR		8,241		3,506		(5,683	)
Less: Payments		2,848		1,953		6,402

Net reserves for A&E losses and loss adjustment expenses—end of period	$	31,185	$	23,038	$	20,134

Establishing reserves for A&E and other mass tort claims involves more judgment than other types of claims due to, among other things, inconsistent court decisions, an increase in bankruptcy filings as a result of asbestos-related liabilities, and judicial interpretations that often expand theories of recovery and broaden the scope of coverage. The insurance industry continues to receive a substantial number of asbestos-related bodily injury claims, with an increasing focus being directed toward other parties, including installers of products containing asbestos rather than against asbestos manufacturers. This shift has resulted in significant insurance coverage litigation implicating applicable coverage defenses or determinations, if any, including but not limited to, determinations as to whether or not an asbestos-related bodily injury claim is subject to aggregate limits of liability found in most comprehensive general liability policies.

In 2009, one of the Company’s insurance companies entered into a settlement agreement to resolve asbestos related coverage litigation related to approximately 3,900 existing asbestos-related bodily injury claims and future claims. The settlement was approved by the Court and a final order was issued in September 2014.

As of December 31, 2014, 2013, and 2012, the survival ratio on a gross basis for the Company’s open A&E claims was 10.8 years, 11.3 years, and 11.3 years, respectively. As of December 31, 2014, 2013, and 2012, the survival ratio on a net basis for the Company’s open A&E claims was 8.4 years, 6.7 years, and 7.0 years, respectively. The survival ratio, which is the ratio of gross or net reserves to the 3-year average of annual paid claims, is a financial measure that indicates how long the current amount of gross or net reserves are expected to last based on the current rate of paid claims.