6. Liability for Loss and Loss Adjustment Expenses

Activity in liability for loss and LAE in 2011, 2010 and 2009 is summarized as follows (in millions):


	2011			2010			2009
Reserves as of January 1	$	2,328.7		$	2,521.0		$	2,578.6
Less: reinsurance recoverables*		847.4			947.7			1,008.3

Net reserves		1,481.3			1,573.3			1,570.3

Incurred loss, net of reinsurance, related to:
Current year		455.8			411.6			460.0
Prior years		(25.8	)		(33.7	)		(17.9	)

Total incurred loss, net of reinsurance		430.0			377.9			442.1

Paid loss, net of reinsurance, related to:
Current year		84.4			81.2			83.5
Prior years		345.7			388.7			355.6

Total paid loss, net of reinsurance		430.1			469.9			439.1

Reserves, net of reinsurance recoverables, as of December 31		1,481.2			1,481.3			1,573.3
Reinsurance recoverables as of December 31*		831.8			847.4			947.7

Reserves, gross of reinsurance recoverables, as of December 31	$	2,313.0		$	2,328.7		$	2,521.0

*	Reinsurance recoverables in this table include only ceded loss reserves.

Gross Reserves. Gross loss and LAE reserves as of December 31, 2011 decreased slightly from December 31, 2010, primarily reflecting reserve decreases in the casualty and workers’ compensation lines of business, largely offset by reserve increases in the property lines of business. The decrease in the casualty gross loss and LAE reserves was $39.6 million, and primarily reflects the impact of releases in gross loss and LAE reserves by RSUI during 2011 related to prior accident years, partially offset by the impact of increases in gross loss and LAE reserves by CATA during 2011 related to prior accident years. The decrease in workers’ compensation gross loss and LAE reserves was $19.2 million, and primarily reflects the impact of PCC ceasing to solicit new or renewal business on a direct basis commencing August 1, 2009, partially offset by an increase in gross loss and LAE reserves by PCC as of June 30, 2011 and December 31, 2011 related to prior accident years. The increase in property gross loss and LAE reserves was $42.3 million, and is due to increases in case reserves related primarily to significant catastrophe and other large losses incurred in 2011, partially offset by claim payments made by RSUI in 2011 related to catastrophe losses in prior years. Such claim payments caused RSUI to reduce its case reserves from prior accident years, primarily related to 2008 third quarter hurricane losses.

Gross loss and LAE reserves as of December 31, 2010 decreased $192.3 million from December 31, 2009 due primarily to reserve decreases in the property lines of business of $99.0 million and reserve decreases in workers’ compensation lines of business of $59.2 million. The decrease in property gross loss and LAE reserves is mainly due to loss payments made by RSUI on hurricane related losses incurred in prior years. The decrease in workers’ compensation gross loss and LAE reserves primarily reflects the impact of PCC’s decision in June 2009 to cease soliciting new or renewal business on a direct basis commencing August 1, 2009.

The above reserve changes included (decreases) increases prior year net reserves, which are summarized as follows (in millions):


	2011			2010
RSUI:
Net casualty reserve (releases)	$	(56.2	)	$	(33.9	)
Property and other, net		(3.3	)		(9.3	)

	$	(59.5	)	$	(43.2	)
CATA:
Net insurance reserve increases (releases)	$	5.0		$	(0.4	)
Reinsurance assumed reserve release		—			(3.5	)

	$	5.0		$	(3.9	)
PCC:
Net workers’ compensation increases	$	28.4		$	12.5
All other, net		0.3			0.9

	$	28.7		$	13.4
Total incurred related to prior years	$	(25.8	)	$	(33.7	)

The more significant prior year adjustments affecting 2011 and 2010 are summarized as follows:

•

For RSUI, loss and LAE for 2011 reflect a net $56.2 million release of prior accident year casualty loss reserves, compared with a net $33.9 million release of prior accident year casualty loss reserves during 2010. The $56.2 million release relates primarily to the umbrella/excess, general liability and professional liability lines of business, primarily for the 2003 through 2008 accident years, and reflects favorable loss emergence, compared with loss emergence patterns assumed in earlier periods for such lines of business. Specifically, cumulative losses for such lines of business, which include both loss payments and case reserves, in respect of prior accident years were expected to be higher through the balance sheet date than the actual cumulative losses through that date. The amount of lower cumulative losses, expressed as a percentage of carried loss and LAE reserves at the beginning of the year, was 2.3 percent. Such reduction did not impact the assumptions used in estimating RSUI’s loss and LAE liabilities for its general liability and professional liability lines of business earned in 2011. Such reserve releases were partially offset by an increase in loss reserves in the directors and officers (“D&O”) liability line of business in the 2011 third quarter, primarily reflecting adverse legal developments associated with a large claim from the 2007 accident year. Such increase did not impact the assumptions used in estimating RSUI’s loss and LAE liabilities for its D&O liability line of business earned in 2011.

For RSUI, the $33.9 million net release of prior accident year casualty loss reserves in 2010 consisted of a $41.4 million reserve release, partially offset by a $7.5 million reserve increase. The $41.4 million reserve release relates primarily to the general liability and professional liability lines of business primarily for the 2003 through 2007 accident years and reflects favorable loss emergence, compared with loss emergence patterns assumed in earlier periods for such lines of business. The $7.5 million reserve increase in loss reserves related to an increase in estimated ultimate 2007 accident year losses for the D&O liability line of business, reflecting, in part, unfavorable loss emergence on certain sub-prime mortgage industry claims.

•

For RSUI, loss and LAE for 2011 and 2010 also include a net $3.3 million and $9.3 million release of prior accident year loss reserves, respectively, primarily related to a re-estimation of case and IBNR reserves in the property line of business. For 2011, the net $3.3 million reserve release primarily reflects significant net reserve releases in non-catastrophe property reserves and unallocated LAE, partially offset by reserve increases related to prior year catastrophes. For 2010, the net $9.3 million reserve release primarily reflects significant net reserve releases in non-catastrophe property reserves, partially offset by a $16.3 million reserve increase related to prior year catastrophes. Of the $16.3 million, $5.3 million was recorded in the 2010 second quarter and related to the third quarter 2008 hurricanes, and $11.0 million was recorded throughout 2010 and related to the third quarter 2005 hurricanes.

•

For CATA, loss and LAE for 2011 reflect a net $5.0 million increase of prior accident year loss reserves (related primarily to the casualty lines of business), compared with a $0.4 million release of prior accident year loss reserves during 2010 (related primarily to the surety lines of business). The $5.0 million net reserve increase consists of a $14.6 million increase in reserves related to certain specialty property and casualty classes of business through a program administrator in connection with a program where notice of termination of such program has been given (“Terminated Program Business”), partially offset by a $9.6 million net reserve release in certain of CATA’s casualty lines of business. The reserve increase in the Terminated Program Business reflects unfavorable loss emergence, primarily in the 2009 and 2010 accident years, compared with loss emergence patterns assumed in earlier periods for such business. The net $5.0 million increase of prior accident year loss reserves did not impact the assumptions used in estimating CATA’s loss and LAE liabilities for business earned in 2011.

•

For CATA, loss and LAE for 2010 reflect a $3.5 million reserve release reflecting favorable loss emergence for asbestos and environmental impairment claims that arose from reinsurance assumed by a subsidiary of CATA between 1969 and 1976, based on a reserve study that was completed in the 2010 second quarter.

•

For PCC, loss and LAE for 2011 reflect a $28.4 million increase of prior accident year workers’ compensation net loss reserves, compared with a $12.5 million reserve increase of prior accident year workers’ compensation loss reserves during 2010. Of the $28.4 million increase, $15.0 million was recorded in the 2011 second quarter and $13.4 million was recorded in the 2011 fourth quarter, as follows (in millions):


	Three months ended:				Twelve months ended
	June 30, 2011		December 31, 2011		December 31, 2011
Adverse claims emergence	$	10.0	$	4.2	$	14.2
Increases in allocated LAE		3.0		6.4		9.4
Increases in unallocated LAE		—		2.8		2.8
Decrease in ceded loss and LAE reserves		2.0		—		2.0

	$	15.0	$	13.4	$	28.4

PCC’s adverse claims emergence relates to an unanticipated increase in medical claims emergence and an absence of anticipated favorable indemnity claims emergence. PCC had anticipated favorable indemnity claims emergence based upon prior claims development experience which indicated that injured workers would be returning to work, curtailing lost wage costs. PCC believes the weak California employment environment has hindered the ability of injured workers to return to work and indirectly influenced indemnity claims. The increases in allocated and unallocated LAE reserves primarily reflect increased use of outside counsel to assist in the settlement process and higher litigation costs caused by recent Workers’ Compensation Appeals Board decisions. The decrease in ceded loss and LAE reserves was based on a second quarter 2011 review of reinsurance coverage estimates, which also resulted in a $1.1 million decrease in ceded premiums earned, thereby increasing net premiums earned in the 2011 second quarter.

For PCC, the $12.5 million increase in loss and LAE for 2010 relates primarily to a decrease in ceded loss and LAE reserves based on a fourth quarter 2010 review of reinsurance coverage estimates and, to a lesser extent, an increase in unallocated LAE reserves, which also resulted in a $5.0 million decrease in ceded premiums earned, thereby increasing net premiums earned in 2010.