The reserving process requires management to continuously monitor and evaluate the life cycle of claims.  Our claims range from the very routine Private Passenger Automobileprivate passenger automobile “fender bender” to the highly complex and costly claims involving large tractor-trailer rigs and large-scale losses resulting from catastrophic events.  Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment.  The high limits coveredprovided by the Company’s Fleet Transportationfleet transportation liability policies provide for greater volatility in the reserving process for more serious claims.  Court rulings, legislative actions, geographic location of the claim under consideration and trends in jury awards also play a significant rol erole in the estimation process of larger claims.  The Company

Loss reserves related to certain permanent total disability (PTD) workers' compensation claims have been discounted to present value using tables provided by the National Council on Compensation Insurance which are based upon a pretax interest rate of 3.5% and adjusted for those portions of the losses retained by the insured.  The loss and LAE reserves at December 31, 20092010 have been reduced by approximately $6.7$6.5 million as a result of such discounting.  Had the Company not discounted loss and LAE reserves, pretax income would have been approximately $1.3$.2 million lowerhigher for the year ended December 31, 2009.2010.

The Company has revised its treaty arrangements several times in prior years in response to changing market conditions.  The current treaty arrangements are effective until July 3, 20102, 2011 and cover the entire policy period for all business written from inception of the treaty on JuneJuly 3, 20092010 through that date.  Treaty renewals are expected to occur annually in the foreseeable future.  DuringBecause the past ten years, Protective’s maximum exposure to a single occurrence has ranged from less than $100,000 to as much as $3.7 million for a very limited number of risks.  Because ProtectiveCompany occasionally offers multiple year policies and because losses from Fleet Transportationfleet transportation business take years to develop, losses reported in the current year may be covered by a number of older reinsurance treaties with higher or lower loss retentions by Protective than those provided by current treaty provisions.

The table on page 5 sets forth a reconciliation of beginning and ending loss and LAE liability balances, for 2010, 2009 2008 and 2007.2008.  That table is presented net of reinsurance recoverable to correspond with income statement presentation.  However, a reconciliation of these net reserves to those gross of reinsurance recoverable, as presented in the balance sheet, is also shown.  The table on page 11 shows the development of the estimated liability, net of reinsurance recoverable, for the ten years prior to 2009.2010.  The table on page 12 is a summary of the re-estimated liability, before consideration of reinsurance, for the ten years prior to 20092010 as well as the related re-estimated reinsurance recoverableceded for the same periods.

The reconciliation above shows that a savings of $9.6$8.8 million was developed in the liability for losses and LAE recorded at December 31, 2008,2009, with comparative developments for the two previous calendar years.  The following table is a summary of the $9.6$8.8 million reserve savings by accident year (dollars in thousands):

The (savings) deficiency recorded for these loss years was derived from varied sources, as follows (dollars in thousands):

Loss and loss expense developments, presented separately by major product line, were as follows for the years ended December 31 (dollars in thousands):

In the first table on page 6, the amounts identified as "Net (savings) deficiency on losses from directly-produced business" consist of development on cases known at December 31, 2008,2009, losses reported which were previously unknown at December 31, 20082009 (incurred but not reported), unallocated loss expense paid related to accident years 20082009 and prior and changes in the reserves for incurred but not reported losses and loss expenses.  Bulk loss reserves are established to provide for potential future adverse development on cases known to the Company and for cases unknown at the reserve date.  Changes in the reserves for incurred but not reported losses and loss expenses occur based upon information received on known and newly reported cases during the current year and the effect of that development on the application of standard actuarial methods used by the Company.

Also shown in the table are amounts representing the "(Savings) deficiency reported under reinsurance assumption agreements and residual markets".  These amounts relate to the Company's participation in property catastrophe reinsurance policies and treaties.  The Company records its share of losses from these policies and treaties based on reports from the reinsured companies and retrocessionaires and does not directly establish case reserves related to this segment of the Company's business.  The Company does, however, establish additional reserves for Reinsuranceproperty reinsurance losses to supplement case reserves reported by the ceding companies, when considered necessary.  While involuntary residual market premiums and losses are included in the property and casualty segment, they are shown separately in this presentation because reserves on this business are established by the regulatory entities and, accordingly, development on these losses is outside the control of the Company.

Fleet TransportationDirectly produced property and casualty insurance has historically constituted the largest portion of net reserve development savings.  As shown, the savings from this categorysegment ranged from $12.9$7.1 million in 20092010 to $16.5$16.8 million in 2007.2008.  This fluctuation reflects the variability associated with the larger claims covered by the Company, particularlyas well as fluctuations in periods when the Company’s net retentions increased.retentions.  The Company continues to incorporate more recent loss development data into its loss reserving formulae; however, the change from excess of loss to quota share treaties beginning in 2004,2005, the widely fluctuating use of facultative reinsurance on larger risks, and the dynamic nature of losses associated with the Fleet Transportationfleet transportation business as well as the timing of settlement of large claims increases the likelihood of variability i nin loss developments from period to period.  As discussed elsewhere, the Company has historically experienced savings in its loss developments owing to, among other things, its long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures.  While the Company’s basic assumptions have remained consistent, we continue to update loss data to reflect changing trends which can be expected to result in fluctuations in loss developments over time.

The developments for reinsurance assumed and involuntary residual markets, which netted towith a $4.5$2.3 million savings and a $.5 million deficiency during 2009,2010, respectively, are heavily dependent on the establishment of case basis and IBNR reserves by other insurance and reinsurance companies and by managers of state run residual market pools.  While the Company evaluates the sufficiency of such reserving, considering the number of different entities involved and the fact that the Company must rely on external sources of information, the savings or deficiency developed from these products will likely fluctuate from year to year.  We have found this to be particularly true during years when large catastrophic events occur near year end, such as was the case in 2008 with the occurrence of Hurricane Ike in September.  The larger savings developed during 2007, when c ompared to other years, reflects reductions in estimates of losses related to hurricane losses during 2004 and 2005 including additional reserves recorded by the Company in excess of those estimated by ceding reinsurers.

Factors affecting the development of environmental claims are more fully discussed in the following paragraphs.  ActivityThe Company has little exposure to environmental losses and activity during the three year period ending 20092010 has been insignificant.

Our goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible.  The $9.6$8.8 million in net savings developed during 20092010 represents approximately 31%48% of pre-tax net income before realized capital gains for 20092010 but only approximately 4.1%4.3% of December 31, 20082009 net loss and LAE reserves.reserves, which is well within the acceptable range of variation for the Company’s diverse and complex book of business.  The Company has maintained a consistent, conservative posture in its reserving process and has not significantly altered its assumptions used in the reserving process since the mid - 1980's.  This process has proven to be fully adequate with no overall deficiencies developed since 1985.  There were no significant changes in trends related to the numbers of claims incurred (other than correlative variances with premium volume), average settlement amounts, numbers of claims outstanding at period ends or the averages per claim outstanding during the year ended December 31, 20092010 for most lines of business.  However, the average settlement amounts of severe Fleet Transportationfleet transportation claims have tended to increase in recent years.

As described on page 4, changes have occurred in the Company's net per accident exposure under reinsurance agreements in place during the periods presented in the previous table.  It is much more difficult to reserve for losses where policy limits are as high as $10 million per accident as opposed to those losses related to business which carries lower policy limits, such as Private Passenger Automobile.private passenger automobile.  There are fewer policy limit losses in the Company's historical loss database on which to project future loss developments and the larger the loss, the greater the likelihood that the courtslitigation will become involved in the settlement process.  As such, the level of uncertainty in the reserving process is much greater when dealing with larger losses and will routinely result in fluctuations among accident year de velopments.developments.

The differences between the liability for losses and LAE reported in the accompanying 20092010 consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and that reported in the annual statements filed with state and provincial insurance departments in the United States and Canada in accordance with statutory accounting practices ("SAP") are as follows (dollars in thousands):

The table on page 11 presents the development of GAAP balance sheet insurance reserves for each year-end 19992000 through 2009,2010, net of all reinsurance credits.  The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years.  This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the respective balance sheet date, including losses that had been incurred, but not yet reported, to the Company.

The upper portion of the table shows the re-estimated amount of the previously recorded liability based on additional information available to the Company as of the end of each succeeding year.  The estimate is increased or decreased as more information becomes known about the frequency and severity of individual claims and as claims are settled and paid.

The "cumulative redundancy" represents the aggregate change in the estimates of each calendar year end reserve through December 31, 2009.2010.  For example, the 19992000 liability has developed a $14.3an $11.0 million redundancy over ten years.  That amount has been reflected in income over those ten years, as shown on the table.  The effect on income of changes in estimates of the liability for losses and LAE during each of the past three years is shown in the table on page 5.

Historically, the Company’s loss developments have been favorable.  Reserve developments for all years ended in the period 1986 through 20082009 have produced redundancies as of December 31, 2009.2010.  In addition to refinements in reserving methods, loss reserve developments since 1985 have been favorably affected by several other factors.  Perhaps the most significant single factor has been the improvement in safety programs by the Fleet Transportationfleet transportation industry in general and by the Company’s insureds specifically.  Statistics produced by the American Trucking Association show that driver quality has improved markedly in the past decade resulting in fewer fatalities and serious accidents.  The Company’s experience also shows that improved safety and hiring programs have a drama ticdramatic impact on the frequency and severity of Fleet Transportationfleet transportation accidents and, more recently, the introduction of numerous safety devices using state-of-the-art technology has reduced rear end and cross over accidents which often produce the most serious injuries.  Significant trucking industry and regulatory initiatives, such as CSA 2010, have provided strong motivation to trucking companies to upgrade their driver roster, increase monitoring of driver behavior and improve equipment maintenance, all resulting in fewer accidents.  Higher self-insured retentions also play a part in reduced insurance losses.  Higher retentions not only raise the excess insurance entry point but also encourage Fleet Transportationfleet transportation company management to focus even more intensely on safety programs.  To a small degree, reserve savings have been achieved by the use of structured settlements on certain workers' compensation and liability claims of a long-term liability nature.

The establishment of bulk reserves requires the use of historical data where available and generally a minimum of ten years of such data is required to provide statistically valid samples.  As previously mentioned, numerous factors must be considered in reviewing historical data including inflation, legislative actions, new coverages provided and trends noted in the current book of business which are different from those present in the historical data.  Clearly, the Company's book of business in 20092010 is different from that which generated much of the ten-year historical loss data used to establish reserves in recent years.  Management has noted trends toward significantly higher settlements and jury awards associated with the more serious Fleet Transportationfleet transportation liability claims over the past several years.  ;  The inflationary factors affecting these claims appear to be more subjective in nature and not in line with compensatory equity.  In addition to the factors mentioned above, savings realized in recent years upon the closing of claims, as reflected in the tables on pages 5 and 11, are attributable to the Company’s experience in specializing in long-haul trucking business for over 50 years as well as its long-standing policy

of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of the underlying exposures.  The Company will continue to review the trends noted and, should it appear that such trends are permanent and projectable, they will be reflected in future reserving method refinements.

The lower section of the table on page 11 shows the cumulative amount paid with respect to the previously recorded calendar year end liability as of the end of each succeeding year.  For example, as of December 31, 2009,2010, the Company had paid $90.9$84.6 million of losses and LAE that had been incurred, but not paid, as of December 31, 1999;2000; thus an estimated $25.2$24.3 million (22%) of losses incurred through 19992000 remain unpaid as of the current financial statement date ($116.1108.9 million incurred less $90.9$84.6 million paid).  The payment patterns shown in this table demonstrate the “long-tail” nature of much of the Company’s business whereby many claims do not settle for more than ten years.

In evaluating this information, it is important to note that the method of presentation causes some development experience to be duplicated.  For example, the amount of any redundancy or deficiency related to losses settled in 2002,2005, but incurred in 1999,2002, will be included in the cumulative development amount for each of the years-end 1999, 2000,2002, 2003, and 2001.2004.  As such, this table does not present accident or policy year development data which readers may be more accustomed to analyzing.  Rather, this table is intended to present an evaluation of the Company’s ability to establish its liability for losses and loss expenses at a given balance sheet date.  It is important to note that conditions and trends that have affected development of the liability in the past may not necessarily occur in th ethe future.  Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.

The table presented on page 12 presents loss development data on a gross (before consideration of reinsurance) basis for the same ten year period December 31, 19992000 through December 31, 2008,2009, as of December 31, 2009,2010, with a reconciliation of the data to the net amounts shown in the table on page 11.  Readers are reminded that the gross data presented on page 12 requires significantly more subjectivity in the estimation of incurred but not reported and loss expense reserves because of the high limits provided by Protectivethe Company to its Fleet Transportationfleet transportation customers, much of which has been covered by excess of loss and facultative reinsurance.  This is particularly true of excess of loss treaties where Protectivethe Company retains risk in only the lower, more predictable, layers of coverage.  Accordingly, one would generally e xpectexpect more variability in development on a gross basis than on a net basis.  The difference between loss developments before consideration of reinsurance, as presented on page 12, and those net of reinsurance, as shown on page 11 do not impact the Company’s operating results as all such differences are borne by reinsurers.

However, the Company has also received a few environmental claims that did not result from a "sudden and accidental" event.  Most of these claims fallwere made under policies issued in the 1970's primarily to one account which was involved in the business of hauling and disposing of hazardous waste.  Although the Company had pollution exclusions in its policies during that period, the courts have, ignoredat times, refused to recognize such exclusions in many environmental cases.  Beginning with the year 1994 and through the year ended December 31, 2009, the Company has recorded a total of $5.1 million in losses incurred with respect to environmental claims.  The Company received notification in 2007 of a new environmental case involving a former insured during the 1970’s.  Discovery regarding this case continues; however, management believes exposure to the Company will not be significant.  Incurred losses to date include a reserve for incurred but not reported environmental losses of $1.5 million at December 31, 2009.

EstablishingIn general, establishing reserves for environmental claims, other than those associated with “sudden and accidental” losses, is subject to uncertainties that are greater than those represented by other types of claims.  Factors contributing to those uncertainties include a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, and the extent and timing of any such contractual liability.  Courts have reached different and sometimes inconsistent conclusions as to when the loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether cleanup costs represent insured property damage.  Management believes that tho se issues are not likely to be resolved in the near future.

However, to date,as previously noted, very few environmental claims have been reported to the Company.  In addition, a review of the businesses of our past and current insureds indicates that exposure to further claims of an environmental nature is limited because mostthe vast majority of the Company's accounts are not currently, and have not in the past been, involved in the hauling of hazardous substances.  Also, the revision of the pollution exclusion in the Company's policies since 1986 has, and is expected to, further limit exposure to claims from that point forward.

The Company has never been presented with an environmental claim relating to asbestos and, based on the types of business the Company has insured over the years, it is not expected that the Company will have any significant asbestos exposure.

Accordingly, management believes that theThe Company's reserves for unpaid losses and loss expenses at December 31, 2010 did not include significant amounts for liability related to environmental damage claims.  The Company does not foresee significant future exposure to environmental damage claims and accordingly has established no reserve for incurred but not reported environmental losses beyond those already provided for in the financial statements is not material.at December 31, 2010.