LOSS AND LOSS ADJUSTMENT RESERVES

9 Months Ended

Sep. 30, 2019

Liability for Future Policy Benefit, before Reinsurance [Abstract]

LOSS AND LOSS ADJUSTMENT RESERVES

7. LOSS AND LOSS ADJUSTMENT RESERVES

The liability for loss and LAE reserves is determined on an individual-case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and incurred but not reported ("IBNR").

Activity in the liability for loss and LAE reserves is summarized as follows:

	Nine Months Ended
	September 30,
	2019		2018
	(In thousands)
Gross reserves, beginning-of-period	$	296,230	$	230,515
Less: reinsurance recoverable (1)	(166,396)		(98,345)
Net reserves, beginning-of-period	129,834		132,170
Incurred loss, net of reinsurance, related to:
Current year	195,024		159,998
Prior year loss development (redundancy) (2)	1,238		330
Ceded losses subject to offsetting experience account adjustments (3)	(1,978)		(4,230)
Prior years	(740)		(3,900)
Total incurred loss and LAE, net of reinsurance	194,284		156,098
Paid loss, net of reinsurance, related to:
Current year	114,790		87,960
Prior years	77,398		71,266
Total paid loss and LAE, net of reinsurance	192,188		159,226
Net reserves, end-of-period	131,930		129,042
Plus: reinsurance recoverable (1)	155,018		92,072
Gross reserves, end-of-period	$	286,948	$	221,114

(1)Reinsurance recoverable in this table includes only ceded loss and LAE reserves.

(2)Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.

(3)Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income (loss).

The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

During the nine months ended September 30, 2019, the Company experienced $1.2 million of unfavorable loss and LAE reserve development on prior accident years, which consists of adverse development in its commercial general liability and personal automobile lines of business, offset by redundancy in the homeowners line of business as a result of lower LAE expenses associated primarily with Hurricane Irma.

During the nine months ended September 30, 2018, the Company experienced $0.3 million of favorable loss and LAE reserve redundancy in accident year 2017. The redundancy was the result of lower LAE expenses associated primarily with Hurricane Irma.

As previously disclosed, the Company entered into 30% and 10% retrospectively-rated Florida-only property quota-share treaties, which ended on July 1, 2016 and 2017, respectively.  These agreements included a profit share (experience account) provision, under which the Company will receive ceded premium adjustments at the end of the treaty to the extent there is a positive balance in the experience account.  This experience account is based on paid losses rather than incurred losses.  Due to the retrospectively-rated nature of this treaty, when the experience account is positive we cede losses under these treaties as the claims are paid with an equal and offsetting adjustment to ceded premiums (in recognition of the related change to the experience account receivable), with no impact on net income.  Conversely, when the experience account is negative, the Company cedes losses on an incurred basis with no offsetting adjustment to ceded premiums, which impacts net income. Loss development can be either favorable or unfavorable regardless of whether the experience account is in a positive or negative position.