6. LOSS AND LOSS ADJUSTMENT EXPENSE 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 yet reported (“IBNR”).

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



	Year Ended December 31,
	2016		2015		2014
	(in thousands)
Gross reserves, beginning of period	$	97,340	$	78,330	$	61,016
Less: reinsurance recoverable (1)		(7,496)		(10,394)		(2,313)
Net reserves, beginning of period		89,844		67,936		58,703

Incurred loss, net of reinsurance, related to:
Current year		174,795		113,819		79,932
Prior years		12,546		(9,466)		1,104
Total incurred loss and LAE, net of reinsurance		187,341		104,353		81,036

Paid loss, net of reinsurance, related to:
Current year		113,196		49,531		40,680
Prior years		56,958		32,914		31,123
Total paid loss and LAE, net of reinsurance		160,154		82,445		71,803

Net reserves, end of period		117,031		89,844		67,936
Plus: reinsurance recoverable (1)		41,079		7,496		10,394
Gross reserves, end of period	$	158,110	$	97,340	$	78,330

(1)

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

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 year ended December 31, 2016, the Company experienced unfavorable loss and LAE reserve development on prior year accident years primarily in its all other peril homeowners’ coverage in Florida. The deficiency primarily relates to reserve development on prior year accident years and was related to the all other peril homeowners’ coverage in the state of Florida. The deficiency primarily relates to higher severity above the expected development factor anticipated at December 31, 2015 which was driven by the impact from assignment of benefits and other related adjusting expenses.

During the year ended December 31, 2015, the Company experienced a redundancy on prior year accident years primarily a result of continued favorable loss experience (mostly caused by decreased severity in reported claims) in the Company’s all other peril homeowners’ coverage caused in part by the absence of severe weather in Florida. Specifically, we have experienced better severity than expected on the 2014 and 2013 accident years.

The following tables provide incurred losses and allocated loss adjustment expenses (“ALAE”) as well as cumulative paid claims and ALAE, net of reinsurance, for the prior ten accident years for our largest lines of business, homeowners’’. In addition, as of the most recent reporting period, the total of IBNR reserves plus expected development on reported claims and the cumulative number of reported claims are presented (in thousands, except severity). The information about incurred and paid claims development for the years ended December 31, 2007 to December 31, 2015 is presented as supplementary information.



											IBNR & expected	Cumulative
	Incurred losses and ALAE, net of reinsurance										development on	number of
	For the years ended December 31,										reported claims	reported claims (1)	Severity (2)
	(unaudited)
Accident Year	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2016	2016	2016
2007	19,410	18,293	17,319	17,544	17,494	17,761	17,912	17,715	17,553	17,559	6	1,883	9,325
2008		18,305	15,784	15,811	15,977	15,659	16,021	15,661	15,604	15,609	4	1,705	9,155
2009			26,228	25,618	25,955	26,482	27,015	27,041	27,119	27,163	101	2,323	11,693
2010				24,825	25,056	26,151	27,895	28,968	29,407	29,945	34	2,348	12,753
2011					20,492	21,344	23,007	23,932	24,582	25,957	40	2,344	11,074
2012						23,032	23,301	24,186	24,468	25,889	326	2,579	10,038
2013							43,807	42,021	35,834	35,859	216	3,209	11,175
2014								64,312	63,300	61,770	2,222	5,679	10,877
2015									99,286	92,159	8,097	11,196	8,231
2016										168,875	48,663	20,923	8,071
									Total	$500,785


	Cumulative paid losses and ALAE, net of reinsurance
	For the years ended December 31,
	(unaudited)
Accident Year	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
2007	11,358	15,352	16,160	16,783	17,027	17,291	17,429	17,443	17,509	17,519
2008		9,477	13,832	14,689	15,190	15,308	15,445	15,595	15,583	15,587
2009			15,047	23,095	24,657	26,007	26,462	26,831	26,927	26,982
2010				14,052	21,350	24,730	26,886	27,984	29,092	29,739
2011					11,119	19,250	21,323	22,723	24,047	25,580
2012						13,693	20,728	23,120	23,923	25,186
2013							19,986	31,606	33,867	35,123
2014								37,033	53,831	57,891
2015									52,190	76,169
2016										101,532
									Total	$414,308

All outstanding liabilities for unpaid claims and LAE prior to 2007, net of reinsurance										1,478
Total outstanding liabilities for unpaid claims and LAE, net of reinsurance										$ 87,955

(1)

The cumulative number of reported claims is measured by individual claimant at a coverage level.

(2)

Calculated severity amounts by accident year are based on inception-to-date incurred less IBNR and expected development dollars on reported claims. Note the older accident years are more developed than recent accident years.

The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the consolidated balance sheets is as follows:





			As of December 31, 2016
			(in thousands)
Liabilities for unpaid losses and LAE:
Homeowners			$ 87,955
Other lines			28,915
Total liabilities for unpaid losses and LAE, net of reinsurance			116,870

Reinsurance recoverables:
Homeowners			19,964
Other lines			21,115
Total reinsurance recoverables			41,079

Unallocated loss adjustment expenses			161
Gross liability for unpaid losses and LAE			$ 158,110

Other lines include our CGL and personal automobile lines of business. Management performed a quantitative and qualitative assessment and determined that neither line of business met the guidelines for disaggregation, above.

Management establishes a liability on an aggregate basis to provide for the estimated IBNR. The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of tests and methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of December 31, 2016, were not considered material.

IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. Various standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses are the following:

Reported Loss Development Method: a reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;

Paid Development Method: a paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels;

Expected Loss Ratio Method: expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and

Bornhuetter-Ferguson Method: the results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.

Supplementary Information on Historical Loss and LAE Duration (Unaudited)

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, as of December 31, 2016:



	Average annual payout of losses and LAE, net of reinsurance
	(unaudited)
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Homeowners	53.4%	28.3%	7.4%	4.2%	2.2%	2.6%	1.0%	0.1%	0.4%	0.0%