6. LOSS AND LOSS ADJUSTMENT EXPENSE (“LAE”) 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, consideration for anticipated subrogation recoveries that will offset future loss payments, anticipated future claim development and incurred but not yet reported (“IBNR”) claims.

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



	Nine Months Ended
	September 30,
	2017		2016
	(in thousands)
Gross reserves, beginning of period	$	158,476	$	97,340
Less: reinsurance recoverable (1)		(41,079)		(7,496)
Net reserves, beginning of period		117,397		89,844

Incurred loss, net of reinsurance, related to:
Current year		178,299		115,270
Prior years		3,358		10,946
Total incurred loss and LAE, net of reinsurance		181,657		126,216

Paid loss, net of reinsurance, related to:
Current year		106,233		46,073
Prior years		57,322		53,526
Total paid loss and LAE, net of reinsurance		163,555		99,599

Net reserves, end of period		135,499		110,428
Plus: reinsurance recoverable (1)		326,042		17,057
Gross reserves, end of period	$	461,541	$	127,485

(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.

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. For purposes of this disclosure, we classify paid losses ceded in the current year as relating to the current year, even if the ceded claim paid was incurred in a prior year. This matches the ceded paid losses with the year in which the loss and loss adjustment expenses caption in our statement of operations was impacted, and results in the prior year development amounts of $3.4 million and $10.9 million for the nine months ended September 30, 2017 and 2016, respectively, being representative of the pre-tax impact on net income from prior year development. For the nine months ended September 30, 2017 and 2016, $11.4 million and $15.4 million, respectively, of paid ceded losses were classified as ‘current year’.

We believe this presentation is consistent with the purpose of this disclosure and effectively provides users of the financial statements with the pre-tax net income impact of prior year development, inclusive of the negative change in the experience account that is attributable to prior accident years.

During the nine months ended September 30, 2017, the Company experienced $3.4 million of unfavorable loss and LAE reserve development on prior accident years primarily in its Homeowners line of business. The Homeowners’ unfavorable development primarily relates to the continued impact from assignment of benefits and related ligation costs in the state of Florida.

During the nine months ended September 30, 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 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.