Reserve for Loss and Loss Adjustment Expenses

Our reserve for loss and LAE comprises:



December 31,	2016		2015
Reserve for reported loss and LAE	$	1,617,956	$	1,411,712
Reserve for losses incurred but not reported ("IBNR")	1,278,540		1,098,389
Reserve for loss and LAE	$	2,896,496	$	2,510,101

The following table represents a reconciliation of our beginning and ending gross and net loss and LAE reserves:



For the Year Ended December 31,	2016			2015			2014
Gross loss and LAE reserves, January 1	$	2,510,101		$	2,271,292		$	1,957,835
Less: reinsurance recoverable on unpaid losses, January 1	71,248			75,873			84,036
Net loss and LAE reserves, January 1	2,438,853			2,195,419			1,873,799
Net incurred losses related to:
Current year	1,600,454			1,558,704			1,479,425
Prior years	219,452			74,866			18,846
	1,819,906			1,633,570			1,498,271
Net paid losses related to:
Current year	(430,707		)	(457,517		)	(430,394		)
Prior years	(1,006,884		)	(892,840		)	(705,397		)
	(1,437,591		)	(1,350,357		)	(1,135,791		)
Effect of foreign exchange movements	(24,608		)	(39,779		)	(40,860		)
Net loss and LAE reserves, December 31	2,796,560			2,438,853			2,195,419
Reinsurance recoverable on unpaid losses, December 31	99,936			71,248			75,873
Gross loss and LAE reserves, December 31	$	2,896,496		$	2,510,101		$	2,271,292

Management believes that its use of both historical experience and industry-wide loss development factors provide a reasonable basis for estimating future losses. In the future, certain events may be beyond the control of management, such as changes in law, judicial interpretations of law, and inflation may favorably or unfavorably impact the ultimate settlement of the Company’s loss and LAE reserves.

The anticipated effect of inflation is implicitly considered when estimating liabilities for loss and LAE. While anticipated changes in claim costs due to inflation are considered in estimating the ultimate claim costs, changes in average severity of claims are caused by a number of factors that vary with the individual type of policy written. Ultimate losses are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves in previous calendar years. The development reflects changes in management's best estimate of the ultimate losses under the relevant reinsurance policies after review of changes in actuarial assessments.

During 2016, the Company increased loss reserves for 2015 and prior years by $219,452 or 9.0% of prior year net loss and LAE reserves compared to $74,866 or 3.3% in 2015 and of $18,846 or 1.0% in 2014, respectively. The increase in prior year incurred losses was primarily due to the reserve charge implemented in the fourth quarter as well as new premium ceded during 2016 on prior underwriting year contracts. Due to loss sensitive features of certain contracts, favorable (or unfavorable) loss reserve development does not necessarily result in a commensurate amount of additional (or reduced) underwriting income as ceding commission may be adjusted proportionally to the amount of loss development, pursuant to the terms of the individual contracts. The Company recognized approximately $165,343 of adverse development, net of commission changes on adjustable contracts for the full year. This was largely due to significant fourth quarter adverse development in commercial auto liability in both the Diversified Reinsurance and AmTrust Reinsurance segments.

For the Diversified Reinsurance segment, adverse development was $96,788 (2015 - adverse development $49,856, 2014 - favorable development $14,959) for the full year, including the fourth quarter of 2016 reserve charge as well as adverse development experienced in prior quarters of 2016. For the AmTrust Reinsurance segment, adverse development was $54,000, (2015 - adverse development $9,100, 2014 - adverse development $13,900) largely related to program commercial auto as well as program general liability.

9. Reserve for Loss and Loss Adjustment Expenses (continued)


a)	Claims Development

The adoption of ASU 2015-09 Disclosures about Short-Duration Contracts did not change any of the methodologies or assumptions used in compiling data used in the Company's Consolidated Financial Statements or in estimating incurred losses.

Incurred loss and LAE reflects estimates of ultimate losses based on information received from cedants or obtained through reviews of industry trends, regarding claims incurred prior to the end of each financial year. A (redundancy) or deficiency arises when the re-estimation of reserves is (lower) or greater than its estimation at the preceding year-end. The cumulative (redundancies) or deficiencies reflect cumulative differences between the initial reported net reserves and the currently re-estimated net reserves. Annual changes in the estimates are reflected in the consolidated statement of income for each year as the liabilities are re-estimated.

IBNR reserves represent a provision for claims that have been incurred but not yet reported to the Company, as well as future loss development on losses already reported, in excess of the case reserves. The Company updates its estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants. IBNR estimates will be negative where our history indicates favorable future emergence is the best estimate. For all lines, the Company’s objective is to estimate ultimate loss and LAE. As a result, the reserve for loss and LAE include significant estimates for IBNR reserves. Please refer to "Note 2. Significant Accounting Policies" for the accounting policy and methodology for determining loss reserves. As a reinsurer of primarily quota share contracts, claim counts are frequently unavailable and as a result they are not a methodology applied in our loss reserving process and therefore claim counts have not been provided in the table below as it is impractical to do so.

The following is a summary of the Company's incurred losses and paid losses development by accident year, net of reinsurance, from the last six calendar years including the total reserve for losses IBNR plus development on reported loss and LAE for both our reportable segments, Diversified Reinsurance and AmTrust Reinsurance, as of December 31, 2016. Information prior to 2016 is included as unaudited supplementary information. As a reinsurer we are reliant on our cedants to provide us with this detailed information. Six years of information has been presented only as it was impractical to obtain the sufficiently detailed additional information on those earlier years. The incurred and paid amounts have been translated from the local currency to U.S. dollars using the December 31, 2016 spot rate for all years presented in the table below in order to isolate changes in foreign exchange rates from loss development. Information regarding our Other category has not been presented in the development tables below but is included in the reconciliation, as these losses include amounts from our former NGHC Quota Share segment and the remnants of the U.S. excess and surplus business, which are in run-off.

There are a number of factors to consider when considering the information in these tables:


•	For both segments, the premium and exposure for prior years is often reported to us in subsequent periods, as reporting lags exist from an insurer to a reinsurer. This leads to increases in the provision for loss and LAE in prior years, but does not reduce expected income (and in many cases can result in additional income);


•	In the Diversified Reinsurance segment, our U.S. operations have adjustable commission features on a significant portion of its business which is not reflected in this loss disclosure;

•

In the AmTrust Reinsurance segment, the European Hospital Liability Quota Share exposure results in many instances where claims are eventually closed with no liability. As a claims made exposure, there is also minimal to no "tail" that would result in IBNR. The net result is a significant amount of negative IBNR accounting for claims with case reserves established that are expected to be closed with no payment; and


•	In the AmTrust Reinsurance segment, these numbers are affected by the commutation with AmTrust at year end 2015 which resulted in a $107,000 payment and the reduction of loss and unearned premium reserves.

9. Reserve for Loss and Loss Adjustment Expenses (continued)

The following table represents information on the Company's incurred losses and LAE and cumulative paid losses and LAE, both net of reinsurance, since 2011 for our Diversified Reinsurance segment. The development tables below included reserves acquired from the loss portfolio transfer agreement associated with the GMAC RE business as at October 31, 2008 of $755,554 and reserves acquired from the loss portfolio transfer agreement associated with the GMAC International Insurance Services business as at November 30, 2010 of $98,827. For the purposes of the disclosure, the reserves from each of the loss portfolio transfers were allocated to the original accident year. Prior period information is unaudited and is presented as required supplementary information.



Diversified Reinsurance	Incurred losses and LAE, net of reinsurance												At December 31, 2016
For the Year Ended December 31,	2011		2012		2013		2014		2015		2016		Total IBNR
Accident Year:	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
2007 and prior	$	570,859	$	563,762	$	552,718	$	546,160	$	552,342	$	556,561	$	7,626
2008	207,118		188,325		180,972		179,100		180,624		180,957		17,681
2009	376,766		370,940		362,134		366,680		367,492		367,738		15,767
2010	519,644		517,885		559,628		591,836		583,788		590,871		13,207
2011	475,042		500,027		480,265		497,245		499,809		503,011		16,595
2012			549,587		527,380		547,331		551,957		561,003		21,098
2013					531,167		454,637		516,728		537,057		38,675
2014							583,353		565,198		596,039		79,168
2015									493,518		513,791		112,954
2016											481,086		217,631
Total											$	4,888,114	$	540,402

	Cumulative paid losses and LAE, net of reinsurance
For the Year Ended December 31,	2011		2012		2013		2014		2015		2016
Accident Year:	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
2007 and prior	349,690		394,639		432,821		452,716		470,930		476,064
2008	111,589		126,265		135,439		140,884		147,568		157,420
2009	225,940		252,388		264,246		274,120		283,705		292,088
2010	336,181		422,063		479,840		511,819		536,759		551,702
2011	168,075		326,995		387,380		427,817		445,476		459,451
2012			201,871		351,247		420,709		453,673		483,631
2013					192,601		334,452		408,651		453,911
2014							197,964		377,434		457,165
2015									180,698		331,595
2016											175,451
Total											3,838,478
Total net reserves											$	1,049,636

9. Reserve for Loss and Loss Adjustment Expenses (continued)

The following table represents information on the Company's incurred losses and LAE and cumulative paid losses and LAE, both net of reinsurance, since 2011 for our AmTrust Reinsurance segment. Prior period information is unaudited and is presented as required supplementary information.



AmTrust Reinsurance			Incurred losses and LAE, net of reinsurance										At December 31, 2016
For the Year Ended December 31,	2011		2012		2013		2014		2015		2016		Total IBNR
Accident Year:	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
2007	$	67,836	$	67,204	$	67,048	$	70,531	$	71,857	$	72,947	$	18
2008	225,656		224,460		224,667		238,357		242,624		246,009		1,445
2009	226,650		238,131		248,792		249,583		252,686		257,829		1,981
2010	279,228		285,118		295,502		302,721		309,161		329,971		3,176
2011	342,577		352,187		367,915		390,325		401,861		406,203		(3,564		)
2012			473,294		450,770		480,984		482,833		497,132		(30,776		)
2013					648,071		576,404		576,524		611,617		(10,187		)
2014							854,667		838,549		844,465		53,727
2015									1,033,505		1,031,258		141,662
2016											1,117,722		518,454
Total											$	5,415,153	$	675,936

	Cumulative paid losses and LAE, net of reinsurance
For the Year Ended December 31,	2011		2012		2013		2014		2015		2016
Accident Year:	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
2007	$	64,128	$	65,545	$	67,639	$	70,246	$	70,109	$	71,414
2008	194,344		210,319		219,088		231,095		231,399		234,499
2009	192,446		220,376		232,478		232,364		236,632		242,516
2010	194,566		227,598		252,841		288,261		296,332		312,743
2011	161,926		235,792		278,150		328,710		363,457		373,974
2012			150,495		235,473		354,717		409,910		453,428
2013					213,499		323,134		432,396		504,964
2014							213,565		479,119		610,327
2015									284,147		630,914
2016											255,579
Total											3,690,358
Total net reserves											$	1,724,795

9. Reserve for Loss and Loss Adjustment Expenses (continued)

The following table represents a reconciliation of the net incurred and paid claims development tables to the reserve for loss and LAE in the Consolidated Balance Sheet:



	As at December 31, 2016
	Total Net Reserves		Reinsurance Recoverables on unpaid claims		Total Gross Reserves

Diversified Reinsurance	$	1,049,636	$	54,299	$	1,103,935
AmTrust Reinsurance	1,724,795		32,933		1,757,728
Other	22,129		12,704		34,833
Total claims reserves	$	2,796,560	$	99,936	$	2,896,496


b)	Claims duration disclosure

The following unaudited supplementary information represents the average annual percentage payout of net loss and LAE by age, net of reinsurance, for both our reportable segments as of December 31, 2016:



	Average annual payout of incurred claims by age, net of reinsurance
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6
Diversified Reinsurance	35.9	%	30.9	%	9.7	%	5.6	%	2.5	%	2.8	%
AmTrust Reinsurance	28.4	%	28.0	%	14.7	%	10.3	%	7.7	%	1.4	%

The average annual payout of incurred claims by age, net of reinsurance, is calculated using the amount of claims paid in each development year and is compared with the estimated incurred claims as of the most recent period presented.