The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs, product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third-party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.

Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore, the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.

Management believes that the reserve for losses and LAE is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the consolidated financial statements based on available facts and in accordance with applicable laws and regulations.

The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):


	Three months ended September 30,						Nine months ended September 30,
	2023			2022			2023			2022
Gross reserves - beginning of period	$	145,004		$	140,996		$	165,539		$	139,085
Less: reinsurance recoverables on unpaid losses		(56,505	)		(37,769	)		(82,651	)		(40,344	)
Net reserves - beginning of period		88,499			103,227			82,888			98,741
Add: incurred losses and LAE, net of reinsurance:
Current period		17,281			13,541			51,004			38,765
Prior period		3,630			3,130			2,939			18,175
Total net incurred losses and LAE		20,911			16,671			53,943			56,940
Deduct: loss and LAE payments, net of reinsurance:
Current period		9,194			5,634			18,635			13,313
Prior period		7,768			11,456			25,748			39,560
Total net loss and LAE payments		16,962			17,090			44,383			52,873
Net reserves - end of period		92,448			102,808			92,448			102,808
Plus: reinsurance recoverables on unpaid losses		46,766			41,749			46,766			41,749
Gross reserves - end of period	$	139,214		$	144,557		$	139,214		$	144,557

Net losses and LAE increased by $4.2 million, or 25.4%, to $20.9 million during the third quarter of 2023, compared to $16.7 million for the same period in 2022. The increase was attributable to a $3.7 million increase in current accident year losses during the third quarter of 2023, compared to the same period in 2022. There was $2.5 million of additional homeowners loss emergence in the third quarter related to the second quarter storm activity.

The Company’s incurred losses during the three and nine months ended September 30, 2023 included prior-year adverse reserve development of $3.6 million and $2.9 million, respectively. For the quarter, the Company recognized $4.0 million of reserve development in the commercial liability lines of business relating to accident years 2020 through 2022, offset by $414,000 of favorable development in the personal lines segment. For the nine months ended September 30, 2023, the Company recognized $4.1 million of adverse development in the commercial liability lines of business, related to accident years 2020 through 2022, offset by $1.2 million of favorable development in the personal lines segment.

The Company’s incurred losses during the three and nine months ended September 30, 2022 included prior-year adverse reserve development of $3.1 million and $18.2 million, respectively. Of the $3.1 million of adverse development, $2.3 million was related to 2019 and prior accident years and $1.8 million was related to the 2021 accident year. This was offset by $958,000 of favorable development experienced in the 2020 accident year. Of the $3.1 million of adverse development $2.7 million was related to the commercial lines of business, while $381,000 was related to the personal lines of business.

Of the $18.2 million of adverse development for the nine months ended September 30, 2022, $14.3 million was related to 2019 and prior accident years, $2.2 million was related to 2020 accident year, and $1.7 million was related to the 2021 accident year. Of the $18.2 million of adverse development, $17.7 million was related to the commercial lines of business, while $430,000 came from the personal lines of business.