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, net of reinsurance recoverables, 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,
	2020			2019			2020			2019
Gross reserves - beginning of period	$	106,734		$	97,981		$	107,246		$	92,807
Less: reinsurance recoverables on unpaid losses		(20,892	)		(21,396	)		(22,579	)		(29,685	)
Plus: deferred gain on ADC					481						5,677
Net reserves - beginning of period		85,842			77,066			84,667			68,799
Add: incurred losses and LAE, net of reinsurance:
Current period		9,858			12,154			29,286			36,619
Prior period		4,695			2,703			11,481			7,076
Total net incurred losses and LAE		14,553			14,857			40,767			43,695
Deduct: loss and LAE payments, net of reinsurance:
Current period		5,149			4,933			9,067			8,675
Prior period		10,126			6,515			31,247			23,344
Total net loss and LAE payments		15,275			11,448			40,314			32,019
Net reserves - end of period		85,120			80,475			85,120			80,475
Plus: reinsurance recoverables on unpaid losses		18,564			16,862			18,564			16,862
Less: deferred gain on ADC		—			—			—			—
Gross reserves - end of period	$	103,684		$	97,337		$	103,684		$	97,337

In September 2017, the Company entered into an adverse development cover reinsurance agreement (the "ADC") to cover loss development of up to $17.5 million in excess of stated reserves as of June 30, 2017. The agreement provided up to $17.5 million of reinsurance for adverse net loss reserve development for accident years 2005 through 2016. The Company had ceded to the limit of the ADC and the deferred gain from the ADC had been fully utilized during 2019, thus there was no impact from the ADC in 2020.

The Company’s incurred losses during the three and nine months ended September 30, 2020 include prior-year adverse reserve development of $4.7 million and $11.5 million, respectively. The adverse development mostly came from commercial liability lines within the hospitality businesses.

The Company’s incurred losses during the three and nine months ended September 30, 2019 included prior-year adverse reserve development of $2.7 million and $7.1 million, respectively. The reported reserve development was net of the amortization of the deferred gain on the ADC of $481,000 and $5.7 million for the three and nine months ended September 30, 2019, respectively. As of September 30, 2019, the deferred gain on the ADC was fully recognized. The adverse development mainly stemmed from commercial liability and Florida homeowners lines of business.