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,
	2022			2021			2022			2021
Gross reserves - beginning of period	$	140,996		$	117,852		$	139,085		$	111,270
Less: reinsurance recoverables on unpaid losses		(37,769	)		(22,824	)		(40,344	)		(24,218	)
Net reserves - beginning of period		103,227			95,028			98,741			87,052
Add: incurred losses and LAE, net of reinsurance:
Current period		13,541			12,513			38,765			37,813
Prior period		3,130			3,646			18,175			15,634
Total net incurred losses and LAE		16,671			16,159			56,940			53,447
Deduct: loss and LAE payments, net of reinsurance:
Current period		5,634			5,802			13,313			14,102
Prior period		11,456			8,587			39,560			29,599
Total net loss and LAE payments		17,090			14,389			52,873			43,701
Net reserves - end of period		102,808			96,798			102,808			96,798
Plus: reinsurance recoverables on unpaid losses		41,749			23,056			41,749			23,056
Gross reserves - end of period	$	144,557		$	119,854		$	144,557		$	119,854

Net losses and LAE were $16.7 million during the third quarter of 2022. Adverse development contributed $3.1 million to the total incurred losses in the third quarter of 2022. 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.

Net losses and LAE were $56.9 million for the nine months ended September 30, 2022. Adverse development contributed $18.2 million to the total incurred losses during the nine months ended September 30, 2022. Of the $18.2 million of adverse development, $14.3 million was related to 2019 and prior accident years, $2.2 million was related to the 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.

Net losses and LAE were $16.2 million during the third quarter of 2021. Adverse development contributed $3.6 million to the total incurred losses in the third quarter of 2021, of which $1.1 million was related to 2017 and prior accident years, $1.4 million was related to the 2018 accident year, and $1.0 million was related to the 2019. In the third quarter, $3.4 million of the adverse development came from the commercial lines of business, mostly from liability lines, while $290,000 was related to the personal lines of business.

Net losses and LAE were $53.4 million for the nine months ended September 30, 2021. The Company experienced $2.0 million of catastrophe losses, net of reinsurance recoverables, during the first quarter of 2021 from Winter Storm Uri. The Company also experienced $15.6 million of adverse development for the nine months ended September 30, 2021. Of the $15.6 million in adverse development, $5.0 million was related to 2017 and prior accident years, $4.8 million was related to the 2018 accident year, $3.4 million was related to the 2019 accident year, and $2.4 million was related to the 2020 accident year. Of the $15.6 million in adverse development, $14.7 million was related to commercial lines, mostly from liability lines, while $926,000 was related to personal lines.