As of September 30, 2017 and December 31, 2016, loss and loss adjustment expense reserves in the condensed consolidated balance sheets was comprised of the following:



	September 30, 2017		December 31, 2016
	($ in thousands)
Case loss and loss adjustment expense reserves	$	118,444	$	80,370
Incurred but not reported loss and loss adjustment expense reserves	580,151		522,818
Deferred gains on retroactive reinsurance contracts	774		1,941
	$	699,369	$	605,129

The following table represents the activity in the loss and loss adjustment expense reserves for the nine months ended September 30, 2017 and 2016:



	September 30, 2017			September 30, 2016
	($ in thousands)
Gross reserves for loss and loss adjustment expenses, beginning of period	$	605,129		$	466,047
Less: loss and loss adjustment expenses recoverable, beginning of period	(1		)	(125		)
Net reserves for loss and loss adjustment expenses, beginning of period	605,128			465,922
Increase (decrease) in net loss and loss adjustment expenses incurred in respect of losses occurring in:
Current year	295,379			249,212
Prior years	(23,433		)	25,495
Amortization of deferred gains on retroactive reinsurance contracts	(1,397		)	(885		)
Total incurred loss and loss adjustment expenses	270,549			273,822
Net loss and loss adjustment expenses paid in respect of losses occurring in:
Current year	(47,655		)	(58,523		)
Prior years	(145,550		)	(104,161		)
Total net paid losses	(193,205		)	(162,684		)
Foreign currency translation	15,310			(11,379		)
Net reserve for loss and loss adjustment expenses, end of period	697,782			565,681
Plus: loss and loss adjustment expenses recoverable, end of period	1,587			1
Gross reserve for loss and loss adjustment expenses, end of period	$	699,369		$	565,682

Changes in the Company’s loss and loss adjustment expense reserves result from re-estimating loss reserves and from changes in premium estimates. Furthermore, many of the Company’s contracts have sliding scale or profit commissions whereby loss reserve development can be offset by changes in acquisition costs that vary inversely with loss experience. In some instances, the Company can have loss reserve development on contracts where there is no sliding scale or profit commission or where the loss ratio falls outside of the loss ratio range to which the sliding scale or profit commission applies.

The $24.8 million decrease in prior years’ reserves, which includes amortization of deferred gains, for the nine months ended September 30, 2017 includes $31.7 million of net favorable reserve development related to re-estimating loss reserves, partially offset by $6.9 million of additional loss reserves resulting from increases in premium estimates on certain contracts. The net decrease in loss reserves as well as the impact of any offsetting changes in acquisition costs as a result of sliding scale or profit commissions is explained as follows:

•

The $31.7 million of net favorable prior years’ reserve development for the nine months ended September 30, 2017 was primarily a result of net favorable loss development on certain retroactive reinsurance contracts. These retroactive reinsurance contracts had profit commission terms such that the net favorable reserve development associated with these contracts was offset by similar increases in acquisition costs, resulting in minimal impact in net underwriting loss.

•

The $6.9 million increase in loss and loss adjustment expenses incurred related to increases in premium estimates on certain contracts was accompanied by minimal increases in acquisition costs. The increase in earned premium related to the increase in premium estimates was $8.1 million, resulting in a net decrease of $1.2 million in net underwriting loss for the nine months ended September 30, 2017.

The $24.6 million increase in prior years’ reserves, which includes amortization of deferred gains, for the nine months ended September 30, 2016 includes $15.0 million of net adverse reserve development related to re-estimating loss reserves and $9.6 million of additional loss reserves resulting from increases in premium estimates on certain contracts. The net increase in loss reserves as well as the impact of any offsetting changes in acquisition costs as a result of sliding scale or profit commissions is explained as follows:


•	The $15.0 million of net adverse prior years’ reserve development for the nine months ended September 30, 2016 was accompanied by net decreases of $2.5 million in acquisition costs, resulting in a net increase of $12.5 million in net underwriting loss. The net underwriting loss impact of the adverse loss development was

primarily due to:


◦	$4.8 million of net adverse underwriting loss development relating to one multi-line contract written since 2014. This contract contains underlying commercial auto physical damage and auto extended warranty exposure. The adverse loss experience is a result of an increase in the number of reported claims and inadequate pricing in certain segments of the underlying business;

◦

$3.5 million of net adverse underwriting loss development relating to our Florida homeowners’ reinsurance contracts primarily as a result of higher than anticipated water damage claims and an increase in the practice of assignment of benefits whereby homeowners assign their rights for filing and settling claims to attorneys and public adjusters, which has led to increases in the frequency of claims reported as well as the severity of losses and loss adjustment expenses. Contracts for which we experienced this adverse loss development have not been renewed;


◦	$3.3 million of net adverse underwriting loss development relating to a workers’ compensation contract written in 2012, 2013, and 2014 under which we have been experiencing claims developing with higher than anticipated severity, which led to an increase in our previous loss assumptions on this contract; and


◦	$3.1 million of net adverse underwriting loss development relating to non-standard auto contracts, primarily due to the inability of cedents to promptly react to increasing frequency and severity trends, resulting in underpriced business and adverse selection.

•

The $9.6 million increase in loss and loss adjustment expenses incurred related to the increase in premium estimates on certain contracts was accompanied by a $5.2 million increase in acquisition costs, for a total of $14.8 million increase in loss and loss adjustment expenses incurred and acquisition costs. The related increase in earned premium related to the increase in premium estimates was $14.8 million, resulting in minimal impact in net underwriting loss for the nine months ended September 30, 2016.


•	In total, the change in net underwriting loss for prior periods due to loss reserve development and adjustments to premium estimates was an increase in net underwriting loss of $12.5 million for the nine months ended September 30, 2016.