Unpaid Loss and Loss Adjustment Expense

9 Months Ended

Sep. 30, 2022

The following table presents the activity in the liability for unpaid loss and loss adjustment expense ("LAE") for the nine months ended September 30, 2022 and 2021 ($ in millions):


	Nine Months Ended September 30,
	2022		2021
Unpaid loss and LAE at beginning of period	$	97.9	$	46.3
Less: Reinsurance recoverable at beginning of period (1)	72.7		36.3
Net unpaid loss and LAE at beginning of period	25.2		10.0
Add: Incurred loss and LAE, net of reinsurance, related to:
Current year	106.9		47.3
Prior years	(1.1)		(0.3)
Total incurred	105.8		47.0
Deduct: Paid loss and LAE, net of reinsurance, related to:
Current year	65.9		32.3
Prior years	21.9		6.3
Total paid	87.8		38.6
Unpaid loss and LAE, net of reinsurance recoverable acquired from Metromile	68.1		—
Unpaid loss and LAE, net of reinsurance recoverable, at end of period	111.3		18.4
Reinsurance recoverable at end of period (1)	109.3		55.6
Unpaid loss and LAE, gross of reinsurance recoverable, at end of period	$	220.6	$	74.0

(1) Reinsurance recoverable in this table includes only ceded unpaid loss and LAE

Unpaid loss and LAE includes anticipated salvage and subrogation recoverable.

Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders' equity. Additional variability exists due to accident year allocations of ceded amounts in accordance with reinsurance agreements, which is not expected to result in any changes to the ultimate liability. Other factors that can impact loss reserve development may also include trends in general economic conditions, including the effects of inflation. The Company had favorable development on net loss and LAE reserves of $1.1 million for the nine months ended September 30, 2022, and favorable development on net loss and LAE reserves of $0.3 million for the nine months ended September 30, 2021. No additional premiums or returned premiums have been accrued as a result of prior year effects.

For the nine months ended September 30, 2022, current accident year incurred loss and LAE included $2.2 million of net incurred loss and LAE from Hurricane Ian. The net incurred loss and LAE from Hurricane Ian as of September 30, 2022 represents the Company's best estimates based upon information currently available.

For the nine months ended September 30, 2021, current accident year incurred loss and LAE included $6.2 million of net incurred loss and LAE from the severe winter storm that affected the Company's customers in the states of Texas and Oklahoma. The net incurred loss and LAE from Winter Storm Uri as of September 30, 2021 represents the Company's best estimates based upon information currently available.

In the ordinary course of business, the Company cedes losses and LAE to other reinsurance companies. These arrangements reduce the net loss potentially arising from large or catastrophic risks. Certain of these arrangements consist of excess of loss and catastrophe contracts, which protect against losses exceeding stipulated amounts. The ceding of risk through reinsurance does not relieve the Company from its obligations to policyholders. The Company remains liable with respect to losses and LAE ceded in the event that any reinsurer does not meet obligations assumed under the reinsurance agreements. The Company does not have any significant unsecured aggregate recoverable for losses, paid and unpaid including Incurred But Not Reported ("IBNR"), loss adjustment expenses, and unearned premium with any individual reinsurer.

Through June 30, 2021, the Company had proportional reinsurance contracts which cover all of the Company's products and geographies, and transferred, or “ceded,” 75% of the premium to reinsurers ("Proportional Reinsurance Contracts"). In exchange, these reinsurers paid a ceding commission of 25% for every dollar ceded, in addition to funding all of the corresponding claims, or 75% of all claims. The Company opted to manage the remaining 25% of the business with alternative forms of reinsurance through non-proportional reinsurance contracts ("Non-Proportional Reinsurance Contracts").

A portion of the Company’s proportional reinsurance program expired on June 30, 2021 and on June 30, 2022. As the business continues to grow and diversify, and with stability in the Company's insurance results, the Company decreased the overall share of proportional reinsurance from 75% of premium to 55% effective July 1, 2022. In addition, the Company purchased a reinsurance program to protect against catastrophe risk in the U.S that exceed $80 million in losses effective July 1, 2022. Other non-proportional reinsurance contracts were renewed with terms similar to the expired contracts.

Metromile entered into a Quota Share reinsurance agreement effective January 1, 2022 through June 30, 2023. Under the terms of the agreement, the Company cedes 30% of premiums and losses to reinsurers.