Reserve for Loss and Loss Adjustment Expenses

9 Months Ended

Sep. 30, 2020

Reserve for Loss and Loss Adjustment Expenses

The Company uses both historical experience and industry-wide loss development factors to provide a reasonable basis for estimating future losses. In the future, certain events may be beyond the control of management, such as changes in law, judicial interpretations of law, and rates of inflation, which may favorably or unfavorably impact the ultimate settlement of the Company’s loss and LAE reserves.

The anticipated effect of inflation is implicitly considered when estimating liabilities for loss and LAE. While anticipated changes in claim costs due to inflation are considered in estimating the ultimate claim costs, changes in average severity of claims are caused by a number of factors that vary with the individual type of policy written. Ultimate losses are projected based on historical trends adjusted for implemented changes in underwriting standards, claims handling, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary.

The reserving process begins with the collection and analysis of paid losses and incurred claims data for each of the Company's contracts. While reserves are mostly reviewed on a contract by contract basis, paid loss and incurred claims data is also aggregated into reserving segments. The segmental data is disaggregated by reserving class and further disaggregated by either accident year (i.e. the year in which the loss event occurred) or by underwriting year (i.e. the year in which the contract generating the premium and losses incepted). The Company in some cases uses underwriting year information to analyze the Diversified Reinsurance segment and subsequently allocate reserves to the respective accident years. The reserve for loss and LAE consists of:


	September 30, 2020		December 31, 2019
Reserve for reported loss and LAE	$	1,039,079	$	1,271,358
Reserve for losses incurred but not reported ("IBNR")	935,994		1,168,549
Reserve for loss and LAE	$	1,975,073	$	2,439,907

The following table represents a reconciliation of our beginning and ending gross and net loss and LAE reserves:


For the Nine Months Ended September 30,	2020		2019
Gross loss and LAE reserves, January 1	$	2,439,907	$	3,126,134
Less: reinsurance recoverable on unpaid losses, January 1	623,422		71,901
Net loss and LAE reserves, January 1	1,816,485		3,054,233
Net incurred losses related to:
Current year	48,988		318,654
Prior years	(7,829)		96,456
	41,159		415,110
Net paid losses related to:
Current year	(5,253)		(8,969)
Prior years	(519,864)		(872,125)
	(525,117)		(881,094)
Retroactive reinsurance adjustment	32,955		(549,542)
Effect of foreign exchange rate movements	11,914		(28,330)
Net loss and LAE reserves, September 30	1,377,396		2,010,377
Reinsurance recoverable on unpaid losses, September 30	597,677		615,481
Gross loss and LAE reserves, September 30	$	1,975,073	$	2,625,858

Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves in previous calendar years. The favorable or unfavorable development reflects changes in management's best estimate of the ultimate losses under the relevant reinsurance policies after considerable review of changes in actuarial assessments. During the three and nine months ended September 30, 2020, the Company recognized net favorable prior year loss development of $7,236 and $7,829, respectively (2019 - adverse $63,184 and $96,456, respectively).

In the Diversified Reinsurance segment, net adverse prior year loss development was $483 and $312 for the three and nine months ended September 30, 2020, respectively (2019 - adverse $692 and favorable $1,456, respectively). Prior year loss development for the three and nine months ended September 30, 2020 was primarily due to adverse reserve development in European Capital Solutions. The favorable loss development for the nine months ended September 30, 2019 was largely due to favorable development in German Auto Programs as well as facultative reinsurance run-off lines.

9. Reserve for Loss and Loss Adjustment Expenses (continued)

The adverse development for the three months ended September 30, 2019 was due to facultative reinsurance run-off partially offset by favorable development in International Auto.

In the AmTrust Reinsurance segment, the net favorable prior year loss development was $7,719 and $8,141 for the three and nine months ended September 30, 2020, respectively (2019 - adverse $62,384 and $97,600, respectively). The net favorable prior year loss development for the three and nine months ended September 30, 2020 was primarily due to favorable development in Workers Compensation partly offset by adverse development within Commercial Auto and General Liability programs. The adverse development in the three and nine months ended September 30, 2019 was primarily driven by Commercial Auto and General Liability in accident years 2014 to 2018, partly offset by favorable development in Workers Compensation in accident years 2016 to 2018. The adverse development for the three and nine months ended September 30, 2019 includes $27,587 recognized from application of the $40,500 loss corridor cap on AmTrust program business (please see "Note 10. Related Party Transactions" for details).

Retroactive reinsurance adjustment of $32,955 represents the decrease in reinsurance recoverable on unpaid losses under the LPT/ADC Agreement with Cavello that was recognized in the nine months ended September 30, 2020 (2019 - $549,542 increase) in the reconciliation of our beginning and ending gross and net loss and LAE reserves presented above. This includes the corresponding decrease in the deferred gain on retroactive reinsurance for favorable development both on reserves covered under the LPT/ADC Agreement of $9,250 and Workers Compensation commuted losses of $23,705 during the nine months ended September 30, 2020 (2019 - $104,542 increase in deferred gain). The deferred gain on retroactive reinsurance represents the cumulative adverse development under the AmTrust Quota Share covered under the LPT/ADC Agreement at September 30, 2020 and September 30, 2019. Amortization of the deferred gain will not occur until paid losses have exceeded the minimum retention under the LPT/ADC Agreement, which is estimated to be in 2024.

Under the Commutation and Release Agreement with AmTrust on July 1, 2019, Maiden Bermuda transferred cash and invested assets in the amount of $312,786 which is the sum of the net ceded reserves in the amount of $330,682 with respect to the commuted Business as of December 31, 2018 less payments in the amount of $17,896 made by Maiden Bermuda with respect to the Commuted Business from January 1, 2019 through July 31, 2019. Settlement of the commutation occurred on August 12, 2019 and is reflected in the reconciliation of our beginning and ending gross and net loss and LAE reserves presented above under net paid losses related to prior years.

The Other category had net adverse prior year loss development of $108 and $312 for the three and nine months ended September 30, 2019 due to increased reserves in the run-off of the NGHC Quota Share which was commuted in November 2019.