Unpaid Losses and Loss Adjustment Expenses

The Company establishes reserves for unpaid losses and loss adjustment expenses which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; “IBNR”) and loss adjustment expenses 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, including reserves for catastrophes, 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 prior year 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 loss adjustment expenses, 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 loss adjustment expenses, net of recoverables from reinsurers, for the periods indicated as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015		2014
Gross reserves - beginning of period	$	32,357		$	31,833		$	31,531	$	28,908
Less: reinsurance recoverables on unpaid losses		5,022			4,207			3,224		3,953
Net reserves - beginning of period		27,335			27,626			28,307		24,955

Add: incurred losses and loss adjustment expenses, net of reinsurance:
Current period		9,894			10,509			27,234		31,743
Prior period		(81	)		(294	)		125		(1,266	)
Total net incurred losses and loss adjustment expenses		9,813			10,215			27,359		30,477

Deduct: loss and loss adjustment expense payments, net of reinsurance:
Current period		6,972			8,090			13,766		16,861
Prior period		2,650			1,767			14,374		10,587
Total net loss and loss adjustment expense payments		9,622			9,857			28,140		27,448

Net reserves - end of period		27,526			27,984			27,526		27,984
Plus: reinsurance recoverables on unpaid losses		5,069			3,673			5,069		3,673
Gross reserves - end of period	$	32,595		$	31,657		$	32,595	$	31,657

The Company’s incurred losses during the three and nine months ended September 30, 2015, reflect prior-year favorable reserve development of $81,000 and adverse development of $125,000, respectively. In the third quarter of 2015, there was $256,000 and $95,000 of favorable development in the commercial multi-peril and homeowners lines, respectively. This favorable development was partially offset by $163,000 and $161,000 of adverse reserve development in the run-off personal automobile and commercial automobile lines, respectively. For the nine months ended September 30, 2015, the adverse development was generated by the personal and commercial automobiles lines, totaling $494,000 and $696,000, respectively. This adverse development was partially offset by favorable development in other lines, including $530,000, $125,000 and $313,000 in the commercial multi-peril, other liability and workers’ compensation lines, respectively.

The Company’s incurred losses during the three and nine months ended September 30, 2014, reflect prior-year favorable reserve development of $294,000 and $1.3 million, respectively. In the third quarter of 2014, there was $91,000 and $91,000 of favorable reserve development in the commercial multi-peril and other liability lines, respectively. For the nine months ended September 30, 2014, there was a similar result, with the favorable development being generated primarily by the commercial multi-peril and other liability lines, totaling $877,000 and $481,000, respectively. This favorable development was partially offset by adverse development of $422,000 in the low-value dwelling line.