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 June 30,						Six months ended June 30,
	2021			2020			2021			2020
Gross reserves - beginning of period	$	118,676		$	109,657		$	111,270		$	107,246
Less: reinsurance recoverables on unpaid losses		(26,559	)		(22,022	)		(24,218	)		(22,579	)
Net reserves - beginning of period		92,117			87,635			87,052			84,667
Add: incurred losses and LAE, net of reinsurance:
Current period		11,716			8,908			25,300			19,428
Prior period		6,210			3,037			11,988			6,786
Total net incurred losses and LAE		17,926			11,945			37,288			26,214
Deduct: loss and LAE payments, net of reinsurance:
Current period		5,120			3,044			8,300			3,918
Prior period		9,895			10,694			21,012			21,121
Total net loss and LAE payments		15,015			13,738			29,312			25,039
Net reserves - end of period		95,028			85,842			95,028			85,842
Plus: reinsurance recoverables on unpaid losses		22,824			20,892			22,824			20,892
Gross reserves - end of period	$	117,852		$	106,734		$	117,852		$	106,734

Net losses and LAE increased by $6.0 million, or 50.1%, to $17.9 million during the second quarter of 2021, compared to $11.9 million for the same period in 2020. The increase in losses was driven by adverse development that occurred during the second quarter of 2021. The Company experienced $6.2 million of adverse development for the three months ended June 30, 2021. Of the $6.2 million in adverse development, $1.9 million was related to 2017 and prior accident years, $2.4 million was related to the 2018 accident year, and $1.9 million was related to the 2019 and 2020 accident years. Substantially all of the development was from the Company’s commercial lines of business.

Net losses and LAE increased by $11.1 million, or 42.2%, to $37.3 million for the six months ended June 30, 2021, compared to $26.2 million for the same period in 2020. 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 $12.0 million of adverse development for the six months ended June 30, 2021, which increased losses further. Of the $12.0 million in adverse development, $11.4 million was related to commercial lines, while $636,000 was related to personal lines. The adverse development was mostly attributable to the 2018 and 2017 and prior accident years.

The Company’s incurred losses during the three and six months ended June 30, 2020 included prior-year adverse reserve development of $3.0 million and $6.7 million, respectively. These losses were related to the Company’s commercial lines of business.