Unpaid Losses and Loss Adjustment Expense Reserves

9 Months Ended

Sep. 30, 2020

Unpaid Losses and Loss Adjustment Expense Reserves

The unpaid losses and Loss Adjustment Expense (“LAE”) reserves are an estimate of the Company’s liability from incurred claims at the end of the reporting period. The unpaid losses and LAE reserves are the result of an ongoing analysis of recent loss development trends and emerging historical experience. Original estimates are increased or decreased as additional information becomes known regarding individual claims. In setting its reserves, the Company reviews its loss data to estimate expected loss development. Management believes that its use of standard actuarial methodology applied to its analyses of its historical experience provides a reasonable estimate of future losses. However, actual future losses may differ from the Company’s estimate, and may be affected by future events beyond the control of management, including inflation, which may favorably or unfavorably impact the ultimate settlement of the Company’s losses and LAE, as well as changes in the law and judicial interpretations.

The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. In addition to inflation, the average severity of claims is affected by a number of factors that may vary by types and features of policies written. Future average severities are projected from historical trends, adjusted for implemented changes in underwriting standards and policy provisions, as well as general economic trends. These estimated trends are monitored and revised as necessary based on actual development.

The following tables present a reconciliation of beginning and ending balances for unpaid losses and LAE:


	Nine Months Ended September 30, 2020
	Property and Casualty		Accident and Health		NGHC		Reciprocal Exchanges		Total
Gross balance at beginning of the period	$	2,528,754	$	151,874	$	2,680,628	$	205,786	$	2,886,414
Less: Reinsurance recoverable at beginning of the period	(1,016,368)		(11,266)		(1,027,634)		(84,174)		(1,111,808)
Net balance at beginning of the period	1,512,386		140,608		1,652,994		121,612		1,774,606
Incurred losses and LAE related to:
Current year	1,711,599		248,269		1,959,868		117,486		2,077,354
Prior year	13,989		(22,065)		(8,076)		(2,670)		(10,746)
Total incurred	1,725,588		226,204		1,951,792		114,816		2,066,608
Paid losses and LAE related to:
Current year	(959,452)		(126,296)		(1,085,748)		(68,269)		(1,154,017)
Prior year	(749,463)		(81,757)		(831,220)		(44,980)		(876,200)
Total paid	(1,708,915)		(208,053)		(1,916,968)		(113,249)		(2,030,217)
Net balance at end of the period	1,529,059		158,759		1,687,818		123,179		1,810,997
Plus: Reinsurance recoverable at end of the period	982,491		18,660		1,001,151		85,317		1,086,468
Gross balance at end of the period	$	2,511,550	$	177,419	$	2,688,969	$	208,496	$	2,897,465


	Nine Months Ended September 30, 2019
	Property and Casualty		Accident and Health		NGHC		Reciprocal Exchanges		Total
Gross balance at beginning of the period	$	2,507,409	$	271,280	$	2,778,689	$	178,470	$	2,957,159
Less: Reinsurance recoverable at beginning of the period	(1,182,588)		(24,575)		(1,207,163)		(77,979)		(1,285,142)
Net balance at beginning of the period	1,324,821		246,705		1,571,526		100,491		1,672,017
Incurred losses and LAE related to:
Current year	1,726,618		279,460		2,006,078		125,250		2,131,328
Prior year	19,791		(37,775)		(17,984)		(666)		(18,650)
Total incurred	1,746,409		241,685		1,988,094		124,584		2,112,678
Paid losses and LAE related to:
Current year	(661,742)		(136,261)		(798,003)		(76,704)		(874,707)
Prior year	(1,013,023)		(105,076)		(1,118,099)		(39,005)		(1,157,104)
Total paid	(1,674,765)		(241,337)		(1,916,102)		(115,709)		(2,031,811)
Acquired losses and LAE reserves	92,573		—		92,573		—		92,573
Unrealized foreign exchange gain	—		(8,204)		(8,204)		—		(8,204)
Net balance at end of the period	1,489,038		238,849		1,727,887		109,366		1,837,253
Plus: Reinsurance recoverable at end of the period	1,079,560		38,352		1,117,912		84,090		1,202,002
Gross balance at end of the period	$	2,568,598	$	277,201	$	2,845,799	$	193,456	$	3,039,255

Prior Year Loss Development, Net of Reinsurance

Prior year development is based upon numerous estimates by line of business and accident year. No additional premiums or return premiums have been accrued as a result of the prior year effects.

2020. Loss and LAE for the nine months ended September 30, 2020, included $10,746 of favorable loss development on prior accident year loss and LAE reserves. The $11,319 of unfavorable loss development in the property and casualty segment (including $2,670 of favorable loss development for the Reciprocal Exchanges) was driven by small business auto, while the $22,065 of favorable loss development in the accident and health segment was driven by the small group self-funded business and short term medical.

2019. Loss and LAE for the nine months ended September 30, 2019, included $18,650 of favorable loss development on prior accident year loss and LAE reserves. The $19,125 of unfavorable loss development in the property and casualty segment (including $666 of favorable loss development for the Reciprocal Exchanges) was driven by small business auto, while the $37,775 of favorable loss development in the accident and health segment was driven by the small group self-funded business and short term medical.