Reserves for unpaid losses and loss adjustment expenses

The reserves for unpaid losses and loss adjustment expenses represent the Company's estimated ultimate cost of all unreported and reported but unpaid insured claims and the cost to adjust these losses that have occurred as of or before the balance sheet date. Reserves are estimated using individual case-basis valuations of reported claims and statistical analyses. Case reserves are established for individual claims that have been reported to the Company, typically by the Company's insureds or their brokers. Based on the information provided, case reserves are established by estimating the ultimate losses from the claim, including defense costs associated with the ultimate settlement of the claim. Incurred-but-not-reported ("IBNR") reserves are determined using actuarial methods to estimate losses that have occurred but have not yet been reported to the Company. The incurred Bornhuetter-Ferguson actuarial method ("BF method") is used to arrive at the Company's loss reserve estimates for each line of business. This method estimates the reserves based on the initial expected loss ratio and expected reporting patterns for losses. Because the Company has a limited number of years of loss experience compared to the period over which losses are expected to be reported, the Company uses industry and peer-group data as a basis for selecting its expected reporting patterns.

As part of the reserving process, the Company reviews historical data and considers the effect of various factors on claims development patterns including polices written on a "claims made" versus "occurrence" basis. Policies written on a claims made basis provide coverage to the insured only for losses incurred during the coverage period, and only if the claim was reported during a specified reporting period. Policies written on an occurrence basis provide coverage to the insured for liabilities arising from events occurring during the term of the policy, regardless of when a claim is actually made. Accordingly, claims related to policies written on an occurrence basis may arise many years after a policy has lapsed. Property losses, while written on an occurrence basis, are generally reported within a short time from the date of loss, and in most instances, property claims are settled and paid within a relatively short period of time.

The following table presents a reconciliation of consolidated beginning and ending reserves for unpaid losses and loss adjustment expenses:



	December 31,
	2017			2016			2015
	(in thousands)
Net reserves for unpaid losses and loss adjustment expenses, beginning of year	$	194,602		$	124,126		$	91,970
Commutation of MLQS:
2016 MLQS	—			9,109			—
2015 MLQS	27,929			—			—
2014 MLQS	—			24,296			—
2012 MLQS	—			—			8,587
	27,929			33,405			8,587
Adjusted net reserves for losses and loss adjustment expenses	222,531			157,531			100,557
Incurred losses and loss adjustment expenses:
Current year	114,960			83,675			51,434
Prior year	(11,280		)	(12,714		)	(9,196		)
Total net losses and loss adjustment expenses incurred	103,680			70,961			42,238
Payments:
Current year	13,792			5,494			2,226
Prior year	44,926			28,396			16,443
Total payments	58,718			33,890			18,669
Net reserves for unpaid losses and loss adjustment expenses, end of year	267,493			194,602			124,126
Reinsurance recoverable on unpaid losses	48,224			70,199			95,503
Gross reserves for unpaid losses and loss adjustment expenses, end of year	$	315,717		$	264,801		$	219,629

During the year ended December 31, 2017, our net incurred losses for accident years 2016 and prior developed favorably by $11.3 million. This favorable development included $9.4 million for the 2016 accident year, $4.2 million for the 2015 accident year and $1.8 million for accident year 2014. This favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business. The favorable development was offset in part by adverse development of $2.1 million for the 2013 accident year, $1.3 million for the 2012 accident year and $0.7 million for the 2011 accident year. The unfavorable development was primarily attributable to claims on the other liability occurrence line of business.

During the year ended December 31, 2016, our net incurred losses for accident years 2015 and prior developed favorably by $12.7 million. This favorable development included $6.1 million for the 2015 accident year and $6.6 million of favorable development for accident years 2014 and prior. The favorable development was primarily due to reported losses emerging at a lower level than expected, across most lines of business.

During the year ended December 31, 2015, our net incurred losses for accident years 2014 and prior developed favorably by $9.2 million. This favorable development included $6.5 million for the 2014 accident year and $2.7 million of favorable development for accident years 2013 and prior. The favorable development was primarily due to reported losses emerging at a lower level than expected, particularly on the medical malpractice and professional liability lines of business.

Incurred and Paid Claims Development

The following is information about incurred and paid claims development as of December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of IBNR liabilities plus expected development on reported claims included within the net incurred claims amounts. The development and claims duration tables below exclude the commuted MLQS contracts, which would distort development patterns related to those transactions. See Note 8 for further details regarding the commutation of the MLQS. Cumulative number of reported claims is reported on a per claim basis.

The information about incurred and paid claims development for the years ended December 31, 2016 to December 31, 2010, is presented as unaudited supplementary information.

Property



	Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,										As of December 31, 2017
Accident Year	2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017		Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	($ in thousands)
2013	$	417	$	205	$	103	$	88	$	81	$	—	7
2014			1,561		1,344		1,240		1,222		5		28
2015					1,394		880		857		26		63
2016							4,177		3,392		85		282
2017									12,473		624		998
							Total		$	18,025



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017
	($ in thousands)
2013	$	99	$	81	$	81	$	81	$	81
2014			169		1,217		1,217		1,217
2015					584		706		832
2016							1,867		3,257
2017									9,938
							Total		15,325
			All outstanding liabilities before 2013, net of reinsurance						—
			Liabilities for claims and claim adjustment expenses, net of reinsurance						$	2,700

Historical Claims Duration

The following is supplementary information about average historical claims duration as of December 31, 2017:



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5
Property	67.9	%	29.6	%	4.9	%	—	%	—	%

Casualty - Claims Made



	Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,																As of December 31, 2017
Accident Year	2010 Unaudited		2011 Unaudited		2012 Unaudited		2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017		Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	($ in thousands)
2010	$	778	$	805	$	679	$	737	$	946	$	916	$	894	$	883	$	24	14
2011			4,246		3,844		3,646		3,609		3,560		3,374		3,261		199		76
2012					7,913		5,749		4,205		3,102		2,845		2,477		576		138
2013							15,238		11,639		9,113		7,917		7,002		1,519		226
2014									18,847		14,289		11,748		11,217		3,247		271
2015											18,883		16,777		14,896		5,412		252
2016													19,170		14,694		9,162		303
2017															18,116		15,373		335
													Total		$	72,546



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2010 Unaudited		2011 Unaudited		2012 Unaudited		2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017
	($ in thousands)
2010	$	—	$	79	$	368	$	393	$	862	$	859	$	859	$	859
2011			139		1,037		1,392		2,116		3,044		3,042		3,042
2012					153		475		877		1,024		1,090		1,882
2013							499		1,915		4,436		5,070		5,320
2014									435		1,865		5,039		6,384
2015											217		4,496		7,562
2016													1,158		3,015
2017															340
													Total		28,404
					Liabilities for claims and claim adjustment expenses, net of reinsurance										$	44,142

Casualty - Occurrence



	Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,																As of December 31, 2017
Accident Year	2010 Unaudited		2011 Unaudited		2012 Unaudited		2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017		Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	($ in thousands)
2010	$	843	$	771	$	531	$	460	$	458	$	404	$	406	$	429	$	76	47
2011			5,839		5,940		5,757		7,340		7,613		8,142		8,375		641		214
2012					16,977		17,436		18,803		20,401		20,579		22,001		2,416		554
2013							30,616		28,771		28,037		29,039		31,731		6,371		784
2014									47,805		40,668		38,049		36,678		13,822		1,059
2015											59,717		51,739		49,122		25,959		1,130
2016													61,440		55,680		39,527		938
2017															71,126		63,393		712
													Total		$	275,142



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2010 Unaudited		2011 Unaudited		2012 Unaudited		2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017
	($ in thousands)
2010	$	4	$	37	$	59	$	113	$	263	$	261	$	273	$	309
2011			207		1,596		2,519		3,788		4,575		6,363		6,868
2012					757		4,441		7,850		11,238		14,382		16,474
2013							1,099		4,469		7,957		14,890		21,348
2014									698		3,081		8,489		17,576
2015											941		3,161		12,685
2016													1,099		6,015
2017															1,581
													Total		82,856
					Liabilities for claims and claim adjustment expenses, net of reinsurance										$	192,286

Historical Claims Duration

The following is supplementary information about average historical claims duration as of December 31, 2017:



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8
Casualty - claims made	4.1	%	17.7	%	24.1	%	10.4	%	21.9	%	10.5	%	—	%	—	%
Casualty - occurrence	2.3	%	10.2	%	12.8	%	18.0	%	19.8	%	10.1	%	4.4	%	8.5	%

Reconciliation of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses

The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows:



(in thousands)	December 31, 2017
Net outstanding liabilities
Property	$	2,700
Casualty - claims made	44,142
Casualty - occurrence	192,286
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance	239,128

Reinsurance recoverable on unpaid claims
Property	2,018
Casualty - claims made	7,092
Casualty - occurrence	39,114
Total reinsurance recoverable on unpaid claims	48,224
Unallocated claims adjustment expenses	28,365
Gross liability for unpaid claims and claim adjustment expense	$	315,717