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, in addition to its own 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,
	2018			2017			2016
	(in thousands)
Net reserves for unpaid losses and loss adjustment expenses, beginning of year	$	267,493		$	194,602		$	124,126
Commutation of MLQS:
2016 MLQS	—			—			9,109
2015 MLQS	—			27,929			—
2014 MLQS	—			—			24,296
Total commutation of MLQS	—			27,929			33,405
Adjusted net reserves for losses and loss adjustment expenses	267,493			222,531			157,531
Incurred losses and loss adjustment expenses:
Current year	135,078			114,960			83,675
Prior year	(7,037		)	(11,280		)	(12,714		)
Total net losses and loss adjustment expenses incurred	128,041			103,680			70,961
Payments:
Current year	14,118			13,792			5,494
Prior year	67,653			44,926			28,396
Total payments	81,771			58,718			33,890
Net reserves for unpaid losses and loss adjustment expenses, end of year	313,763			267,493			194,602
Reinsurance recoverable on unpaid losses	55,389			48,224			70,199
Gross reserves for unpaid losses and loss adjustment expenses, end of year	$	369,152		$	315,717		$	264,801

During the year ended December 31, 2018, our net incurred losses for accident years 2017 and prior developed favorably by $7.0 million. This favorable development included $6.8 million for the 2017 accident year and $3.8 million for accident year 2016. 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 by adverse development of $3.6 million for the 2011 through 2015 accident years. The unfavorable development was primarily attributable to claims on the other liability occurrence line of business.

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.

Incurred and Paid Claims Development

The following is information about incurred and paid claims development as of December 31, 2018, 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, 2010 to December 31, 2017, 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, 2018
Accident Year	2014 Unaudited		2015 Unaudited		2016 Unaudited		2017 Unaudited		2018		Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	($ in thousands)
2014	$	1,561	$	1,344	$	1,240	$	1,222	$	1,217	$	—	28
2015			1,394		880		857		872		7		63
2016					4,177		3,392		3,301		31		286
2017							12,473		11,705		115		1,031
2018									11,559		818		611
							Total		$	28,654



	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2014 Unaudited		2015 Unaudited		2016 Unaudited		2017 Unaudited		2018
	($ in thousands)
2014	$	169	$	1,217	$	1,217	$	1,217	$	1,217
2015			584		706		832		865
2016					1,867		3,257		3,265
2017							9,938		11,233
2018									9,132
							Total		25,712
			All outstanding liabilities before 2014, net of reinsurance						—
			Liabilities for claims and claim adjustment expenses, net of reinsurance						$	2,942

Historical Claims Duration

The following is supplementary information about average historical claims duration as of December 31, 2018:



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5
Property	60.2	%	38.3	%	4.9	%	1.9	%	—	%

Casualty - Claims Made



	Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,																		As of December 31, 2018
Accident Year	2010 Unaudited		2011 Unaudited		2012 Unaudited		2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017 Unaudited		2018		Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims

2010	$	778	$	805	$	679	$	737	$	946	$	916	$	894	$	883	$	876	$	17	14
2011			4,246		3,844		3,646		3,609		3,560		3,374		3,261		3,225		133		76
2012					7,913		5,749		4,205		3,102		2,845		2,477		2,314		368		138
2013							15,238		11,639		9,113		7,917		7,002		6,463		1,007		227
2014									18,847		14,289		11,748		11,217		10,948		1,963		273
2015											18,883		16,777		14,896		13,583		3,375		255
2016													19,170		14,694		14,675		5,031		308
2017															18,116		17,096		9,003		359
2018																	22,429		19,175		432
															Total		91,609



	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 Unaudited		2018
	($ in thousands)
2010	$	—	$	79	$	368	$	393	$	862	$	859	$	859	$	859	$	859
2011			139		1,037		1,392		2,116		3,044		3,042		3,042		3,065
2012					153		475		877		1,024		1,090		1,882		1,946
2013							499		1,915		4,436		5,070		5,320		5,439
2014									435		1,865		5,039		6,384		8,290
2015											217		4,496		7,562		9,238
2016													1,158		3,015		6,907
2017															340		4,897
2018																	507
															Total		41,148
					Liabilities for claims and claim adjustment expenses, net of reinsurance												$	50,461

Casualty - Occurrence



	Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance
	For the Years Ended December 31,																	As of December 31, 2018
Accident Year	2010 Unaudited		2011 Unaudited		2012 Unaudited		2013 Unaudited		2014 Unaudited		2015 Unaudited		2016 Unaudited		2017 Unaudited		2018	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	402	$	55	48
2011			5,839		5,940		5,757		7,340		7,613		8,142		8,375		9,023	446		220
2012					16,977		17,436		18,803		20,401		20,579		22,001		22,401	1,753		566
2013							30,616		28,771		28,037		29,039		31,731		33,248	4,594		822
2014									47,805		40,668		38,049		36,678		39,313	9,704		1,122
2015											59,717		51,739		49,122		52,100	17,260		1,253
2016													61,440		55,680		53,549	27,787		1,143
2017															71,126		67,151	47,150		1,116
2018																	86,157	75,246		756
															Total		363,344



	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 Unaudited		2018
	($ in thousands)
2010	$	4	$	37	$	59	$	113	$	263	$	261	$	273	$	313	346
2011			207		1,596		2,519		3,788		4,575		6,363		6,868		8,510
2012					757		4,441		7,850		11,238		14,382		16,474		19,383
2013							1,099		4,469		7,957		14,890		21,348		26,715
2014									698		3,081		8,489		17,576		23,771
2015											941		3,161		12,685		28,385
2016													1,099		6,015		17,225
2017															1,581		9,352
2018																	2,638
															Total		136,325
					Liabilities for claims and claim adjustment expenses, net of reinsurance												$	227,019

Historical Claims Duration

The following is supplementary information about average historical claims duration as of December 31, 2018:



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9
Casualty - claims made	4.0	%	19.6	%	25.5	%	11.0	%	21.3	%	8.9	%	0.9	%	0.4	%	—	%
Casualty - occurrence	2.3	%	10.2	%	13.5	%	19.5	%	19.0	%	11.2	%	7.2	%	14.1	%	8.3	%

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, 2018
Net outstanding liabilities
Property	$	2,942
Casualty - claims made	50,461
Casualty - occurrence	227,019
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance	280,422

Reinsurance recoverable on unpaid claims
Property	1,133
Casualty - claims made	7,617
Casualty - occurrence	46,639
Total reinsurance recoverable on unpaid claims	55,389
Unallocated claims adjustment expenses	33,341
Gross liability for unpaid claims and claim adjustment expense	$	369,152