
	6.	Reserves for Losses and Loss Adjustment Expenses:

Activity in the consolidated reserves for unpaid losses and LAE is summarized as follows (in thousands):



		2016		2015		2014

Balance at January 1	$	450,878	$	415,135	$	382,640
Less reinsurance recoverable		102,791		91,943		70,172
Net balance at January 1		348,087		323,192		312,468

Incurred related to:
Current year		246,080		237,102		215,258
Prior years		7,608		(6,953)		(5,203)
Total incurred		253,688		230,149		210,055

Paid related to:
Current year		93,067		83,132		76,231
Prior years		150,378		122,122		123,100
Total paid		243,445		205,254		199,331

Net balance at December 31		358,330		348,087		323,192
Plus reinsurance recoverable		123,237		102,791		91,943
Balance at December 31	$	481,567	$	450,878	$	415,135

The $7.6 million unfavorable net development, $7.0 million favorable net development and $5.2 million favorable net development in prior accident years recognized in 2016, 2015 and 2014, respectively, represent normal changes in our loss reserve estimates. In 2016, the aggregate loss reserve estimates for prior years were increased to reflect unfavorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be more than the previous estimates. In 2015 and 2014, the aggregate loss reserve estimates for prior years were decreased to reflect favorable loss development when the available information indicated a reasonable likelihood that the ultimate losses would be less than the previous estimates. Generally, changes in reserves are caused by variations between actual experience and previous expectations and by reduced emphasis on the Bornhuetter-Ferguson method due to the aging of the accident years.

The $7.6 million increase in prior period reserves for unpaid losses and LAE recognized in 2016 was attributable to $5.3 million favorable net development on claims incurred in the 2015 accident year, $3.9 million unfavorable net development on claims incurred in the 2014 accident year and $9.0 million unfavorable net development on claims incurred in the 2013 and prior accident years. Our MGA Commercial Products operating unit, Specialty Personal Lines operating unit and Specialty Commercial operating unit accounted for $11.3 million, $5.0 million, and $1.2 million, respectively, of the increase in prior period reserves recognized during 2016. The increase in reserves for our MGA Commercial operating unit was primarily related to our commercial auto liability line of business. The increase in reserves for our Specialty Personal Lines operating unit was primarily attributable to the 2015, 2014 and 2013 and prior accident years. The increase in reserves for our Specialty Commercial operating unit was primarily related to $0.9 million unfavorable development in our medical professional liability products and $0.7 million related to our commercial auto liability specialty program, partially offset by $0.3 million favorable development in our general aviation line of business and $0.1 million favorable development in our commercial excess liability line of business. These unfavorable developments were partially offset by favorable development of $6.6 million in our Standard Commercial P&C operating unit and $3.3 in our Workers Compensation operating unit. The decrease in reserves for our Standard Commercial P&C operating unit was primarily related to our general liability lines of business. The decrease in prior period reserves for our Workers Compensation operating unit was attributable to the 2015, 2014, 2013 and prior accident years.

Short-Duration Contract Disclosures

ASU 2015-09, “Disclosures about Short-Duration Contracts” (Topic 944), requires insurers to make disclosures about their liability for unpaid claims and claim adjustment expenses for short-duration insurance contracts. These disclosures include tables showing incurred and paid claims development information (net of reinsurance and excluding unallocated loss adjustment expenses) which are disaggregated based on the characteristics of the insurance contracts that the insurer writes and other factors specific to the reporting entity. The information should be disclosed by accident year for the number of years claims typically remain outstanding, but need not be more than 10 years, including a reconciliation of the disaggregated information to the consolidated statement of financial position. The basis for our disaggregation of this information is by each of our three reportable segments. See Note 10, “Segment Information,” for additional information regarding our three reportable segments.

Reserves for Incurred But Not Reported (“IBNR”) Claims

Reserves for IBNR claims are based on the estimated ultimate cost of settling claims, including the effects of inflation and other social and economic factors, using past experience adjusted for current trends and any other factors that would modify past experience. We use a variety of statistical and actuarial techniques to analyze current claims costs, including frequency and severity data and prevailing economic, social and legal factors. Each such method has its own set of assumptions and outputs, and each has strengths and weaknesses in different areas. Since no single estimation method is superior to another method in all situations, the methods and assumptions used to project loss reserves will vary by coverage and product. We use what we believe to be the most appropriate set of actuarial methods and assumptions for each product line grouping and coverage. While the loss projection methods may vary by product line and coverage, the general approach for calculating IBNR remains the same: ultimate losses are forecasted first, and that amount is reduced by the amount of cumulative paid claims and case reserves. Reserves established in prior years are adjusted as loss experience develops and new information becomes available. Adjustments to previously estimated reserves are reflected in the results of operations in the year in which they are made.

As described above, various actuarial methods are utilized to determine the reserves for losses and LAE recorded in our Consolidated Balance Sheets. Weightings of methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures, and time elements. There were no significant changes to the methods and assumptions underlying our consolidated reserve estimations and selections as of December 31, 2016.

Methodology for Determining Cumulative Number of Reported Claims

A claim file is created when the Company is notified of an actual demand for payment, notified of an event that may lead to a demand for payment or when it is determined that a demand for payment could possibly lead to a future demand for payment on another coverage on the same policy or on another policy. The cumulative number of reported claims is predominately measured at a coverage level by occurrence, with the exception of our Specialty Commercial operating unit which is predominately measured at the claim level. Reported occurrences that do not result in a liability are included in reported claims. The Company does not generate claim counts for ceded business.

Incurred & Paid Claims Development Disclosures

The following tables provide information about incurred and cumulative paid losses and allocated loss adjustment expenses (“ALAE”), net of reinsurance for our three reportable segments, our Specialty Commercial Segment, our Standard Commercial Segment and our Personal Segment. The incurred and paid losses by accident year information presented for all segments in the below tables for calendar years prior to 2016 is required supplementary information and is unaudited. The following tables also include IBNR reserves plus expected development on reported claims and the cumulative number of reported claims as of December 31, 2016 ($ in thousands):

Specialty Commercial Segment



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																						As of December 31,
Accident Year		For the Years Ended December 31,																				IBNR	Cumulative Number of Reported Claims
		Unaudited
		2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		2016	2016

2007	$	51,458	$	52,141	$	51,813	$	52,673	$	50,158	$	49,654	$	49,096	$	49,056	$	49,290	$	49,544	$	68	6,095
2008				55,617		56,150		58,143		57,923		56,579		55,157		55,425		55,457		55,864		(102)	7,367
2009						60,950		62,679		61,196		59,471		59,831		59,635		59,988		61,361		87	5,456
2010								74,187		78,089		75,695		77,593		78,003		77,972		77,631		1,227	4,999
2011										88,679		87,558		91,059		90,713		89,737		87,793		1,641	5,782
2012												106,371		111,253		111,841		115,709		116,320		2,020	7,337
2013														140,546		135,114		137,230		143,983		2,127	9,188
2014																144,996		133,464		138,842		6,547	10,049
2015																		147,304		146,610		23,447	10,707
2016																				151,494		52,283	10,424
																		Total	$	1,029,442


Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year		For the Years Ended December 31,
		Unaudited
		2007		2008		2009		2010		2011		2012		2013		2014		2015		2016

2007	$	18,851	$	33,504	$	41,344	$	44,861	$	47,453	$	48,612	$	48,612	$	48,783	$	48,860	$	49,025
2008				24,134		37,803		44,903		51,280		53,723		53,577		54,080		54,909		55,372
2009						21,259		34,411		45,757		53,135		56,791		57,641		59,149		60,785
2010								24,818		45,234		58,139		68,625		73,398		74,513		75,787
2011										27,454		53,509		71,697		80,004		83,787		84,936
2012												37,655		60,923		82,066		97,680		109,060
2013														40,475		76,366		101,725		126,025
2014																42,097		73,631		99,521
2015																		39,515		74,906
2016																				41,397
																		Total	$	776,814
								All outstanding liabilities before 2007, net of reinsurance												(26)
				Liabilities for claims and claim adjustment expenses, net of reinsurance															$	252,602

Standard Commercial Segment



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																						As of December 31,
Accident Year		For the Years Ended December 31,																				IBNR	Cumulative Number of Reported Claims
		Unaudited
		2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		2016	2016

2007	$	48,423	$	45,280	$	42,632	$	42,898	$	41,814	$	39,476	$	37,894	$	36,798	$	37,321	$	36,419	$	576	3,156
2008				49,452		47,557		46,762		45,556		42,758		41,597		40,387		40,001		39,195		1,826	3,246
2009						44,719		45,674		46,772		46,778		45,970		44,159		43,851		43,107		2,102	2,632
2010								45,263		45,235		44,847		43,164		43,459		42,426		42,175		2,252	2,903
2011										60,236		56,489		55,156		49,268		47,266		47,423		3,387	4,364
2012												51,998		52,554		48,222		45,990		44,272		5,144	3,212
2013														55,482		57,528		56,703		53,174		6,379	3,910
2014																55,488		55,808		53,568		8,979	3,531
2015																		49,571		49,857		11,946	3,129
2016																				46,880		16,885	2,554
																		Total	$	456,070



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year		For the Years Ended December 31,
		Unaudited
		2007		2008		2009		2010		2011		2012		2013		2014		2015		2016

2007	$	13,883	$	20,362	$	25,484	$	28,908	$	31,311	$	32,288	$	32,949	$	33,561	$	33,982	$	34,483
2008				17,182		25,624		29,058		32,523		34,056		34,762		35,360		36,276		36,859
2009						15,242		28,313		32,075		35,818		38,316		40,389		40,575		40,629
2010								21,302		28,342		30,957		33,428		37,166		39,115		39,706
2011										24,899		35,119		38,909		40,301		41,140		42,441
2012												23,445		32,203		34,789		37,191		38,526
2013														23,123		36,411		41,809		44,475
2014																24,255		37,122		41,514
2015																		19,085		34,245
2016																				21,508
																		Total	$	374,386
								All outstanding liabilities before 2007, net of reinsurance												538
				Liabilities for claims and claim adjustment expenses, net of reinsurance															$	82,222

Personal Segment



Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance																						As of December 31,
Accident Year		For the Years Ended December 31,																				IBNR	Cumulative Number of Reported Claims
		Unaudited
		2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		2016	2016

2007	$	28,774	$	31,603	$	31,252	$	31,485	$	31,651	$	31,931	$	32,272	$	32,517	$	32,528	$	32,528	$	-	15,814
2008				36,247		36,976		38,329		39,412		39,793		40,170		40,239		40,324		40,369		-	17,353
2009						40,436		42,092		46,244		47,977		48,930		49,694		49,772		49,891		-	21,052
2010								63,862		78,294		80,765		84,724		83,903		84,252		84,591		6	30,179
2011										75,746		77,652		87,810		86,757		86,804		86,948		(28)	31,612
2012												58,604		73,795		70,552		71,513		72,042		50	23,937
2013														55,706		59,132		60,100		60,211		234	23,461
2014																5,452		5,340		6,243		406	19,275
2015																		23,104		25,682		1,813	23,234
2016																				32,260		6,638	21,134
																		Total	$	490,765



Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Accident Year		For the Years Ended December 31,
		Unaudited
		2007		2008		2009		2010		2011		2012		2013		2014		2015		2016

2007	$	$ 18,106	$	27,757	$	30,043	$	30,975	$	31,355	$	31,523	$	32,056	$	31,213	$	32,531	$	32,530
2008				20,005		32,555		36,782		38,925		39,511		40,210		40,309		40,323		40,347
2009						23,306		37,621		44,689		47,967		49,287		49,539		49,704		49,853
2010								38,643		67,755		75,199		82,624		83,511		84,111		84,556
2011										46,416		67,939		83,497		85,533		86,217		86,593
2012												37,860		64,278		68,849		70,807		71,995
2013														45,901		54,514		58,047		59,775
2014																2,515		4,418		5,631
2015																		11,570		22,281
2016																				21,669
																		Total	$	475,230

						All outstanding liabilities before 2007, net of reinsurance														9

				Liabilities for claims and claim adjustment expenses, net of reinsurance															$	15,544

The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in our Consolidated Balance Sheets is as follows (in thousands):


		2016

Net outstanding liabilities for losses and LAE

Specialty Commercial Segment	$	252,602
Standard Commercial Segment		82,222
Personal Segment		15,544
Liabilities for unpaid losses and allocated loss adjustment expenses, net of reinsurance		350,368

Reinsurance recoverable on unpaid losses and LAE
Specialty Commercial Segment		102,597
Standard Commercial Segment		8,540
Personal Segment		12,100
Total reinsurance recoverable on unpaid losses and LAE		123,237

Unallocated loss adjustment expenses
Specialty Commercial Segment		3,831
Standard Commercial Segment		3,031
Personal Segment		1,100
Total unallocated loss adjustment expenses		7,962

Total reserves for unpaid losses and loss adjustment expenses	$	481,567

Claims Duration

The following table provides supplementary unaudited information about the annual percentage payout of incurred losses and ALAE, net of reinsurance, as of December 31, 2016:



	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (1)
	Unaudited
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Specialty Commercial Segment	32.4%	24.8%	17.4%	12.0%	6.0%	1.2%	1.2%	1.5%	0.5%	-0.3%
Standard Commercial Segment	44.6%	23.0%	8.7%	6.6%	5.0%	3.3%	1.3%	1.4%	1.3%	-1.4%
Personal Segment	51.5%	29.2%	10.9%	4.3%	1.4%	0.8%	0.7%	-0.7%	1.9%	0.0%

(

(1)

The average annual percentage payout is calculated from a paid losses and ALAE development pattern based on an actuarial analysis of the paid losses and ALAE movements by accident year for each disaggregation category. The paid losses and ALAE development pattern provides the expected percentage of ultimate losses and ALAE to be paid in each year. The pattern considers all accident years included in the claims development tables.