HISTORICAL LOSS AND LAE DEVELOPMENT

3 Months Ended

Mar. 31, 2020

HISTORICAL LOSS AND LAE DEVELOPMENT

HISTORICAL LOSS AND LAE DEVELOPMENT

3. HISTORICAL LOSS AND LAE DEVELOPMENT

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first three months of 2020 and 2019:

	For the Three-Month Periods
	Ended March 31,
(in thousands)	2020		2019
Unpaid losses and LAE at beginning of year
Gross	$	1,574,352	$	1,461,348
Ceded		(384,517)		(364,999)
Net	$	1,189,835	$	1,096,349
Adoption impact of ASU 2016-13 on reinsurance balances recoverable	$	(1,345)	$	—
Increase (decrease) in incurred losses and LAE
Current accident year	$	126,194	$	113,930
Prior accident years		(15,173)		(19,633)
Total incurred	$	111,021	$	94,297
Loss and LAE payments for claims incurred
Current accident year	$	(9,295)	$	(5,531)
Prior accident years		(81,897)		(70,145)
Total paid	$	(91,192)	$	(75,676)
Net unpaid losses and LAE at March 31	$	1,208,319	$	1,114,970
Unpaid losses and LAE at March 31
Gross	$	1,574,760	$	1,479,344
Ceded		(366,441)		(364,374)
Net	$	1,208,319	$	1,114,970

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required financial assets, including reinsurance balances recoverable, to be presented at the net amount expected to be collected. We previously maintained an allowance for uncollectible reinsurance balances prior to the adoption of this update. However, in order to comply with the updated requirements, we released $1.3 million of the allowance on uncollectible reinsurance balances upon adoption. The implementation guidance required the cumulative-effect adjustment be made to the beginning balance of retained earnings, rather than through net earnings like historical changes have and ongoing modifications will continue to be recorded. See note 1. B. for more information on the adoption of the ASU.

For the first three months of 2020, incurred losses and LAE included $15.2 million of favorable development on prior years’ loss reserves. The majority of products experienced modest amounts of favorable development on prior accident years, with notable contributions from transportation, marine, small commercial and surety. No products experienced significant adverse development.

For the first three months of 2019, incurred losses and LAE included $19.6 million of favorable development on prior years’ loss reserves. General liability, commercial excess and personal umbrella, professional services and surety were drivers of the favorable development. Executive products experienced adverse development.

The spread of COVID-19 and related economic shutdown has increased the uncertainty that is always present in our estimate of the ultimate cost of loss and settlement expense. Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of March 31, 2020. We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite. The industry is experiencing new issues, including the temporary suspension of civil court cases in most states, the extension of certain statutes of limitations and a significant reduction in economic activity and insured exposure in some classes. Our booked reserves include consideration of these factors, but legislative, regulatory or judicial actions could result in loss reserve deficiencies and reduce earnings in future periods.