The Company establishes reserves for unpaid losses and loss adjustment expenses ("LAE") which represent the estimated ultimate cost of all losses incurred that were both reported and unreported (i.e., incurred but not yet reported losses; or “IBNR”) and LAE incurred that remain unpaid at the balance sheet date. The Company’s reserving process takes into account known facts and interpretations of circumstances and factors including the Company’s experience with similar cases, actual claims paid, historical trends involving claim payment patterns and pending levels of unpaid claims, loss management programs,

product mix and contractual terms, changes in law and regulation, judicial decisions, and economic conditions. In the normal course of business, the Company may also supplement its claims processes by utilizing third-party adjusters, appraisers, engineers, inspectors, and other professionals and information sources to assess and settle catastrophe and non-catastrophe related claims. The effects of inflation are implicitly considered in the reserving process.

Reserves are estimates of unpaid portions of losses that have occurred, including IBNR losses; therefore, the establishment of appropriate reserves is an inherently uncertain and complex process. The ultimate cost of losses may vary materially from recorded amounts, which are based on management’s best estimates. The highest degree of uncertainty is associated with reserves for losses incurred in the current reporting period as it contains the greatest proportion of losses that have not been reported or settled. The Company regularly updates its reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in reserve estimates, which may be material, are reported in the results of operations in the period such changes are determined to be needed and recorded.

Management believes that the reserve for losses and LAE is appropriately established in the aggregate and adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by the date of the condensed consolidated financial statements based on available facts and in accordance with applicable laws and regulations.

The table below provides the changes in the reserves for losses and LAE, net of reinsurance recoverables, for the periods indicated as follows (dollars in thousands):


	Three months ended March 31,
	2026			2025
Gross reserves - beginning of period	$	146,262		$	189,285
Less: reinsurance recoverables on unpaid losses		(63,909	)		(84,490	)
Net reserves - beginning of period		82,353			104,795
Add: incurred losses and LAE, net of reinsurance:
Current period		3,508			9,130
Prior period		(179	)		144
Total net incurred losses and LAE		3,329			9,274
Deduct: loss and LAE payments, net of reinsurance:
Current period		980			1,593
Prior period		9,215			13,986
Total net loss and LAE payments		10,195			15,579
Net reserves - end of period		75,487			98,490
Plus: reinsurance recoverables on unpaid losses		62,014			77,872
Gross reserves - end of period	$	137,501		$	176,362

Net losses and LAE decreased by $6.0 million, or 64.1%, to $3.3 million during the first quarter of 2026, compared to $9.3 million for the same period in 2025. The decrease was mostly due to a significant reduction in net earned premiums as the commercial lines business is in runoff and we focus on the specialty homeowners business.