The Company uses both historical experience and industry-wide loss development factors to provide a reasonable basis for estimating future losses. In the future, certain events may be beyond the control of management, such as changes in law, judicial interpretations of law, and rates of inflation, which may favorably or unfavorably impact the ultimate settlement of the Company’s loss and LAE reserves.

The anticipated effect of inflation is implicitly considered when estimating liabilities for loss and LAE. While anticipated changes in claim costs due to inflation are considered in estimating the ultimate claim costs, changes in the average severity of claims are caused by a number of factors that vary with the individual type of policy written. Ultimate losses are projected based on historical trends adjusted for implemented changes in underwriting standards, claims handling, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary.

The reserving process begins with the collection and analysis of paid losses and incurred claims data for each of the Company's contracts. While reserves are mostly reviewed on a contract by contract basis, paid loss and incurred claims data is also aggregated into reserving segments. The segmental data is disaggregated by reserving class and further disaggregated by either accident year (i.e. the year in which the loss event occurred) or by underwriting year (i.e. the year in which the contract generating the premium and losses incepted). In cases where the Company uses underwriting year information, reserves are subsequently allocated to the respective accident year. The reserve for loss and LAE consists of:


	June 30, 2021		December 31, 2020
Reserve for reported loss and LAE	$	906,833	$	998,691
Reserve for losses incurred but not reported ("IBNR")	767,757		894,608
Reserve for loss and LAE	$	1,674,590	$	1,893,299


For the Six Months Ended June 30,	2021		2020
Gross loss and LAE reserves, January 1	$	1,893,299	$	2,439,907
Less: reinsurance recoverable on unpaid losses, January 1	592,571		623,422
Net loss and LAE reserves, January 1	1,300,728		1,816,485
Net incurred losses related to:
Current year	15,393		32,687
Prior years	(18,361)		(593)
	(2,968)		32,094
Net paid losses related to:
Current year	8,479		(1,832)
Prior years	(206,708)		(387,023)
	(198,229)		(388,855)
Retroactive reinsurance adjustment	20,687		1,410
Effect of foreign exchange rate movements	(11,177)		(7,408)
Net loss and LAE reserves, June 30	1,109,041		1,453,726
Reinsurance recoverable on unpaid losses, June 30	565,549		617,496
Gross loss and LAE reserves, June 30	$	1,674,590	$	2,071,222

Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves established in previous calendar years. The favorable or unfavorable development reflects changes in management's best estimate of the ultimate losses under the relevant reinsurance policies after considerable review of changes in actuarial assessments. During the three and six months ended June 30, 2021, the Company recognized net favorable prior year loss development of $12,807 and $18,361, respectively (2020 - favorable $60 and $593, respectively).

In the Diversified Reinsurance segment, net favorable prior year loss development was $951 and $937, respectively, for the three and six months ended June 30, 2021 (2020 - adverse $362 and favorable $171, respectively). Prior year loss development for the three and six months ended June 30, 2021 was due to favorable reserve development in German Auto Programs, European Capital Solutions and other runoff business. The favorable development for the six months ended June 30, 2020 was primarily due to favorable reserve development in German Auto Programs partly offset by adverse development in specific German Auto Programs for the three months ended June 30, 2020.

In the AmTrust Reinsurance segment, the net favorable prior year loss development was $11,856 and $17,424, respectively, for the three and six months ended June 30, 2021 (2020 - favorable $422 for both periods). The net favorable prior year loss development for the three and six months ended June 30, 2021 was primarily due to favorable development in Workers Compensation and Commercial Auto Liability partly offset by adverse development in Hospital Liability. The net favorable prior year loss development for the three and six months ended June 30, 2020 was primarily due to favorable development in Workers Compensation partly offset by adverse development within Commercial General Liability programs.

Retroactive reinsurance adjustment of $20,687 represents the decrease in reinsurance recoverable on unpaid losses under the LPT/ADC Agreement with Cavello that was recognized in the six months ended June 30, 2021 (2020 - $1,410) in the reconciliation of our beginning and ending gross and net loss and LAE reserves presented above. It reflects the corresponding decrease in the deferred gain on retroactive reinsurance for favorable development on reserves covered under the LPT/ADC Agreement of $20,687 during the six months ended June 30, 2021. The deferred gain on retroactive reinsurance represents the cumulative adverse development under the AmTrust Quota Share covered under the LPT/ADC Agreement at June 30, 2021 and December 31, 2020. Amortization of the deferred gain will not occur until paid losses have exceeded the minimum retention under the LPT/ADC Agreement, which is estimated to be in 2024.