Contract analysis

I. Executive Summary This memorandum analyzes Pinnacle Atlantic Reinsurance Ltd.'s ("Pinnacle Atlantic") second ground for dispute in connection with the ongoing reinsurance recovery dispute with Quorum Casualty & Surety Company ("QC&S"): the allegation that QC&S improperly allocated $22,300,000 in incurred but not reported ("IBNR") reserve strengthening to Treaty Year 2022 (July 1, 2022 – June 30, 2023) ("TY 2022")

II. Background and Factual Summary A. The 2019 Treaty Structure Treaty No. PA-QCS-2019-EXL-0044, effective July 1, 2019, is an aggregate excess-of-loss reinsurance treaty between QC&S, as cedent, and Pinnacle Atlantic, as reinsurer. The Treaty was placed through Broadreach Intermediaries Inc. ("Broadreach"), with Jamie Castellano serving as the Account Executive responsible for the placement. On behalf of QC&S, the T

III. Article 5.2 — "Losses Incurred" Definition A. Treaty Language

Article 5 of the Treaty is titled "Losses Incurred" and provides the framework for calculating the aggregate net incurred loss for each treaty year — the figure that determines whether the $120,000,000 retention has been breached and the amount, if any, of ceded losses owed by Pinnacle Atlantic. The critical operative provision for purposes of this dispute is Article 5.2, which defines the components of "losses incur

Article 5.2 provides, in relevant part: "For purposes of this Treaty, the term 'Losses Incurred' shall mean, with respect to each Treaty Year, the sum of: (a) all loss and loss adjustment expense payments made during such Treaty Year on claims arising under Covered Policies, net of salvage, subrogation, and other recoveries; (b) case reserves established or maintained as of the end of such Treaty Year on reported cla

IV. Velthorn Actuarial Advisors' Methodology A. Overview of Velthorn's Analysis Dr. Stephen Tanaka, FCAS, MAAA, is the Principal Actuary at Velthorn Actuarial Advisors LLC who performed the loss development and reserve analysis underlying the TY 2022 cession. Dr. Tanaka holds the Fellow of the Casualty Actuarial Society (FCAS) designation and is a Member of the American Academy of Actuaries (MAAA). He has over twenty

1. Paid Loss Development Method: This method projects ultimate losses by applying development factors to paid loss data organized by accident year. The development factors are derived from QC&S's historical loss triangles, which track the emergence of paid losses over successive reporting periods. This method is most reliable for mature accident years with stable payment patterns but may be less reliable for recent a

2. Incurred Loss Development Method: This method is similar to the paid loss development method but uses incurred loss data (paid losses plus case reserves) as the starting point. Incurred losses typically exhibit less volatility than paid losses in the early development periods because case reserves provide an early estimate of ultimate loss values. Velthorn applies development factors to the incurred loss data to p

3. Bornhuetter-Ferguson Method: This method is a credibility-weighted blend of the development method and an a priori expected loss estimate. It is particularly useful for recent accident years where the loss development data is immature and the development method alone may produce volatile or unreliable estimates. The Bornhuetter-Ferguson method tempers the development method projections with a prior expectation of

V. Actuarial Standards of Practice A. Applicable Actuarial Standards The actuarial analysis performed by Velthorn is governed by several Actuarial Standards of Practice ("ASOPs") promulgated by the Actuarial Standards Board (the "ASB"), which is the body responsible for establishing binding standards for actuaries in the United States. Article 5.2(c) of the Treaty expressly requires that IBNR reserves be determined "

VI. New York Reinsurance Case Law on IBNR Allocation A. General Principles of Treaty Interpretation Under New York Law New York courts interpret reinsurance treaties as contracts, applying the standard principles of contract construction that govern commercial agreements generally. These principles are well-established and may be summarized as follows: The primary objective of contract interpretation is to give effec

VII. Course of Dealing and Waiver / Estoppel Considerations A. Pinnacle Atlantic's Payment History Pinnacle Atlantic paid the full $78,400,000 in ceded losses across seven billing installments between October 15, 2022 and March 29, 2024. Each billing statement submitted by QC&S through Broadreach was accompanied by Velthorn's actuarial certificate, which set forth the aggregate net incurred loss figures and the IBNR