| RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES | RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy. Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the period such changes are determined. The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments. We engage an independent actuary, Regnier Consulting Group, Inc. ("Regnier"), to render an opinion as to the reasonableness of our statutory reserves annually. The actuarial opinion is filed in those states where we are licensed. On a quarterly basis, United Fire's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate. Our IBNR methodologies and assumptions are reviewed periodically, but changes are infrequent. Between calendar year 2015 and 2016, in response to an increase in miles driven by commercial vehicles, we revised our commercial automobile frequency and severity assumptions, resulting in an increase to our carried loss IBNR. We also reviewed our methodology and assumptions in our product liability line, associated with our construction defects business, and decreased our frequency and severity assumptions due to improvement in development patterns related to the statute of limitations on accident years that have matured 13 to 15 years which haven't developed to the extent we initially expected. These assumption changes resulted in a release of IBNR in 2016 in our product liability line. Beside the changes to our assumptions used for our commercial automobile line and product liability line, we did not make any other significant methodology or assumption changes in 2016. We do not discount loss reserves based on the time value of money. The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves for 2016 , 2015 and 2014 (net of reinsurance amounts): Years Ended December 31, 2016 2015 2014 Gross liability for losses and loss settlement expenses $ 1,003,895 $ 969,437 $ 960,651 Ceded losses and loss settlement expenses (54,653 ) (63,757 ) (75,150 ) Net liability for losses and loss settlement expenses $ 949,242 $ 905,680 $ 885,501 Losses and loss settlement expenses incurred Current year $ 683,662 $ 560,482 $ 566,555 Prior years (31,229 ) (40,395 ) (56,744 ) Total incurred $ 652,433 $ 520,087 $ 509,811 Losses and loss settlement expense payments Current year $ 277,053 $ 225,022 $ 247,651 Prior years 260,520 251,503 241,981 Total paid $ 537,573 $ 476,525 $ 489,632 Net liability for losses and loss settlement expenses $ 1,064,102 $ 949,242 $ 905,680 Ceded loss and loss settlement expenses 59,794 54,653 63,757 Gross liability for losses and loss settlement expenses $ 1,123,896 $ 1,003,895 $ 969,437 There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific dollar impact of any individual factor on the development of reserves. The significant drivers of the favorable reserve development in 2016 were our commercial liability and workers compensation. Much of the favorable commercial liability development came from loss adjustment expense and is attributed to our continued litigation management efforts. Workers compensation favorable development was due to the combined effects of decreases in claim reserves along with favorable changes affecting loss adjustment expense. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial property, commercial automobile and assumed reinsurance exhibited adverse development which provided a partial offset to the favorable development previously noted. The adverse development for all three lines is due to paid loss which was greater than reductions in reported loss reserves and reserves for claims incurred but not reported. No other single line of business contributed a significant portion of the total development. The significant drivers of the favorable reserve development in 2015 were our long-tail liability lines, workers compensation, and automobile (physical damage). The favorable development is attributable to reductions in reserves for reported claims as well as reductions in required reserves for IBNR claims combined with continued successful management of litigation expenses. These reserve decreases were more than sufficient to offset claim payments. The favorable development was partially offset by adverse development, the majority coming from three lines which included property, assumed reinsurance and commercial auto liability. No other single line of business contributed a significant portion of the total development. The significant drivers of the favorable reserve development in 2014 were our long-tail liability lines, workers compensation, and automobile (both liability and physical damage). Much of the favorable long-tail liability development came from loss adjustment expense and is attributed to our litigation management initiative. Workers' compensation favorable development was due to the combination of claim reserve decreases along with favorable changes affecting loss adjustment expense. Changes in reserve development patterns have shown increased redundancies in reserves for reported claims along with relatively less need for IBNR claim reserves. Loss adjustment expense, closely tied to loss, generally decreases when loss decreases. Commercial auto liability continues to benefit from loss control and re-underwriting initiatives over the past two years as well as favorable changes affecting loss adjustment expense as reserve development patterns also showed a redundancy in reserves along with less need for IBNR claim reserves. Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies. We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure. The following tables provide information about incurred and paid losses and loss settlement expense development as of December 31, 2016 , net of reinsurance, as well as cumulative development, cumulative claim frequency and IBNR liabilities. Claim data for Mercer Insurance Group, which was acquired on March 28, 2011, is presented retrospectively. The cumulative number of reported claims, for calendar year 2016, are counted for all lines of business on a per claimant per coverage basis and a single event may result in multiple claims due to the involvement of multiple individual claimants and / or multiple independent coverages. Claim counts for calendar years 2015 and prior are counted on a per claim and per coverage basis. Claim counts include open claims, claims that have been paid and closed, and reported claims that have been closed without the need for any payment. Line of business: Commercial other liability Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2016 For the years ended December 31, Total of incurred but not reported liabilities plus expected development on reported claims Cumulative development Cumulative number of reported claims Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 64,793 $ 64,117 $ 71,032 $ 72,407 $ 67,115 $ 61,811 $ 76,740 $ 76,130 $ 74,956 $ 76,049 $ 12,056 11,256 6,948 2008 79,455 84,944 81,963 73,892 63,231 78,152 75,178 74,115 74,915 14,050 (4,540 ) 6,506 2009 88,298 85,991 73,545 65,831 84,286 83,660 85,761 86,757 15,018 (1,541 ) 5,915 2010 88,987 69,533 65,299 82,865 78,564 77,948 78,291 15,154 (10,696 ) 5,060 2011 81,522 64,738 88,371 88,200 79,591 80,801 17,772 (721 ) 5,193 2012 100,389 96,158 94,195 91,980 92,537 21,130 (7,852 ) 5,426 2013 104,982 91,460 90,502 86,119 16,331 (18,863 ) 5,787 2014 118,928 117,958 106,486 26,590 (12,442 ) 5,769 2015 137,386 125,307 43,435 (12,079 ) 6,309 2016 139,144 71,618 5,279 Total $ 946,406 Line of business: Commercial other liability Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 6,054 $ 17,542 $ 31,120 $ 41,306 $ 51,337 $ 53,663 $ 56,838 $ 59,085 $ 60,429 $ 61,499 2008 9,220 24,096 34,482 42,545 47,112 50,143 52,659 55,843 59,052 2009 8,375 21,151 32,073 41,696 50,098 56,789 63,149 67,733 2010 7,103 15,230 24,577 35,043 51,336 56,761 60,116 2011 6,236 13,670 26,260 40,595 50,146 56,150 2012 6,875 24,620 39,948 55,316 64,574 2013 9,835 25,228 39,953 54,559 2014 10,207 29,679 50,211 2015 11,185 27,182 2016 13,782 Total $ 514,858 All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance 26,712 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 458,261 Line of business: Commercial fire & allied Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2016 For the years ended December 31, Total of incurred but not reported liabilities plus expected development on reported claims Cumulative development Cumulative number of reported claims Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 94,762 $ 90,694 $ 89,790 $ 88,746 $ 89,160 $ 87,407 $ 71,495 $ 71,454 $ 71,542 $ 71,569 $ 14 (23,193 ) 18,351 2008 157,303 141,384 138,602 140,321 134,821 116,940 118,115 118,376 118,329 64 (38,974 ) 21,086 2009 113,754 106,085 105,031 105,614 87,751 87,845 87,932 88,891 188 (24,863 ) 18,017 2010 113,139 106,152 108,246 83,836 83,932 83,767 83,981 205 (29,158 ) 16,647 2011 148,220 142,330 117,082 120,492 119,820 120,219 519 (28,001 ) 15,989 2012 138,602 110,448 108,774 108,047 107,958 735 (30,644 ) 6,361 2013 91,521 88,550 91,498 92,212 1,142 691 6,484 2014 126,216 131,198 128,762 2,178 2,546 7,650 2015 103,177 108,293 3,577 5,116 6,976 2016 147,473 14,476 7,142 Total $ 1,067,687 Line of business: Commercial fire & allied Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 40,578 $ 56,759 $ 59,322 $ 63,329 $ 68,928 $ 70,960 $ 71,178 $ 71,360 $ 71,376 $ 71,406 2008 80,005 102,804 107,480 112,678 115,804 115,897 117,553 117,690 118,003 2009 53,219 72,181 77,732 82,809 86,930 87,544 87,721 88,037 2010 52,660 72,271 78,284 80,352 82,037 83,000 83,374 2011 85,585 104,800 109,429 112,497 116,614 118,183 2012 71,008 94,380 100,078 103,197 105,250 2013 59,331 78,226 82,853 86,115 2014 84,456 113,663 116,750 2015 67,217 90,454 2016 92,895 Total $ 970,467 All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance 564 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 97,785 Line of business: Commercial automobile Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2016 For the years ended December 31, Total of incurred but not reported liabilities plus expected development on reported claims Cumulative development Cumulative number of reported claims Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 71,186 $ 68,864 $ 67,566 $ 69,968 $ 69,802 $ 69,368 $ 68,986 $ 68,756 $ 68,900 $ 68,872 $ 5 (2,314 ) 15,851 2008 80,461 78,391 76,051 76,527 75,070 75,021 73,506 73,431 73,463 68 (6,998 ) 18,113 2009 80,021 69,328 68,569 64,121 64,516 63,605 63,560 63,567 38 (16,454 ) 15,018 2010 75,781 68,068 65,860 67,015 67,563 67,296 68,086 121 (7,695 ) 16,239 2011 84,887 87,299 90,750 92,519 92,379 91,336 647 6,449 15,224 2012 100,039 90,848 94,755 95,321 96,594 1,127 (3,445 ) 14,335 2013 104,356 98,037 102,943 103,726 2,647 (630 ) 15,462 2014 107,723 106,076 113,720 6,443 5,997 17,045 2015 125,506 129,816 15,837 4,310 19,302 2016 174,018 47,509 22,910 Total $ 983,198 Line of business: Commercial automobile Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 27,058 $ 42,688 $ 53,231 $ 62,272 $ 65,798 $ 67,634 $ 68,074 $ 68,439 $ 68,794 $ 68,834 2008 30,527 47,271 58,926 68,629 70,459 72,122 72,984 72,990 73,018 2009 27,674 44,867 53,451 58,087 61,398 62,732 63,495 63,503 2010 29,329 41,141 52,953 57,947 62,231 65,169 67,622 2011 34,332 50,931 65,021 79,383 85,348 87,475 2012 39,247 57,201 71,469 82,944 90,292 2013 43,592 67,630 79,663 90,780 2014 45,704 68,033 87,590 2015 50,782 78,225 2016 66,013 Total $ 773,352 All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance 137 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 209,984 Line of business: Workers' compensation Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2016 For the years ended December 31, Total of incurred but not reported liabilities plus expected development on reported claims Cumulative development Cumulative number of reported claims Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 36,494 $ 35,972 $ 33,430 $ 32,986 $ 31,933 $ 31,945 $ 32,276 $ 31,200 $ 31,095 $ 31,255 $ 261 (5,239 ) 4,660 2008 42,739 42,301 39,895 41,278 40,474 40,010 39,386 39,680 39,768 564 (2,971 ) 5,035 2009 43,560 39,009 36,294 36,837 36,823 36,158 36,014 35,026 392 (8,534 ) 4,243 2010 38,210 42,531 41,180 41,167 40,647 41,422 41,468 745 3,258 3,923 2011 39,967 38,481 35,352 34,309 33,585 33,314 640 (6,653 ) 3,799 2012 48,848 46,279 42,158 38,423 38,553 716 (10,295 ) 3,687 2013 64,048 62,579 56,369 54,584 1,252 (9,464 ) 3,949 2014 64,051 60,729 58,284 1,921 (5,767 ) 4,105 2015 53,788 55,578 2,818 1,790 4,366 2016 70,419 10,858 3,847 Total $ 458,249 Line of business: Workers' compensation Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 8,246 $ 18,220 $ 22,444 $ 24,768 $ 26,284 $ 27,330 $ 27,922 $ 29,212 $ 29,444 $ 29,577 2008 10,082 21,227 25,736 30,123 31,980 33,770 34,319 34,862 35,292 2009 10,478 20,292 24,189 27,747 29,898 31,003 31,886 32,911 2010 11,821 22,606 28,765 31,887 33,119 34,143 35,052 2011 10,322 21,678 26,033 27,497 28,247 29,022 2012 11,802 23,023 28,397 30,933 33,063 2013 14,136 30,209 38,023 42,941 2014 13,965 30,289 38,441 2015 12,063 27,304 2016 14,413 Total $ 318,016 All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance 20,072 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 160,303 Line of business: Personal Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2016 For the years ended December 31, Total of incurred but not reported liabilities plus expected development on reported claims Cumulative development Cumulative number of reported claims Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 29,005 $ 28,358 $ 28,074 $ 27,837 $ 27,521 $ 27,427 $ 27,376 $ 27,384 $ 27,368 $ 27,345 $ 34 (1,660 ) 12,703 2008 49,961 44,686 43,408 43,672 43,577 43,535 43,515 43,482 42,882 70 (7,079 ) 15,821 2009 34,597 33,519 31,945 32,026 32,134 32,029 32,085 32,070 140 (2,527 ) 13,501 2010 36,686 34,347 33,928 33,865 33,403 33,413 33,432 201 (3,254 ) 13,312 2011 50,014 48,534 47,090 47,035 46,968 47,013 300 (3,001 ) 14,839 2012 47,924 46,199 46,403 46,150 44,715 427 (3,209 ) 10,749 2013 39,232 38,525 37,262 37,086 628 (2,146 ) 9,213 2014 53,910 52,661 52,944 796 (966 ) 10,843 2015 42,848 41,088 989 (1,760 ) 9,313 2016 48,072 3,928 10,291 Total $ 406,647 Line of business: Personal Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Unaudited) 2007 $ 19,900 $ 25,024 $ 26,073 $ 26,840 $ 27,214 $ 27,257 $ 27,260 $ 27,259 $ 27,311 $ 27,311 2008 32,032 40,114 41,735 42,414 42,613 42,627 42,748 42,748 42,787 2009 22,086 27,926 29,801 30,829 31,564 31,644 31,718 31,804 2010 24,499 29,867 31,340 32,076 32,771 32,997 33,165 2011 36,489 43,801 45,306 45,949 46,487 46,573 2012 30,415 41,979 43,375 44,448 43,569 2013 25,505 32,788 34,297 35,306 2014 37,055 47,912 49,710 2015 29,551 37,431 2016 32,999 Total $ 380,655 All outstanding liabilities for unpaid losses and loss settlement expenses before 2007, net of reinsurance 1,800 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 27,793 The reconciliation of the net incurred and loss development tables to the liability for unpaid losses and loss settlement expenses in the consolidated statement of financial position is as follows. December 31, 2016 Net outstanding liabilities for unpaid losses and allocated loss settlement expenses: Commercial other liability $ 458,261 Commercial fire and allied 97,785 Commercial automobile 209,984 Commercial workers' compensation 160,303 Personal 27,793 All other lines 26,510 Net outstanding liabilities for unpaid losses and allocated loss settlement expenses 980,636 Net outstanding liabilities for unpaid unallocated loss settlement expenses 79,751 Fair value adjustment (purchase accounting adjustment for Mercer acquisition) 3,715 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance 1,064,102 Reinsurance recoverable on unpaid losses and allocated loss settlement expenses: Commercial other liability 21,173 Commercial fire and allied 9,748 Commercial automobile 1,544 Commercial workers' compensation 29,686 Personal 41 All other lines 1,155 Reinsurance recoverable on unpaid losses and allocated loss settlement expenses 63,347 Reinsurance fair value amortization (purchase accounting adjustment for Mercer acquisition) (3,553 ) Total reinsurance recoverable on unpaid losses and loss settlement expenses 59,794 Total gross liability for unpaid losses and loss settlement expenses $ 1,123,896 The following is supplementary information about average historical claims duration as of December 31, 2016 . Average annual percentage payout of incurred claims by age, net of reinsurance Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 (Unaudited) Commercial other liability 9.4 % 15.3 % 15.6 % 14.3 % 11.9 % 5.8 % 4.8 % 4.2 % 3.0 % 1.4 % Commercial fire and allied 63.9 % 21.0 % 4.7 % 3.9 % 3.7 % 1.2 % 0.6 % 0.2 % 0.1 % — % Commercial automobile 40.5 % 21.2 % 15.1 % 11.3 % 5.5 % 2.7 % 1.7 % 0.2 % 0.3 % 0.1 % Commercial workers' compensation 26.4 % 29.1 % 13.3 % 8.0 % 4.4 % 3.2 % 2.0 % 2.8 % 0.9 % 0.4 % Personal 71.5 % 19.2 % 4.0 % 2.3 % 0.9 % 0.3 % 0.3 % 0.1 % 0.1 % — % |
