| 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 evaluate an appropriate response 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 team of internal actuaries 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. In response to an increase in severity of losses and an increase in distracted driving claims, we revised our commercial automobile 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 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. Besides the changes to our assumptions used for our commercial automobile line and product liability line, we continually review and revise items affecting our projections of required reserves for unpaid loss and loss adjustment expense ("LAE"). Items reviewed and revised include development factors for paid and reported loss, paid development factors for allocated LAE, and the ratios of paid unallocated LAE to paid loss. 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 2021, 2020 and 2019 (net of reinsurance amounts): Years Ended December 31, 2021 2020 2019 Gross liability for losses and loss settlement expenses $ 1,578,131 $ 1,421,754 $ 1,312,483 Ceded losses and loss settlement expenses (131,843) (68,536) (57,094) Net liability for losses and loss settlement expenses $ 1,446,288 $ 1,353,218 $ 1,255,389 Losses and loss settlement expenses incurred Current year $ 701,064 $ 887,119 $ 835,507 Prior years (48,909) (17,652) (5,335) Total incurred $ 652,155 $ 869,467 $ 830,172 Losses and loss settlement expense payments Current year $ 277,115 $ 354,635 $ 333,975 Prior years 419,963 421,762 398,368 Total paid $ 697,078 $ 776,397 $ 732,343 Net liability for losses and loss settlement expenses $ 1,401,365 $ 1,446,288 $ 1,353,218 Ceded loss and loss settlement expenses 112,900 131,843 68,536 Gross liability for losses and loss settlement expenses $ 1,514,265 $ 1,578,131 $ 1,421,754 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 monetary impact of any individual factor on the development of 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 may 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. Reserve Development The significant drivers of the favorable reserve development in 2021 were commercial automobile along with a favorable contribution from workers' compensation. This favorable development was partially offset by unfavorable development from commercial other liability. Favorable development for both commercial automobile and workers' compensation was from both loss and LAE. Reserve reductions for unpaid loss and LAE were more than sufficient to offset payments. Commercial other liability was adversely affected by reserve strengthening for reported claims and reserve strengthening for incurred but unreported claims. Commercial other liability reserve strengthening resulted in unfavorable development because paid loss exceeded the reduction in unpaid claim reserves but favorable development for LAE partially offset the unfavorable loss development. The significant drivers of the favorable reserve development in 2020 were workers' compensation, commercial fire and allied lines, fidelity and surety and personal automobile. The favorable development for workers' compensation was primarily from reductions in reserves for reported claims which were more than sufficient to offset paid loss. Reductions in reserves for IBNR claims also contributed favorable development in addition to LAE where reductions in reserves more than sufficient to offset payments. Commercial fire and allied lines developed favorably because reductions in reserves for reported claims combined with reductions in reserves for IBNR claims were more than sufficient to offset paid loss. LAE also contributed favorable development with reductions in reserves more than sufficient to offset payments. Fidelity and surety loss developed favorably because a reduction in reserves for IBNR claims was more than sufficient to offset both paid loss and increases in reserves for reported claims. The personal automobile line of business developed favorably because reductions of reserves for reported claims combined with reductions of reserves for IBNR claims were more than sufficient to offset paid loss. LAE also contributed favorable development with reductions in reserves more than sufficient to offset payments. Much of the favorable development was offset by unfavorable development from three lines: commercial liability, reinsurance assumed and commercial automobile. The commercial liability line of business experienced unfavorable development due to paid loss which was greater than reductions in reserves for unpaid loss. LAE developed favorably and partially offset the unfavorable loss development. The unfavorable development for reinsurance assumed was due to paid loss which was greater than reductions in reserves for unpaid loss. The commercial automobile line of business experienced unfavorable development because paid loss was greater than reductions in reserves for unpaid loss, but a portion of the unfavorable loss development was offset by favorable development from LAE where payments were more than offset by reductions of reserves for unpaid loss adjustment expense. On an all lines combined basis, favorable development is attributable to LAE which continues to benefit from additional litigation management efforts. The significant drivers of the favorable reserve development in 2019 were our workers' compensation partially offset by unfavorable development primarily for commercial liability and commercial automobile. Workers' compensation favorable development was primarily from reserve reductions for both reported claims and loss IBNR which were more than sufficient to offset paid loss with additional favorable development coming from LAE, where the reduction in LAE reserves was more than sufficient to offset paid LAE. The other lines with relatively small contributions to development, either favorable or unfavorable, generally experienced favorable development for LAE. Commercial liability unfavorable development was primarily from paid loss which exceeded reserve reductions for both reported claims and loss IBNR; additional unfavorable development came from LAE where paid LAE exceeded reductions of LAE reserves. Commercial liability and commercial automobile continue to be adversely affected by reserve strengthening for both reported claims and loss IBNR in response to an increase in severity of claims. Commercial liability continues to receive umbrella claims which flow in from commercial automobile. The following tables provide information about incurred and paid losses and loss settlement expense development as of December 31, 2021, net of reinsurance, as well as cumulative development, cumulative claim frequency and IBNR liabilities. Claim data for Mercer Insurance Group, Inc., which was acquired on March 28, 2011, is presented retrospectively. The cumulative number of reported claims, for calendar year 2021, 2020 and 2019, 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 2016 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, 2021 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 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 100,389 $ 96,158 $ 94,195 $ 91,980 $ 92,537 $ 91,346 $ 89,731 $ 91,571 $ 89,900 $ 89,445 $ 11,818 (10,944) 5,905 2013 104,982 91,460 90,502 86,119 85,399 88,816 86,082 85,999 94,808 3,962 (10,174) 6,489 2014 118,928 117,958 106,486 97,809 102,487 105,507 107,417 111,517 3,837 (7,411) 6,680 2015 137,386 125,307 120,005 127,091 129,945 131,325 132,694 8,651 (4,692) 7,849 2016 139,144 130,041 136,275 142,397 140,784 148,324 12,640 9,180 9,132 2017 139,602 139,032 152,547 156,369 159,653 19,305 20,051 9,063 2018 163,059 172,894 176,496 187,841 29,864 24,782 8,872 2019 149,173 169,344 183,918 37,331 34,745 8,102 2020 171,013 158,022 43,673 (12,991) 5,673 2021 145,822 76,825 2,343 Total $ 1,412,044 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 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 6,875 $ 24,620 $ 39,948 $ 55,316 $ 64,574 $ 69,800 $ 71,773 $ 73,819 $ 74,644 $ 75,187 2013 9,835 25,228 39,953 54,559 65,773 72,115 75,961 78,448 83,491 2014 10,207 29,679 50,211 70,363 83,109 93,060 96,509 102,042 2015 11,185 27,182 53,901 74,292 96,339 104,472 109,540 2016 13,782 38,184 63,526 88,885 102,757 115,107 2017 17,716 43,172 70,500 91,984 111,085 2018 16,200 44,772 79,168 105,515 2019 18,221 46,986 72,179 2020 17,011 43,596 2021 12,434 Total $ 830,176 All outstanding liabilities for unpaid losses and loss settlement expenses before 2012, net of reinsurance 30,242 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 612,108 Line of business: Commercial fire and allied Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2021 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 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 138,602 $ 110,448 $ 108,774 $ 108,047 $ 107,958 $ 108,623 $ 109,687 $ 109,480 $ 110,245 $ 109,911 $ 318 (28,691) 6,477 2013 91,521 88,550 91,498 92,212 93,826 93,858 92,988 92,855 93,498 62 1,977 6,675 2014 126,216 131,198 128,762 128,185 128,503 126,811 127,068 128,180 70 1,964 7,940 2015 103,177 108,293 110,633 108,235 105,218 104,646 105,043 209 1,866 7,592 2016 147,473 144,208 143,721 143,724 143,108 144,109 493 (3,364) 9,860 2017 155,139 160,240 160,946 161,693 161,232 676 6,093 13,478 2018 143,280 146,951 146,378 146,010 1,765 2,730 10,746 2019 164,030 155,482 158,475 3,614 (5,555) 11,146 2020 207,207 201,391 6,528 (5,816) 14,354 2021 156,794 27,009 4,796 Total $ 1,404,643 Line of business: Commercial fire and allied Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 71,008 $ 94,380 $ 100,078 $ 103,197 $ 105,250 $ 106,521 $ 106,740 $ 107,992 $ 108,123 $ 108,859 2013 59,331 78,226 82,853 86,115 89,200 91,493 92,012 92,472 93,200 2014 84,456 113,663 116,750 122,370 123,697 125,745 126,307 127,883 2015 67,217 90,454 95,515 101,367 104,115 103,975 104,127 2016 92,895 125,962 132,429 137,909 139,353 141,104 2017 99,484 137,058 145,900 152,219 157,512 2018 92,770 123,559 133,703 137,794 2019 100,980 136,084 142,342 2020 128,704 173,055 2021 97,451 Total $ 1,283,327 All outstanding liabilities for unpaid losses and loss settlement expenses before 2012, net of reinsurance 1,422 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 122,739 Line of business: Commercial automobile Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2021 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 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 100,039 $ 90,848 $ 94,755 $ 95,321 $ 96,594 $ 96,389 $ 96,305 $ 96,059 $ 96,176 $ 96,174 $ — (3,865) 14,365 2013 104,356 98,037 102,943 103,726 104,980 105,248 104,886 106,140 106,288 323 1,932 15,528 2014 107,723 106,076 113,720 118,869 120,385 121,077 120,599 119,214 381 11,491 17,326 2015 125,506 129,816 132,206 138,987 137,395 137,335 136,826 271 11,320 20,085 2016 174,018 175,357 174,337 175,657 173,823 174,588 843 570 27,302 2017 227,919 224,553 235,110 233,159 233,007 2,581 5,088 32,878 2018 236,629 245,173 253,045 255,017 5,739 18,388 34,440 2019 279,229 291,139 289,929 12,144 10,700 34,669 2020 243,360 216,951 19,907 (26,409) 23,949 2021 179,880 33,802 11,104 Total $ 1,807,874 Line of business: Commercial automobile Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 39,247 $ 57,201 $ 71,469 $ 82,944 $ 90,292 $ 93,179 $ 94,747 $ 94,983 $ 96,176 $ 96,174 2013 43,592 67,630 79,663 90,780 96,375 100,058 101,580 103,037 103,368 2014 45,704 68,033 87,590 99,922 109,682 113,751 116,843 117,770 2015 50,782 78,225 99,201 118,395 129,317 134,100 135,462 2016 66,013 103,528 128,157 148,224 164,341 168,950 2017 81,311 126,644 166,170 197,893 212,947 2018 81,572 138,092 187,405 211,123 2019 91,919 153,244 205,614 2020 67,660 109,686 2021 64,381 Total $ 1,425,475 All outstanding liabilities for unpaid losses and loss settlement expenses before 2012, net of reinsurance 749 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 383,149 Line of business: Workers' compensation Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2021 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 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 48,848 $ 46,279 $ 42,158 $ 38,423 $ 38,553 $ 39,015 $ 39,182 $ 39,063 $ 38,290 $ 38,562 $ 228 (10,286) 4,001 2013 64,048 62,579 56,369 54,584 52,761 51,753 50,984 50,349 49,801 215 (14,247) 4,259 2014 64,051 60,729 58,284 56,630 54,636 53,023 52,889 52,388 637 (11,663) 4,804 2015 53,788 55,578 51,003 46,682 46,019 44,706 43,751 377 (10,037) 5,678 2016 70,419 66,575 61,648 55,168 53,964 52,870 571 (17,549) 7,959 2017 76,184 69,528 55,982 51,874 49,362 688 (26,822) 8,194 2018 71,972 67,883 59,192 56,109 1,075 (15,863) 8,022 2019 52,136 49,189 49,336 1,373 (2,800) 7,332 2020 45,365 46,612 2,153 1,247 4,389 2021 45,177 5,142 1,623 Total $ 483,968 Line of business: Workers' compensation Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 11,802 $ 23,023 $ 28,397 $ 30,933 $ 33,063 $ 34,330 $ 35,388 $ 36,060 $ 36,520 $ 36,762 2013 14,136 30,209 38,023 42,941 45,078 47,071 47,572 48,093 48,327 2014 13,965 30,289 38,441 42,964 45,193 45,825 46,299 46,664 2015 12,063 27,304 35,229 38,424 39,305 40,034 41,006 2016 14,413 32,345 40,680 45,743 47,082 48,277 2017 14,647 31,309 38,083 41,672 43,833 2018 16,949 35,369 43,189 47,173 2019 13,582 29,668 38,382 2020 17,603 29,605 2021 17,949 Total $ 397,978 All outstanding liabilities for unpaid losses and loss settlement expenses before 2012, net of reinsurance 17,864 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 103,856 Line of business: Personal Incurred losses and allocated loss settlement expenses, net of reinsurance As of December 31, 2021 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 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 47,924 $ 46,199 $ 46,403 $ 46,150 $ 44,715 $ 44,352 $ 44,165 $ 44,158 $ 44,160 $ 44,178 $ — (3,746) 10,792 2013 39,232 38,525 37,262 37,086 36,729 36,661 36,486 36,467 36,466 — (2,766) 9,252 2014 53,910 52,661 52,944 52,782 52,615 52,702 52,810 52,854 21 (1,056) 10,963 2015 42,848 41,088 40,336 40,368 40,220 40,194 40,189 11 (2,659) 9,553 2016 48,072 45,840 45,379 45,961 45,113 45,297 39 (2,775) 11,905 2017 60,330 59,342 58,695 58,544 59,023 107 (1,307) 14,709 2018 51,639 51,721 52,715 52,062 183 423 13,677 2019 59,547 58,378 58,745 554 (802) 13,576 2020 81,206 73,761 899 (7,445) 16,884 2021 28,537 2,644 2,437 Total $ 491,112 Line of business: Personal Cumulative paid losses and allocated loss settlement expenses, net of reinsurance For the years ended December 31, Accident Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 (Unaudited) 2012 $ 30,415 $ 41,979 $ 43,375 $ 44,448 $ 43,569 $ 44,139 $ 44,158 $ 44,158 $ 44,159 $ 44,178 2013 25,505 32,788 34,297 35,306 36,155 36,323 36,397 36,466 36,466 2014 37,055 47,912 49,710 51,837 52,018 52,543 52,519 52,526 2015 29,551 37,431 39,027 39,428 39,865 40,029 40,053 2016 32,999 40,910 42,660 44,046 44,618 44,737 2017 42,135 53,111 55,982 57,169 57,824 2018 37,410 47,433 49,464 50,185 2019 40,544 52,390 54,935 2020 54,181 68,124 2021 20,298 Total $ 469,326 All outstanding liabilities for unpaid losses and loss settlement expenses before 2012, net of reinsurance 719 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance $ 22,503 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, 2021 Net outstanding liabilities for unpaid losses and allocated loss settlement expenses: Commercial other liability $ 612,108 Commercial fire and allied 122,739 Commercial automobile 383,149 Commercial workers' compensation 103,856 Personal 22,503 All other lines 64,083 Net outstanding liabilities for unpaid losses and allocated loss settlement expenses 1,308,438 Net outstanding liabilities for unpaid unallocated loss settlement expenses 92,084 Fair value adjustment (purchase accounting adjustment for Mercer acquisition) 843 Liabilities for unpaid losses and loss settlement expenses, net of reinsurance 1,401,365 Reinsurance recoverable on unpaid losses and allocated loss settlement expenses: Commercial other liability 22,522 Commercial fire and allied 21,309 Commercial automobile 4,819 Commercial workers' compensation 53,189 Personal 3,236 All other lines 8,631 Reinsurance recoverable on unpaid losses and allocated loss settlement expenses 113,706 Reinsurance fair value amortization (purchase accounting adjustment for Mercer acquisition) (806) Total reinsurance recoverable on unpaid losses and loss settlement expenses 112,900 Total gross liability for unpaid losses and loss settlement expenses $ 1,514,265 The following is supplementary information about average historical claims duration as of December 31, 2021. 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 % 16.2 % 17.2 % 15.8 % 11.9 % 7.2 % 3.3 % 3.3 % 3.1 % 0.6 % Commercial fire and allied 63.7 % 22.0 % 4.8 % 3.8 % 2.2 % 1.3 % 0.3 % 1.0 % 0.4 % 0.7 % Commercial automobile 36.1 % 20.4 % 15.8 % 11.6 % 7.5 % 3.2 % 1.7 % 0.8 % 0.8 % — % Commercial workers' compensation 30.5 % 31.8 % 15.5 % 8.0 % 3.8 % 2.5 % 1.7 % 1.2 % 0.8 % 0.6 % Personal 71.2 % 20.1 % 4.0 % 2.4 % 0.7 % 0.7 % 0.1 % 0.1 % — % — % |
