| LOSS AND LOSS ADJUSTMENT RESERVES | 6. LOSS AND LOSS ADJUSTMENT RESERVES The liability for loss and LAE reserves is determined on an individual-case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR. Activity in the liability for loss and LAE reserves is summarized as follows: Year Ended December 31, 2017 2016 2015 (In thousands) Gross reserves, beginning of period $ 158,110 $ 97,706 $ 78,330 Less: reinsurance recoverable (1) (40,412 ) (7,496 ) (10,394 ) Net reserves, beginning of period 117,698 90,210 67,936 Incurred loss, net of reinsurance, related to: Current year 245,545 201,704 120,005 Prior year loss development (2) 13,926 13,156 (9,466 ) Ceded losses subject to offsetting experience account adjustments (3) (11,914 ) (17,050 ) 2,171 Prior years 2,012 (3,894 ) (7,295 ) Total incurred loss and LAE, net of reinsurance 247,557 197,810 112,710 Paid loss, net of reinsurance, related to: Current year 160,945 123,364 54,710 Prior years 72,140 46,958 35,726 Total paid loss and LAE, net of reinsurance 233,085 170,322 90,436 Net reserves, end of period 132,170 117,698 90,210 Plus: reinsurance recoverable (1) 98,345 40,412 7,496 Gross reserves, end of period $ 230,515 $ 158,110 $ 97,706 (1) Reinsurance recoverable in this table includes only ceded loss and LAE reserves. (2) Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment. (3) Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income. The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made. During the year ended December 31, 2017 , the Company experienced $13.9 million of unfavorable loss and LAE reserve development on prior accident years primarily in its personal automobile and homeowners lines of businesses. The adverse development in personal automobile of approximately $8.0 million was driven primarily by adjustments to cession percentages in certain auto reinsurance treaties. Additionally, the adverse development in homeowners of approximately $8.0 million was primarily caused by the continued impact of assignment of benefits (“AOB”) and related ligation costs in 2015 and other accident years. As previously disclosed, the Company entered into 30% and 10% retrospectively-rated Florida-only property quota share treaties, which ended on July 1, 2016 and 2017, respectively. These agreements included a profit share (experience account) provision, under which the Company will receive ceded premium adjustments at the end of the treaty to the extent there is a positive balance in the experience account. This experience account is based on paid losses rather than incurred losses. Due to the retrospectively-rated nature of this treaty, when the experience account is positives the Company cedes losses under these treaties as the claims are paid with an equal and offsetting adjustment to ceded premiums (in recognition of the related change to the experience account receivable), with no impact on net income. Conversely, when the experience account is negative, the Company cedes losses on an incurred basis with no offsetting adjustment to ceded premiums, which impacts net income. Loss development can be either favorable or unfavorable regardless of whether the experience account is in a positive or negative position. Beginning in 2017, for purposes of the total incurred loss, net of reinsurance line within this disclosure, the Company has classified paid losses related to these retrospectively rated quota share treaties which were ceded during the indicated year but relating to a prior accident year in a separate line. The related amounts in the previous year have been adjusted to conform to this presentation. Prior to 2017, these amounts were included in the current year incurred line item in the table above. Total amounts of incurred losses presented for 2016 and 2015 remain unchanged. During the year ended December 31, 2016 , the Company experienced unfavorable loss and LAE reserve development on prior accident years primarily in its all other peril homeowners coverage in Florida. In the first half of 2016, the Company began to experience a new and higher level of AOB claims both in frequency and severity in our homeowners business in Florida, which caused adverse experience on the loss activity in accident years 2015 and 2016. This increased level of AOB claims was the significant driver in the Company’s decision to increase the Company’s 2015 accident year reserves related to the Company’s homeowners Florida policies. AOB is a legal construct that allows a third party to step into the shoes of the insured and is then paid directly by an insurance company for services rendered on behalf of the insured for a covered loss. Absent an AOB, the insured would pay the third party and those costs would be reimbursed by the insurance company to the insured. AOB is commonly used when a homeowner experiences a water loss, for example a leaky pipe, an overflow from a sink, or a damaged appliance, and contacts a contractor or water remediation company. Misuse of this legal construct has led to contractors over inflating costs of claims and/or submitting improper claims, causing insurance companies to have to either pay the overinflated claim, fight the claim in court, or both. In all cases, AOB claims cost the insurance company, on average, more than five times the cost to settle non-AOB claims, which has been a primary driver the increase to our overall loss and loss adjustment in comparison to historical severity averages. Although the concept of AOB had been around for several years prior to 2016, the Company had a relatively low level of AOB claims in the accident years prior to 2016 and the related adverse impact of AOB claims had a marginal impact on the Company’s overall loss experience. Given the nature of AOB claims, it is difficult to identify the number of outstanding or expected AOB claims as the third parties may not step into the shoes of the insured or may not identify itself to the Company until later on in the claim processing cycle. This delay in identifying AOB claims creates a challenge in estimating the Company’s loss reserves, as capturing the incremental costs to settle AOB claims as part of the Company’s calculation of estimated loss reserves at the end of the year. Accordingly, the challenge described above together with the change in the Company’s historical trend on AOB claims were the main drivers of the prior year development in 2016. During the year ended December 31, 2015 , the Company experienced a redundancy on prior year accident years primarily a result of continued favorable loss experience (mostly caused by severity in reported claims) in the Company’s all other peril homeowners coverage caused in part by the absence of severe weather in Florida. Specifically, the Company has experienced better severity than expected in 2013 and 2014 accident years. The following tables provide incurred losses and ALAE and cumulative paid losses and ALAE, net of reinsurance, for the prior 10 accident years, and the total of IBNR reserves plus expected development on reported claims and the cumulative number of reported claims (in thousands, except number of reported claims and severity), as of the most recent reporting period, by the Company’s significant lines of business, which are Homeowners, Commercial General Liability and Automobile. IBNR & Expected Cumulative Homeowners Incurred Losses and ALAE, Net of Reinsurance Development on Number of For the Years Ended December 31, Reported Claims Reported Claims (1) Severity (2) (Unaudited) Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2017 2017 2017 2008 18,305 15,784 15,811 15,977 15,659 16,021 15,661 15,604 15,609 15,608 5 1,710 9,125 2009 26,228 25,618 25,955 26,482 27,015 27,041 27,119 27,163 27,173 104 2,334 11,598 2010 24,825 25,056 26,151 27,895 28,968 29,407 29,945 30,459 35 2,389 12,735 2011 20,492 21,344 23,007 23,932 24,582 25,957 26,143 27 2,423 10,778 2012 23,032 23,301 24,186 24,468 25,889 26,356 14 2,677 9,840 2013 43,807 42,021 35,834 35,859 37,185 402 3,415 10,771 2014 64,312 63,300 61,770 62,206 1,730 7,564 7,995 2015 99,497 92,411 95,129 6,260 13,292 6,686 2016 171,264 162,043 18,842 26,562 5,391 2017 202,844 81,261 54,717 2,222 Total $ 685,146 (1) The cumulative number of reported claims is measured by individual claimant at a coverage level. (2) Calculated severity amounts by accident year are based on inception-to-date incurred less IBNR and expected development dollars on reported claims. Note the older accident years are more developed than recent accident years. Homeowners Cumulative Paid Losses and ALAE, Net of Reinsurance For the Years Ended December 31, (Unaudited) Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 9,477 13,832 14,689 15,190 15,308 15,445 15,595 15,583 15,587 15,587 2009 15,047 23,095 24,657 26,007 26,462 26,831 26,927 26,982 27,049 2010 14,052 21,350 24,730 26,886 27,984 29,092 29,739 30,376 2011 11,119 19,250 21,323 22,723 24,047 25,580 25,982 2012 13,693 20,728 23,120 23,923 25,186 26,113 2013 19,986 31,606 33,867 35,123 35,803 2014 37,033 53,831 57,891 59,722 2015 52,214 79,359 86,647 2016 102,556 142,716 2017 135,589 $ 585,584 All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance 88 Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance $ 99,650 The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Homeowners policies, as of December 31, 2017: Average Annual Payout of Losses and ALAE, Net of Reinsurance (Unaudited) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Homeowners 55.8 % 25.2 % 6.9 % 3.8 % 2.8 % 3.0 % 1.2 % 0.9 % 0.2 % — % IBNR & Expected Cumulative Commercial General Liability Incurred Losses and ALAE, Net of Reinsurance Development on Number of For the Years Ended December 31, Reported Claims Reported Claim Severity (Unaudited) Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2017 2017 2017 2008 16,615 17,448 17,271 17,260 16,083 15,584 16,297 16,839 18,453 20,039 — 1,553 12,903 2009 13,297 12,397 12,220 11,943 9,270 10,192 10,466 11,081 11,621 — 899 12,927 2010 8,552 7,582 7,474 7,045 7,535 7,597 7,645 7,809 — 673 11,603 2011 6,436 5,854 4,749 4,603 4,760 5,409 6,254 136 856 7,147 2012 5,279 4,952 4,801 4,700 4,658 4,346 127 452 9,334 2013 7,095 5,069 5,221 5,502 5,704 129 523 10,660 2014 7,475 7,709 6,384 6,620 178 578 11,145 2015 8,082 7,008 6,020 260 660 8,727 2016 10,727 5,809 658 617 8,348 2017 8,289 4,038 391 10,872 Total $ 82,511 Commercial General Liability Paid Losses and ALAE, Net of Reinsurance For the Years Ended December 31, (Unaudited) Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2,324 6,491 8,856 10,980 12,768 14,662 15,389 16,122 17,716 19,693 2009 2,253 4,236 6,466 7,384 8,046 8,593 10,130 10,454 11,308 2010 1,187 2,279 3,855 5,553 6,363 7,238 7,382 7,631 2011 764 2,763 3,366 3,673 4,246 4,866 5,831 2012 871 1,714 2,632 3,342 3,686 3,841 2013 882 2,233 3,366 3,867 4,606 2014 717 2,593 3,855 4,375 2015 798 2,296 3,249 2016 1,515 3,657 2017 1,592 Total $ 65,783 All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance 383 Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance $ 17,111 The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Commercial General Liability policies, as of December 31, 2017: Average Annual Payout of Losses and ALAE, Net of Reinsurance (Unaudited) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Commercial General Liability 13.9 % 20.3 % 14.3 % 9.6 % 7.8 % 7.3 % 6.5 % 2.9 % 6.9 % 8.8 % IBNR & Expected Cumulative Automobile Incurred Losses and ALAE, Net of Reinsurance Development on Number of For the Years Ended December 31, Reported Claims Reported Claims Severity (Unaudited) Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2017 2017 2017 2008 752 615 562 561 572 554 554 554 554 554 — 170 3,259 2009 272 267 259 264 258 243 243 243 243 — 63 3,857 2010 2,823 2,963 3,111 3,088 3,044 3,035 3,059 3,041 — 1,139 2,670 2011 3,580 3,350 2,954 2,912 2,762 2,848 2,796 — 918 3,046 2012 1,735 1,741 1,717 1,424 1,455 1,491 — 918 1,624 2013 1,517 1,863 1,826 1,829 2,161 61 3,533 594 2014 2,038 3,213 3,551 4,315 — 6,109 706 2015 3,045 2,882 2,781 49 6,883 397 2016 13,414 20,205 1,258 40,384 469 2017 20,411 8,912 23,557 488 Total $ 57,998 Automobile Paid Losses and ALAE, Net of Reinsurance For the Years Ended December 31, (Unaudited) Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 442 513 519 541 554 554 554 554 554 554 2009 61 218 220 225 241 243 243 243 243 2010 1,713 2,482 2,715 2,863 2,942 2,978 2,984 3,035 2011 1,417 2,381 2,562 2,644 2,726 2,755 2,755 2012 867 1,293 1,333 1,384 1,393 1,430 2013 907 1,609 1,906 2,069 2,109 2014 1,455 3,120 3,678 4,122 2015 1,393 2,293 2,670 2016 8,084 17,258 2017 12,821 Total $ 46,997 All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance 29 Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance $ 11,030 The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Automobile policies, as of December 31, 2017: Average Annual Payout of Losses and ALAE, Net of Reinsurance (Unaudited) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Automobile 45.4 % 35.6 % 8.8 % 5.6 % 2.1 % 1.2 % 0.1 % 1.2 % — % — % The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the consolidated balance sheets is as follows: As of December 31, 2017 2016 (In thousands) Liabilities for unpaid losses and LAE: Homeowners $ 99,650 $ 87,955 Commercial general liability 17,111 21,790 Automobile 11,030 7,792 Flood — — Total liabilities for unpaid losses and LAE, net of reinsurance 127,791 117,537 Reinsurance recoverables: Homeowners 81,852 20,968 Commercial general liability — 35 Automobile 15,360 19,201 Flood 1,133 208 Total reinsurance recoverables 98,345 40,412 Unallocated loss adjustment expenses 4,379 161 Gross liability for unpaid losses and LAE $ 230,515 $ 158,110 Management establishes a liability on an aggregate basis to provide for the estimated IBNR. The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates. Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of tests and methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of December 31, 2017 and 2016, were not considered material. IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. Various standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses are the following: • Reported Loss Development Method : A reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels; • Paid Development Method : A paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels; • Expected Loss Ratio Method : Expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and • Bornhuetter-Ferguson Method : The results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method. |
