| Liability for Future Policy Benefits and Unpaid Claims Disclosure | LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE (LAE) We generally use the term loss(es) to collectively refer to both loss and LAE. We establish reserves for both reported and unreported unpaid losses that have occurred at or before the balance sheet date for amounts we estimate we will be required to pay in the future. Our policy is to establish these loss reserves after considering all information known to us at each reporting period. At any given point in time, our loss reserve represents our best estimate of the ultimate settlement and administration cost of our insured claims incurred and unpaid. Since the process of estimating loss reserves requires significant judgment due to a number of variables, such as fluctuations in inflation, judicial decisions, legislative changes and changes in claims handling procedures, our ultimate liability will likely differ from these estimates. We revise our reserve for unpaid losses as additional information becomes available, and reflect adjustments, if any, in our earnings in the periods in which we determine the adjustments are necessary. General Discussion of the Loss Reserving Process Reserves for unpaid losses fall into two categories: case reserves and reserves for claims incurred but not reported. • Case reserves - When a claim is exported, we establish an automatic minimum case reserve for that claim type that represents our initial estimate of the losses that will ultimately be paid on the reported claim. Our initial estimate for each claim is based upon averages of loss payments for our prior closed claims made for that claim type. Then, our claims personnel perform an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss and adjust the reserve as necessary. As claims mature, we increase or decrease the reserve estimates as deemed necessary by our claims department based upon additional information we receive regarding the loss, the results of on-site reviews and any other information we gather while reviewing the claims. • Reserves for losses incurred but not reported (IBNR reserves) - Our IBNR reserves include true IBNR reserves plus “bulk” reserves. Bulk reserves represent additional amounts that cannot be allocated to particular claims, but which are necessary to estimate ultimate losses on reported and unreported claims. We estimate our IBNR reserves by projecting the ultimate losses using the methods discussed below and then deducting actual loss payments and case reserves from the projected ultimate losses. We review and adjust our IBNR reserves on a quarterly basis based on information available to us at the balance sheet date. When we establish our reserves, we analyze various factors such as our historical loss experience and that of the insurance industry, claims frequency and severity, our business mix, our claims processing procedures, legislative enactments, judicial decisions and legal developments in imposition of damages, and general economic conditions, including inflation. A change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or worse than indicated by our reserves, and the difference could be material. Due to the interaction of the aforementioned factors, there is no precise method for evaluating the impact of any one specific factor in isolation, and an element of judgment is ultimately required. Due to the uncertain nature of any projection of the future, the ultimate amount we will pay for losses will be different from the reserves we record. However, in our judgment, we employ techniques and assumptions that are appropriate, and the resulting reserve estimates are reasonable, given the information available at the balance sheet date. We determine our ultimate losses by using multiple actuarial methods to determine an actuarial estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques. Our selection of the actuarial estimate is influenced by the analysis of our historical loss and claim experience. For each accident year, we estimate the ultimate incurred losses for both reported and unreported claims. In establishing this estimate, we review the results of various actuarial methods discussed below. Estimation of the Reserves for Unpaid Losses and Allocated LAE We calculate our estimate of ultimate losses by using the following actuarial methods. We separately calculate the methods using paid loss data and incurred loss data. In the versions of these methods based on incurred loss data, the incurred losses are defined as paid losses plus case reserves. For this discussion of our loss reserving process, the word “segment” refers to a subgrouping of our claims data, such as by geographic area and/or by particular line of business; it does not refer to operating segments. • Incurred Development Method - The incurred development method is based upon the assumption that the relative change in a given year’s incurred loss estimates from one evaluation point to the next is similar to the relative change in prior years’ reported loss estimates at similar evaluation points. In utilizing this method, actual annual historical incurred loss data is evaluated. Successive years can be arranged to form a triangle of data. Loss development factors (LDFs) are calculated to measure the change in cumulative incurred costs from one evaluation point to the next. These historical LDFs and comparable industry benchmark factors form the basis for selecting the LDFs used in projecting the current valuation of losses to an ultimate basis. This method’s implicit assumption is that the relative adequacy of case reserves has been consistent over time, and that there have been no material changes in the rate at which claims have been reported. The paid development method is similar to the incurred development method. While the paid development method has the disadvantage of not recognizing the information by current case reserves, it has the advantage of avoiding potential distortions in the data due to changes in case reserving methodology. The paid development method’s implicit assumption is that the rate of payment of claims has been relatively consistent over time. • Expected Loss Method - In the expected loss method, ultimate loss projections are based upon some prior measure of the anticipated losses, usually relative to some measure of exposure (e.g., earned house years). An expected loss cost is applied to the measure of exposure to determine estimated ultimate losses for each year. Actual losses are not considered in this calculation. This method has the advantage of stability over time, because the ultimate loss estimates do not change unless the exposures or loss costs change. However, this advantage of stability is offset by a lack of responsiveness, since this method does not consider actual loss experience as it emerges. This method is based on the assumption that the loss cost per unit of exposure is a good indication of ultimate losses. It can be entirely dependent on pricing assumptions (e.g., historical experience adjusted for loss trend). • Bornhuetter-Ferguson Method - The incurred Bornhuetter-Ferguson (B-F) method is essentially a blend of two other methods. The first method is the loss development method whereby actual incurred losses are multiplied by an expected LDF. For slow reporting coverages, the loss development method can lead to erratic and unreliable projections because a relatively small swing in early reporting can result in a large swing in ultimate projections. The second method is the expected loss method whereby the IBNR estimate equals the difference between a predetermined estimate of expected losses and actual incurred losses. The incurred B-F method combines these two methods by setting ultimate losses equal to actual incurred losses plus expected unreported losses. As an experience year matures and expected unreported losses become smaller, the initial expected loss assumption becomes gradually less important. Two parameters are needed to apply the B-F method: the initial expected loss cost and the expected reporting pattern. This method is often used for long-tail lines and in situations where the incurred loss experience is relatively immature or lacks sufficient credibility for the application of other methods. The paid B-F method is analogous to the incurred B-F method using paid losses and development patterns in place of incurred losses and patterns. • Paid-to-Paid Development Method - In addition to the aforementioned methods, we also rely upon the paid-to-paid development method to project ultimate unallocated loss adjustment expense (ULAE). Ratios of paid ULAE to paid loss and allocated loss adjustment expense (ALAE) are compiled by calendar year and a paid-to-paid ratio selection is made. The selected ratio is applied to the estimated IBNR amounts and one half of this ratio is applied to case reserves. This method is derived from rule of thumb that half of ULAE is incurred when a claim is opened and the other half is incurred over the remaining life of the claim. Reliance and Selection of Methods The various methods we use have strengths and weaknesses that depend upon the circumstances of the segment and the age of the claims experience we analyze. The nature of our book of business allows us to place substantial, but not exclusive, reliance on the loss development methods, and the selected LDFs, represent the most critical aspect of our loss reserving process. We use the same set of LDFs in the methods during our loss reserving process that we also use to calculate the premium necessary to pay expected ultimate losses. Reasonably-Likely Changes in Variables As previously noted, we evaluate several factors when exercising our judgment in the selection of the LDFs that ultimately drive the determination of our loss reserves. The process of establishing our reserves is complex and necessarily imprecise, as it involves using judgment that is affected by many variables. We believe a reasonably-likely change in almost any of these aforementioned factors could have an impact on our reported results, financial condition and liquidity. However, we do not believe any reasonably likely changes in the frequency or severity of claims would have a material impact on us. On an annual basis, our consulting actuary issues a statement of actuarial opinion that documents the actuary’s evaluation of the adequacy of our unpaid loss obligations under the terms of our policies. We review the analysis underlying the actuary’s opinion and compare the projected ultimate losses per the actuary’s analysis to our own projection of ultimate losses to ensure that our reserve for unpaid losses recorded at each annual balance sheet date is based upon our analysis of all internal and external factors related to known and unknown claims against us and to ensure our reserve is within guidelines promulgated by the National Association of Insurance Commissioners (NAIC). We maintain an in-house claims staff that monitors and directs all aspects of our claims process. We assign the fieldwork to our wholly-owned claims subsidiary, or to third-party claims adjusting companies, none of whom have the authority to settle or pay any claims on our behalf. The third-party claims adjusting companies conduct inspection of the damaged property and prepare initial estimates. We review the inspection reports and initial estimates to determine the amounts to be paid to the policyholder in accordance with the terms and conditions of the policy in effect at the time that the policyholder incurs the loss. We maintain strategic relationships with multiple claims adjusting companies that we can engage should we need additional non-catastrophe claims servicing capacity. We believe the combination of our internal resources and relationships with external claims servicing companies provide an adequate level of claims servicing in the event catastrophes affect our policyholders. The following is information about incurred claims development and paid claims development as of December 31, 2017 , net of reinsurance, as well as cumulative claim frequency and the total of IBNR liability plus expected development on reported claims included within the net incurred claims amounts. The incurred claims development and paid claims development data reflect the acquisitions of FSIC, IIC, and AmCo in February 2015, April 2016, and April 2017, respectively, on a retrospective basis (includes FSIC, IIC and AmCo data for years prior to our acquisition of the insurance affiliates). The information about incurred claims development and paid claims development for the years ended December 31, 2008 to 2015 is presented as supplementary information. Personal Homeowners’ Insurance $ In thousands (except number of reported claims) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims For the Years Ended December 31, Unaudited Audited Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 30,073 $ 28,126 $ 27,174 $ 27,161 $ 27,358 $ 27,597 $ 27,564 $ 27,468 $ 27,453 $ 27,463 $ — 3,220 2009 — 46,952 46,089 45,515 45,583 45,316 45,116 44,959 44,996 44,617 40 4,150 2010 — — 51,144 51,292 51,862 52,239 51,685 51,841 51,674 51,836 4 5,090 2011 — — — 53,878 56,840 57,670 58,047 59,517 60,215 60,288 (47 ) 6,217 2012 — — — — 65,112 69,438 68,923 68,388 69,000 69,064 18 11,025 2013 — — — — — 98,461 94,755 93,041 92,702 92,792 385 8,331 2014 — — — — — — 130,090 130,488 131,402 132,096 1,427 12,750 2015 — — — — — — — 181,609 195,902 195,864 3,359 18,914 2016 — — — — — — — — 249,276 250,774 10,112 29,705 2017 — — — — — — — — — 208,537 44,937 55,410 Total $ 1,133,331 Accident Year Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Unaudited Audited 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 17,915 $ 23,806 $ 25,264 $ 26,360 $ 27,044 $ 27,358 $ 27,390 $ 27,445 $ 27,451 $ 27,461 2009 — 31,525 41,134 43,149 44,114 44,413 44,737 44,898 44,966 44,577 2010 — — 32,993 43,932 46,711 49,256 50,215 50,704 51,163 51,435 2011 — — — 36,419 48,558 52,412 55,532 58,069 59,461 59,806 2012 — — — — 42,699 60,640 64,675 66,739 68,337 68,655 2013 — — — — — 63,732 85,346 89,068 90,627 91,789 2014 — — — — — — 88,375 119,612 125,951 129,636 2015 — — — — — — — 123,888 174,993 188,199 2016 — — — — — — — — 170,527 232,266 2017 — — — — — — — — — 138,112 Total $ 1,031,936 All outstanding liabilities before 2008, net of reinsurance 149 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 101,544 The following is supplementary information about average historical claims duration as of December 31, 2017 . Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Unaudited Years 1 2 3 4 5 6 7 8 9 10 65.2 % 22.8 % 5.1 % 3.4 % 2.1 % 1.1 % 0.5 % 0.3 % (0.4 )% — % Commercial Residential Insurance $ In thousands (except number of reported claims) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims For the Years Ended December 31, Unaudited Audited Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 12,428 $ 3,844 $ 1,939 $ 2,137 $ 2,051 $ 2,045 $ 1,906 $ 1,905 $ 1,902 $ 1,899 $ — 261 2009 — 11,323 5,233 4,054 3,853 4,182 3,459 3,490 3,489 3,486 — 383 2010 — — 12,134 5,603 5,374 5,489 4,291 4,160 4,112 4,112 — 580 2011 — — — 12,702 11,280 10,197 8,972 9,142 9,030 8,985 52 758 2012 — — — — 11,404 9,540 9,690 9,771 8,671 12,615 40 803 2013 — — — — — 8,359 6,420 11,826 8,382 7,573 319 742 2014 — — — — — — 15,845 15,752 16,311 16,816 1,762 681 2015 — — — — — — — 16,554 20,434 24,568 2,168 849 2016 — — — — — — — — 38,632 25,599 6,249 1,223 2017 — — — — — — — — — 76,910 12,074 3,949 Total $ 182,563 Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Unaudited Audited Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 700 $ 1,619 $ 1,678 $ 1,665 $ 1,897 $ 1,927 $ 1,902 $ 1,902 $ 1,900 $ 1,899 2009 — 1,639 3,616 3,410 3,415 3,920 3,446 3,471 3,485 3,484 2010 — — 1,968 3,127 3,461 3,966 3,909 3,909 4,112 4,112 2011 — — — 3,541 6,241 7,605 7,846 8,825 8,851 8,933 2012 — — — — 4,583 6,942 6,893 7,543 8,552 12,575 2013 — — — — — 2,958 5,127 5,317 7,248 7,254 2014 — — — — — — 6,379 9,452 13,212 14,420 2015 — — — — — — — 10,188 17,139 20,645 2016 — — — — — — — — 10,917 16,687 2017 — — — — — — — — — 42,744 Total $ 132,753 All outstanding liabilities before 2008, net of reinsurance — Liabilities for claims and claim adjustment expenses, net of reinsurance $ 49,810 The following is supplementary information about average historical claims duration as of December 31, 2017 . Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Unaudited Years 1 2 3 4 5 6 7 8 9 10 42.0 % 30.7 % 7.0 % 7.5 % 7.4 % 4.0 % 1.3 % 0.1 % (0.1 )% (0.1 )% Remaining Product Lines $ In thousands (except number of reported claims) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2017 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims For the Years Ended December 31, Unaudited Audited Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 13,504 $ 12,871 $ 12,324 $ 11,833 $ 11,877 $ 12,661 $ 12,761 $ 12,885 $ 12,884 $ 12,883 $ — 1,173 2009 — 10,610 10,135 10,093 10,026 9,902 9,844 9,837 10,009 10,007 — 1,097 2010 — — 9,911 11,042 10,733 11,126 11,020 11,105 11,072 11,072 — 1,161 2011 — — — 11,126 11,022 10,896 10,630 10,575 10,740 10,741 — 1,217 2012 — — — — 10,760 9,651 9,350 9,412 9,147 9,138 12 1,063 2013 — — — — — 6,657 5,817 5,401 5,736 5,857 16 554 2014 — — — — — — 9,073 7,927 8,016 7,956 54 687 2015 — — — — — — — 19,669 19,723 19,352 151 1,382 2016 — — — — — — — — 17,053 17,898 564 84 2017 — — — — — — — — — 46,892 3,455 13 Total $ 151,796 Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Unaudited Audited Accident Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 $ 6,169 $ 9,309 $ 10,647 $ 11,104 $ 11,404 $ 12,360 $ 12,403 $ 12,557 $ 12,884 $ 12,883 2009 — 4,807 7,507 8,470 9,062 9,471 9,570 9,688 10,009 10,007 2010 — — 4,346 8,128 9,036 10,182 10,242 10,327 11,073 11,072 2011 — — — 4,587 8,013 9,444 9,837 10,128 10,740 10,741 2012 — — — — 5,112 7,631 8,242 8,626 9,124 9,126 2013 — — — — — 2,925 4,496 4,811 5,566 5,626 2014 — — — — — — 4,008 6,237 7,868 7,898 2015 — — — — — — — 11,104 18,129 18,817 2016 — — — — — — — — 12,432 16,116 2017 — — — — — — — — — 37,127 Total $ 139,413 All outstanding liabilities before 2008, net of reinsurance 1 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 12,384 The following is supplementary information about average historical claims duration as of December 31, 2017 . Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Unaudited Years 1 2 3 4 5 6 7 8 9 10 51.0 % 25.8 % 6.9 % 5.9 % 2.7 % 3.0 % 2.1 % 1.5 % 1.3 % — % The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position is as follows. December 31, 2017 2016 Net outstanding liabilities Personal Homeowners’ Only $ 101,544 $ 109,320 Commercial Residential Only 49,810 566 All other lines of business 12,384 6,031 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance $ 163,738 $ 115,917 Reinsurance recoverable on unpaid claims Personal Homeowners’ Only $ 131,581 $ 14,223 Commercial Residential Only 165,313 — All other lines of business 8,779 4,501 Total reinsurance recoverable on unpaid claims $ 305,673 $ 18,724 Unallocated claims adjustment expenses 12,821 6,214 Total gross liability for unpaid claims and claims adjustment expense $ 482,232 $ 140,855 The table below shows the analysis of our reserve for unpaid losses for each of our last three fiscal years on a GAAP basis: 2017 2016 2015 Balance at January 1 $ 140,855 $ 76,792 $ 54,436 Less: reinsurance recoverable on unpaid losses 18,724 2,114 1,252 Net balance at January 1 $ 122,131 $ 74,678 $ 53,184 Acquired reserves, net of recoverables (1) 40,299 22,576 2,390 Incurred related to: Current year 368,148 281,365 185,476 Prior years (2,613 ) 16,988 (2,368 ) Total incurred $ 365,535 $ 298,353 $ 183,108 Paid related to: Current year 256,134 210,970 127,306 Prior years 95,272 62,506 36,698 Total paid $ 351,406 $ 273,476 $ 164,004 Net balance at December 31 $ 176,559 $ 122,131 $ 74,678 Plus: reinsurance recoverable on unpaid losses 305,673 18,724 2,114 Balance at December 31 $ 482,232 $ 140,855 $ 76,792 Composition of reserve for unpaid losses and LAE: Case reserves $ 236,253 $ 83,447 $ 45,502 IBNR reserves 245,979 57,408 31,290 Balance at December 31 $ 482,232 $ 140,855 $ 76,792 (1) Acquired reserves, net of recoverables for 2017, 2016, and 2015 relate to our merges with AmCo, IIC, and FSH, respectively. Based upon our internal analysis and our review of the statement of actuarial opinion provided by our actuarial consultants, we believe that the reserve for unpaid losses reasonably represents the amount necessary to pay all claims and related expenses which may arise from incidents that have occurred as of the balance sheet date. As reflected by our losses incurred related to prior years, the favorable development experienced in 2017 was primarily the result of losses related to the 2016 and 2015 accident years coming in better than expected and the favorable development in 2015 was primarily the result of losses related to the 2014 and 2013 accident years coming in better than expected. During 2016, we had a reserve deficiency. Since we place substantial reliance on loss-development-based actuarial models when determining our estimate of ultimate losses, the deficiencies resulted from additional development on prior accident years which caused our ultimate losses to increase. |
