| 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 reported, 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. To determine our ultimate losses, we first use multiple actuarial techniques to establish a range of reasonable estimates. These techniques are in line with actuarial standards of practice and actuarial literature. A brief overview of each of these techniques is provided below. We then make additional qualitative considerations for many of the previously mentioned factors and select a point within this range. These ultimate loss estimates include reserves for both reported and unreported claims. Estimation of the Reserves for Unpaid Losses and Allocated LAE We calculate our estimate of ultimate losses with the following actuarial methods. The methods are applied to paid and incurred loss data. Incurred losses are defined as paid losses plus case reserves. For 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. • Development Method - The development method is based upon the assumption that the relative change in a given year’s 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 loss data is evaluated. Loss development factors (LDFs) are calculated to measure the change in cumulative losses 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. When applied to incurred loss data, the 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. Applying this method to paid losses avoids potential distortions in the data due to changes in case reserving methodology, but also loses any potentially useful information contained in the current case reserves. The paid development method’s implicit assumption is that the rate of payment of claims has been relatively consistent over time. • Expected Loss Method - Ultimate loss projections are based upon a prior measure of the anticipated losses, usually relative to a measure of exposure (such as earned house years). An expected loss cost is applied to each year’s measure of exposure to determine estimated ultimate losses for that year. Actual losses are not considered in this calculation. Because the ultimate loss estimates do not change unless the exposures or loss costs change, this method has the advantage of being stable over time. However, the advantage of this stability is offset by a lack of responsiveness since this method does not consider actual loss experience as it emerges. This method assumes 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 Bornhuetter-Ferguson (B-F) method is a credibility weighting procedure that blends the responsiveness of the Development Method with the stability of the Expected Loss Method by setting ultimate losses equal to actual losses plus the expected unreported losses which are based on the Expected Loss Method. As an experience year matures, actual losses gradually move closer to their ultimate levels so reliance on the Expected Loss Method can be reduced. • 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 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 Each of these methods has its own 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 consulting actuary’s opinion and compare the projected ultimate losses to our own estimates to ensure that the reserve for unpaid losses recorded at each annual balance sheet date is based upon 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, 2021, 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, 2012 to 2020 is presented as supplementary information. During 2019, three of our insurance subsidiaries, UPC, FSIC and ACIC, entered into an intercompany property and casualty reinsurance pooling arrangement. Under this arrangement, the participating companies share substantially all business that is written and allocate the combined premiums, losses and expenses. The Company performed an analysis and concluded that the nature of our claims cash flows and development patterns, along with the structure of our reinsurance program, are similar among all products. In prior years, we have elected to disclose one single property and casualty homeowners’ insurance table. With the change to disclosing two reporting segments in 2021, we are providing disclosures for each of our reporting segments separately. Personal Lines Operating Segment $ In thousands (except number of reported claims) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2021 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims For the Years Ended December 31, Audited Accident Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012 $ 75,872 $ 79,089 $ 78,273 $ 77,800 $ 78,147 $ 78,202 $ 78,454 $ 78,299 $ 78,306 $ 78,528 $ 79 12,057 2013 — 105,118 100,572 98,442 98,438 98,649 98,706 99,187 99,338 99,464 44 8,900 2014 — — 139,163 138,415 139,418 140,052 139,967 140,354 140,695 140,507 90 13,462 2015 — — — 201,328 215,680 215,221 215,894 216,278 217,198 217,223 253 20,350 2016 — — — — 267,124 269,228 271,207 271,795 273,797 275,142 644 31,115 2017 — — — — — 261,689 273,512 280,048 288,161 295,511 4,166 85,881 2018 — — — — — — 299,141 324,877 333,763 339,347 502 48,081 2019 — — — — — — — 344,912 316,649 332,682 6,540 40,369 2020 — — — — — — — — 484,372 452,090 9,570 58,299 2021 — — — — — — — — — 313,527 132,514 48,823 Total $ 2,544,021 Accident Year Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Audited 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012 $ 47,811 $ 68,271 $ 72,917 $ 75,365 $ 77,461 $ 77,781 $ 78,004 $ 77,867 $ 77,979 $ 78,420 2013 — 66,657 89,842 93,879 96,193 97,415 97,945 98,424 98,666 99,021 2014 — — 92,383 125,849 133,819 137,534 138,257 139,137 139,812 140,346 2015 — — — 134,992 193,127 207,021 211,040 213,968 214,817 216,011 2016 — — — — 183,238 248,852 261,089 267,015 268,953 271,536 2017 — — — — — 177,516 251,530 263,657 275,698 286,362 2018 — — — — — — 219,513 297,871 318,619 331,438 2019 — — — — — — — 202,105 270,923 309,014 2020 — — — — — — — — 244,512 414,666 2021 — — — — — — — — — 146,582 Total $ 2,293,396 All outstanding liabilities before 2011, net of reinsurance 325 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 250,950 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 Unaudited Years 1 2 3 4 5 6 7 8 9 10 61.2 % 25.9 % 6.4 % 2.9 % 1.7 % 0.6 % 0.5 % 0.1 % 0.2 % 0.5 % Commercial Lines Operating Segment $ In thousands (except number of reported claims) Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance As of December 31, 2021 Total of IBNR Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims For the Years Ended December 31, Audited Accident Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012 $ 11,404 $ 9,540 $ 9,690 $ 9,771 $ 8,671 $ 12,615 $ 12,641 $ 12,580 $ 12,584 $ 12,584 $ — $ 802 2013 — 8,359 6,420 11,826 8,382 7,573 7,426 7,263 7,262 7,328 — 741 2014 — — 15,845 15,752 16,311 16,816 16,070 15,602 15,604 15,618 11 680 2015 — — — 16,504 20,379 24,563 26,614 26,332 26,910 28,350 145 821 2016 — — — — 37,837 25,043 22,578 23,816 23,397 23,945 316 1,140 2017 — — — — — 70,650 72,135 78,970 83,286 87,833 2,173 4,239 2018 — — — — — — 61,778 64,964 69,203 68,384 (530) 3,666 2019 — — — — — — — 76,515 70,515 68,900 1,729 4,982 2020 — — — — — — — — 67,573 68,165 (8,785) 4,581 2021 — — — — — — — — — 53,338 21,844 1,600 Total $ 434,445 Accident Year Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Years Ended December 31, Audited 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2012 $ 4,583 $ 6,942 $ 6,893 $ 7,543 $ 8,552 $ 12,575 $ 12,576 $ 12,580 $ 12,584 $ 12,584 2013 — 2,958 5,127 5,317 7,248 7,254 7,256 7,262 7,261 7,327 2014 — — 6,379 9,452 13,212 14,420 15,336 15,460 15,475 15,606 2015 — — — 10,188 17,134 20,640 22,978 23,605 25,269 27,303 2016 — — — — 10,638 16,217 19,114 21,410 22,266 23,506 2017 — — — — — 40,467 62,353 64,329 73,683 80,460 2018 — — — — — — 27,852 54,551 61,885 66,848 2019 — — — — — — — 38,428 57,041 62,133 2020 — — — — — — — — 25,068 46,535 2021 — — — — — — — — — 19,754 Total $ 362,056 All outstanding liabilities before 2011, net of reinsurance 1 Liabilities for claims and claim adjustment expenses, net of reinsurance $ 72,390 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 Unaudited Years 1 2 3 4 5 6 7 8 9 10 40.4 % 25.2 % 7.7 % 10.7 % 4.6 % 8.8 % 1.8 % 0.3 % 0.5 % — % 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, 2021 2020 Net outstanding liabilities Personal Lines Operating Segment $ 250,950 $ 322,605 Commercial Lines Operating Segment 72,390 75,804 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 323,340 398,409 Reinsurance recoverable on unpaid claims Personal Lines Operating Segment 596,344 407,934 Commercial Lines Operating Segment 153,256 266,812 Total reinsurance recoverable on unpaid claims 749,600 674,746 Unallocated claims adjustment expenses 11,510 16,811 Total gross liability for unpaid claims and claims adjustment expense $ 1,084,450 $ 1,089,966 The table below shows the analysis of our reserve for unpaid losses for each of our last three fiscal years on a GAAP basis: 2021 2020 2019 Balance at January 1 $ 1,089,966 $ 760,357 $ 661,203 Less: reinsurance recoverable on unpaid losses 674,746 482,315 477,870 Net balance at January 1 $ 415,220 $ 278,042 $ 183,333 Incurred related to: Current year 394,278 615,102 466,359 Prior years 27,856 (6,786) 33,134 Total incurred $ 422,134 $ 608,316 $ 499,493 Paid related to: Current year 202,202 320,389 275,488 Prior years 300,302 150,749 129,296 Total paid $ 502,504 $ 471,138 $ 404,784 Net balance at December 31 $ 334,850 $ 415,220 $ 278,042 Plus: reinsurance recoverable on unpaid losses 749,600 674,746 482,315 Balance at December 31 $ 1,084,450 $ 1,089,966 $ 760,357 Composition of reserve for unpaid losses and LAE: Case reserves $ 384,393 $ 392,717 $ 300,858 IBNR reserves 700,057 697,249 459,499 Balance at December 31 $ 1,084,450 $ 1,089,966 $ 760,357 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. |
