| Reserve for Losses and Loss Adjustment Expenses | 6. Reserve for Losses and Loss Adjustment Expenses In establishing the reserve for losses and loss adjustment expenses, the Company’s internal actuaries estimate an initial expected ultimate loss ratio for each of our product lines by accident year (or for our Casualty Reinsurance segment, on a contract by contract basis). Input from the Company’s underwriting and claims departments, including premium pricing assumptions and historical experience, are considered by the Company’s internal actuaries in estimating the initial expected loss ratios. The Company’s internal actuaries generally utilize five actuarial methods in their estimation process for the reserve for losses and loss adjustment expenses. These five methods utilize, to varying degrees, the initial expected loss ratio, detailed statistical analysis of past claims reporting and payment patterns, claims frequency and severity, paid loss experience, industry loss experience, and changes in market conditions, policy forms, exclusions, and exposures. In applying these methods to develop an estimate of the reserve for losses and loss adjustment expenses, our internal actuaries use judgment to determine three key parameters for each accident year and line of business: the initial expected loss ratios, the incurred and paid loss development factors and the weighting of the five actuarial methods to be used for each accident year and line of business. For the Excess and Surplus Lines and Specialty Admitted Insurance segments, the internal actuary performs a study on each of these parameters annually in the third quarter and makes recommendations for the initial expected loss ratios, the incurred and paid loss development factors and the weighting of the five actuarial methods by accident year and line of business. Members of management’s Reserve Committee review and approve the parameter review actuarial recommendations, and these approved parameters are used in the reserve estimation process for the next four quarters at which time a new parameter study is performed. For the Casualty Reinsurance segment, periodic assessments are made on a contract by contract basis with the goal of keeping the initial expected loss ratios and the incurred and paid loss development factors as constant as possible until sufficient evidence presents itself to support adjustments. Method weights are generally less rigid for the Casualty Reinsurance segment given the heterogeneous nature of the various contracts, and the potential for significant changes in mix of business within individual treaties. Different reserving methods are appropriate in different situations, and the Company’s internal actuaries use their judgment and experience to determine the weighting of the methods to use for each accident year and each line of business and, for our Casualty Reinsurance segment, on a contract by contract basis. For example, the current accident year has very little incurred and paid loss development data on which to base reserve projections. As a result, the Company relies heavily on the initial expected loss ratio in estimating reserves for the current accident year. The Company generally sets the initial expected loss ratio for the current accident year consistent with the internal actuaries’ pricing assumptions. We believe that this is a reasonable and appropriate reserving assumption for the current accident year since our pricing assumptions are actuarially driven and since the Company expects to make an acceptable return on the new business written. If actual loss emergence is better than our initial expected loss ratio assumptions, we will experience favorable development and if it is worse than our initial expected loss ratio assumptions, we will experience adverse development. Conversely, sufficient incurred and paid loss development is available for the oldest accident years, so more weight is given to this development data and less weight is given to the initial expected loss ratio. Historically, the Company’s reserve selections for the Excess and Surplus Lines segment gave more weight to industry indications due to the Company’s limited operating history. When reviewing the Excess and Surplus Lines segment’s reserve parameters in 2013, our internal actuaries’ felt that there was enough Company history to give more weight to the Company’s own experience. Accordingly, the initial expected loss ratios, the paid loss development factors and the incurred loss development factors were adjusted to more closely resemble the Company’s own internal indications. Method weights were also changed as management, in consultation with our actuaries, deemed appropriate. These changes had the cumulative effect of reducing our then best estimate for the reserve for losses and loss adjustment expenses. The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses, net of reinsurance, to the gross amounts reported in the consolidated balance sheets:
Year Ended December 31,
2016
2015
2014
(in thousands)
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period $ 653,534 $ 589,042 $ 526,985
Add: Incurred losses and loss adjustment expenses net of reinsurance:
Current year 349,137 295,334 264,786
Prior years (23,716 ) (16,318 ) (27,418 )
Total incurred losses and loss and adjustment expenses 325,421 279,016 237,368
Deduct: Loss and loss adjustment expense payments net of reinsurance:
Current year 39,473 31,957 25,942
Prior years 178,354 182,567 149,369
Total loss and loss adjustment expense payments 217,827 214,524 175,311
Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period 761,128 653,534 589,042
Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period 182,737 131,788 127,254
Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period $ 943,865 $ 785,322 $ 716,296
The foregoing reconciliation shows that a $23.7 million redundancy developed in 2016 on the reserve for losses and loss adjustment expenses held at December 31, 2015. This favorable reserve development included $24.1 million of favorable development in the Excess and Surplus Lines segment primarily from the 2013, 2014 and 2015 accident years with favorable development of $4.5 million, $10.7 million and $10.0 million, respectively. This favorable development occurred because our actuarial studies at December 31, 2016 for the Excess and Surplus Lines segment indicated that our loss experience on our casualty business continues to be below our initial expected ultimate loss ratios. The Company also experienced $3.8 million of favorable development on prior accident years in the Specialty Admitted Insurance segment primarily from accident years 2010 through 2014, as losses on our workers’ compensation business written prior to 2015 continued to develop more favorably than we had anticipated. The Casualty Reinsurance segment experienced $4.2 million of adverse development on prior accident years primarily from two contracts from 2012 and 2013 that had higher than expected reported losses in 2016. The foregoing reconciliation shows that a $16.3 million redundancy developed in 2015 on the reserve for losses and loss adjustment expenses held at December 31, 2014. This favorable reserve development included $25.4 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included $17.3 million of favorable development from the 2014 accident year and $10.5 million of favorable development from the 2013 accident year. This favorable development occurred because our actuarial studies at December 31, 2015 for the Excess and Surplus Lines segment indicated that our loss experience for our shorter-tailed general casualty division book for the 2014 accident year is below our initial expected ultimate loss ratios. The actuarial studies at December 31, 2015 also showed that the experience on our other casualty business continues to be below our initial expected ultimate loss ratios. Favorable reserve development written in the Specialty Admitted Insurance segment was $3.5 million and primarily came from accident years 2011 through 2013, as losses on our workers’ compensation business written prior to 2014 continued to develop more favorably than we had anticipated. In addition, $12.6 million of adverse development occurred in the Casualty Reinsurance segment, with a majority of this adverse development coming from three reinsurers principally in the 2011, 2012, and 2013 underwriting years that experienced higher loss development in 2015 than expected. The foregoing reconciliation shows that a $27.4 million redundancy developed in 2014 on the reserve for losses and loss adjustment expenses held at December 31, 2013. This favorable reserve development included $27.3 million of favorable development in the Excess and Surplus Lines segment. The Excess and Surplus Lines segment favorable development included $7.9 million of favorable development from the 2011 accident year, $5.0 million of favorable development from the 2009 accident year, and $4.2 million of favorable development from the 2007 accident year. This favorable development occurred because our actuarial studies at December 31, 2014 for the Excess and Surplus Lines segment indicated that our loss experience on our maturing casualty business continues to be below our initial expected ultimate loss ratios. Favorable reserve development written in the Specialty Admitted Insurance segment was $5.9 million and primarily came from accident years 2007 through 2012, as losses on our workers’ compensation business written prior to 2013 continued to develop more favorably than we had anticipated. In addition, $5.7 million of adverse development occurred in the Casualty Reinsurance segment, with a majority of this adverse development coming from one reinsurance relationship from the 2011 underwriting year that experienced higher loss development in 2014 than expected. The following tables present incurred and paid losses and loss adjustment expenses, net of reinsurance as of December 31, 2016 for: (1) the Excess and Surplus Lines segment split between all excess and surplus lines business excluding commercial auto and commercial auto, (2) the Specialty Admitted Insurance segment split between individual risk workers’ compensation and fronting and programs, and (3) the Casualty Reinsurance segment. The information provided herein about incurred and paid accident year claims development for the years ended December 31, 2015 and prior is presented as unaudited supplementary information. Excess and Surplus Lines — Excluding Commercial Auto Incurred losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007 $ 120,679 $ 119,181 $ 121,021 $ 117,835 $ 110,565 $ 106,483 $ 99,231 $ 94,987 $ 93,954 $ 94,042
2008 120,760 119,736 116,817 112,227 107,927 102,122 99,169 98,765 96,687
2009 114,834 110,783 106,480 98,502 86,691 81,764 83,431 83,846
2010 78,424 80,569 78,117 73,035 69,080 69,964 70,294
2011 111,190 119,927 114,473 106,564 106,381 106,130
2012 97,908 98,672 97,829 96,497 97,306
2013 96,729 96,064 85,433 81,009
2014 114,942 104,092 90,267
2015 126,443 113,417
2016 138,507
Total $ 971,505
Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007 $ 7,806 $ 30,138 $ 50,123 $ 64,080 $ 76,262 $ 82,264 $ 85,049 $ 87,082 $ 88,539 $ 90,002
2008 16,922 35,228 53,566 69,585 80,385 83,937 87,630 91,750 91,768
2009 29,860 41,687 51,731 61,548 67,293 71,245 76,091 79,014
2010 13,673 26,418 35,812 45,641 52,071 57,371 61,307
2011 27,684 53,109 72,732 81,696 90,884 94,998
2012 6,944 33,757 49,604 63,216 74,869
2013 3,867 14,509 30,382 44,421
2014 3,412 16,969 28,212
2015 4,048 17,164
2016 5,180
Total $ 586,935
All outstanding losses and loss adjustment expenses prior to 2007, net of reinsurance $ 8,345
Total outstanding losses and loss adjustment expenses, net of reinsurance $ 392,915
Excess and Surplus Lines — Commercial Auto Incurred losses and adjustment expenses, net of reinsurance (in thousands)
Accident Year
2013
2014
2015
2016
2013 $ 1,255 $ 1,300 $ 1,451 $ 1,351
2014 20,487 14,071 17,233
2015 30,109 33,113
2016 74,340
Total $ 126,037
Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2013 $ 60 $ 1,182 $ 1,285 $ 1,291
2014 6,166 8,645 12,679
2015 8,356 15,234
2016 18,295
Total $ 47,499
Total outstanding losses and loss adjustment expenses, net of reinsurance $ 78,538
Specialty Admitted — Individual Risk Workers’ Compensation Incurred losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007 $ 33,846 $ 32,211 $ 32,474 $ 32,190 $ 31,061 $ 30,013 $ 30,007 $ 29,246 $ 29,139 $ 29,071
2008 37,602 36,641 38,654 38,807 40,330 40,552 39,321 39,320 39,131
2009 28,691 28,526 27,535 28,116 27,795 26,171 26,169 26,232
2010 27,209 28,736 30,464 30,373 28,963 28,938 27,590
2011 37,834 41,421 40,154 38,999 38,311 37,455
2012 32,116 32,420 31,490 29,689 28,255
2013 12,525 13,668 12,786 11,578
2014 16,638 16,652 14,620
2015 20,938 21,274
2016 21,678
Total $ 256,884
Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2007 $ 7,475 $ 18,240 $ 23,671 $ 25,774 $ 27,837 $ 28,337 $ 28,782 $ 28,824 $ 28,846 $ 28,846
2008 10,479 22,664 28,436 31,432 33,885 36,778 37,905 37,933 37,965
2009 7,277 16,945 21,095 22,646 24,231 24,192 24,350 24,418
2010 7,157 16,245 21,805 23,898 25,210 25,477 26,345
2011 10,123 23,127 29,021 33,204 34,240 34,287
2012 9,222 20,308 24,755 26,435 26,897
2013 4,487 8,723 9,846 10,246
2014 4,633 10,648 12,041
2015 6,604 13,285
2016 4,664
Total $ 218,994
All outstanding losses and loss adjustment expenses prior to 2007, net of reinsurance $ 246
Outstanding losses and loss adjustment expenses assumed from involuntary workers’ compensation pools $ 5,040
Total outstanding losses and loss adjustment expenses, net of reinsurance $ 43,176
Specialty Admitted — Fronting and Programs Incurred losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2013
2014
2015
2016
2013 $ 104 $ 80 $ 52 $ 52
2014 3,460 3,468 3,818
2015 7,136 9,632
2016 11,542
Total $ 25,044
Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2013 $ 28 $ 52 $ 52 $ 52
2014 883 1,687 2,369
2015 2,058 4,666
2016 1,894
Total $ 8,981
Total outstanding losses and loss adjustment expenses, net of reinsurance $ 16,063
Casualty Reinsurance Incurred losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2008 $ 1,418 $ 3,215 $ 2,897 $ 2,859 $ 3,199 $ 3,473 $ 3,462 $ 3,467 $ 3,470
2009 34,587 28,244 24,125 26,458 27,078 27,116 26,989 26,931
2010 64,413 60,476 61,068 62,714 61,344 60,949 60,978
2011 114,908 103,123 97,366 97,812 98,993 99,282
2012 148,251 132,388 131,281 135,594 136,813
2013 133,230 130,361 131,352 134,446
2014 118,881 115,927 114,636
2015 119,157 108,870
2016 112,759
Total $ 798,185
Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands)
Accident Year
2008 $ 320 $ 616 $ 999 $ 1,595 $ 2,087 $ 2,478 $ 2,706 $ 2,929 $ 3,029
2009 6,487 9,926 12,956 16,466 19,672 21,646 23,024 23,796
2010 21,918 31,500 38,430 44,921 49,263 52,761 54,659
2011 48,688 61,922 68,616 78,164 87,267 90,287
2012 73,124 81,859 97,215 113,943 121,026
2013 59,756 75,094 93,902 108,396
2014 41,421 58,601 76,302
2015 40,021 53,986
2016 36,268
Total $ 567,749
Total outstanding losses and loss adjustment expenses, net of reinsurance $ 230,436
The reconciliation of the net incurred and paid claims development tables to the reserve for losses and loss adjustment expenses in the consolidated balance sheet at December 31, 2016 is as follows (in thousands):
E&S – excluding commercial auto $ 392,915
E&S – commercial auto 78,538
Specialty Admitted – individual risk workers’ compensation 43,176
Specialty Admitted – fronting and programs 16,063
Casualty Reinsurance 230,436
Net reserve for losses and loss adjustment expenses 761,128
Reinsurance recoverables on unpaid losses 182,737
Gross reserve for losses and loss adjustment expenses $ 943,865
The following is unaudited supplementary information about average annual percentage payouts of incurred claims by age, net of reinsurance, for the Excess and Surplus Lines segment and the Specialty Admitted Insurance segments as of December 31, 2016. The Specialty Admitted Insurance segment’s first full year of writing fronting and programs business was 2014, so the average annual percentage payouts for fronting and programs only shows three years of payout information.
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
E&S – excluding commercial auto 10.9 % 16.9 % 17.5 % 17.3 % 13.8 % 7.1 % 4.5 % 4.8 % 1.6 % 1.1 %
E&S – commercial auto 22.0 % 44.1 % 14.9 % 14.5 %
Specialty Admitted – individual risk workers’ compensation 29.7 % 35.4 % 14.9 % 6.9 % 3.9 % 1.5 % 1.1 % 0.1 % 0.1 % 0.0 %
Specialty Admitted – fronting 22.0 % 21.3 % 4.2 %
Casualty Reinsurance 32.7 % 12.5 % 12.5 % 9.5 % 6.4 % 4.1 % 3.5 % 3.1 % 2.8 % 2.5 % In determining the cumulative number of reported claims, the Company measures claim counts by individual claimant for individual risk workers’ compensation policies in the Specialty Admitted Insurance segment. In the Excess and Surplus Lines insurance segment and for fronting and programs in the Specialty Admitted Insurance segment, the Company measures claim counts by claim event. The claim counts include all claims reported, even if the Company does not establish a liability for the claim (i.e. reserve for loss and loss adjustment expenses). The Casualty Reinsurance segment typically assumes written premium under quota share arrangements. The Company typically does not have direct access to claim frequency information underlying its assumed quota arrangements given the nature of that business. In addition, multiple claims are often aggregated by the ceding company before being reported to the Company. We do not use claim frequency information in the Casualty Reinsurance segment in the determination of loss reserves or for other internal purposes. Based on these considerations, the Company does not believe providing claims frequency information is practicable as it relates to the Casualty Reinsurance segment. The table below provides information on IBNR liabilities and claims frequency for: (1) the Excess and Surplus Lines segment split between commercial auto and all non commercial auto, and (2) the Specialty Admitted Insurance segment split between individual risk workers’ compensation and fronting and programs: Excess and Surplus Lines — Excluding Commercial Auto
Accident Year
Incurred Losses
IBNR
Cumulative # of
($ in thousands)
2007 $ 94,042 $ 3,786 2,478
2008 96,687 4,451 2,237
2009 83,846 3,766 1,644
2010 70,294 5,428 1,333
2011 106,130 8,731 1,399
2012 97,306 12,661 1,659
2013 81,009 23,009 2,090
2014 90,267 46,232 1,909
2015 113,417 76,090 2,046
2016 138,507 120,959 1,873 Excess and Surplus Lines — Commercial Auto
Accident Year
Incurred Losses
IBNR
Cumulative # of
($ in thousands)
2013 $ 1,351 $ 60 54
2014 17,233 3,608 7,574
2015 33,113 9,582 40,876
2016 74,340 26,822 83,099 Specialty Admitted - Individual Risk Workers’ Compensation
Accident Year
Incurred Losses
IBNR
Cumulative # of
($ in thousands)
2007 $ 29,071 $ 225 2,119
2008 39,131 994 2,011
2009 26,232 462 1,490
2010 27,590 1,180 1,604
2011 37,455 2,649 1,813
2012 28,255 1,261 1,322
2013 11,578 1,115 539
2014 14,620 2,102 850
2015 21,274 3,964 972
2016 21,678 6,783 800 Specialty Admitted — Fronting and Programs
Accident Year
Incurred Losses
IBNR
Cumulative # of
($ in thousands)
2013 $ 52 $ — 84
2014 3,818 857 1,363
2015 9,632 2,416 1,469
2016 11,542 4,354 1,283 The Company has not provided insurance coverage that could reasonably be expected to produce material levels of asbestos claims activity. In addition, management does not believe that the Company is exposed to environmental liability claims other than those which it has specifically underwritten and priced as an environmental exposure. |
