| Reserve for Losses and Loss Adjustment Expenses | 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 lines of business by accident year. 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 primary actuarial methods in their estimation process for the reserve for losses and loss adjustment expenses. These primary methods are supplemented by additional actuarial methods as the Chief Actuary considers appropriate. For example, these supplemental methods can include frequency and severity methods that utilize claim count data to estimate ultimate losses and loss adjustment expenses. These 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 and claims handling practices, 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 actuarial methods to be used for each accident year and line of business. For the Excess and Surplus Lines segment, the internal actuaries perform a study on each of these parameters at least annually and make recommendations for the initial expected loss ratios, the incurred and paid loss development factors and the weighting of the actuarial methods by accident year and line of business. Members of management’s Reserve Committee review and approve the parameter review actuarial recommendations, and absent any developments requiring an earlier review, 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 Specialty Admitted Insurance segment, expected loss ratios, loss development factors, and loss cost trends are reviewed and updated at least annually. 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. 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 adjusted upward where warranted based on management's judgment in order to produce the best estimate. 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 data 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. 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. Reinsurance recoverables on unpaid losses and loss adjustment expenses are presented gross of an allowance for credit losses on reinsurance balances of $660,000, $580,000, and $607,000 at December 31, 2023, 2022, and 2021, respectively. Year Ended December 31, 2023 2022 2021 (in thousands) Reserve for losses and loss adjustment expenses net of reinsurance recoverables at beginning of period $ 1,080,766 $ 974,221 $ 1,078,248 Add: Incurred losses and loss adjustment expenses net of reinsurance: Current year 463,530 429,260 383,964 Prior years - retroactive reinsurance 4,991 15,742 — Prior years - excluding retroactive reinsurance 31,636 (4,360) 188,210 Total incurred losses and loss and adjustment expenses 500,157 440,642 572,174 Deduct: Loss and loss adjustment expense payments net of reinsurance: Current year 32,410 33,720 32,923 Prior years 296,549 284,635 386,826 Total loss and loss adjustment expense payments 328,959 318,355 419,749 Deduct: Change in deferred reinsurance gain - retroactive reinsurance 4,991 15,742 — Deduct: Loss reserves ceded in loss portfolio transfer — — 256,452 Reserve for losses and loss adjustment expenses net of reinsurance recoverables at end of period 1,246,973 1,080,766 974,221 Add: Reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period 1,359,134 1,260,197 1,336,058 Reserve for losses and loss adjustment expenses gross of reinsurance recoverables on unpaid losses and loss adjustment expenses at end of period $ 2,606,107 $ 2,340,963 $ 2,310,279 The foregoing reconciliation shows that $31.6 million of net adverse development was experienced in 2023 on the reserve for losses and loss adjustment expenses held at December 31, 2022 (excluding adverse prior year development on the commercial auto loss portfolio transfer subject to retroactive reinsurance accounting - see Loss Portfolio Transfer below). This net adverse reserve development included $32.6 million of net adverse development in the Excess and Surplus Lines segment, with adverse development in accident years 2020 and prior exceeding favorable development on accident years 2022 and 2021, and $972,000 of net favorable development in the Specialty Admitted Insurance segment. The foregoing reconciliation shows that $4.4 million of net favorable development was experienced in 2022 on the reserve for losses and loss adjustment expenses held at December 31, 2021 (excluding adverse prior year development on the commercial auto loss portfolio transfer subject to retroactive reinsurance accounting - see Loss Portfolio Transfer below). This net favorable reserve development included $210,000 of net favorable development in the Excess and Surplus Lines segment and $4.2 million of net favorable development in the Specialty Admitted Insurance segment. The Company also experienced $5.0 million of net catastrophe losses in the current accident year in 2022 related to Hurricane Ian. The foregoing reconciliation shows that $188.2 million of net adverse development was experienced in 2021 on the reserve for losses and loss adjustment expenses held at December 31, 2020. This net adverse reserve development included $190.7 million of net adverse development in the Excess and Surplus Lines segment including $200.1 million of net adverse development in the commercial auto line of business that was primarily related to the 2019 and prior accident years with Rasier. The adverse development for commercial auto was partially offset by $9.4 million of net favorable development in the Core E&S underwriting divisions. The Company also experienced $2.5 million of net favorable development on prior accident years in the Specialty Admitted Insurance segment, as losses on our workers’ compensation business written prior to 2020 continued to develop more favorably than we had anticipated. The Company also experienced $5.0 million of net catastrophe losses in the current accident year in 2021 related to Hurricane Ida. Loss Portfolio Transfers Loss portfolio transfers are a form of reinsurance utilized by the Company to transfer losses and loss adjustment expenses and associated risk of adverse development on covered subject business, as defined in the respective agreements, to an assuming reinsurer in exchange for a reinsurance premium. Loss portfolio transfers can bring economic finality on the subject risks when they no longer meet the Company's appetite or are no longer aligned with the Company's risk management guidelines. Commercial Auto Loss Portfolio Transfer On September 27, 2021, James River Insurance Company and James River Casualty Company (together, “James River”) entered into a loss portfolio transfer transaction (the “Commercial Auto LPT”) with Aleka Insurance, Inc. (“Aleka”), a captive insurance company affiliate of Rasier LLC, to reinsure substantially all of the Excess and Surplus Lines segment's legacy portfolio of commercial auto policies previously issued to Rasier LLC and its affiliates (collectively, “Rasier”) for which James River is not otherwise indemnified by Rasier. Under the terms of the transaction, effective as of July 1, 2021, James River ceded to Aleka approximately $345.1 million of commercial auto liabilities relating to Rasier policies written in the years 2013-2019, which amount constituted the reinsurance premium. The reinsurance coverage is structured to be fully collateralized, is not subject to an aggregate limit, and is subject to certain exclusions. A pre-tax loss of $29.6 million was recognized as adverse loss and loss adjustment reserve development in the Excess and Surplus Lines segment for the third quarter of 2021 associated with the loss portfolio transfer. Retroactive Reinsurance Accounting The Company periodically reevaluates the remaining reserves subject to the Commercial Auto LPT, and when recognized adverse prior year development on the subject business causes the cumulative amounts ceded under the loss portfolio transfer to exceed the consideration paid, the loss portfolio transfer moves into a gain position subject to retroactive reinsurance accounting under GAAP. Gains are deferred under retroactive reinsurance accounting and recognized in earnings in proportion to actual paid recoveries under the loss portfolio transfer using the recovery method. While the deferral of gains can introduce volatility in our results in the short-term, over the life of the contract, we would expect no economic impact to the Company as long as the counterparty performs under the contract. The impact of retroactive reinsurance accounting is not indicative of our current and ongoing operations. For the years ended December 31, 2023 and 2022, due to adverse paid and reported loss trends on the legacy Rasier business, the Company recognized adverse prior year development of $64.4 million and $46.7 million, respectively, on the net reserves subject to the Commercial Auto LPT, resulting in corresponding additional amounts ceded under the Commercial Auto LPT. As a result, the cumulative amounts ceded under the Commercial Auto LPT exceed the consideration paid, moving the Commercial Auto LPT into a gain position. The Company has applied retroactive reinsurance accounting to the loss portfolio transfer. Retroactive reinsurance benefits of $59.4 million and $31.0 million, respectively, were recorded in losses and loss adjustment expenses on the Consolidated Statements of (Loss) Income and Comprehensive Loss for the years ended December 31, 2023 and 2022 using the recovery method. The cumulative amounts ceded under the loss portfolio transfer were $456.2 million and $391.8 million as of December 31, 2023 and 2022, respectively. The deferred retroactive reinsurance gain related to the Commercial Auto LPT separately presented on the Company's Consolidated Balance Sheets was $20.7 million and $15.7 million at December 31, 2023 and 2022, respectively. The following tables present incurred and paid losses and loss adjustment expenses, net of reinsurance as of December 31, 2023 for: (1) the Excess and Surplus Lines segment split between all excess and surplus lines business excluding commercial auto, and separately, commercial auto, and (2) the Specialty Admitted Insurance segment split between individual risk workers’ compensation and fronting and programs. The information provided herein about incurred and paid accident year claims development for the years ended December 31, 2022 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 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 114,942 $ 104,092 $ 90,267 $ 82,232 $ 84,074 $ 88,904 $ 90,191 $ 90,944 $ 91,391 $ 94,877 2015 126,443 113,417 104,847 102,434 103,688 110,466 114,398 116,085 118,599 2016 138,507 125,093 126,050 126,971 125,097 132,235 135,491 141,242 2017 144,349 131,897 132,136 124,265 128,674 134,272 147,196 2018 167,004 158,458 146,633 150,687 151,563 167,237 2019 214,653 194,759 189,671 188,061 204,844 2020 239,897 211,732 207,210 231,658 2021 304,435 286,343 274,120 2022 340,436 293,402 2023 369,255 Total $ 2,042,430 Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands) Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 3,412 $ 16,969 $ 28,212 $ 43,891 $ 58,774 $ 71,549 $ 76,523 $ 79,980 $ 85,433 $ 89,769 2015 4,048 17,164 34,801 55,911 73,455 87,344 94,494 103,138 110,860 2016 5,180 22,852 46,045 70,105 90,166 102,072 116,059 126,916 2017 5,290 22,956 42,764 64,924 81,303 102,866 120,229 2018 6,000 26,160 50,679 76,494 105,538 124,903 2019 8,235 31,346 62,227 103,836 136,289 2020 8,642 34,561 73,106 117,892 2021 11,693 55,070 100,649 2022 12,713 51,537 2023 10,927 Total $ 989,971 All outstanding losses and loss adjustment expenses prior to 2014, net of reinsurance (76 claims outstanding) $ 11,111 Total outstanding losses and loss adjustment expenses, net of reinsurance $ 1,063,570 Excess and Surplus Lines — Commercial Auto Incurred losses and loss adjustment expenses, net of reinsurance (in thousands) Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 20,487 $ 14,071 $ 17,233 $ 18,953 $ 19,779 $ 18,303 $ 19,196 $ 20,013 $ 20,222 $ 20,121 2015 30,109 33,113 35,149 36,139 36,636 37,839 38,046 37,915 37,950 2016 74,340 109,286 126,791 147,122 157,712 164,399 164,046 165,744 2017 207,355 208,743 272,421 319,472 355,713 366,636 376,251 2018 255,881 230,220 283,408 349,067 371,637 389,244 2019 262,306 240,773 339,771 365,279 408,340 2020 19,133 10,899 12,324 19,009 2021 21,154 16,565 17,319 2022 26,126 19,921 2023 18,181 Total $ 1,472,080 Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands) Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 6,166 $ 8,645 $ 12,679 $ 16,359 $ 18,678 $ 17,745 $ 18,301 $ 19,163 $ 20,070 $ 20,077 2015 8,356 15,234 24,282 31,592 34,819 35,983 36,710 37,462 37,725 2016 18,295 54,054 89,381 125,108 141,545 152,030 158,819 162,219 2017 41,467 107,377 192,961 252,169 309,860 344,235 364,501 2018 45,136 119,099 184,686 257,346 329,009 368,865 2019 44,225 107,182 192,982 285,725 358,920 2020 628 2,854 7,304 14,151 2021 2,810 4,313 10,325 2022 1,897 5,365 2023 2,066 Total $ 1,344,214 Total outstanding losses and loss adjustment expenses, net of reinsurance before Rasier LPT $ 127,866 Reinsurance recoverable for Rasier LPT $ 78,065 Total outstanding losses and loss adjustment expenses, net of reinsurance $ 49,801 Specialty Admitted — Individual Risk Workers’ Compensation Incurred losses and loss adjustment expenses, net of reinsurance (in thousands) Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 16,638 $ 16,652 $ 14,620 $ 13,890 $ 12,704 $ 12,704 $ 12,573 $ 12,685 $ 12,553 $ 12,424 2015 20,938 21,274 19,741 18,376 17,626 16,492 16,468 16,409 16,096 2016 21,678 20,299 18,050 15,800 14,050 13,069 12,790 12,510 2017 24,869 22,071 19,779 18,810 16,606 15,487 15,360 2018 16,432 16,288 16,038 14,200 12,139 11,829 2019 20,253 21,056 20,631 18,129 17,624 2020 20,137 22,240 19,389 18,934 2021 14,519 14,713 12,668 2022 14,507 11,828 2023 21,095 $ 150,368 Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands) Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 4,633 $ 10,648 $ 12,041 $ 12,236 $ 12,282 $ 12,282 $ 12,276 $ 12,287 $ 12,306 $ 12,308 2015 6,604 13,285 15,118 15,889 15,901 16,068 16,069 16,071 16,071 2016 4,664 10,227 12,135 12,432 12,481 12,483 12,483 12,483 2017 6,546 12,782 14,285 15,195 15,210 15,236 15,279 2018 4,497 9,034 11,412 11,746 11,765 11,752 2019 5,473 13,776 16,254 16,909 17,154 2020 7,394 14,668 16,665 17,206 2021 5,874 10,780 11,679 2022 5,943 9,732 2023 6,126 Total $ 129,790 All outstanding losses and loss adjustment expenses prior to 2014, net of reinsurance (6 claims outstanding) $ 341 Outstanding losses and loss adjustment expenses assumed from involuntary workers’ compensation pools $ 3,701 Total outstanding losses and loss adjustment expenses, net of reinsurance $ 24,620 Specialty Admitted — Fronting and Programs Incurred losses and loss adjustment expenses, net of reinsurance (in thousands) Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 3,460 $ 3,468 $ 3,818 $ 3,425 $ 3,228 $ 3,083 $ 3,081 $ 3,068 $ 3,061 $ 2,939 2015 7,136 9,632 9,358 8,974 8,384 8,444 8,436 8,279 8,195 2016 11,542 15,670 14,682 15,522 14,468 15,090 14,304 13,289 2017 21,229 24,271 25,201 24,728 25,097 24,893 23,128 2018 21,758 20,677 19,822 20,158 19,268 19,193 2019 18,832 19,020 19,991 18,956 18,777 2020 25,433 28,131 31,555 34,705 2021 39,999 44,857 47,505 2022 47,262 51,101 2023 53,635 Total $ 272,467 Cumulative paid losses and loss adjustment expenses, net of reinsurance (in thousands) Accident Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 $ 883 $ 1,687 $ 2,369 $ 2,728 $ 2,854 $ 2,916 $ 2,917 $ 2,926 $ 2,939 $ 2,941 2015 2,058 4,666 6,165 6,919 7,329 7,654 7,728 7,824 8,007 2016 1,894 5,123 6,888 10,732 10,896 11,711 12,142 12,321 2017 1,223 6,682 13,065 15,854 18,219 20,655 20,770 2018 885 4,972 10,495 12,631 14,059 15,424 2019 4,358 5,125 9,958 13,007 14,914 2020 5,375 15,678 20,903 26,523 2021 8,347 18,106 27,156 2022 13,018 23,284 2023 13,145 Total $ 164,485 All outstanding losses and loss adjustment expenses, net of reinsurance $ 107,982 Outstanding losses and loss adjustment expenses, assumed from involuntary pools $ 1,000 Total outstanding losses and loss adjustment expenses, net of reinsurance $ 108,982 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, 2023 is as follows (in thousands): E&S – excluding commercial auto $ 1,063,570 E&S – commercial auto 49,801 Specialty Admitted – individual risk workers’ compensation 24,620 Specialty Admitted – fronting and programs 108,982 Net reserve for losses and loss adjustment expenses 1,246,973 Reinsurance recoverables on unpaid losses (gross of $660,000 allowance for credit losses on reinsurance recoverables) 1,359,134 Gross reserve for losses and loss adjustment expenses $ 2,606,107 The following is unaudited supplementary information about average annual percentage payouts of incurred claims by age, net of reinsurance, as of December 31, 2023. 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 3.7 % 12.7 % 15.1 % 17.4 % 14.8 % 12.0 % 8.2 % 6.2 % 6.1 % 3.8 % E&S – commercial auto 13.8 % 15.7 % 23.0 % 21.7 % 13.6 % 4.8 % 3.5 % 2.8 % 1.1 % 0.0 % Specialty Admitted – individual risk workers’ compensation 28.5 % 32.5 % 14.8 % 8.1 % 6.4 % 3.3 % 1.9 % 1.0 % 1.0 % 0.8 % Specialty Admitted – fronting and programs 18.7 % 21.4 % 20.7 % 13.3 % 7.6 % 5.4 % 4.5 % 3.5 % 2.3 % 2.1 % 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 losses and loss adjustment expenses). 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) 2014 $ 94,877 $ 1,888 2,278 2015 118,599 3,198 2,706 2016 141,242 4,198 3,285 2017 147,196 9,122 3,322 2018 167,237 19,021 4,728 2019 204,844 30,925 6,143 2020 231,658 63,022 5,590 2021 274,120 123,776 4,803 2022 293,402 198,836 4,185 2023 369,255 337,417 2,712 Excess and Surplus Lines — Commercial Auto Accident Year Incurred Losses IBNR before Rasier LPT IBNR net of Rasier LPT Cumulative # of ($ in thousands) 2014 $ 20,121 $ 44 $ 20 7,764 2015 37,950 225 143 41,771 2016 165,744 1,032 106 89,117 2017 376,251 4,679 176 134,150 2018 389,244 8,474 157 97,342 2019 408,340 13,992 317 71,492 2020 19,009 1,212 1,212 633 2021 17,319 4,364 4,364 785 2022 19,921 11,871 11,871 501 2023 18,181 14,452 14,452 263 Specialty Admitted - Individual Risk Workers’ Compensation Accident Year Incurred Losses IBNR Cumulative # of ($ in thousands) 2014 $ 12,424 $ 26 851 2015 16,096 25 975 2016 12,510 26 835 2017 15,360 54 1,093 2018 11,829 32 1,238 2019 17,624 338 1,555 2020 18,934 808 1,381 2021 12,668 298 1,301 2022 11,828 759 1,046 2023 21,095 3,017 860 Specialty Admitted — Fronting and Programs Accident Year Incurred Losses IBNR Cumulative # of ($ in thousands) 2014 $ 2,939 $ — 858 2015 8,195 50 1,363 2016 13,289 290 2,823 2017 23,128 1,043 6,805 2018 19,193 1,365 7,407 2019 18,777 1,806 8,154 2020 34,705 3,178 9,039 2021 47,505 10,971 10,622 2022 51,101 16,914 9,745 2023 53,635 27,444 8,035 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. |
