Reserves for Losses and Loss Settlement Expenses

6 Months Ended

Jun. 30, 2022

Reserves for Losses and Loss Settlement Expenses

RESERVES FOR LOSSES AND LOSS SETTLEMENT EXPENSES

Property insurance indemnifies an insured with an interest in physical property for loss of, or damage to, such property or the loss of its income-producing abilities. Casualty insurance primarily covers liability for damage to property of, or injury to, a person or entity other than the insured. In most cases, casualty insurance also obligates the insurance company to provide a defense for the insured in litigation, arising out of events covered by the policy.

Liabilities for losses and loss settlement expenses reflect management's best estimates at a given point in time of what we expect to pay for claims that have been reported and those that have been incurred but not reported ("IBNR"), based on known facts, circumstances, and historical trends. Because property and casualty insurance reserves are estimates of the unpaid portions of incurred losses that have been reported to us, as well as losses that have been incurred but not reported, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process. The ultimate cost of losses and related loss settlement expenses may vary materially from recorded amounts. We regularly update our reserve estimates as new information becomes available and as events unfold that may affect the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reported as a component of losses and loss settlement expenses incurred in the period such changes are determined.

The determination of reserves (particularly those relating to liability lines of insurance that have relatively longer lag in claim reporting) requires significant work to reasonably project expected future claim reporting and payment patterns. If, during the course of our regular monitoring of reserves, we determine that coverages previously written are incurring higher than expected losses, we will take action that may include, among other things, increasing the related reserves. Any adjustments we make to reserves are reflected in operating results in the year in which we make those adjustments.

On a quarterly basis, UFG's internal actuary performs a detailed actuarial review of IBNR reserves. This review includes a comparison of results from the most recent analysis of reserves completed by both our internal and external actuaries. Senior management meets with our internal actuary to review, on a regular and quarterly basis, the adequacy of carried reserves based on results from this actuarial analysis. There are two fundamental types or sources of IBNR reserves. We record IBNR reserves for "normal" types of claims and also specific IBNR reserves related to unique circumstances or events. A major hurricane is an example of an event that might necessitate establishing specific IBNR reserves because an analysis of existing historical data would not provide an appropriate estimate.

We do not discount loss reserves based on the time value of money.

The following table provides an analysis of changes in our property and casualty losses and loss settlement expense reserves at June 30, 2022 and December 31, 2021 (net of reinsurance amounts):



	June 30, 2022		December 31, 2021
Gross liability for losses and loss settlement expenses at beginning of year	$	1,514,265	$	1,578,131
Ceded losses and loss settlement expenses	(112,900)		(131,843)
Net liability for losses and loss settlement expenses at beginning of year	$	1,401,365	$	1,446,288
Losses and loss settlement expenses incurred for claims occurring during
Current year	$	297,239	$	701,064
Prior years	(15,355)		(48,909)
Total incurred	$	281,884	$	652,155
Losses and loss settlement expense payments for claims occurring during
Current year	$	82,671	$	277,115
Prior years	260,063		419,963
Total paid	$	342,734	$	697,078
Net liability for losses and loss settlement expenses at end of year	$	1,340,515	$	1,401,365
Ceded loss and loss settlement expenses	119,314		112,900
Gross liability for losses and loss settlement expenses at end of period	$	1,459,828	$	1,514,265

There are a multitude of factors that can impact loss reserve development. Those factors include, but are not limited to: historical data, the potential impact of various loss reserve development factors and trends including historical loss experience, legislative enactments, judicial decisions, legal developments in imposition of damages, experience with alternative dispute resolution, results of our medical bill review process, the potential impact of salvage and subrogation and changes and trends in general economic conditions, including the effects of inflation. All of these factors influence our estimates of required reserves and for long tail lines these factors can change over the course of the settlement of the claim. However, there is no precise method for evaluating the specific monetary impact of any individual factor on the development of reserves.

Generally, we base reserves for each claim on the estimated ultimate exposure for that claim. We believe that it is appropriate and reasonable to establish a best estimate for reserves within a range of reasonable estimates, especially when we are reserving for claims for bodily injury, disabilities and similar claims, for which settlements and verdicts can vary widely. Our reserving philosophy may result in favorable reserve development in future years that will decrease losses and loss settlement expenses for prior year claims in the year of adjustment. We realize that this philosophy, coupled with what we believe to be aggressive and successful claims management and loss settlement practices, has resulted in year-to-year redundancies in reserves. We believe our approach produces recorded reserves that are reasonably consistent as to their relative position within a range of reasonable reserves from year-to-year. However, conditions and trends that have affected the reserve development for a given year do change. Therefore, such development cannot be used to project future reserve redundancies or deficiencies.

We are not aware of any significant contingent liabilities related to environmental issues. Because of the type of property coverage we write, we have potential exposure to environmental pollution, mold and asbestos claims. Our underwriters are aware of these exposures and use riders or endorsements to limit exposure.

Reserve Development

The significant driver of the favorable reserve development in the six-month period ended June 30, 2022 was the favorable claims experience for the commercial automobile line of business and the commercial other liability business. This favorable development was partially offset by unfavorable development for the commercial fire and allied line of business. The favorable development for commercial automobile was driven by the favorable claims experience especially for accident years 2020 and 2019. The favorable development for commercial other liability was primarily due to favorable claims experience in accident years 2012 and prior in the legacy book of product liability. The unfavorable development for commercial fire and allied was driven by claim payments on commercial multiple peril claims in accident year 2021 for many of which the cause of loss was wind or hail.

The significant drivers of the favorable reserve development for the full year of 2021 were the commercial automobile line of business along with a favorable contribution from the workers' compensation line of business. This favorable development was partially offset by unfavorable development from the commercial other liability line of business. Favorable development for both the commercial automobile line of business and the workers' compensation line of business was from both loss and loss adjustment expense ("LAE"). Reserve reductions for unpaid loss and LAE were more than sufficient to offset payments. The commercial other liability line of business was adversely affected by reserve strengthening for reported claims and reserve strengthening for incurred but unreported claims. The commercial other liability line of business reserve strengthening resulted in unfavorable development because paid loss exceeded the reduction in unpaid claim reserves but favorable development for LAE partially offset the unfavorable loss development.