LOSS AND LOSS ADJUSTMENT RESERVES

12 Months Ended

Dec. 31, 2018

Liability for Future Policy Benefits [Abstract]

LOSS AND LOSS ADJUSTMENT RESERVES

6. LOSS AND LOSS ADJUSTMENT RESERVES

The liability for loss and LAE reserves is determined on an individual-case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR.

Activity in the liability for loss and LAE reserves is summarized as follows:

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	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Gross reserves, beginning-of-period	$	230,515		$	158,110		$	97,706
Less: reinsurance recoverable (1)	(98,345		)	(40,412		)	(7,496		)
Net reserves, beginning-of-period	132,170			117,698			90,210
Incurred loss, net of reinsurance, related to:
Current year	231,133			245,545			201,704
Prior year loss development (2)	2,166			13,926			13,156
Ceded losses subject to offsetting experience account adjustments (3)	(4,883		)	(11,914		)	(17,050		)
Prior years	(2,717		)	2,012			(3,894		)
Total incurred loss and LAE, net of reinsurance	228,416			247,557			197,810
Paid loss, net of reinsurance, related to:
Current year	155,462			160,945			123,364
Prior years	75,290			72,140			46,958
Total paid loss and LAE, net of reinsurance	230,752			233,085			170,322
Net reserves, end-of-period	129,834			132,170			117,698
Plus: reinsurance recoverable (1)	166,396			98,345			40,412
Gross reserves, end-of-period	$	296,230		$	230,515		$	158,110

(1) Reinsurance recoverable in this table includes only ceded loss and LAE reserves.

(2) Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.

(3) Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income (loss).

The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

During the year ended December 31, 2018, the Company experienced $2.2 million of unfavorable loss and LAE reserve development on prior accident years in its personal automobile and commercial general liability lines of businesses, partially offset by redundancy in the homeowners line of business as a result of lower LAE expenses primarily associated with Hurricane Irma.

During the year ended December 31, 2017, the Company experienced $13.9 million of unfavorable loss and LAE reserve development on prior accident years primarily in our personal automobile and homeowners line of business. The automobile’s unfavorable development primarily related to the 2016 accident year from our auto program in the state of Georgia. The homeowners unfavorable development primarily related to the continued impact from assignment of benefits ("AOB") and related ligation costs in the state of Florida.

As previously disclosed, the Company entered into 30% and 10% retrospectively-rated Florida-only property quota-share treaties, which ended on July 1, 2016 and 2017, respectively. These agreements included a profit share (experience account) provision, under which the Company will receive ceded premium adjustments at the end of the treaty to the extent there is a positive balance in the experience account.  This experience account is based on paid losses rather than incurred losses.  Due to the retrospectively-rated nature of this treaty, when the experience account is positive we cede losses under these treaties as the claims are paid with an equal and offsetting adjustment to ceded premiums (in recognition of the related change to the experience account receivable), with no impact on net income.  Conversely, when the experience account is negative, the Company cedes losses on an incurred basis with no offsetting adjustment to ceded premiums, which impacts net income. Loss development can be either favorable or unfavorable regardless of whether the experience account is in a positive or negative position.

Beginning in 2017, for purposes of the total incurred loss, net of reinsurance line within this disclosure, the Company has classified paid losses related to these retrospectively rated quota-share treaties which were ceded during the indicated year but relating to a prior accident year in a separate line. The related amounts in the previous year have been adjusted to conform to this presentation. Prior to 2017, these amounts were included in the current year incurred line item in the table above. Total amounts of incurred losses presented for 2016 remain unchanged.

During the year ended December 31, 2016, the Company experienced unfavorable loss and LAE reserve development on prior accident years primarily in its all other peril homeowners coverage in Florida. In the first half of 2016, the Company began to experience a new and higher level of AOB claims both in frequency and severity in our homeowners business in Florida, which caused adverse experience on the loss activity in accident years 2015 and 2016. This increased level of AOB claims was the significant driver in the Company’s decision to increase the Company’s 2015 accident year reserves related to the Company’s homeowners Florida policies.

AOB is a legal construct that allows a third party to step into the shoes of the insured and is then paid directly by an insurance company for services rendered on behalf of the insured for a covered loss. Absent an AOB, the insured would pay the third party and those costs would be reimbursed by the insurance company to the insured. AOB is commonly used when a homeowner experiences a water loss, for example a leaky pipe, an overflow from a sink, or a damaged appliance, and contacts a contractor or water remediation company.

Misuse of this legal construct has led to contractors over inflating costs of claims and/or submitting improper claims, causing insurance companies to have to either pay the overinflated claim, fight the claim in court, or both. In all cases, AOB claims cost the insurance company, on average, more than five times the cost to settle non-AOB claims, which has been a primary driver the increase to our overall loss and loss adjustment in comparison to historical severity averages.

Although the concept of AOB had been around for several years prior to 2016, the Company had a relatively low level of AOB claims in the accident years prior to 2016 and the related adverse impact of AOB claims had a marginal impact on the Company’s overall loss experience. Given the nature of AOB claims, it is difficult to identify the number of outstanding or expected AOB claims as the third parties may not step into the shoes of the insured or may not identify itself to the Company until later on in the claim processing cycle. This delay in identifying AOB claims creates a challenge in estimating the Company’s loss reserves, as capturing the incremental costs to settle AOB claims as part of the Company’s calculation of estimated loss reserves at the end of the year.

Accordingly, the challenge described above together with the change in the Company’s historical trend on AOB claims were the main drivers of the prior year development in 2016.

The following tables provide incurred losses and ALAE and cumulative paid losses and ALAE, net of reinsurance, for the prior 10 accident years, and the total of IBNR reserves plus expected development on reported claims and the cumulative number of reported claims (in thousands, except number of reported claims), as of the most recent reporting period, by the Company’s significant lines of business, which are homeowners, commercial general liability and automobile.

																					IBNR & Expected		Cumulative
	Homeowners Incurred Losses and ALAE, Net of Reinsurance																				Development on		Number of
	For the Years Ended December 31,																				Reported Claims		Reported Claims (1)
	(Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		2018		2018
2009	$	26,228	$	25,618	$	25,955	$	26,482	$	27,015	$	27,041	$	27,119	$	27,163	$	27,173	$	27,159	$	141	$	2,334
2010			24,825		25,056		26,151		27,895		28,968		29,407		29,945		30,459		30,602		30		2,391
2011					20,492		21,344		23,007		23,932		24,582		25,957		26,143		26,394		25		2,428
2012							23,032		23,301		24,186		24,468		25,889		26,356		26,836		38		2,691
2013									43,807		42,021		35,834		35,859		37,185		37,880		139		3,427
2014											64,312		63,300		61,770		62,206		61,817		636		7,621
2015													99,497		92,411		95,129		94,760		2,232		13,137
2016															171,264		162,043		158,764		11,832		23,982
2017																	202,844		192,769		62,363		62,200
2018																			210,158		91,887		28,532
																	Total		$	867,139

(1) The cumulative number of reported claims is measured by individual claimant at a coverage level.

	Homeowners Cumulative Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	15,047	$	23,095	$	24,657	$	26,007	$	26,462	$	26,831	$	26,927	$	26,982	$	27,049	$	27,015
2010			14,052		21,350		24,730		26,886		27,984		29,092		29,739		30,376		30,449
2011					11,119		19,250		21,323		22,723		24,047		25,580		25,982		26,287
2012							13,693		20,728		23,120		23,923		25,186		26,113		26,777
2013									19,986		31,606		33,867		35,123		35,803		37,473
2014											37,033		53,831		57,891		59,722		60,555
2015													52,214		79,359		86,647		90,415
2016															102,556		142,716		148,274
2017																	135,589		176,580
2018																			141,173
																			$	764,998
All outstanding liabilities for unpaid claims and ALAE prior to 2009, net of reinsurance																			138
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance																			$	102,279

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for homeowners policies, as of December 31, 2018:

	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Homeowners	57.8	%	23.5	%	5.7	%	3.8	%	2.5	%	3.5	%	1.5	%	1.1	%	0.2	%	—	%

																					IBNR & Expected		Cumulative
	Commercial General Liability Incurred Losses and ALAE, Net of Reinsurance																				Development on		Number of
	For the Years Ended December 31,																				Reported Claims		Reported Claims
	(Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		2018		2018
2009	$	13,297	$	12,397	$	12,220	$	11,943	$	9,270	$	10,192	$	10,466	$	11,081	$	11,621	$	12,872	$	5	$	988
2010			8,552		7,582		7,474		7,045		7,535		7,597		7,645		7,809		8,252		72		691
2011					6,436		5,854		4,749		4,603		4,760		5,409		6,254		6,828		63		1,058
2012							5,279		4,952		4,801		4,700		4,658		4,346		4,509		121		538
2013									7,095		5,069		5,221		5,502		5,704		5,580		219		573
2014											7,475		7,709		6,384		6,620		6,348		161		673
2015													8,082		7,008		6,020		5,377		215		713
2016															10,727		5,809		6,561		402		695
2017																	8,289		7,853		4,634		530
2018																			6,553		5,254		313
																	Total		$	70,733

	Commercial General Liability Cumulative Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	2,253	$	4,236	$	6,466	$	7,384	$	8,046	$	8,593	$	10,130	$	10,454	$	11,308	$	12,377
2010			1,187		2,279		3,855		5,553		6,363		7,238		7,382		7,631		7,918
2011					764		2,763		3,366		3,673		4,246		4,866		5,831		6,349
2012							871		1,714		2,632		3,342		3,686		3,841		4,098
2013									882		2,233		3,366		3,867		4,606		5,033
2014											717		2,593		3,855		4,375		5,130
2015													798		2,296		3,249		3,827
2016															1,515		3,657		5,088
2017																	1,592		2,478
2018																			963
																	Total		$	53,261
All outstanding liabilities for unpaid claims and ALAE prior to 2009, net of reinsurance																			1,416
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance																			$	18,888

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for commercial general liability policies, as of December 31, 2018:

	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Commercial general liability	14.1	%	18.5	%	18.5	%	9.1	%	7.6	%	6.0	%	7.7	%	3.4	%	4.7	%	9.6	%

																					IBNR & Expected		Cumulative
	Automobile Incurred Losses and ALAE, Net of Reinsurance																				Development on		Number of
	For the Years Ended December 31,																				Reported Claims		Reported Claims
	(Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		2018		2018
2009	$	272	$	267	$	259	$	264	$	258	$	243	$	243	$	243	$	243	$	242	$	—	$	57
2010			2,823		2,963		3,111		3,088		3,044		3,035		3,059		3,041		3,042		—		969
2011					3,580		3,350		2,954		2,912		2,762		2,848		2,796		2,756		—		789
2012							1,735		1,741		1,717		1,424		1,455		1,491		1,448		2		822
2013									1,517		1,863		1,826		1,829		2,161		2,123		9		3,468
2014											2,038		3,213		3,551		4,315		4,379		14		6,006
2015													3,045		2,882		2,781		2,878		62		6,498
2016															13,414		20,205		24,346		482		45,423
2017																	20,411		22,472		2,222		31,169
2018																			3,513		2,230		6,241
																	Total		$	67,199

	Automobile Cumulative Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	61	$	218	$	220	$	225	$	241	$	243	$	243	$	243	$	243	$	242
2010			1,713		2,482		2,715		2,863		2,942		2,978		2,984		3,035		3,037
2011					1,417		2,381		2,562		2,644		2,726		2,755		2,755		2,755
2012							867		1,293		1,333		1,384		1,393		1,430		1,444
2013									907		1,609		1,906		2,069		2,109		2,112
2014											1,455		3,120		3,678		4,122		4,291
2015													1,393		2,293		2,670		2,807
2016															8,084		17,258		23,053
2017																	12,821		20,762
2018																			2,331
																	Total		$	62,834
All outstanding liabilities for unpaid claims and ALAE prior to 2009, net of reinsurance																			9
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance																			$	4,374

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for automobile policies, as of December 31, 2018:

	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Automobile	41.7	%	32.2	%	16.4	%	5.5	%	2.5	%	1.0	%	0.2	%	0.5	%	—	%	—	%

The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the consolidated balance sheets is as follows:

	December 31,
	2018		2017
	(In thousands)
Liabilities for unpaid losses and ALAE:
Homeowners	$	102,279	$	99,650
Commercial general liability	18,888		17,111
Automobile	4,374		11,030
Flood	—		—
Total liabilities for unpaid losses and ALAE, net of reinsurance	125,541		127,791
Reinsurance recoverables:
Homeowners	158,043		81,852
Commercial general liability	—		—
Automobile	8,275		15,360
Flood	78		1,133
Total reinsurance recoverables	166,396		98,345
Unallocated loss adjustment expenses	4,293		4,379
Gross liability for unpaid losses and LAE	$	296,230	$	230,515

Management establishes a liability on an aggregate basis to provide for the estimated IBNR.   The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of tests and methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of December 31, 2018 and 2017, were not considered material.

IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. Various standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses are the following:    

• Reported Loss Development Method: A reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;

• Paid Development Method: A paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels;

• Expected Loss Ratio Method: Expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and

• Bornhuetter-Ferguson Method: The results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.