Reserves for Claims

Changes in the reserves for claims for the years ended December 31 are summarized as follows based on the year in which the policies were written:



	2014			2013			2012
Balance, beginning of period	$	35,360,000		$	39,078,000		$	37,996,000
Provisions related to:
Current year	6,860,335			7,239,628			7,650,959
Prior year	(1,630,619		)	(7,811,224		)	(1,578,844		)
Total provision charged to operations	5,229,716			(571,596		)	6,072,115
Claims paid, net of recoveries, related to:
Current year	(102,947		)	(110,240		)	(76,288		)
Prior year	(3,809,769		)	(3,036,164		)	(4,913,827		)
Total claims paid, net of recoveries	(3,912,716		)	(3,146,404		)	(4,990,115		)
Balance, end of year	$	36,677,000		$	35,360,000		$	39,078,000

The Company continually refines its reserve estimates as current loss experience develops and credible data emerges. Movements in the reserves related to prior periods were primarily the result of changes to estimates to better reflect the latest reported loss data. The 2014 calendar year change in the provision relating to prior years resulted mostly from changes to certain actuarial inputs and favorable development in 2014 versus the prior year related primarily to policy years 2009 through 2013. Due to variances between actual and expected loss payments, loss development is subject to significant variability.

The Company does not recognize claim recoveries until an actual payment has been received by the Company. The Company realized claim recoveries of approximately $790,000, $1,165,000 and $1,324,000 during 2014, 2013 and 2012, respectively.

The provision for claims as a percentage of net premiums written was 4.8%, (0.5)% and 5.9% in 2014, 2013 and 2012, respectively.

A large claim is defined as a claim with incurred losses exceeding $250,000. Due to the small volume of large claims, the long-tail nature of title insurance claims and the inherent uncertainty in loss emergence patterns, large claim activity can vary significantly between policy years. The estimated development of large claims by policy year is therefore subject to significant changes as experience develops.

During 2013 certain actuarial inputs were changed to reflect recent trends. The Company considers these modifications in actuarial inputs to be a change in estimate. The Company believes that these changes in actuarial inputs were necessary in response to favorable reserve development and claims experience incurred in several recent reporting periods. The approximate impact of this change in estimate for the year ended December 31, 2013 was a reduction of $2,200,000 to the reserves for claims in the Consolidated Balance Sheets, and in the Consolidated Statements of Income a decrease of $2,200,000 to the provision for claims, an increase of $750,000 in the provision for income taxes and an increase of $1,450,000 in net income, or $0.71 per basic share and $0.70 per diluted share, compared with the amounts that would have been recorded under the Company’s prior estimate. This change in estimate, coupled with several recent policy years which continued to emerge favorably in comparison with prior expectations, contributed to a benefit in the claims provision for the 2013 year. The change in estimate was primarily driven by the following:


•	Changing the specific weightings used in performing certain actuarial methods, including weighting between policy years and weighting of title industry loss data;


•	Adjusting for premium rate changes and the Company’s improved underwriting efforts related to construction business; and


•	Increasing the ratios used to estimate projected payments of unallocated loss adjustment expenses to more accurately reflect expected payments.

A summary of the Company’s loss reserves, broken down into its components of known title claims and IBNR, follows:



	2014		%	2013		%
Known title claims	$	5,364,645	14.6	$	4,670,809	13.2
IBNR	31,312,355		85.4	30,689,191		86.8
Total loss reserves	$	36,677,000	100.0	$	35,360,000	100.0

In management’s opinion, the reserves are adequate to cover claim losses which might result from pending and future claims.