Liability for Losses and Loss Expenses

12 Months Ended

Dec. 31, 2022

Liability for Losses and Loss Expenses [Abstract]

Liability for Losses and Loss Expenses

8 - Liability for Losses and Loss Expenses

The establishment of an appropriate liability for losses and loss expenses is an inherently uncertain process, and we can provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed their loss and loss expense reserves and have an adverse effect on our results of operations and financial condition. For example, legislative, judicial and regulatory actions may expand coverage definitions, retroactively mandate coverage or otherwise require our insurance subsidiaries to pay losses for damages that their policies explicitly excluded or did not intend to cover. Furthermore, we cannot predict the timing, frequency and extent of adjustments to our insurance subsidiaries’ estimated future liabilities, because the historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of ultimate claim costs may change. As is the case for substantially all property and casualty insurance companies, our insurance subsidiaries have found it necessary in the past to increase their estimated future liabilities for losses and loss expenses in certain periods, and, in other periods, their estimates have exceeded their actual liabilities. Changes in our insurance subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual payments and their evaluation of information received since the prior reporting date.

We summarize activity in our insurance subsidiaries’ liability for losses and loss expenses as follows:

	2022			2021			2020
Balance at January 1	$	1,077,620,301		$	962,007,437		$	869,673,849
Less reinsurance recoverable		(451,261,306	)		(404,818,480	)		(362,768,427	)
Net balance at January 1		626,358,995			557,188,957			506,905,422
Incurred related to:
Current year		608,900,206			551,917,571			472,709,060
Prior years		(44,821,213	)		(31,208,029	)		(12,944,767	)
Total incurred		564,078,993			520,709,542			459,764,293
Paid related to:
Current year		302,272,322			269,316,762			236,984,291
Prior years		218,304,130			182,222,742			172,496,467
Total paid		520,576,452			451,539,504			409,480,758
Net balance at December 31		669,861,536			626,358,995			557,188,957
Plus reinsurance recoverable		451,184,222			451,261,306			404,818,480
Balance at December 31	$	1,121,045,758		$	1,077,620,301		$	962,007,437

Our insurance subsidiaries recognized a decrease in their liability for losses and loss expenses of prior years of $44.8 million, $31.2 million and $12.9 million in 2022, 2021 and 2020, respectively. Our insurance subsidiaries made no significant changes in their reserving philosophy or claims management personnel, and they have made no significant offsetting changes in estimates that increased or decreased their loss and loss expense reserves in those years. The 2022 development represented 7.2% of the December 31, 2021 net carried reserves and resulted primarily from lower-than-expected loss emergence in the personal automobile and commercial automobile lines of business for accident years prior to 2022. The majority of the 2022 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The 2021 development represented 5.6% of the December 31, 2020 net carried reserves and resulted primarily from lower-than-expected loss emergence in the personal automobile, workers’ compensation and commercial automobile lines of business for accident years prior to 2021. The majority of the 2021 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO. The 2020 development represented 2.6% of the December 31, 2019 net carried reserves and resulted primarily from lower-than-expected severity in the workers’ compensation and personal automobile lines of business, partially offset by higher-than-expected severity in the commercial automobile and commercial multi-peril lines of business, for accident years prior to 2020. The majority of the 2020 development related to decreases in the liability for losses and loss expenses of prior years for Atlantic States and MICO.

Short-duration contracts are contracts for which our insurance subsidiaries receive premiums that they recognize as revenue over the period of the contract in proportion to the amount of insurance protection our insurance subsidiaries provide. Our insurance subsidiaries consider the policies they issue to be short-duration contracts. We consider our insurance subsidiaries’ material lines of business to be personal automobile, homeowners, commercial automobile, commercial multi-peril and workers’ compensation.

Our insurance subsidiaries determine incurred but not reported (“IBNR”) reserves by subtracting the cumulative loss and loss expense amounts our insurance subsidiaries have paid and the case reserves our insurance subsidiaries have established at the balance sheet date from their actuaries’ estimate of the ultimate cost of losses and loss expenses. Accordingly, our insurance subsidiaries’ IBNR reserves include their actuaries’ projections of the cost of unreported claims as well as their actuaries’ projected development of case reserves on known claims and reopened claims. Our insurance subsidiaries’ methodology for estimating IBNR reserves has been in place for many years, and their actuaries made no significant changes to that methodology during 2022.

The actuaries for our insurance subsidiaries generally prepare an initial estimate for ultimate losses and loss expenses for the current accident year by multiplying earned premium by an “a priori,” or expected, loss ratio for each line of business our insurance subsidiaries write. Expected loss ratios represent the actuaries’ expectation of losses at the time our insurance subsidiaries price and write their policies, before the emergence of any actual claims experience. The actuaries determine an expected loss ratio by analyzing historical experience and adjusting for loss cost trends, loss frequency and severity trends, premium rate level changes, reported and paid loss emergence patterns and other known or observed factors.

The actuaries use a variety of actuarial methods to estimate the ultimate cost of losses and loss expenses.  These methods include paid loss development, incurred loss development and the Bornhuetter-Ferguson method from which the actuaries select loss development factor assumptions. The actuaries base their selection of a point estimate on a judgmental weighting of estimates each of these methods produce.

The actuaries consider loss frequency and severity trends when they develop expected loss ratios and point estimates. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims.  Factors that affect loss frequency include changes in weather patterns or economic activity.  Factors that affect loss severity include changes in policy limits, reinsurance retentions, inflation rates and judicial interpretations.

Our insurance subsidiaries create a claim file when they receive notice of an actual demand for payment, an event that may lead to a demand for payment or when they otherwise determine that a demand for payment could potentially lead to a future demand for payment on another coverage under the same policy or another policy they have issued. In recent years, our insurance subsidiaries have noted an increase in the period of time between the occurrence of a casualty loss event and the date on which they receive notice of a liability claim.  Changes in the length of time between the loss occurrence date and the claim reporting date affect the actuaries’ ability to accurately predict loss frequency and the amount of IBNR reserves our insurance subsidiaries require.

Our insurance subsidiaries generally create a claim file for a policy at the claimant level by type of coverage and generally recognize one count for each claim event.  In certain lines of business where it is common for multiple parties to claim damages arising from a single claim event, our insurance subsidiaries recognize one count for each claimant involved in the event. Atlantic States recognizes one count for each claim event, or claimant involved in a multiple-party claim event, related to losses Atlantic States assumes through its participation in its pooling agreement with Donegal Mutual. Our insurance subsidiaries accumulate the claim counts and report them by line of business. For purposes of the claim development tables we present below, our insurance subsidiaries count claims on policies they issue even if they eventually close such claims without making a loss payment. Claims our insurance subsidiaries close without making a loss payment typically generate loss expenses. The methods our insurance subsidiaries have used to summarize claim counts have not changed significantly over the time periods we report in the tables below.

The following tables present information about incurred and paid claims development as of December 31, 2022, net of reinsurance, as well as cumulative claim frequency and the total of IBNR reserves plus expected development on reported claims that our insurance subsidiaries included within their net incurred claims amounts. The tables include unaudited information about incurred and paid claims development for the years ended December 31, 2013 through 2021, which we present as supplementary information.

Personal Automobile																					At December 31, 2022
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022		Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	Unaudited
(dollars and reported claims in thousands)
2013	$	124,965	$	130,737	$	131,594	$	132,643	$	132,604	$	132,934	$	132,853	$	132,690	$	132,787	$	132,735	$	51		66
2014				124,426		124,806		124,210		126,200		126,779		126,734		126,861		126,977		127,108		65		71
2015						137,569		139,333		139,181		142,493		142,408		142,073		142,010		141,965		135		70
2016								150,216		153,937		157,516		157,943		156,935		156,436		156,227		522		73
2017										166,690		127,728		175,939		174,784		173,730		173,032		901		79
2018												186,580		183,358		181,558		180,787		179,732		1,695		81
2019														161,056		157,689		156,300		154,805		2,559		68
2020																111,483		103,585		100,339		3,324		43
2021																		119,364		118,752		6,432		47
2022																				126,203		19,934		48
																	Total		$	1,410,898

Personal Automobile
	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022
	Unaudited
(in thousands)
2013	$	84,241	$	109,051	$	120,118	$	125,946	$	130,026	$	131,326	$	131,642	$	132,215	$	132,300	$	132,420
2014				85,377		104,736		114,893		120,491		123,815		124,926		125,619		125,762		126,701
2015						93,611		116,303		128,395		135,027		139,121		140,028		140,892		141,172
2016								102,433		129,507		143,321		151,159		153,521		154,769		155,521
2017										111,964		142,372		159,879		166,099		169,190		170,895
2018												115,585		150,175		163,036		169,651		173,922
2019														103,101		127,187		141,004		146,667
2020																66,084		81,783		89,736
2021																		76,477		93,998
2022																				83,616
																	Total			1,314,648
					All outstanding liabilities before 2013, net of reinsurance															913
					Liabilities for claims and claims adjustment expenses, net of reinsurance														$	97,163

Homeowners																					At December 31, 2022
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022		Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	Unaudited
(dollars and reported claims in thousands)
2013	$	50,887	$	51,121	$	51,122	$	50,874	$	50,988	$	50,971	$	51,008	$	51,064	$	51,053	$	51,021	$	—		13
2014				56,916		58,378		57,680		57,332		57,288		57,402		57,367		57,371		57,353		—		17
2015						63,359		63,925		63,053		63,071		63,099		62,993		63,043		63,036		10		14
2016								62,443		64,064		63,735		63,355		63,279		63,409		63,472		35		12
2017										79,283		79,911		79,305		79,247		79,065		78,815		62		17
2018												81,965		83,385		82,905		82,566		82,058		230		18
2019														73,294		73,554		73,234		72,168		457		16
2020																61,633		62,718		61,595		835		14
2021																		67,677		66,996		1,455		11
2022																				82,433		7,556		9
																	Total		$	678,947

Homeowners
	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022
	Unaudited
(in thousands)
2013	$	40,949	$	49,410	$	50,210	$	50,478	$	51,043	$	50,902	$	50,967	$	50,965	$	50,955	$	50,923
2014				45,823		56,255		56,990		57,195		56,995		57,243		57,336		57,339		57,318
2015						51,885		61,542		62,204		62,590		62,844		62,943		62,936		62,938
2016								50,125		61,145		62,760		63,144		63,162		63,217		63,266
2017										67,077		77,663		78,006		78,127		78,454		78,528
2018												70,385		79,892		80,905		81,464		81,568
2019														58,074		69,145		70,416		70,884
2020																51,226		60,348		60,809
2021																		52,161		63,920
2022																				63,107
																	Total			653,261
					All outstanding liabilities before 2013, net of reinsurance															219
					Liabilities for claims and claims adjustment expenses, net of reinsurance														$	25,905

Commercial Automobile																					At December 31, 2022
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022		Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	Unaudited
(dollars and reported claims in thousands)
2013	$	32,902	$	33,749	$	34,751	$	35,240	$	36,404	$	36,435	$	36,569	$	36,181	$	36,165	$	36,133	$	27		8
2014				42,760		44,544		47,326		48,213		49,284		49,168		49,308		49,291		49,285		33		11
2015						46,526		48,323		51,412		54,259		54,517		54,619		53,793		53,477		74		12
2016								54,302		57,353		65,905		67,127		66,894		66,085		65,922		179		13
2017										61,484		67,927		67,697		67,249		65,310		64,631		205		14
2018												79,307		81,396		82,313		83,043		82,226		860		15
2019														88,864		91,245		90,290		86,140		3,066		16
2020																90,367		87,766		85,016		5,973		14
2021																		109,824		99,231		16,504		14
2022																				115,287		38,312		14
																	Total		$	737,348

Commercial Automobile
	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022
	Unaudited
(in thousands)
2013	$	16,306	$	23,557	$	26,879	$	31,053	$	34,083	$	36,004	$	36,106	$	36,092	$	36,087	$	36,081
2014				22,707		31,089		39,436		44,374		47,290		48,418		48,603		48,714		48,757
2015						23,875		35,342		41,678		48,261		51,605		51,992		52,728		53,052
2016								27,033		38,237		48,837		57,237		60,485		64,421		65,076
2017										28,707		40,213		49,703		57,128		59,889		62,187
2018												33,862		47,941		57,451		69,487		74,421
2019														36,948		53,026		63,575		72,139
2020																31,884		46,459		60,665
2021																		39,851		56,101
2022																				46,242
																	Total			574,721
					All outstanding liabilities before 2013, net of reinsurance															56
					Liabilities for claims and claims adjustment expenses, net of reinsurance														$	162,683

Commercial Multi-Peril																					At December 31, 2022
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022		Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	Unaudited
(dollars and reported claims in thousands)
2013	$	35,683	$	35,679	$	37,292	$	37,205	$	37,981	$	37,365	$	37,453	$	37,495	$	37,630	$	37,598	$	—		6
2014				48,204		50,135		51,843		52,336		53,294		53,116		52,926		52,933		53,502		—		7
2015						42,070		43,874		44,728		45,104		45,873		45,366		45,420		45,595		—		6
2016								43,005		46,988		48,267		48,871		48,732		48,823		48,802		137		6
2017										56,185		56,043		56,517		54,812		55,076		54,244		208		7
2018												66,265		66,470		67,749		67,810		65,911		1,632		7
2019														71,865		73,836		76,326		75,821		4,491		7
2020																83,195		79,910		76,490		8,388		8
2021																		116,827		117,574		22,939		7
2022																				142,395		44,828		6
																	Total		$	717,932

Commercial Multi-Peril
	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022
	Unaudited
(in thousands)
2013	$	19,875	$	26,216	$	29,159	$	33,614	$	35,104	$	36,321	$	37,333	$	37,436	$	37,488	$	37,575
2014				27,920		35,520		40,936		47,021		50,017		51,615		52,103		52,252		52,875
2015						21,837		29,419		34,323		39,162		42,849		44,090		44,439		44,764
2016								19,660		29,402		34,612		41,193		43,435		44,944		47,432
2017										27,399		36,926		42,691		46,361		49,488		51,494
2018												30,597		42,296		48,050		54,913		59,118
2019														28,210		41,266		47,522		55,951
2020																34,729		46,193		52,646
2021																		46,768		69,735
2022																				57,641
																	Total			529,231
					All outstanding liabilities before 2013, net of reinsurance															699
					Liabilities for claims and claims adjustment expenses, net of reinsurance														$	189,400

Workers’ Compensation																					At December 31, 2022
	Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022		Total IBNR Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
	Unaudited
(dollars and reported claims in thousands)
2013	$	46,325	$	47,027	$	44,289	$	42,828	$	42,327	$	42,555	$	42,651	$	42,341	$	42,427	$	43,059	$	1		6
2014				51,508		51,553		49,288		48,537		47,540		47,693		47,849		47,620		47,794		14		6
2015						53,332		49,615		45,991		44,986		43,006		42,597		42,225		42,043		240		5
2016								58,814		49,802		47,883		44,969		44,098		43,559		43,484		561		5
2017										60,450		56,351		52,687		51,464		49,557		48,802		1,105		5
2018												62,197		55,291		52,514		47,912		47,007		1,470		6
2019														60,998		59,624		57,728		56,480		1,897		6
2020																57,172		57,850		57,384		2,990		5
2021																		67,035		65,530		6,505		6
2022																				67,046		21,062		6
																	Total		$	518,629

Workers’ Compensation
	Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31,
Accident Year	2013		2014		2015		2016		2017		2018		2019		2020		2021		2022
	Unaudited
(in thousands)
2013	$	13,052	$	26,043	$	32,783	$	36,351	$	38,877	$	39,617	$	40,361	$	40,827	$	41,209	$	41,599
2014				13,932		28,513		36,284		40,393		42,465		43,866		44,403		44,671		45,314
2015						13,071		27,531		34,192		36,929		37,936		38,596		39,096		39,478
2016								14,709		30,344		37,178		40,570		41,208		41,543		41,809
2017										15,581		31,990		39,684		42,954		44,242		45,174
2018												17,644		31,928		37,072		41,611		43,279
2019														16,939		33,009		41,740		47,121
2020																14,591		32,817		44,089
2021																		20,931		42,633
2022																				18,643
																	Total			409,139
					All outstanding liabilities before 2013, net of reinsurance															4,843
					Liabilities for claims and claims adjustment expenses, net of reinsurance														$	114,333

The following table presents a reconciliation of the net incurred and paid claims development tables to the liability for claims and claims adjustment expenses in our consolidated balance sheet:

	At December 31,
(in thousands)	2022
Net outstanding liabilities:
Personal automobile	$	97,163
Homeowners		25,905
Commercial automobile		162,683
Commercial multi-peril		189,400
Workers’ compensation		114,333
Other		30,510
		619,994
Reinsurance recoverable:
Personal automobile	$	104,349
Homeowners		14,712
Commercial automobile		101,574
Commercial multi-peril		108,853
Workers’ compensation		90,454
Other		7,808
		427,750
Unallocated loss adjustment expenses	$	73,302
Gross liability for unpaid losses and loss expenses	$	1,121,046

The following table presents supplementary information about average historical claims duration as of December 31, 2022:

	Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years		1		2		3		4		5		6		7		8		9		10
Personal automobile		65.4	%	16.7	%	8.5	%	4.2	%	2.4	%	0.9	%	0.5	%	0.2	%	0.4	%	0.1	%
Homeowners		81.0		15.6		1.3		0.5		0.3		0.1		0.1		—		—		—
Commercial automobile		42.3		18.1		13.7		11.8		6.0		3.6		0.8		0.3		—		—
Commercial multi-peril		45.3		17.2		9.4		10.8		5.7		3.1		2.4		0.4		0.7		0.2
Workers’ compensation		30.9		32.0		15.7		8.2		3.4		1.8		1.2		0.9		1.1		0.9