NOTE 5 - Property and Casualty Unpaid Claims and Claim Expenses

The following table is a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both gross and net (after reinsurance) bases. The total net Property and Casualty insurance claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the year gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets.

	Year Ended December 31,
		2016			2015			2014
Property and Casualty segment
Gross reserves, beginning of year (1)	$	301,569		$	311,097		$	275,809
Less: reinsurance recoverables		50,332			43,740			14,107
Net reserves, beginning of year (2)		251,237			267,357			261,702
Incurred claims and claim expenses:
Claims occurring in the current year		471,099			432,811			416,512
Decrease in estimated reserves for
claims occurring in prior years (3)		(7,000	)		(12,500	)		(17,000	)
Total claims and claim expenses incurred (4)		464,099			420,311			399,512
Claims and claim expense payments for claims occurring during:
Current year		323,025			294,449			273,699
Prior years		145,753			141,982			120,158
Total claims and claim expense payments		468,778			436,431			393,857
Net reserves, end of year (2)		246,558			251,237			267,357
Plus: reinsurance recoverables		61,199			50,332			43,740
Gross reserves, end of year (1)	$	307,757		$	301,569		$	311,097

(1)	Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for the Life and Retirement segments of $22,131, $22,151 and $14,687 as of December 31, 2016, 2015 and 2014, respectively, in addition to Property and Casualty segment reserves.

(2)	Reserves net of anticipated reinsurance recoverables.

(3)

Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs. Also refer to the paragraphs below for additional information regarding the reserve development recorded in 2016, 2015 and 2014.

(4)

Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for the Life and Retirement segments of $76,905, $76,053 and $68,914 for the years ended December 31, 2016, 2015 and 2014, respectively, in addition to the Property and Casualty segment amounts.

Underwriting results of the Property and Casualty segment are significantly influenced by estimates of the Company's ultimate liability for insured events. There is a high degree of uncertainty inherent in the estimates of ultimate losses underlying the liability for unpaid claims and claim settlement expenses. This inherent uncertainty is particularly significant for liability-related exposures due to the extended period, often many years, that transpires between a loss event, receipt of related claims data from policyholders and ultimate settlement of the claim. Reserves for Property and Casualty claims include provisions for payments to be made on reported claims (“case reserves”), claims incurred but not yet reported (“IBNR”) and associated settlement expenses (together, “loss reserves”). The process by which these reserves are established requires reliance upon estimates based on known facts and on interpretations of circumstances, including the Company's experience with similar cases and historical trends involving claim payments and related patterns, pending levels of unpaid claims and product mix, as well as other factors including court decisions, economic conditions, public attitudes and medical costs.

The Company believes the Property and Casualty loss reserves are appropriately established based on available facts, laws, and regulations. The Company calculates and records a single best estimate of the reserve (which is equal to the actuarial point estimate) as of each balance sheet date, for each line of business and its coverages for reported losses and for IBNR losses and as a result believes no other estimate is better than the recorded amount. Due to uncertainties involved, the ultimate cost of losses may vary materially from recorded amounts.

The Company continually updates loss estimates using both quantitative and qualitative information from its reserving actuaries and information derived from other sources. Adjustments may be required as information develops which varies from experience, or, in some cases, augments data which previously were not considered sufficient for use in determining liabilities. The effects of these adjustments may be significant and are charged or credited to income in the period in which the adjustments are made.

Numerous risk factors will affect more than one product line. One of these factors is changes in claim department practices, including claim closure rates, number of claims closed without payment, the use of third-party claim adjusters and the level of needed case reserve estimated by the adjuster. Other risk factors include changes in claim frequency, changes in claim severity, regulatory and legislative actions, court actions, changes in economic conditions and trends (e.g. medical costs, labor rates and the cost of materials), the occurrence of unusually large or frequent catastrophic loss events, timeliness of claim reporting, the state in which the claim occurred and degree of claimant fraud. The extent of the impact of a risk factor will also vary by coverages within a product line. Individual risk factors are also subject to interactions with other risk factors within product line coverages.

While all product lines are exposed to these risks, there are some loss types or product lines for which the financial effect will be more significant. For instance, given the relatively large proportion (approximately 80% as of December 31, 2016) of the Company’s reserves that are in the longer-tail automobile liability coverages, regulatory and court actions, changes in economic conditions and trends, and medical costs could be expected to impact this product line more extensively than others.

Reserves are established for claims as they occur for each line of business based on estimates of the ultimate cost to settle the claims. The actual loss results are compared to prior estimates and differences are recorded as reestimates. The primary actuarial techniques (development of paid loss dollars, development of reported loss dollars, methods based on expected loss ratios and methods utilizing frequency and severity of claims) used to estimate reserves and provide for losses are applied to actual paid losses and reported losses (paid losses plus individual case reserves set by claim adjusters) for an accident year to create an estimate of how losses are likely to develop over time.

An accident year refers to classifying claims based on the year in which the claim occurred. For estimating short-tail coverage reserves (e.g. homeowners and automobile physical damage), which comprise approximately 15% of the Company’s total loss reserves as of December 31, 2016, the primary actuarial technique utilized is the development of paid loss dollars due to the relatively quick claim settlement period. As it relates to estimating long-tail coverage reserves (primarily related to automobile liability), which comprise approximately 85% of the Company’s total loss reserves as of December 31, 2016, the primary actuarial technique utilized is the development of reported loss dollars due to the relatively long claim settlement period.

In all of the loss estimation techniques referred to above, a ratio (development factor) is calculated which compares current results to results in the prior period for each accident year. Various development factors, based on historical results, are multiplied by the current experience to estimate the development of losses of each accident year from the current time period into the next time period. The development factors for the next time period for each accident year are compounded over the remaining calendar years to calculate an estimate of ultimate losses for each accident year. Occasionally, unusual aberrations in loss patterns are caused by factors such as changes in claim reporting, settlement patterns, unusually large losses, process changes, legal or regulatory environment changes, and other influences. In these instances, analyses of alternate development factor selections are performed to evaluate the effect of these factors, and actuarial judgment is applied to make appropriate development factor assumptions needed to develop a best estimate of ultimate losses. Paid losses are then subtracted from estimated ultimate losses to determine the indicated loss reserves. The difference between indicated reserves and recorded reserves is the amount of reserve reestimate.

Reserves are reestimated quarterly. When new development factors are calculated from actual losses, and they differ from estimated development factors used in previous reserve estimates, assumptions about losses and required reserves are revised based on the new development factors. Changes to reserves are recorded in the period in which development factor changes result in reserve reestimates.

Claim count estimates are also established for claims as they occur for each line of business based on estimates of the ultimate claim counts. (These counts are derived by counting the number of claimants by insurance coverage.) The primary actuarial techniques (development of paid claim counts, and development of reported claim counts) used to estimate ultimate claim counts are applied to actual paid claim counts and reported claim counts (paid claims plus individual unpaid claims set by claim adjusters) for an accident year to create an estimate of how claims are likely to develop over time. An accident year refers to classifying claims based on the year in which the claim occurred. The ultimate claim count generally gives equal consideration to the results of the two actuarial techniques described.

Occasionally, unusual aberrations in claim reporting patterns or claims payment patterns may occur. In these instances, analyses of alternate development factor selections are performed to evaluate the effect of these factors, and actuarial judgment is applied to make appropriate development factor assumptions needed to develop a best estimate of ultimate claims.

See tables on the following pages of Note 5 for details of the average annual percentage payout of incurred claims by age, also referred to as a history of claims duration and tables illustrating the incurred and paid claims development information by accident year on a net basis for the lines of Homeowners, Auto Liability, and Auto Physical Damage, which represents over 97% of the Company’s incurred losses for 2016.

Numerous actuarial estimates of the types described above are prepared each quarter to monitor losses for each line of business, including the line’s individual coverages; for reported losses and IBNR. Often, several different estimates are prepared for each detailed component, incorporating alternative analyses of changing claim settlement patterns and other influences on losses, from which the Company selects the best estimate for each component, occasionally incorporating additional analyses and actuarial judgment, as described above. These estimates also incorporate the historical impact of inflation into reserve estimates, the implicit assumption being that a multi-year average development factor represents an adequate provision. Based on the Company’s review of these estimates, as well as the review of the independent reserve studies, the best estimate of required reserves for each line of business, including the line’s individual coverages, is determined by management and is recorded for each accident year, then the required reserves for each component are summed to create the reserve balances carried on the Company’s Consolidated Balance Sheets.

Based on the Company’s products and coverages, historical experience, and various actuarial methodologies used to develop reserve estimates, the Company estimates that the potential variability of the Property and Casualty loss reserves within a reasonable probability of other possible outcomes may be approximately plus or minus 6% of reserves, which equates to plus or minus approximately $10,000 of net income as of December 31, 2016. Although this evaluation reflects the most likely outcomes, it is possible the final outcome may fall below or above these estimates.

Net favorable development of total reserves for Property and Casualty claims occurring in prior years was $17,000 in 2014, $12,500 in 2015 and $7,000 in 2016. The favorable development in 2014 was predominantly the result of favorable frequency and severity trends in automobile liability loss emergence for accident years 2011 and prior. In 2015, the favorable development was predominantly the result of favorable frequency and severity trends in automobile liability loss emergence for accident years 2013 and prior, as well as favorable severity trends in property for accident years 2013 and prior. In 2016, the favorable development was predominantly the result of favorable severity trends in property for accident years 2014 and prior.

The Company completes a detailed study of Property and Casualty reserves based on information available at the end of each quarter and year. Trends of reported losses (paid amounts and case reserves on claims reported to the Company) for each accident year are reviewed and ultimate loss costs for those accident years are estimated. The Company engages an independent property and casualty actuarial consulting firm to prepare an independent study of the Company's Property and Casualty reserves at December 31 of each year. The result of the independent actuarial study at December 31, 2016 was consistent with management’s analysis and selected estimates and did not result in any adjustments to the Company’s recorded Property and Casualty reserves.

At the time each of the reserve analyses was performed, the Company believed that each estimate was based upon sound methodology and such methodologies were appropriately applied and that there were no trends which indicated the likelihood of future loss reserve development. The financial impact of the net reserve development was therefore accounted for in the period that the development was determined.

No other adjustments were made in the determination of the liabilities during the periods covered by these consolidated financial statements. Management believes that, based on data currently available, it has reasonably estimated the Company's ultimate losses.

Below is the average annual percentage payout of incurred claims by age, also referred to as a history of claims duration:

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1			2			3			4			5			6			7			8			9			10
Homeowners		76.8	%		18.4	%		2.8	%		1.4	%		0.7	%		0.2	%		0.1	%		-			0.1	%		-
Auto liability		41.0	%		34.3	%		13.8	%		6.3	%		2.4	%		1.0	%		0.4	%		0.2	%		0.1	%		0.1	%
Auto physical damage		95.1	%		4.9	%		-			-			-			-			-			-			-			-

The following tables illustrate the incurred and paid claims development by accident year on a net basis for the lines of homeowners, auto liability and auto physical damage. Conditions and trends that have affected the development of these reserves in the past will not necessarily recur in the future. It may not be appropriate to use this cumulative history in the projection of future performance.

Homeowners
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,																					As of December 31, 2016
																					Total of Incurred-
																					But-Not-Reported
																					Liabilities Plus		Cumulative
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Audited		Expected Development		Number of
Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		on Reported Claims		Reported Claims

2007	$	85,552	$	85,725	$	84,666	$	85,605	$	83,198	$	83,266	$	83,241	$	83,090	$	83,101	$	83,111	$	-		19,298
2008				140,469		136,743		136,002		139,743		139,232		139,511		139,472		139,348		139,306		-		31,376
2009						113,274		112,280		112,970		113,096		113,357		113,230		113,216		112,900		22		20,320
2010								140,994		136,907		133,358		133,235		133,216		133,136		132,859		235		23,624
2011										150,141		150,334		150,791		148,860		148,755		148,414		358		27,676
2012												108,754		109,156		109,360		106,486		106,309		502		20,239
2013														105,584		107,489		103,982		102,406		1,023		18,066
2014																111,647		113,506		109,058		3,136		18,400
2015																		111,706		115,134		4,480		17,054
2016																				115,931		11,737		15,578
																		Total	$	1,165,428

Homeowners
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,

Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Audited
Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016

2007	$	59,268	$	79,566	$	82,272	$	82,862	$	82,722	$	82,977	$	83,028	$	83,028	$	83,096	$	83,096
2008				105,401		130,888		134,235		136,923		138,802		138,992		139,121		139,224		139,256
2009						81,570		104,407		108,217		110,324		112,554		112,720		112,827		112,848
2010								98,190		124,326		129,790		132,246		132,523		132,604		132,599
2011										123,046		142,846		145,852		146,908		147,451		148,026
2012												84,260		101,566		104,203		105,156		105,561
2013														76,890		96,599		99,361		100,968
2014																83,314		103,030		105,703
2015																		90,704		109,303
2016																				95,772
																Total				1,133,132
																Outstanding prior to 2006				18
																Prior years paid				23
																Liabilities for claims and claim adjustment expenses, net of reinsurance			$	32,314

Auto Liability
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,																					As of December 31, 2016
																					Total of Incurred-
																					But-Not-Reported
																					Liabilities Plus		Cumulative
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Audited		Expected Development		Number of
Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		on Reported Claims		Reported Claims

2007	$	148,884	$	146,400	$	144,661	$	139,619	$	138,148	$	137,151	$	136,817	$	136,855	$	136,745	$	136,826	$	-		49,856
2008				144,694		145,669		142,279		149,225		141,666		140,648		139,938		139,131		138,975		2		47,932
2009						159,934		158,703		153,662		157,941		151,418		150,919		150,568		149,822		-		48,780
2010								157,712		160,058		156,369		154,222		152,483		151,653		149,818		324		49,310
2011										150,803		146,713		145,735		143,133		142,488		139,840		1,164		46,171
2012												156,448		153,815		150,336		149,347		147,594		2.849		45,615
2013														153,860		152,858		150,720		150,657		6,501		46,195
2014																155,105		157,249		158,470		8,493		47,146
2015																		165,515		172,553		13,074		47,529
2016																				180,380		55,506		41,220
																		Total	$	1,524,935

Auto Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,

Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Audited
Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016

2007	$	56,819	$	101,803	$	122,129	$	130,555	$	134,207	$	135,467	$	136,056	$	136,504	$	136,630	$	136,815
2008				54,750		103,370		123,062		134,377		137,980		138,539		138,758		138,875		138,962
2009						60,011		110,921		133,568		142,524		146,383		148,783		149,608		149,801
2010								63,416		118,345		137,012		144,255		147,337		148,751		149,247
2011										61,070		108,837		126,812		133,931		136,906		138,151
2012												61,279		109,574		127,185		138,641		142,916
2013														62,224		108,856		131,215		139,954
2014																61,329		117,468		139,463
2015																		70,834		134,473
2016																				73,073
																Total				1,342,855
																Outstanding prior to 2006				80
																Prior years paid				451
																Liabilities for claims and claim adjustment expenses, net of reinsurance			$	182,162

Auto Physical Damage
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,																					As of December 31, 2016
																					Total of Incurred-
																					But-Not-Reported
																					Liabilities Plus			Cumulative
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Audited		Expected Development			Number of
Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		on Reported Claims			Reported Claims

2007	$	87,051	$	86,178	$	86,178	$	85,515	$	86,695	$	86,713	$	86,706	$	86,694	$	86,683	$	86,680	$	-			70,280
2008				89,088		87,854		87,834		86,900		87,992		87,979		87,976		87,966		87,954		-			72,117
2009						84,539		83,515		83,202		82,635		82,000		81,986		81,972		81,963		-			72,867
2010								84,112		83,420		83,103		83,046		83,052		83,050		83,036		-			77,343
2011										86,205		85,507		86,023		85,120		85,143		85,116		-			76,113
2012												83,770		82,337		83,402		83,431		83,354		7			72,803
2013														91,448		88,856		88,672		88,627		95			75,845
2014																95,572		95,634		95,422		151			82,467
2015																		99,291		97,994		139			82,335
2016																				112,430		(944	)		77,495
																		Total	$	902,576

Auto Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Year Ended December 31,

Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Audited
Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016

2007	$	81,171	$	86,439	$	86,678	$	86,637	$	86,695	$	86,713	$	86,706	$	86,694	$	86,685	$	86,680
2008				82,412		87,963		87,905		87,949		87,992		87,979		87,976		87,966		87,954
2009						78,456		82,117		82,039		82,015		82,000		81,985		81,973		81,963
2010								79,329		83,120		83,103		83,087		83,067		83,051		83,036
2011										83,227		85,254		85,181		85,148		85,127		85,116
2012												80,519		83,418		83,372		83,355		83,347
2013														85,110		88,688		88,580		88,532
2014																88,939		95,444		95,266
2015																		92,138		97,850
2016																				106,458
																Total				896,202
																Outstanding prior to 2006				-
																Prior years paid				-
																Liabilities for claims and claim adjustment expenses, net of reinsurance			$	6,374

The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the Consolidated Balance Sheet is as follows:

	Year Ended December 31,
			2016
Property and Casualty segment
Net reserves
Homeowners		$	32,314
Auto liability			182,162
Auto physical damage			6,374
Other short duration lines			3,588
Total net reserves for unpaid claims and claim adjustment expense, net of reinsurance			224,438

Reinsurance recoverable on unpaid claims
Homeowners			375
Auto liability			50,959
Other short duration lines			9,865
Total reinsurance recoverable on unpaid claims			61,199

Insurance lines other than short duration (1)			22,131
Unallocated claims adjustment expenses			22,120
Total other than short duration and unallocated claims adjustment expenses			44,251

Gross reserves, end of year (1)		$	329,888

(1)

This line includes Retirement and Life reserves as included in the Consolidated Balance Sheet.