Property and Casualty Unpaid Claims and Claim Expenses

12 Months Ended

Dec. 31, 2018

Insurance Loss Reserves [Abstract]

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.

($ in thousands)	Years Ended December 31,
	2018			2017			2016
Property and Casualty segment
Gross reserves, beginning of year (1)	$	319,182		$	307,757		$	301,569
Less:  reinsurance recoverables	57,409			61,199			50,332
Net reserves, beginning of year (2)	261,773			246,558			251,237
Incurred claims and claim expenses:
Claims occurring in the current year	547,959			498,989			471,099
Decrease in estimated reserves for claims occurring in prior years (3)	(300		)	(2,700		)	(7,000		)
Total claims and claim expenses incurred (4)	547,659			496,289			464,099
Claims and claim expense payments for claims occurring during:
Current year	369,194			333,385			323,025
Prior years	162,783			147,689			145,753
Total claims and claim expense payments	531,977			481,074			468,778
Net reserves, end of year (2)	277,455			261,773			246,558
Plus:  reinsurance recoverables	89,725			57,409			61,199
Gross reserves, end of year (1)	$	367,180		$	319,182		$	307,757

____________________

⁽¹⁾  Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Life and Retirement of $29,534 thousand, $28,567 thousand and $22,131 thousand as of December 31, 2018, 2017 and 2016, respectively, in addition to Property and Casualty 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 2018, 2017 and 2016.

⁽⁴⁾  Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for Life and Retirement of $89,901 thousand, $86,017 thousand, and $76,905 thousand for the years ended December 31, 2018, 2017 and 2016, respectively, in addition to Property and Casualty amounts.

Underwriting results for Property and Casualty 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, which 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), IBNR claims 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 reporting 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 recognized amount. Due to uncertainties involved, the ultimate cost of losses may vary materially from recognized 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 80.0% as of December 31, 2018) 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 re-estimates. 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 claims occurred. For estimating short-tail coverage reserves (e.g., homeowners and automobile physical damage), which comprise approximately 20.0% of the Company's total loss reserves as of December 31, 2018, 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 80.0% of the Company's total loss reserves as of December 31, 2018, 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 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 re-estimate.

Reserves are re-estimated 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 recognized in the period in which development factor changes result in reserve re-estimates. 

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 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 99.0% of the Company's incurred losses for 2018.

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 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 recognized 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 6.0% of reserves, which equates to plus or minus approximately $13.0 thousand of net income as of December 31, 2018. 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 $300 thousand in 2018, $2,700 thousand in 2017 and $7,000 thousand in 2016. In 2018, the favorable development was predominantly the result of favorable severity trends in property for accident years 2016 and prior. In 2017, the favorable development was predominantly the result of favorable severity trends in property for accident years 2015 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^st of each year. The result of the independent actuarial study at December 31, 2018 was consistent with management's analysis and selected estimates and did not result in any adjustments to the Company's Property and Casualty reserves recognized.

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	78.5	%	17.3	%	2.4	%	0.9	%	0.7	%	0.2	%	—		—		—	—
Auto liability	40.9	%	35.1	%	13.7	%	6.1	%	2.7	%	1.1	%	0.3	%	0.1	%	—	—
Auto physical damage	95.6	%	4.4	%	—		—		—		—		—		—		—	—

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 reoccur in the future. It may not be appropriate to use this cumulative history in the projection of future performance.

The information about incurred and paid claims development for the years ended December 31, 2009 to 2017 is presented as unaudited supplementary information.

($ in thousands)
Homeowners
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,																						As of December 31, 2018
																						Total of Incurred- But-Not-Reported Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Reported Claims
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited			Unaudited		Unaudited
Year	2009		2010		2011		2012		2013		2014		2015			2016		2017		2018
2009	$	113,274	$	112,280	$	112,970	$	113,096	$	113,357	$	113,230	$	113,216		$	112,900	$	112,958	$	113,168	$	—	21,810
2010			140,994		136,907		133,358		133,235		133,216		133,136			132,859		132,905		132,627		—		25,149
2011					150,141		150,334		150,791		148,860		148,755			148,414		148,370		148,079		—		29,530
2012							108,754		109,156		109,360		106,486			106,308		106,348		106,000		—		21,578
2013									105,584		107,489		103,982			102,407		102,345		101,769		88		19,221
2014											111,647		113,505			109,059		106,844		106,554		257		20,083
2015													111,706			115,134		114,404		114,053		362		18,706
2016																115,931		118,604		117,009		724		19,830
2017																		126,285		129,818		759		19,741
2018																				166,793		27,697		19,515
																		Total		$	1,235,870
($ in thousands)
Homeowners
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited			Unaudited		Unaudited
Year	2009		2010		2011		2012		2013		2014		2015			2016		2017		2018
2009	$	81,570	$	104,407	$	108,217	$	110,324	$	112,554	$	112,720	$	112,827		$	112,848	$	112,851	$	112,858
2010			98,190		124,326		129,790		132,246		132,523		132,604			132,599		132,602		132,602
2011					123,046		142,846		145,852		146,908		147,451			148,026		148,014		148,069
2012							84,260		101,566		104,203		105,156			105,561		105,909		105,993
2013									76,890		96,599		99,361			100,968		101,527		101,677
2014											83,314		103,030			105,704		106,081		106,258
2015													90,704			109,303		111,882		113,321
2016																95,772		113,186		115,053
2017																		106,800		128,518
2018																				130,548
																Total				1,194,897
															Outstanding prior to 2009					66
															Prior years paid					—
															Liabilities for claims and claim adjustment expenses, net of reinsurance					$	41,039

($ in thousands)
Auto Liability
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,																						As of December 31, 2018
																						Total of Incurred- But-Not-Reported Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Reported Claims
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited			Unaudited		Unaudited
Year	2009		2010		2011		2012		2013		2014		2015			2016		2017		2018
2009	$	159,934	$	158,703	$	153,662	$	157,941	$	151,418	$	150,919	$	150,568		$	149,822	$	149,888	$	149,807	$	(64	)	49,230
2010			157,712		160,058		156,369		154,222		152,483		151,653			149,818		149,425		149,542		3			48,942
2011					150,803		146,713		145,735		143,133		142,488			139,840		138,891		138,949		210			45,976
2012							156,448		153,815		150,336		149,346			147,594		145,847		145,620		305			45,984
2013									153,860		152,858		150,720			150,657		148,111		147,993		748			47,368
2014											155,105		157,249			158,470		159,937		159,794		1,887			49,380
2015													165,517			172,553		177,021		178,325		2,441			50,596
2016																180,380		184,440		184,567		5,637			51,934
2017																		187,983		188,756		19,007			48,587
2018																				200,314		71,139			43,522
																		Total		$	1,643,667
($ in thousands)
Auto Liability
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited			Unaudited		Unaudited
Year	2009		2010		2011		2012		2013		2014		2015			2016		2017		2018
2009	$	60,011	$	110,921	$	133,568	$	142,524	$	146,383	$	148,783	$	149,608		$	149,801	$	149,855	$	149,871
2010			63,416		118,345		137,012		144,255		147,337		148,751			149,247		149,364		149,439
2011					61,070		108,837		126,812		133,931		136,906			138,151		138,358		138,689
2012							61,279		109,574		127,185		138,641			142,916		144,622		145,121
2013									62,224		108,856		131,214			139,954		145,291		146,770
2014											61,329		117,468			139,463		149,059		155,758
2015													70,836			134,473		157,980		170,088
2016																73,073		140,901		166,815
2017																		70,682		139,531
2018																				77,528
																Total				1,439,610
															Outstanding prior to 2009					183
															Prior years paid					—
															Liabilities for claims and claim adjustment expenses, net of reinsurance					$	204,240

($ in thousands)
Auto Physical Damage
Incurred Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,																						As of December 31, 2018
																						Total of Incurred- But-Not-Reported Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Reported Claims
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited			Unaudited		Unaudited
Year	2009		2010		2011		2012		2013		2014		2015			2016		2017		2018
2009	$	84,539	$	83,515	$	83,202	$	82,635	$	82,000	$	81,986	$	81,972		$	81,963	$	81,972	$	81,941	$	—		77,449
2010			84,112		83,420		83,103		83,046		83,052		83,050			83,036		83,028		83,018		2			81,581
2011					86,205		85,507		86,023		85,120		85,143			85,116		85,108		85,102		8			80,803
2012							83,770		82,337		83,402		83,431			83,354		83,342		83,334		8			78,163
2013									91,448		88,856		88,672			88,627		88,455		88,525		54			80,919
2014											95,572		95,634			95,422		95,239		95,232		(21		)	87,899
2015													99,291			97,994		97,624		97,455		(188		)	87,491
2016																112,430		109,515		109,348		(207		)	93,200
2017																		115,483		111,798		924			91,160
2018																				109,040		(6,859		)	91,070
																		Total		$	944,793
($ in thousands)
Auto Physical Damage
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
Years Ended December 31,
Accident	Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited		Unaudited			Unaudited		Unaudited
Year	2009		2010		2011		2012		2013		2014		2015			2016		2017		2018
2009	$	78,456	$	82,117	$	82,039	$	82,015	$	82,000	$	81,985	$	81,973		$	81,963	$	81,955	$	81,941
2010			79,329		83,120		83,103		83,087		83,067		83,051			83,036		83,028		83,015
2011					83,227		85,254		85,181		85,148		85,127			85,116		85,108		85,095
2012							80,519		83,418		83,372		83,355			83,347		83,342		83,326
2013									85,110		88,688		88,580			88,532		88,484		88,471
2014											88,939		95,444			95,266		95,256		95,258
2015													92,138			97,850		97,685		97,638
2016																106,459		109,686		109,536
2017																		105,156		110,817
2018																				103,559
																Total				938,656
															Outstanding prior to 2009					—
															Prior years paid					—
															Liabilities for claims and claim adjustment expenses, net of reinsurance					$	6,137

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:

($ in thousands)	Years Ended December 31,
	2018
Property and Casualty segment
Net reserves
Homeowners	$	41,039
Auto liability	204,240
Auto physical damage	6,137
Other short duration lines	3,556
Total net reserves for unpaid claims and claim adjustment expense, net of reinsurance	254,972
Reinsurance recoverable on unpaid claims
Homeowners	26,646
Auto liability	55,971
Other short duration lines	7,108
Total reinsurance recoverable on unpaid claims	89,725
Insurance lines other than short duration (1)	29,534
Unallocated claims adjustment expenses	22,483
Total other than short duration and unallocated claims adjustment expenses	52,017
Gross reserves, end of year (1)	$	396,714

____________________

⁽¹⁾ 

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