NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES

The Company’s Property and Casualty Insurance Reserves are reported using the Company’s estimate of its ultimate liability for losses and LAE for claims that occurred prior to the end of any given accounting period but have not yet been paid. Such estimates are based on individual case estimates for reported claims and estimates for IBNR losses, including expected development on reported claims.

The determination of individual case reserves differs by line of business. For preferred personal automobile insurance, homeowners insurance and other personal insurance, case reserves are set by adjusters and are based on the adjusters’ estimates of the amount for which the claims will ultimately be paid. For non-standard personal automobile insurance and commercial automobile insurance, case reserves are set primarily using statistical reserves that are based on studies of historical average paid amounts by state, coverage and product. However, when such reserves exceed certain thresholds they are set manually by adjusters.

The Company’s actuaries generally estimate ultimate losses and LAE and, therefore, reserves at least quarterly for most product lines and/or coverage levels using accident quarters spanning 10 or more years, depending on the size of the product line and/or coverage level or emerging issues relating to them. The Company’s actuaries use a variety of generally accepted actuarial loss reserving estimation methodologies to estimate the ultimate losses and LAE for the current accident quarter and re-estimate the ultimate losses and LAE for previous accident quarters to determine if changes in the previous estimates of the ultimate losses and LAE are indicated by the most recent data.

The key assumption in these estimation methodologies is that patterns observed in prior periods are indicative of how losses and LAE are expected to develop in the future and that such historical data can be used to predict and estimate ultimate losses and LAE. However, changes in the Company’s business processes, by their very nature, are likely to affect the development patterns, which generally results in the historical development factors becoming less reliable over time in predicting how losses and LAE will ultimately develop. The Company’s actuaries use professional judgment in determining how much weight to place on the development patterns based on the older historical data and how much weight to place on the development patterns based on more recent data. In some cases, the Company’s actuaries make adjustments to the loss reserving estimation methodologies to estimate ultimate losses and LAE.

The Company’s actuaries’ quarterly selections are summed by product and/or coverage levels to create the actuarial indication of the ultimate losses and LAE. Paid amounts are then subtracted from the ultimates to compute the reserves for property and casualty insurance losses and LAE. These results are reviewed by the Company’s corporate actuary and corporate management who apply their collective judgment and determine the appropriate estimated level of reserves to record. Numerous factors are considered in this determination process, including, but not limited to, the assessed reliability of key loss trends and assumptions that may be significantly influencing the current actuarial indications, changes in claim handling practices or other changes that affect the timing of payment or development patterns, changes in the mix of business, the maturity of the accident year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, the improvement or deterioration of actuarial indications in the current period as compared to prior periods, and the amount of reserves related to third party pools for which the Company has limited access to the underlying data and, accordingly, relies on calculations provided by such pools.

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

The Company’s goal is to ensure that its total reserves for property and casualty insurance losses and LAE are adequate to cover all costs, while sustaining minimal variation from the time reserves for losses and LAE are initially estimated until losses and LAE are fully developed. Changes in the Company’s estimates of these losses and LAE over time, also referred to as “development,” will occur and may be material.

The following tables contain information about incurred and paid claims development as of and for the year ended December 31, 2017, net of reinsurance and indemnification, as well as cumulative claim frequency and the total of IBNR liabilities, including expected development on reported claims included within the net incurred losses and allocated LAE amounts. The tables are grouped by major product line and, if relevant, coverage. The information about incurred and paid claims development for the years ended December 31, 2013 through 2015 is presented as supplementary information and is unaudited.

Preferred Personal Automobile Insurance—Liability



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS											As of December 31, 2017
	Incurred Losses and Allocated LAE, Net of Reinsurance For the Years Ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Incurred Claims
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	265.4	$	251.1	$	250.1	$	251.6	$	251.8	$	—	51,112
2014			202.1		198.3		200.2		202.8		0.1		39,903
2015					168.3		171.8		176.5		1.3		32,752
2016							162.1		174.5		9.0		30,472
2017									164.4		39.2		28,086
Total									970.0


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	107.2	$	182.2	$	216.3	$	234.1	$	241.9
2014			85.8		143.3		168.8		188.3
2015					73.1		122.4		147.5
2016							61.2		114.6
2017									59.2
Total									751.5
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2013, Net of Reinsurance									11.4
Loss and Allocated LAE Reserves, Net of Reinsurance									$	229.9

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Preferred Personal Automobile Insurance—Physical Damage



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS												As of December 31, 2017
	Incurred Losses and Allocated LAE, Net of Reinsurance For the Years Ended December 31,											Total of IBNR Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Incurred Claims
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	139.7	$	138.5	$	138.5	$	138.4	$	138.4		$	(0.1	)	78,778
2014			122.0		121.6		121.4		121.4			(0.1		)	67,219
2015					101.2		100.7		100.6			(0.1		)	53,464
2016							106.6		106.6			(0.5		)	49,870
2017									109.2			(1.2		)	47,440
Total									576.2


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	137.0	$	138.9	$	138.6	$	138.5	$	138.5
2014			121.0		121.8		121.5		121.5
2015					100.1		101.0		100.7
2016							105.2		106.9
2017									104.4
Total									572.0
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2013, Net of Reinsurance									(0.1		)
Loss and Allocated LAE Reserves, Net of Reinsurance									$	4.1

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Non-standard Personal Automobile Insurance—Liability¹



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS											As of December 31, 2017
	Incurred Losses and Allocated LAE, Net of Reinsurance and Indemnification For the Years Ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Incurred Claims
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	250.5	$	247.1	$	248.3	$	249.5	$	248.8	$	0.2	66,918
2014			255.0		262.9		267.1		266.1		3.4		76,771
2015					379.4		379.8		381.1		0.2		91,674
2016							435.7		437.1		16.6		105,405
2017									444.6		102.8		103,965
Total									1,777.7


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
	For the Years Ended December 31,
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	117.8	$	208.2	$	233.8	$	244.2	$	247.4
2014			117.4		210.8		245.5		258.4
2015					167.7		304.7		359.2
2016							168.9		346.2
2017									175.4
Total									1,386.6
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2013, Net of Reinsurance									1.2
Loss and Allocated LAE Reserves, Net of Reinsurance									$	392.3

¹ Table retrospectively includes Alliance United’s historical incurred and paid accident year claim information for all periods presented.

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Non-standard Personal Automobile Insurance—Physical Damage¹



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS												As of December 31, 2017
	Incurred Losses and Allocated LAE, Net of Reinsurance and Indemnification For the Years Ended December 31,											Total of IBNR Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Incurred Claims
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	100.1	$	100.3	$	100.0	$	99.8	$	99.7		$	(0.1	)	36,174
2014			105.8		104.7		104.3		104.3			(0.5		)	38,048
2015					143.2		143.3		143.5			(0.4		)	42,897
2016							177.9		181.6			(2.3		)	50,533
2017									203.6			6.3			55,303
Total									732.7


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
	For the Years Ended December 31,
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	93.4	$	100.2	$	99.9	$	99.7	$	99.8
2014			97.1		105.9		105.1		105.1
2015					130.0		143.8		143.2
2016							167.4		183.3
2017									185.2
Total									716.6
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2013, Net of Reinsurance									(0.1		)
Loss and Allocated LAE Reserves, Net of Reinsurance									$	16.0

¹ Table retrospectively includes Alliance United’s historical incurred and paid accident year claim information for all periods presented.

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Homeowners Insurance



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS											As of December 31, 2017
	Incurred Losses and Allocated LAE, Net of Reinsurance For the Years Ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Incurred Claims
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	180.8	$	172.8	$	169.4	$	167.5	$	167.8	$	(0.1	)	21,974
2014			211.1		208.5		205.0		204.8		—			22,442
2015					178.9		164.9		163.2		(1.2		)	17,444
2016							200.3		201.7		(0.7		)	17,896
2017									261.2		17.3			17,011
Total									998.7


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2013 (Unaudited)		2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017
2013	$	122.4	$	156.5	$	162.5	$	164.7	$	165.6
2014			149.2		194.4		200.1		202.8
2015					116.9		154.4		158.0
2016							141.2		190.1
2017									165.8
Total									882.3
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2013, Net of Reinsurance									3.7
Loss and Allocated LAE Reserves, Net of Reinsurance									$	120.1

The claim counts in the preceding tables are cumulative incurred claim counts as of December 31, 2017 and are equal to both (i) reported claims minus claims closed without payment as well as (ii) open claims plus claims closed with payment. As such, the difference between these claim counts and final claim counts once all claims have been identified and settled will tend to be higher in recent accident years, particularly the most recent accident year, due to claims closed without payment. Certain product lines, particularly the Company’s non-standard personal automobile insurance, tend to have a higher percentage of claims closed without payment.

The Company's claims are counted at the feature level. As such, each claimant and each coverage is counted separately. For example, if for one occurrence, the Company's policyholder is at fault for damage to his/her own vehicle, another party's vehicle and three injured parties, there may be five features—three for bodily injury liability, one for property damage liability and one for first-party collision coverage. There may also be another feature for first-party medical payments.

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

The following table reconciles the net incurred and paid claims development tables presented above to the Company's liability for Property and Casualty Insurance Reserves included in the Consolidated Balance Sheet at December 31, 2017.



DOLLARS IN MILLIONS	2017
Property and Casualty Insurance Reserves, Net of Reinsurance:
Preferred Personal Automobile Insurance—Liability	$	229.9
Preferred Personal Automobile Insurance—Physical Damage	4.1
Non-standard Personal Automobile Insurance—Liability	392.3
Non-standard Personal Automobile Insurance—Physical Damage	16.0
Homeowners Insurance	120.1
Other	120.9
Total	883.3
Reinsurance Recoverables on Unpaid Losses and Allocated LAE:
Preferred Personal Automobile Insurance—Liability	32.5
Preferred Personal Automobile Insurance—Physical Damage	0.1
Non-standard Personal Automobile Insurance—Liability	0.4
Non-standard Personal Automobile Insurance—Physical Damage	—
Homeowners Insurance	11.3
Other	8.8
Total	53.1
Insurance Lines other than Short-duration	—
Unallocated LAE	80.4
Property and Casualty Insurance Reserves, Gross of Reinsurance and Indemnification	$	1,016.8

The following is supplementary information about average historical claims duration as of December 31, 2017.



Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance and Indemnification (Unaudited)
Years	1		2		3		4		5
Preferred Personal Automobile Insurance—Liability	39.5	%	69.5	%	84.2	%	92.9	%	96.1	%
Preferred Personal Automobile Insurance—Physical Damage	98.5	%	100.3	%	100.1	%	100.1	%	100.1	%
Non-standard Personal Automobile Insurance—Liability	42.7	%	80.5	%	93.5	%	97.6	%	99.4	%
Non-standard Personal Automobile Insurance—Physical Damage	92.1	%	100.8	%	100.3	%	100.4	%	100.1	%
Homeowners Insurance	70.2	%	94.3	%	97.1	%	98.6	%	98.7	%

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Property and Casualty Insurance Reserve activity for the years ended December 31, 2017, 2016 and 2015 was:



DOLLARS IN MILLIONS	2017			2016			2015
Beginning Property and Casualty Insurance Reserves:
Gross of Reinsurance and Indemnification at Beginning of Year	$	931.4		$	862.8		$	733.9
Less Reinsurance Recoverables and Indemnification at Beginning of Year	50.2			52.0			54.9
Property and Casualty Insurance Reserves, Net of Reinsurance and Indemnification at Beginning of Year	881.2			810.8			679.0
Property and Casualty Insurance Reserves Acquired, Net of Reinsurance and Indemnification	—			—			125.4
Incurred Losses and LAE related to:
Current Year:
Continuing Operations	1,454.1			1,358.6			1,123.3
Prior Years:
Continuing Operations	20.4			(14.4		)	(11.5		)
Discontinued Operations	(1.5		)	(6.3		)	(8.6		)
Total Incurred Losses and LAE related to Prior Years	18.9			(20.7		)	(20.1		)
Total Incurred Losses and LAE	1,473.0			1,337.9			1,103.2
Paid Losses and LAE related to:
Current Year:
Continuing Operations	868.1			831.0			723.2
Prior Years:
Continuing Operations	518.5			431.9			366.2
Discontinued Operations	3.9			4.6			7.4
Total Paid Losses and LAE related to Prior Years	522.4			436.5			373.6
Total Paid Losses and LAE	1,390.5			1,267.5			1,096.8
Property and Casualty Insurance Reserves, Net of Reinsurance and Indemnification at End of Year	963.7			881.2			810.8
Plus Reinsurance and Indemnification Recoverables at End of Year	53.1			50.2			52.0
Property and Casualty Insurance Reserves, Gross of Reinsurance and Indemnification at End of Year	$	1,016.8		$	931.4		$	862.8

Property and Casualty Insurance Reserves are estimated based on historical experience patterns and current economic trends. Actual loss experience and loss trends are likely to differ from these historical experience patterns and economic conditions. Loss experience and loss trends emerge over several years from the dates of loss inception. The Company monitors such emerging loss trends on a quarterly basis. Changes in such estimates are included in the Consolidated Statements of Income in the period of change.

In 2017, the Company increased its property and casualty insurance reserves by $18.9 million to recognize adverse development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed adversely by $19.5 million, and commercial lines insurance loss and LAE reserves developed favorably by $0.6 million. Personal automobile insurance loss and LAE reserves developed adversely by $22.2 million due primarily to the emergence of loss patterns that were worse than expected for both physical damage and liability insurance for the 2016 accident year and, to a lesser extent, for liability insurance for the 2015 and 2014 accident years, partially offset by the emergence of more favorable loss patterns than expected for the 2013 and prior accident years. Homeowners insurance loss and LAE reserves developed adversely by $1.0 million due primarily to the emergence of non-catastrophe loss patterns that were worse than expected for the 2016 accident year, and to a lesser extent, the 2013 and prior accident years, partially offset by $3.7 million of favorable development on catastrophes primarily for the 2016 accident year and, to a lesser extent, the 2015 accident year. Other personal lines loss and LAE reserves developed favorably by $3.7 million due primarily to the emergence of more favorable loss patterns than expected for the 2015, 2014, 2013 and prior accident years, partially offset by the emergence of loss patterns that were worse than expected for the 2016 accident year. Commercial lines insurance loss and LAE reserves included adverse

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

development of $0.9 million from continuing operations and favorable development of $1.5 million from discontinued operations.

In 2016, the Company reduced its property and casualty insurance reserves by $20.7 million to recognize favorable development of losses and LAE from prior accident years. Personal lines insurance loss and LAE reserves developed favorably by $16.8 million, and commercial lines insurance loss and LAE reserves developed favorably by $3.9 million. Personal automobile insurance loss and LAE reserves developed adversely by $11.3 million due primarily to the emergence of loss patterns that were worse than expected for liability insurance for the 2015 and 2014 accident years and, to a lesser extent, the 2013 and 2012 accident years. Homeowners insurance loss and LAE reserves developed favorably by $20.0 million due primarily to $16.8 million of favorable development on catastrophes primarily for the 2015 accident year and, to a lesser extent, the 2014 accident year. Other personal lines loss and LAE reserves developed favorably by $8.1 million due primarily to the emergence of more favorable loss patterns than expected for the 2015, 2014, 2013 and 2012 accident years. Commercial lines insurance loss and LAE reserves included adverse development of $2.4 million from continuing operations and favorable development of $6.3 million from discontinued operations.

In 2015, the Company reduced its property and casualty insurance reserves by $20.1 million to recognize favorable development of losses and LAE from prior accident years, including the impact of adverse development of $7.7 million, net of estimated indemnification recoveries, related to Alliance United for periods prior to the date of its acquisition. Personal lines insurance loss and LAE reserves developed favorably by $13.3 million and commercial lines insurance loss and LAE reserves developed favorably by $6.8 million. Personal automobile insurance loss and LAE reserves developed favorably by $1.8 million, net of the adverse development related to Alliance United, homeowners insurance loss and LAE reserves developed favorably by $10.8 million, and other personal lines loss and LAE reserves developed favorably by $0.7 million. Excluding the adverse development related to Alliance United for periods prior to the date of its acquisition, personal lines insurance losses and LAE reserves developed favorably by $21.0 million due primarily to the emergence of more favorable loss patterns than expected for the 2013, 2012 and 2011 accident years. Commercial lines insurance loss and LAE reserves included adverse development of $1.8 million from continuing operations and favorable development of $8.6 million from discontinued operations.

The Company cannot predict whether loss and LAE reserves will develop favorably or unfavorably from the amounts reported in the Consolidated Financial Statements. The Company believes that any such development will not have a material effect on the Company’s consolidated financial position, but could have a material effect on the Company’s consolidated financial results for a given period.

Reinsurance and indemnification recoverables on property and casualty insurance reserves were $53.1 million and $50.2 million at December 31, 2017 and 2016, respectively. These recoverables are concentrated with several reinsurers, the vast majority of which are highly rated by one or more of the principal investor and/or insurance company rating agencies. While most of these recoverables were unsecured at December 31, 2017 and 2016, the agreements with the reinsurers generally provide for some form of collateralization upon the occurrence of certain events.