| Liability For Unpaid Losses And Loss Adjustment Expenses | | 9. |
Liability for Unpaid Losses and Loss Adjustment Expenses |
The liability for unpaid losses and loss adjustment expenses reflects the Company's best estimate for future amounts needed to pay claims and related settlement expenses and the impact of the Company's reinsurance coverage with respect to insured events. Estimating the ultimate claims liability of the Company is a complex and judgmental process because the amounts are based on management's informed estimates and judgments using data currently available. In some cases, significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company's liability for unpaid losses and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as industry data and legal, social, and economic developments. As additional experience and data become available, the Company's estimate for the liability for unpaid losses and loss adjustment expenses is revised accordingly. If the Company's ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded with respect to unpaid losses and loss adjustment expenses at September 30, 2011, the related adjustments could have a material impact on the Company's future results of operations.
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
| |
|
|
$0,000 |
|
|
|
$0,000 |
|
|
|
$0,000 |
|
|
|
$0,000 |
|
| |
|
Quarters Ended
September 30, |
|
|
Nine Months Ended
September 30, |
|
| (Dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
| |
|
|
|
|
|
Balance at beginning of period |
|
$ |
975,192 |
|
|
$ |
1,168,759 |
|
|
$ |
1,052,743 |
|
|
$ |
1,257,744 |
|
|
Less: Ceded reinsurance receivables |
|
|
320,127 |
|
|
|
466,955 |
|
|
|
407,197 |
|
|
|
514,467 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at beginning of period |
|
|
655,065 |
|
|
|
701,804 |
|
|
|
645,546 |
|
|
|
743,277 |
|
| |
|
|
|
|
|
Incurred losses and loss adjustment expenses related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
83,665 |
|
|
|
44,852 |
|
|
|
214,403 |
|
|
|
137,972 |
|
|
Prior years |
|
|
2,569 |
|
|
|
(15,063 |
) |
|
|
(8,074 |
) |
|
|
(33,719 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses |
|
|
86,234 |
|
|
|
29,789 |
|
|
|
206,329 |
|
|
|
104,253 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses and loss adjustment expenses related to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
26,124 |
|
|
|
14,664 |
|
|
|
53,145 |
|
|
|
29,877 |
|
|
Prior years |
|
|
38,367 |
|
|
|
41,650 |
|
|
|
121,922 |
|
|
|
142,366 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid losses and loss adjustment expenses |
|
|
64,491 |
|
|
|
56,314 |
|
|
|
175,067 |
|
|
|
172,243 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Net balance at end of period |
|
|
676,808 |
|
|
|
675,287 |
|
|
|
676,808 |
|
|
|
675,287 |
|
|
Plus: Ceded reinsurance receivables |
|
|
294,414 |
|
|
|
445,175 |
|
|
|
294,414 |
|
|
|
445,175 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Balance at end of period |
|
$ |
971,222 |
|
|
$ |
1,120,462 |
|
|
$ |
971,222 |
|
|
$ |
1,120,462 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
When analyzing loss reserves and prior year development, the Company considers many factors, including the frequency and severity of claims, loss trends, case reserve settlements that may have resulted in significant development, and any other additional or pertinent factors that may impact reserve estimates.
In the third quarter of 2011, the Company increased its prior accident year loss reserves by $2.6 million, which consisted mainly of a $3.3 million increase in auto liability lines, a $0.5 million increase in professional liability lines, and a $0.3 million increase in all other lines, offset partially by a $1.1 million reduction in general liability lines and a $0.5 million reduction in property lines:
| |
• |
|
Auto liability: The $3.3 million increase primarily related to increases in our Reinsurance Operations. This consisted of a $3.8 million increase to accident year 2010 resulting from further unexpected development on non-standard auto treaties which were not renewed in 2011. This was partially offset by a $1.2 million decrease in accident year 2009. Our Insurance Operations also saw an increase of $0.7 million in accident years 2009 and 2010 due to recent unfavorable development on a few large claims. |
| |
• |
|
Professional liability: The $0.5 million increase consisted of increases of $2.5 million primarily related to accident years 2009 and 2010 primarily due to unfavorable development in certain product classes. We are addressing profitability concerns by exiting certain classes of business which have proven to be unprofitable. This was offset by a decrease of $2.0 million related to all other prior accident years. |
| |
• |
|
General liability: The $1.1 million reduction primarily consisted of reductions of $2.1 million related to our Insurance Operations. This amount included an $8.2 million reduction in accident years 2008 and prior due to continued favorable emergence. Incurred losses in these years have developed at a rate lower than the Company's historical averages. We also decreased our reinsurance allowance by $0.9 million in this line due to changes in our reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $6.9 million in accident years 2009 and 2010 related to loss emergence in one of our classes of business as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. We are addressing profitability concerns by exiting certain classes of business that have proven to be unprofitable. At our Reinsurance Operations we increased our general liability reserves by $1.1 million, which primarily related to accident years 2009 and 2010. These changes related to higher than expected loss emergence. |
| |
• |
|
Property: The $0.5 million reduction primarily related to accident year 2010 and is primarily related to favorable loss emergence on a worldwide catastrophe treaty in our Reinsurance Operations. |
In the third quarter of 2010, the Company reduced its prior accident year loss reserves by $15.1 million, which consisted of a $14.2 million reduction in general liability lines, a $1.6 million reduction in property lines, and a $1.3 million reduction in umbrella lines, offset by a $1.7 million increase in commercial auto lines and a $0.1 million increase in professional liability lines:
| |
• |
|
General liability: The $14.2 million reduction primarily consisted of reductions of $16.3 million related to accident years 2004 through 2009 due to lower than anticipated frequency and severity. Incurred losses for these segments have developed at a rate lower than the Company's historical averages. This reduction was offset by a net increase of $2.1 million related to accident years 2003 and prior primarily due to increases in expected unallocated loss adjustment expenses, as well as, higher than expected claim frequency and severity. |
| |
• |
|
Property: The $1.6 million reduction primarily consisted of net reductions of $1.7 million related to accident years 2009, 2008, and 2006 and prior due to decreases in expected unallocated loss adjustment expenses and lower than anticipated severity. This reduction was offset by an increase of $0.1 million related to accident year 2007. |
| |
• |
|
Umbrella: The $1.3 million reduction primarily consisted of net reductions of $1.5 million related to accident years 2009 and 2007 and prior due to lower than anticipated severity. As these accident years have matured, more weight has been given to experience based methods which continue to develop favorably compared to the Company's initial indications. This reduction was offset by an increase of $0.2 million related to accident year 2008 due to an increase in severity. |
| |
• |
|
Commercial auto: The $1.7 million increase consisted of an increase of $1.9 million related to accident year 2009 due to increased frequency on two non-standard auto treaties. This increase was offset by net reductions of $0.2 million related to accident years 2008 and prior. Programs related to these accident years are in run-off, and loss severity has been lower than the Company's prior projections. |
| |
• |
|
Professional liability: The $0.1 million increase primarily consisted of an increase of $1.9 million related to accident years 2007 and 2009 where the Company experienced higher than expected claim frequency and severity. This increase was offset by a reduction of $1.8 million related to accident years 2008 and 2006 and prior driven by lower than expected paid and incurred activity during the quarter. |
In the nine months ended September 30, 2011, the Company reduced its prior accident year loss reserves by $8.1 million, which consisted mainly of a $15.9 million reduction in general liability lines, a $1.1 million reduction in umbrella lines, and a $1.0 million reduction in property lines, offset by a $4.7 million increase in auto liability lines, a $4.4 million increase in professional liability lines and a $0.9 million increase in workers' compensation lines:
| |
• |
|
General liability: The $15.9 million reduction primarily consisted of reductions of $21.3 million related to our Insurance Operations. This amount included a $31.0 million reduction in accident years 2008 and prior due to continued favorable emergence. Incurred losses have developed at a rate lower than the Company's historical averages. We also decreased our reinsurance allowance by $3.1 million in this line due to changes in our reinsurance exposure on specifically identified claims and general decreases in ceded reserves. Offsetting these decreases were increases of $12.8 million in accident years 2009 and 2010 primarily driven by loss emergence in one of our classes of business as well as revised exposure estimates for construction defect liability. Increased estimates for construction defect were the result of a methodology change in the quarter, and were not driven by claim frequency or severity trends. We are addressing profitability concerns by exiting certain classes of business that have proven to be unprofitable. At our Reinsurance Operations we increased our general liability reserves by $5.5 million in accident years 2009 and 2010 due to loss emergence that was greater than expected. |
| |
• |
|
Umbrella: The $1.1 million reduction primarily related to accident years 2010 and prior in our Insurance Operations primarily due to continued favorable emergence. Umbrella coverage typically attaches to other coverage lines, so these net decreases follow the decreases in general liability above. |
| |
• |
|
Property: The $1.0 million reduction primarily related to a $1.8 million decrease in our Insurance Operations primarily related to accident years 2009 and 2010 related to anticipated subrogation on a large equine mortality claim as well as favorable development on prior year catastrophe claims. This was offset by a $0.7 million increase related to accident year 2010 in our Reinsurance Operations due to loss emergence on a worldwide catastrophe treaty. |
| |
• |
|
Auto liability: The $4.7 million increase primarily consisted of an increase of $1.2 million in our Insurance Operations related to accident years 2009 and 2010 due to higher than expected severity. There was also a $3.5 million increase in our Reinsurance Operations primarily related to a $4.0 million increase to accident year 2010 resulting from greater severity on non-standard auto treaties which were not renewed in 2011. This was offset by a decrease of $0.5 million in accident year 2009. |
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• |
|
Professional liability: The $4.4 million increase was primarily related to our Insurance Operations and primarily consisted of increases of $15.1 million related to accident years 1998, 2009 and 2010, offset partially by decreases of $10.8 million related to all other accident years. In 2011, we exited certain classes of business where the volume of premium was low and loss volatility was high. We are focused on writing business where we expect to realize profit that meets our return on investment thresholds. |
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• |
|
Workers' compensation: The $0.9 million increase primarily related to accident years 2009 and 2010 in our Reinsurance Operations and is the result of expected losses recorded on adjustment premiums recorded in 2011. |
In the nine months ended September 30, 2010, the Company reduced its prior accident year loss reserves by $33.7 million, which consisted of a $26.9 million reduction in general liability lines, a $3.7 million reduction in umbrella lines, a $2.9 million reduction in professional liability lines, and a $1.9 million reduction in property lines, offset by a $1.5 million increase in commercial auto lines:
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• |
|
General liability: The $26.9 million reduction primarily consisted of net reductions of $30.2 million related to accident years 2002 through 2009 due to severity that was lower than originally anticipated. Incurred losses for these years have developed at a rate lower than the Company's historical averages. This reduction was partially offset by a net increase of $3.3 million related to accident years 2001 and prior where the Company experienced higher than expected claim frequency and severity. |
| |
• |
|
Umbrella: The $3.7 million reduction primarily consisted of net reductions related to accident years 2009 and prior primarily due to lower than anticipated severity. As these accident years have matured, more weight has been given to experience based methods which continue to develop favorably compared to the Company's initial indications. |
| |
• |
|
Professional liability: The $2.9 million reduction primarily consisted of net reductions of $6.1 million related to accident years 2008 and prior due to severity that was lower than originally anticipated, partially offset by an increase of $3.2 million related to accident year 2009 where the Company experienced higher than expected claim frequency and severity. |
| |
• |
|
Property: The $1.9 million reduction primarily consisted of net reductions of $2.4 million related to accident years 2008 and prior primarily due to lower than anticipated severity. This reduction was offset by an increase of $0.5 million to accident year 2009 that was driven by higher than expected claim frequency and severity. |
| |
• |
|
Commercial auto: The $1.5 million increase primarily consisted of a net increase of $2.1 million related to accident years 2008 and 2009 where losses were higher than anticipated. This increase was offset by net reductions of $0.6 million related to accident years 2007 and prior. Programs related to these accident years are in run-off, and loss severity has been lower than the Company's prior projections. | |