LOSS AND LOSS ADJUSTMENT RESERVES

12 Months Ended

Dec. 31, 2017

Liability for Future Policy Benefits [Abstract]

LOSS AND LOSS ADJUSTMENT RESERVES

6. LOSS AND LOSS ADJUSTMENT RESERVES

The liability for loss and LAE reserves is determined on an individual-case basis for all claims reported. The liability also includes amounts for unallocated expenses, anticipated future claim development and IBNR.

Activity in the liability for loss and LAE reserves is summarized as follows:

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	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Gross reserves, beginning of period	$	158,110		$	97,706		$	78,330
Less: reinsurance recoverable (1)	(40,412		)	(7,496		)	(10,394		)
Net reserves, beginning of period	117,698			90,210			67,936
Incurred loss, net of reinsurance, related to:
Current year	245,545			201,704			120,005
Prior year loss development (2)	13,926			13,156			(9,466		)
Ceded losses subject to offsetting experience account adjustments (3)	(11,914		)	(17,050		)	2,171
Prior years	2,012			(3,894		)	(7,295		)
Total incurred loss and LAE, net of reinsurance	247,557			197,810			112,710
Paid loss, net of reinsurance, related to:
Current year	160,945			123,364			54,710
Prior years	72,140			46,958			35,726
Total paid loss and LAE, net of reinsurance	233,085			170,322			90,436
Net reserves, end of period	132,170			117,698			90,210
Plus: reinsurance recoverable (1)	98,345			40,412			7,496
Gross reserves, end of period	$	230,515		$	158,110		$	97,706

(1) Reinsurance recoverable in this table includes only ceded loss and LAE reserves.

(2) Reflects loss development from prior accident years impacting pre-tax net income. Excludes losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment.

(3) Reflects losses ceded under retrospective reinsurance treaties to the extent there is an offsetting experience account adjustment, such that there is no impact on pre-tax net income.

The establishment of loss reserves is an inherently uncertain process and changes in loss reserve estimates are expected as such estimates are subject to the outcome of future events. The factors influencing changes in claim costs are often difficult to isolate or quantify and developments in paid and incurred losses from historical trends are frequently subject to multiple interpretations. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

During the year ended December 31, 2017, the Company experienced $13.9 million of unfavorable loss and LAE reserve development on prior accident years primarily in its personal automobile and homeowners lines of businesses. The adverse development in personal automobile of approximately $8.0 million was driven primarily by adjustments to cession percentages in certain auto reinsurance treaties. Additionally, the adverse development in homeowners of approximately $8.0 million was primarily caused by the continued impact of assignment of benefits (“AOB”) and related ligation costs in 2015 and other accident years.

As previously disclosed, the Company entered into 30% and 10% retrospectively-rated Florida-only property quota share treaties, which ended on July 1, 2016 and 2017, respectively. These agreements included a profit share (experience account) provision, under which the Company will receive ceded premium adjustments at the end of the treaty to the extent there is a positive balance in the experience account. This experience account is based on paid losses rather than incurred losses. Due to the retrospectively-rated nature of this treaty, when the experience account is positives the Company cedes losses under these treaties as the claims are paid with an equal and offsetting adjustment to ceded premiums (in recognition of the related change to the experience account receivable), with no impact on net income. Conversely, when the experience account is negative, the Company cedes losses on an incurred basis with no offsetting adjustment to ceded premiums, which impacts net income. Loss development can be either favorable or unfavorable regardless of whether the experience account is in a positive or negative position.

Beginning in 2017, for purposes of the total incurred loss, net of reinsurance line within this disclosure, the Company has classified paid losses related to these retrospectively rated quota share treaties which were ceded during the indicated year but relating to a prior accident year in a separate line. The related amounts in the previous year have been adjusted to conform to this presentation. Prior to 2017, these amounts were included in the current year incurred line item in the table above. Total amounts of incurred losses presented for 2016 and 2015 remain unchanged.

During the year ended December 31, 2016, the Company experienced unfavorable loss and LAE reserve development on prior accident years primarily in its all other peril homeowners coverage in Florida. In the first half of 2016, the Company began to experience a new and higher level of AOB claims both in frequency and severity in our homeowners business in Florida, which caused adverse experience on the loss activity in accident years 2015 and 2016. This increased level of AOB claims was the significant driver in the Company’s decision to increase the Company’s 2015 accident year reserves related to the Company’s homeowners Florida policies.

AOB is a legal construct that allows a third party to step into the shoes of the insured and is then paid directly by an insurance company for services rendered on behalf of the insured for a covered loss. Absent an AOB, the insured would pay the third party and those costs would be reimbursed by the insurance company to the insured. AOB is commonly used when a homeowner experiences a water loss, for example a leaky pipe, an overflow from a sink, or a damaged appliance, and contacts a contractor or water remediation company.

Misuse of this legal construct has led to contractors over inflating costs of claims and/or submitting improper claims, causing insurance companies to have to either pay the overinflated claim, fight the claim in court, or both. In all cases, AOB claims cost the insurance company, on average, more than five times the cost to settle non-AOB claims, which has been a primary driver the increase to our overall loss and loss adjustment in comparison to historical severity averages.

Although the concept of AOB had been around for several years prior to 2016, the Company had a relatively low level of AOB claims in the accident years prior to 2016 and the related adverse impact of AOB claims had a marginal impact on the Company’s overall loss experience. Given the nature of AOB claims, it is difficult to identify the number of outstanding or expected AOB claims as the third parties may not step into the shoes of the insured or may not identify itself to the Company until later on in the claim processing cycle. This delay in identifying AOB claims creates a challenge in estimating the Company’s loss reserves, as capturing the incremental costs to settle AOB claims as part of the Company’s calculation of estimated loss reserves at the end of the year.

Accordingly, the challenge described above together with the change in the Company’s historical trend on AOB claims were the main drivers of the prior year development in 2016.

During the year ended December 31, 2015, the Company experienced a redundancy on prior year accident years primarily a result of continued favorable loss experience (mostly caused by severity in reported claims) in the Company’s all other peril homeowners coverage caused in part by the absence of severe weather in Florida. Specifically, the Company has experienced better severity than expected in 2013 and 2014 accident years.

The following tables provide incurred losses and ALAE and cumulative paid losses and ALAE, net of reinsurance, for the prior 10 accident years, and the total of IBNR reserves plus expected development on reported claims and the cumulative number of reported claims (in thousands, except number of reported claims and severity), as of the most recent reporting period, by the Company’s significant lines of business, which are Homeowners, Commercial General Liability and Automobile.

												IBNR & Expected	Cumulative
	Homeowners Incurred Losses and ALAE, Net of Reinsurance											Development on	Number of
	For the Years Ended December 31,											Reported Claims	Reported Claims(1)	Severity(2)
	(Unaudited)
Accident Year	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017		2017	2017	2017
2008	18,305	15,784	15,811	15,977	15,659	16,021	15,661	15,604	15,609	15,608		5	1,710	9,125
2009		26,228	25,618	25,955	26,482	27,015	27,041	27,119	27,163	27,173		104	2,334	11,598
2010			24,825	25,056	26,151	27,895	28,968	29,407	29,945	30,459		35	2,389	12,735
2011				20,492	21,344	23,007	23,932	24,582	25,957	26,143		27	2,423	10,778
2012					23,032	23,301	24,186	24,468	25,889	26,356		14	2,677	9,840
2013						43,807	42,021	35,834	35,859	37,185		402	3,415	10,771
2014							64,312	63,300	61,770	62,206		1,730	7,564	7,995
2015								99,497	92,411	95,129		6,260	13,292	6,686
2016									171,264	162,043		18,842	26,562	5,391
2017										202,844		81,261	54,717	2,222
									Total	$	685,146

(1) The cumulative number of reported claims is measured by individual claimant at a coverage level.

(2) Calculated severity amounts by accident year are based on inception-to-date incurred less IBNR and expected development dollars on reported claims. Note the older accident years are more developed than recent accident years.

	Homeowners Cumulative Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
2008	9,477	13,832	14,689	15,190	15,308	15,445	15,595	15,583	15,587	15,587
2009		15,047	23,095	24,657	26,007	26,462	26,831	26,927	26,982	27,049
2010			14,052	21,350	24,730	26,886	27,984	29,092	29,739	30,376
2011				11,119	19,250	21,323	22,723	24,047	25,580	25,982
2012					13,693	20,728	23,120	23,923	25,186	26,113
2013						19,986	31,606	33,867	35,123	35,803
2014							37,033	53,831	57,891	59,722
2015								52,214	79,359	86,647
2016									102,556	142,716
2017										135,589
										$	585,584
All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance										88
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance										$	99,650

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Homeowners policies, as of December 31, 2017:

	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Homeowners	55.8	%	25.2	%	6.9	%	3.8	%	2.8	%	3.0	%	1.2	%	0.9	%	0.2	%	—	%

												IBNR & Expected	Cumulative
	Commercial General Liability Incurred Losses and ALAE, Net of Reinsurance											Development on	Number of
	For the Years Ended December 31,											Reported Claims	Reported Claim	Severity
	(Unaudited)
Accident Year	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017		2017	2017	2017
2008	16,615	17,448	17,271	17,260	16,083	15,584	16,297	16,839	18,453	20,039		—	1,553	12,903
2009		13,297	12,397	12,220	11,943	9,270	10,192	10,466	11,081	11,621		—	899	12,927
2010			8,552	7,582	7,474	7,045	7,535	7,597	7,645	7,809		—	673	11,603
2011				6,436	5,854	4,749	4,603	4,760	5,409	6,254		136	856	7,147
2012					5,279	4,952	4,801	4,700	4,658	4,346		127	452	9,334
2013						7,095	5,069	5,221	5,502	5,704		129	523	10,660
2014							7,475	7,709	6,384	6,620		178	578	11,145
2015								8,082	7,008	6,020		260	660	8,727
2016									10,727	5,809		658	617	8,348
2017										8,289		4,038	391	10,872
									Total	$	82,511

	Commercial General Liability Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
2008	2,324	6,491	8,856	10,980	12,768	14,662	15,389	16,122	17,716	19,693
2009		2,253	4,236	6,466	7,384	8,046	8,593	10,130	10,454	11,308
2010			1,187	2,279	3,855	5,553	6,363	7,238	7,382	7,631
2011				764	2,763	3,366	3,673	4,246	4,866	5,831
2012					871	1,714	2,632	3,342	3,686	3,841
2013						882	2,233	3,366	3,867	4,606
2014							717	2,593	3,855	4,375
2015								798	2,296	3,249
2016									1,515	3,657
2017										1,592
									Total	$	65,783
All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance										383
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance										$	17,111

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Commercial General Liability policies, as of December 31, 2017:

	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Commercial General Liability	13.9	%	20.3	%	14.3	%	9.6	%	7.8	%	7.3	%	6.5	%	2.9	%	6.9	%	8.8	%

												IBNR & Expected	Cumulative
	Automobile Incurred Losses and ALAE, Net of Reinsurance											Development on	Number of
	For the Years Ended December 31,											Reported Claims	Reported Claims	Severity
	(Unaudited)
Accident Year	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017		2017	2017	2017
2008	752	615	562	561	572	554	554	554	554	554		—	170	3,259
2009		272	267	259	264	258	243	243	243	243		—	63	3,857
2010			2,823	2,963	3,111	3,088	3,044	3,035	3,059	3,041		—	1,139	2,670
2011				3,580	3,350	2,954	2,912	2,762	2,848	2,796		—	918	3,046
2012					1,735	1,741	1,717	1,424	1,455	1,491		—	918	1,624
2013						1,517	1,863	1,826	1,829	2,161		61	3,533	594
2014							2,038	3,213	3,551	4,315		—	6,109	706
2015								3,045	2,882	2,781		49	6,883	397
2016									13,414	20,205		1,258	40,384	469
2017										20,411		8,912	23,557	488
									Total	$	57,998

	Automobile Paid Losses and ALAE, Net of Reinsurance
	For the Years Ended December 31,
	(Unaudited)
Accident Year	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017
2008	442	513	519	541	554	554	554	554	554	554
2009		61	218	220	225	241	243	243	243	243
2010			1,713	2,482	2,715	2,863	2,942	2,978	2,984	3,035
2011				1,417	2,381	2,562	2,644	2,726	2,755	2,755
2012					867	1,293	1,333	1,384	1,393	1,430
2013						907	1,609	1,906	2,069	2,109
2014							1,455	3,120	3,678	4,122
2015								1,393	2,293	2,670
2016									8,084	17,258
2017										12,821
									Total	$	46,997
All outstanding liabilities for unpaid claims and ALAE prior to 2008, net of reinsurance										29
Total outstanding liabilities for unpaid claims and ALAE, net of reinsurance										$	11,030

The following table provides supplementary information about the average annual percentage payout of incurred losses and ALAE, net of reinsurance, for Automobile policies, as of December 31, 2017:

	Average Annual Payout of Losses and ALAE, Net of Reinsurance
	(Unaudited)
	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6		Year 7		Year 8		Year 9		Year 10
Automobile	45.4	%	35.6	%	8.8	%	5.6	%	2.1	%	1.2	%	0.1	%	1.2	%	—	%	—	%

The reconciliation of the net incurred and paid development tables to the liability for unpaid losses and LAE in the consolidated balance sheets is as follows:

	As of December 31,
	2017		2016
	(In thousands)
Liabilities for unpaid losses and LAE:
Homeowners	$	99,650	$	87,955
Commercial general liability	17,111		21,790
Automobile	11,030		7,792
Flood	—		—
Total liabilities for unpaid losses and LAE, net of reinsurance	127,791		117,537
Reinsurance recoverables:
Homeowners	81,852		20,968
Commercial general liability	—		35
Automobile	15,360		19,201
Flood	1,133		208
Total reinsurance recoverables	98,345		40,412
Unallocated loss adjustment expenses	4,379		161
Gross liability for unpaid losses and LAE	$	230,515	$	158,110

Management establishes a liability on an aggregate basis to provide for the estimated IBNR.   The estimates of the liability for loss and LAE reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, we review historical data and consider various factors, including known and anticipated legal developments, inflation and economic conditions. As experience develops and other data become available, these estimates are revised, as required, resulting in increases or decreases to the existing liability for loss and LAE reserves. Adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates.

Various actuarial methods are utilized to determine the reserves that are booked to our financial statements. Weightings of tests and methods at a detailed level may change from evaluation to evaluation based on a number of observations, measures and time elements. On an overall basis, changes to methods and/or assumptions underlying reserve estimations and selections as of December 31, 2017 and 2016, were not considered material.

IBNR reserves are established for the quarter and year-end based on a quarterly reserve analysis by our actuarial staff. Various standard actuarial tests are applied to subsets of the business at a line of business and coverage basis. Included in the analyses are the following:    

• Reported Loss Development Method: A reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;

• Paid Development Method: A paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels;

• Expected Loss Ratio Method: Expected loss ratios are applied to premiums earned, based on historical company experience, or historical insurance industry results when company experience is deemed not to be sufficient; and

• Bornhuetter-Ferguson Method: The results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.