Provision for Unpaid Losses and Loss Adjustment Expenses

12 Months Ended

Dec. 31, 2022

Insurance [Abstract]

Provision for Unpaid Losses and Loss Adjustment Expenses

11 — Provision for Unpaid Losses and Loss Adjustment Expenses

The following table presents the provision for unpaid losses and loss adjustment expenses at December 31, 2022 and 2021:

	Year Ended December 31,
	2022		2021
	in thousands
Outstanding losses reported	$	65,981	$	38,207
IBNR	44,917		36,662
Net reserves for unpaid losses and loss adjustment expenses	$	110,898	$	74,869
Reinsurance recoverables	843		—
Gross reserves for unpaid losses and loss adjustment expenses	$	111,741	$	74,869

The following table presents a reconciliation of beginning and ending provision for unpaid losses and loss adjustment expenses, net of amounts recoverable from reinsurers:

	Year Ended December 31,
	2022		2021
	in thousands
Gross unpaid losses and loss adjustment expenses, beginning of year	$	74,869	$	54,988
Less: Reinsurance recoverable	—		—
Net unpaid losses and loss adjustment expenses, beginning of the year	$	74,869	$	54,988
Incurred losses and loss adjustment expenses:
Current accident year	$	186,478	$	132,481
Prior accident year (1)	(4,076)		(10,401)
Total incurred losses and loss adjustment expenses	$	182,402	$	122,080
Payments:
Current accident year	$	109,555	$	76,559
Prior accident year	36,803		25,656
Total payments	$	146,358	$	102,215
Effect of foreign currency rate changes	(15)		16
Net reserves for losses and loss adjustment expenses, end of year	$	110,898	$	74,869
Reinsurance recoverables	843		—
Gross reserves for losses and loss adjustment expenses, end of year	$	111,741	$	74,869

(1) In both years presented, prior accident year development reflects lower than originally estimated incurred claims related to frequency and severity in accident years 2017 to 2021.

In updating Hagerty Re's loss reserve estimates, inputs are considered and evaluated from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, and internal review processes, including the views of the Company’s actuary. These inputs are used to improve evaluation techniques and to analyze and assess the change in estimated ultimate losses for each accident year by line of business. These analyses produce a range of indications from various methods, from which an actuarial point estimate is selected.

Hurricane Ian was a significant catastrophic event that occurred during the third quarter of 2022 generating losses to Hagerty Re of $15.3 million. Our catastrophe reinsurance program provided recovery of $5.3 million in losses in excess of our $10.0 million retention. As of December 31, 2022, the Company had outstanding reinsurance recoverables of $1.4 million, all related to Hurricane Ian. The Company incurred a reinstatement premium of $0.7 million in connection with our catastrophe reinsurance treaty following the Hurricane Ian claim.

Additionally, the Company strengthened reserves for U.S. auto liability by $6.5 million for the 2022 accident year. Liability claims severity in this line has been increasing across the industry and the Company in 2022.

In determining management’s best estimate of the reserves for losses and loss adjustment expenses as of December 31, 2022 and 2021, consideration was given both to the actuarial point estimate and a number of other internal and external factors, including:

•the uncertainty around inflationary costs, both economic and social inflation;

•estimates of expected losses through the use of historical loss data;

•the changing mix of business due to large growth in modern collectible cars which carry a different risk profile than the risks associated with classic cars;

•legislative and judicial changes in the jurisdictions in which the company writes insurance, and

•management's industry experience.

The following factors are relevant to the additional information included in the tables following:

•Table organization: The tables are organized by accident year and include policies written on an occurrence basis.

•Groupings: Reserves for losses and loss adjustment expenses are grouped by line of business. The Company believes that losses included in each line of business have homogenous risk characteristics with similar development patterns and would generally be subject to similar trends.

•Claim counts: The Company considers a reported claim to be one claim for each claimant for each loss occurrence.

•Limitations: There are limitations that should be considered on the reported claim count data in the tables below, including: claim counts are presented only on a reported (not an ultimate) basis.

The following table presents a summary of total gross reserves for losses and loss adjustment expenses by line of business for the periods specified below:

	December 31,
	2022		2021
	in thousands
Auto	$	111,575	$	74,573
Marine	166		296
Total gross reserves for losses and loss adjustment expenses	$	111,741	$	74,869

The following tables present incurred losses and loss adjustment expenses, by accident year, undiscounted and net of reinsurance recoveries.

a) Auto

(dollars in thousands)													Reserves for Losses and Loss Adjustment Expenses Incurred But Not Reported		Cumulative Number of Reported Claims
	Reporting Years Ended December 31,
Accident Year	2017*		2018*		2019*		2020*		2021*		2022		As of December 31, 2022
2017	$	18,594	$	18,594	$	18,594	$	18,594	$	18,409	$	18,284	$	44	11,031
2018			40,422		40,287		40,287		37,516		37,491		3		20,641
2019					63,642		63,642		59,660		59,660		631		23,780
2020							90,110		86,608		85,111		2,833		27,092
2021									131,643		129,259		9,215		35,116
2022											186,073		32,056		36,604
Total											$	515,878	$	44,782	154,264
Cumulative paid losses and loss adjustment expenses from the table below											(405,131)		—
Reserves for losses and loss adjustment expenses before 2017, net of reinsurance											—		—
Effect of foreign currency rate changes											(15)		(15)
Reserves for losses and loss adjustment expenses, undiscounted and net of reinsurance											$	110,732	$	44,767

Cumulative paid losses and loss adjustment expenses by accident year (in thousands):

	As of December 31,
Accident Year	2017*		2018*		2019*		2020*		2021*		2022
2017	$	11,410	$	16,655	$	17,442	$	17,530	$	17,897	$	18,122
2018			23,915		34,992		35,899		36,414		36,807
2019					37,910		51,491		55,617		57,393
2020							53,167		73,402		78,079
2021									75,933		105,475
2022											109,255
Total											$	405,131

*Unaudited required supplemental information.

b) Marine:

(dollars in thousands)													Reserves for Losses and Loss Adjustment Expenses Incurred But Not Reported		Cumulative Number of Reported Claims
	Reporting Years Ended December 31,
Accident Year	2017*		2018*		2019*		2020*		2021*		2022		As of December 31, 2022
2017	$	198	$	198	$	198	$	198	$	183	$	183	$	—	124
2018			437		437		437		489		514		—		189
2019					893		893		835		835		—		192
2020							915		975		1,002		16		205
2021									854		757		44		210
2022											405		90		114
Total											$	3,696	$	150	1,034
Cumulative paid losses and loss adjustment expenses from the table below											(3,530)		—
Reserves for losses and loss adjustment expenses before the 2017 accident year											—		—
Reserves for losses and loss adjustment expenses, undiscounted and net of reinsurance											$	166	$	150

Cumulative paid losses and loss adjustment expenses by accident year (in thousands):

Accident Year	2017*		2018*		2019*		2020*	2021*		2022
2017	$	138	$	183	$	183	182	$	182	$	183
2018			332		426		425	431		514
2019					514		828	835		835
2020							568	967		985
2021								625		713
2022										300
Total										$	3,530

*Unaudited required supplemental information.

The following table presents supplementary information about average historical claims duration as of December 31, 2022 based on the cumulative incurred and paid losses and allocated loss adjustment expenses presented above.

	Average Annual Percentage of Payout of Incurred Claims by Age (in Years), Net of Reinsurance
unaudited	Year 1		Year 2		Year 3		Year 4		Year 5		Year 6
Auto	62.4	%	21.0	%	8.8	%	3.6	%	1.6	%	1.4	%
Marine	77.9	%	21.4	%	0.9	%	(0.3)	%	—	%	—	%

13 — Statutory Capital and Surplus

Dividend Restrictions — Under Bermuda law, Hagerty Re is prohibited from declaring or making payment of a dividend if it fails to meet its minimum solvency margin or minimum liquidity ratio. Prior approval from the Bermuda Monetary Authority ("BMA") is also required if Hagerty Re's proposed dividend payments would exceed 25% of its prior year-end total statutory capital and surplus. The amount of dividends which could be paid in 2023 without prior approval is $32.9 million.

Capital Restrictions — In Bermuda, Hagerty Re is subject to the Bermuda Solvency Capital Requirement ("BSCR") administered by the BMA. No regulatory action is taken if an insurer’s capital and surplus is equal to or in excess of its enhanced capital requirement determined by the BSCR model. In addition, the BMA has established a target capital level for each insurer, which is 120% of the enhanced capital requirement. Hagerty Re maintained sufficient statutory capital and surplus to comply with regulatory requirements as of December 31, 2022.

Statutory Financial Information — Hagerty Re prepares its statutory financial statements in conformity with the accounting principles set forth in Bermuda in The Insurance Act 1978, amendments thereto and related regulations. As of December 31, 2022 and 2021, the general business statutory capital and surplus of the Company was $131.7 million and $107.3 million, respectively, and the general business statutory net income of Hagerty Re was $24.4 million and $25.2 million for the years ended December 31, 2022 and 2021, respectively.