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LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES
9 Months Ended
Sep. 30, 2018
Liability for Future Policy Benefits and Unpaid Claims and Claims Adjustment Expense [Abstract]  
LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES
LIABILITY FOR LOSSES AND SETTLEMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending reserves for losses and settlement expenses of the Company.  Amounts presented are on a net basis, with a reconciliation of beginning and ending reserves to the gross amounts presented in the consolidated financial statements.
 
 
Nine months ended September 30,
($ in thousands)
 
2018
 
2017
Gross reserves at beginning of year
 
$
732,612

 
$
690,532

Re-valuation due to foreign currency exchange rates
 
525

 
(1,913
)
Less ceded reserves at beginning of year
 
30,923

 
20,664

Net reserves at beginning of year
 
701,164

 
671,781

 
 
 
 
 
Incurred losses and settlement expenses related to:
 
 

 
 

Current year
 
352,992

 
340,706

Prior years
 
(11,996
)
 
(17,617
)
Total incurred losses and settlement expenses
 
340,996

 
323,089

 
 
 
 
 
Paid losses and settlement expenses related to:
 
 

 
 

Current year
 
119,399

 
120,053

Prior years
 
193,673

 
173,986

Total paid losses and settlement expenses
 
313,072

 
294,039

 
 
 
 
 
Net reserves at end of period
 
729,088

 
700,831

Plus ceded reserves at end of period
 
32,661

 
25,348

Re-valuation due to foreign currency exchange rates
 
(168
)
 
282

Gross reserves at end of period
 
$
761,581

 
$
726,461



There is an inherent amount of uncertainty involved in the establishment of insurance liabilities.  This uncertainty is greatest in the current and more recent accident years because a smaller percentage of the expected ultimate claims have been reported, adjusted and settled compared to more mature accident years.  As the carried reserves for these accident years run off, the overall expectation is that, more often than not, favorable development will occur.  However, there is also the possibility that the ultimate settlement of liabilities associated with these accident years will show adverse development, and such adverse development could be substantial.
Changes in reserve estimates are reflected in net income in the year such changes are recorded.  Following is an analysis of the reserve development the Company experienced during the nine months ended September 30, 2018 and 2017.  Care should be exercised when attempting to analyze the financial impact of the reported development amounts because, as noted above, the overall expectation is that, more often than not, favorable development will occur as the prior accident years’ reserves run off.

2018 Development
For the property and casualty insurance segment, the September 30, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior decreased $12.5 million from the estimate at December 31, 2017.  This decrease represents 2.5 percent of the December 31, 2017 gross carried reserves and is primarily attributed to decreases in the ultimate loss and settlement expense ratios for several accident years in the other liability, commercial auto liability, surety bonds and personal auto liability lines of business. Favorable development in the other liability line of business was driven by a reduction in the expected ultimate loss and settlement expense ratios for accident years 2013 and 2015, although the ultimate settlement expense ratios for several prior years were reduced slightly as well. The ultimate loss and settlement expense ratios in the commercial auto liability line of business for accident years 2014 through 2017 were decreased as ultimate claim severities are projected to be better than initially expected. The workers' compensation, commercial property, auto physical damage and homeowners lines of business all experienced adverse development. The adverse development in the workers' compensation line of business is the result of an increase in the accident year 2017 ultimate loss and settlement expense ratio due to an initial underestimate of both ultimate frequency and severity, largely attributed to winter related slip and fall claims.
For the reinsurance segment, the September 30, 2018 estimate of loss and settlement expense reserves for accident years 2017 and prior increased $493,000 from the estimate at December 31, 2017.  This increase represents 0.2 percent of the December 31, 2017 gross carried reserves and is primarily attributed to reserve strengthening mainly in the casualty and multiline excess and pro rata contracts for accident years 2007, 2012, 2014, 2015 and 2017. This adverse development was partially offset by favorable development from Industry Loss Warranty recoveries on 2017 catastrophes.

2017 Development
For the property and casualty insurance segment, the September 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior decreased $15.6 million from the estimate at December 31, 2016.  This decrease represented 3.2 percent of the December 31, 2016 gross carried reserves and was primarily attributed to reductions in prior year ultimate loss ratios for every line of business except commercial auto liability. The other liability line of business was the largest contributor to favorable development. The ultimate loss ratios for this line were decreased slightly for most accident years from 2003 through 2016 due to declines in expected ultimate claim frequency and/or severity. Due to increases in projected ultimate claim frequency and severity, the ultimate loss ratios in the commercial auto line of business were increased for accident years 2013 through 2016, producing adverse reserve development for that line of business. Included in the development amount is adverse development experienced in the other liability line of business stemming from the settlement of claims for past and future legal fess and losses on a multi-year asbestos exposure associated with a former insured, and a slight strengthening of remaining reserves.
For the reinsurance segment, the September 30, 2017 estimate of loss and settlement expense reserves for accident years 2016 and prior increased $2.1 million from the estimate at December 31, 2016.  This increase represented 1.0 percent of the December 31, 2016 gross carried reserves and was primarily attributed to prior year reserve releases in the per risk excess, property/casualty global excess and property/casualty global pro rata contract types.