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 specialty 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.

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, 2018, 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, 2014 through 2017 is presented as supplementary information and is unaudited.

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Preferred Personal Automobile Insurance—Liability



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS											As of December 31, 2018
	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 Reported Claims
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	202.1	$	198.3	$	200.2	$	202.8	$	203.5	$	0.4	46,268
2015			168.3		171.8		176.5		177.6		1.0		39,037
2016					162.1		174.5		179.1		4.8		36,778
2017							164.4		157.8		9.1		33,525
2018									157.6		43.4		29,665
Total									875.6


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	85.8	$	143.3	$	168.8	$	188.3	$	197.7
2015			73.1		122.4		147.5		163.1
2016					61.2		114.6		145.6
2017							59.2		108.9
2018									55.5
Total									670.8
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2014, Net of Reinsurance									13.2
Loss and Allocated LAE Reserves, Net of Reinsurance									$	218.0

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, 2018
	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 Reported Claims
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	122.0	$	121.6	$	121.4	$	121.4	$	121.4		$	—		85,373
2015			101.2		100.7		100.6		100.6			—			68,486
2016					106.6		106.6		106.3			(0.1		)	69,633
2017							109.2		105.8			(0.5		)	66,083
2018									113.9			(1.7		)	59,795
Total									548.0


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	121.0	$	121.8	$	121.5	$	121.5	$	121.5
2015			100.1		101.0		100.7		100.6
2016					105.2		106.9		106.3
2017							104.4		106.1
2018									107.2
Total									541.7
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2014, Net of Reinsurance									(0.1		)
Loss and Allocated LAE Reserves, Net of Reinsurance									$	6.2

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Specialty Personal Automobile Insurance—Liability¹



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS											As of December 31, 2018
	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 Reported Claims
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	827.7	$	838.1	$	798.8	$	851.1	$	830.5	$	11.8	364,671
2015			965.1		855.1		965.1		972.3		18.5		400,513
2016					969.4		1,021.6		1,027.2		36.7		416,367
2017							997.7		999.9		69.5		394,692
2018									1,128.1		317.3		415,580
Total									4,958.0


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
	For the Years Ended December 31,
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	389.1	$	682.8	$	768.8	$	800.2	$	812.4
2015			450.5		794.9		898.9		934.7
2016					459.7		831.1		943.4
2017							441.9		808.6
2018									467.5
Total									3,966.6
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2014, Net of Reinsurance									15.3
Loss and Allocated LAE Reserves, Net of Reinsurance									$	1,006.7

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

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Specialty Personal Automobile Insurance—Physical Damage¹



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS												As of December 31, 2018
	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 Reported Claims
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	347.2	$	332.2	$	331.8	$	332.1	$	332.1		$	(0.4	)	209,277
2015			403.8		407.1		406.7		406.5			—			230,872
2016					462.2		456.9		456.9			(0.1		)	246,102
2017							475.6		465.6			(0.5		)	251,672
2018									504.9			40.2			261,832
Total									2,166.0


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
	For the Years Ended December 31,
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	315.0	$	334.5	$	332.9	$	333.1	$	333.1
2015			382.4		408.8		406.7		406.4
2016					436.4		460.2		458.0
2017							443.0		468.7
2018									463.6
Total									2,129.8
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2014, Net of Reinsurance									(0.7		)
Loss and Allocated LAE Reserves, Net of Reinsurance									$	35.5

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

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Commercial Automobile Insurance—Liability¹



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS											As of December 31, 2018
	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 Reported Claims
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	87.8	$	84.1	$	87.9	$	89.6	$	87.2	$	0.4	78,900
2015			102.5		106.9		112.9		112.3		2.5		94,291
2016					120.5		112.4		115.6		6.7		112,468
2017							120.5		120.0		16.6		126,680
2018									123.2		52.6		151,959
Total									558.3


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
	For the Years Ended December 31,
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	27.9	$	54.5	$	69.1	$	76.7	$	84.6
2015			34.8		70.2		88.6		100.3
2016					36.2		71.6		89.7
2017							36.3		72.3
2018									36.8
Total									383.7
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2014, Net of Reinsurance									1.0
Loss and Allocated LAE Reserves, Net of Reinsurance									$	175.6

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

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Commercial Automobile Insurance—Physical Damage¹



DOLLARS IN MILLIONS, EXCEPT CUMULATIVE INCURRED CLAIMS											As of December 31, 2018
	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 Reported Claims
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	18.7	$	18.1	$	18.1	$	18.0	$	18.0	$	—	8,465
2015			21.5		21.6		21.7		21.7		—		9,642
2016					24.2		24.2		24.1		0.1		10,557
2017							24.2		23.5		0.2		9,776
2018									23.6		2.5		9,158
Total									110.9


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance and Indemnification
	For the Years Ended December 31,
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	17.1	$	18.1	$	18.1	$	18.1	$	18.0
2015			20.2		21.6		21.7		21.7
2016					22.4		24.2		24.1
2017							22.2		23.5
2018									21.7
Total									109.0
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2014, Net of Reinsurance									—
Loss and Allocated LAE Reserves, Net of Reinsurance									$	1.9

¹ Table retrospectively includes Infinity’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, 2018
	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 Reported Claims
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	211.1	$	208.5	$	205.0	$	204.8	$	204.6	$	0.1		21,959
2015			178.9		164.9		163.2		164.3		(0.4		)	17,296
2016					200.3		201.7		204.2		1.4			18,146
2017							261.2		259.5		7.4			18,610
2018									185.9		21.4			13,725
Total									1,018.5


	Cumulative Paid Losses and Allocated LAE, Net of Reinsurance
	For the Years Ended December 31,
Accident Year	2014 (Unaudited)		2015 (Unaudited)		2016 (Unaudited)		2017 (Unaudited)		2018
2014	$	149.2	$	194.4	$	200.1	$	202.8	$	203.2
2015			116.9		154.4		158.0		161.3
2016					141.2		190.1		195.8
2017							165.8		242.5
2018									127.4
Total									930.2
Outstanding Loss and Allocated LAE Reserves on Accident Years before 2014, Net of Reinsurance									5.8
Loss and Allocated LAE Reserves, Net of Reinsurance									$	94.1

The claim counts in the preceding tables are cumulative reported claim counts as of December 31, 2018 and are equal to the sum of cumulative open and cumulative closed claims, including claims closed without payment. Certain product lines, particularly the Company’s specialty personal automobile insurance, tend to have a higher percentage of claims closed without payment.

The Company's claims associated with automobile insurance 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, 2018.



DOLLARS IN MILLIONS	2018
Property and Casualty Insurance Reserves, Net of Reinsurance:
Preferred Personal Automobile Insurance—Liability	$	218.0
Preferred Personal Automobile Insurance—Physical Damage	6.2
Specialty Personal Automobile Insurance—Liability	1,006.7
Specialty Personal Automobile Insurance—Physical Damage	35.5
Commercial Automobile Insurance - Liability	175.6
Commercial Automobile Insurance - Physical Damage	1.9
Homeowners Insurance	94.1
Other	63.2
Total	1,601.2
Reinsurance Recoverables on Unpaid Losses and Allocated LAE:
Preferred Personal Automobile Insurance—Liability	26.9
Preferred Personal Automobile Insurance—Physical Damage	0.1
Specialty Personal Automobile Insurance—Liability	9.2
Specialty Personal Automobile Insurance—Physical Damage	—
Commercial Automobile Insurance - Liability	13.1
Commercial Automobile Insurance - Physical Damage	—
Homeowners Insurance	42.7
Other	9.9
Total	101.9
Unallocated LAE	171.8
Property and Casualty Insurance Reserves, Gross of Reinsurance and Indemnification	$	1,874.9

The following is supplementary information about average historical claims duration as of December 31, 2018.



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	38.0	%	68.1	%	82.4	%	92.2	%	97.1	%
Preferred Personal Automobile Insurance—Physical Damage	98.2	%	100.4	%	100.1	%	100.0	%	100.1	%
Specialty Personal Automobile Insurance—Liability	44.7	%	81.4	%	92.3	%	96.2	%	97.8	%
Specialty Personal Automobile Insurance—Physical Damage	94.3	%	100.7	%	100.2	%	100.1	%	100.3	%
Commercial Automobile Insurance - Liability	30.9	%	61.8	%	78.6	%	88.6	%	97.0	%
Commercial Automobile Insurance - Physical Damage	93.5	%	100.1	%	100.2	%	100.3	%	100.0	%
Homeowners Insurance	69.1	%	93.9	%	96.6	%	98.6	%	99.3	%

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

Property and Casualty Insurance Reserve activity for the years ended December 31, 2018, 2017 and 2016 was:



DOLLARS IN MILLIONS	2018			2017			2016
Beginning Property and Casualty Insurance Reserves:
Gross of Reinsurance and Indemnification at Beginning of Year	$	1,016.8		$	931.4		$	862.8
Less Reinsurance Recoverables and Indemnification at Beginning of Year	53.1			50.2			52.0
Property and Casualty Insurance Reserves, Net of Reinsurance at Beginning of Year	963.7			881.2			810.8
Property and Casualty Insurance Reserves Acquired, Net of Reinsurance	695.1			—			—
Incurred Losses and LAE related to:
Current Year:
Continuing Operations	2,093.4			1,454.1			1,358.6
Prior Years:
Continuing Operations	(5.2		)	20.4			(14.4		)
Discontinued Operations	(2.2		)	(1.5		)	(6.3		)
Total Incurred Losses and LAE related to Prior Years	(7.4		)	18.9			(20.7		)
Total Incurred Losses and LAE	2,086.0			1,473.0			1,337.9
Paid Losses and LAE related to:
Current Year:
Continuing Operations	1,300.8			868.1			831.0
Prior Years:
Continuing Operations	668.2			518.5			431.9
Discontinued Operations	2.8			3.9			4.6
Total Paid Losses and LAE related to Prior Years	671.0			522.4			436.5
Total Paid Losses and LAE	1,971.8			1,390.5			1,267.5
Property and Casualty Insurance Reserves, Net of Reinsurance at End of Year	1,773.0			963.7			881.2
Plus Reinsurance Recoverables at End of Year	101.9			53.1			50.2
Property and Casualty Insurance Reserves, Gross of Reinsurance at End of Year	$	1,874.9		$	1,016.8		$	931.4

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 2018, the Company decreased its property and casualty insurance reserves by $7.4 million to recognize favorable development of loss and LAE reserves from prior accident years. Personal lines insurance loss and LAE reserves developed favorably by $1.4 million, and commercial lines insurance loss and LAE reserves developed favorably by $6.1 million. Preferred Personal Automobile insurance loss and LAE reserves developed favorably by $5.8 million due primarily to the emergence of loss patterns that were better than expected for both physical damage and liability insurance for the 2017 accident year and, to a lesser extent, for liability insurance for the 2015 and prior accident years, partially offset by the emergence of loss patterns that was worse than expected for the 2016 accident year. Specialty Personal Automobile insurance loss and LAE reserves developed adversely by $5.5 million due primarily to the emergence of loss patterns that were worse than expected for both physical damage and liability insurance for the 2017 accident year, partially offset by the emergence of loss patterns that were better than expected for 2016 and prior accident years. Homeowners insurance loss and LAE reserves developed adversely by $3.2 million due primarily to the emergence of non-catastrophe loss patterns that were worse than expected for the 2016 accident year. Other personal lines loss and LAE reserves developed favorably by $4.3 million due primarily to the emergence of more favorable loss patterns than expected for the 2017 prior accident years. Commercial lines insurance loss and LAE reserves included favorable development of $3.9 million and $2.2 million from continuing operations and discontinued operations, respectively.

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

NOTE 6. PROPERTY AND CASUALTY INSURANCE RESERVES (Continued)

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 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.

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 $101.9 million and $53.1 million at December 31, 2018 and 2017, 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, 2018 and 2017, the agreements with the reinsurers generally provide for some form of collateralization upon the occurrence of certain events.