Mercury Insurance 2008 Annual Report Download - page 84

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(7) Reserves for Losses and Loss Adjustment Expenses
Activity in the reserves for losses and loss adjustment expenses is summarized as follows:
2008 2007 2006
Gross reserves, beginning of year 1,103,915$ 1,088,822$ 1,022,603$
Less reinsurance recoverable (4,457) (6,429) (16,969)
Net reserves, beginning of yea
r
1,099,458 1,082,393 1,005,634
Incurred losses and loss adjustment expenses related to:
Current year 1,971,767 2,017,120 2,000,357
Prior years 88,642 19,524 21,289
Total incurred losses and adjustment expenses 2,060,409 2,036,644 2,021,646
Loss and loss adjustment expense payments related to:
Current year 1,316,242 1,345,234 1,311,982
Prior years 715,846 674,345 632,905
Total payments 2,032,088 2,019,579 1,944,887
Net reserves, end of year 1,127,779 1,099,458 1,082,393
Reinsurance recoverable 5,729 4,457 6,429
Gross reserves, end of yea
r
1,133,508$ 1,103,915$ 1,088,822$
(Amounts in thousands)
Year ended December 31,
The increase in the provision for insured events of prior years in 2008 of approximately $89 million resulted primarily
from two sources. The estimates for California Bodily Injury Severities and California Defense and Cost Containment reserves
established at December 31, 2007 were too low and accounted for approximately $45 million of the adverse development. The
New Jersey reserves established at December 31, 2007 were too low and accounted for approximately $30 million of the adverse
development. In California, the Company experienced a lengthening of the pay-out period for claims that are settled after the first
year and a large increase in the average amounts paid on closed claims. The Company believes that the lengthening of the pay-out
periods may be attributable to a law passed in California several years ago that extended the statute for filing claims from one year
to two years. Initial indications, when the law was passed, were that this would have little impact on development patterns and
therefore it was not fully factored into the reserve estimates. In hindsight, claims payouts two to four years after the period-end
have increased thereby affecting the loss reserve estimates at December 31, 2007. The Company believes that it has factored this
trend into its reserve estimate at December 31, 2008. In New Jersey, due to a short operating history and rapid growth in that
state, the Company had limited internal historical claims information to estimate BI, PIP and related loss adjustment expense
reserves as of December 31, 2007. Consequently, the Company relied substantially on industry data to help set these
reserves. During 2008, the reserve indications using the Company’ s own historical data rather than industry data led to increases
in its estimates for both PIP losses and loss adjustment expenses. In particular, loss severities using Company data for the PIP
coverage developed into larger amounts than the industry data suggested. The Company is now using its own historical data,
rather than industry data to set New Jersey loss reserves. The Company believes that, over time, this will lead to less variation in
reserve estimates.
The increase in the provision for insured events of prior years in 2007 primarily relates to adverse development of
approximately $25 million in California mostly resulting from increases in estimates for loss severity and ultimate reported claims
on the bodily injury reserves, which was partially offset by positive development of approximately $5 million related to operations
outside of California.
The increase in the provision for insured events of prior years in 2006 relates largely to the unexpected development of
several large extra-contractual claims in the state of Florida and increases in reserve estimates for the bodily injury and personal
injury protection coverages in New Jersey.
In 2008 and 2007, the Company experienced pre-tax catastrophe losses of $26 million and $23 million, respectively. The
pre-tax losses in 2008 were $20 million related to Southern California wildfires and $6 million related to Hurricane Ike in
Texas. The full $23 million of catastrophe losses in 2007 related to Southern California wildfires.