Risks Relating to the Property and
Casualty Insurance Industry
Industry trends, such as increased litigation against the insurance industry and individual
insurers, the willingness of courts to expand covered causes of loss, rising jury awards, escalating medical costs, increasing loss frequency due to distracted driving and other factors, increasing loss severity and adverse weather conditions may
contribute to increased costs and result in ultimate loss settlements that exceed the reserves of our insurance subsidiaries.
Loss severity in the property and casualty insurance industry has increased in recent years, principally driven by larger court judgments,
higher jury awards and increasing medical and automobile repair costs. The industry has also experienced increases in the frequency of automobile losses due to distracted driving, increases in miles driven due to lower fuel costs, lower unemployment
rates and other factors. In addition, many classes of complainants have brought legal actions and proceedings that tend to increase the size of judgments. The propensity of policyholders and third-party claimants to litigate and the willingness of
courts to expand causes of loss and the size of awards, to eliminate exclusions and to increase coverage limits may result in ultimate settlements of current and future losses that exceed the loss reserves of our insurance subsidiaries.
Our insurance subsidiaries are subject to catastrophe losses and losses from other severe weather events, which are unpredictable and
may adversely affect our results of operations, liquidity and financial condition.
Our property and casualty insurance operations
expose us to claims arising from catastrophic events affecting multiple policyholders. Such catastrophic events consist of various natural disasters, including, but not limited to, hurricanes, tropical storms, tornadoes, windstorms, hailstorms,
fires and wildfires, landslides, earthquakes, severe winter weather events and man-made disasters such as terrorist attacks, explosions and infrastructure failures. Historically, our insurance subsidiaries
have experienced weather-related losses from hurricanes and tropical storms in Mid-Atlantic and Southern states, tornadoes and hailstorms in Mid-Atlantic, Midwestern and
Southern states and severe winter weather events in Mid-Atlantic, Midwestern and New England states.
Losses from catastrophic events are a function of both the extent of our insurance subsidiaries exposures, the frequency and severity of
the events themselves and the level of reinsurance coverage our insurance subsidiaries purchase. Our ability to appropriately manage catastrophe risk depends partially on catastrophe models, which may be affected by inaccurate or
incomplete data, the uncertainty of the frequency and severity of future events and the uncertain impact of climate change. The underwriting results of our insurance subsidiaries are subject to weather and other conditions that may adversely
affect our financial condition, liquidity or results of operations. Because the occurrence and severity of catastrophes are inherently unpredictable and may vary significantly from year to year and region to region, our historical results of
operations may not be indicative of our future results of operations. Our insurance subsidiaries seek to reduce their exposure to catastrophe losses through their underwriting strategies and their purchase of catastrophe reinsurance. Nevertheless,
reinsurance may prove inadequate under certain circumstances.
The increased frequency and severity of weather-related catastrophes and
other losses, such as from wildfires, incurred by the industry in 2019 and in prior years may be indicative of changing weather patterns as a result of climate change. While the emerging science regarding climate change and its connection to extreme
weather events continues to be subject to debate, climate change, to the extent it produces rising temperatures and changes in weather patterns, could impact the frequency and severity of weather events and wildfires and thus impact the
affordability and availability of catastrophe reinsurance coverage for our insurance subsidiaries. In particular, increased weather-related catastrophes in the states in which our insurance subsidiaries operate would lead to higher overall losses if
they were unable to offset such losses through pricing actions.
Our insurance subsidiaries must establish premium rates and loss
and loss expense reserves from forecasts of the ultimate costs they expect will arise from risks underwritten during the policy period, and the profitability of our insurance subsidiaries could be adversely affected if their premium rates or
reserves are insufficient to satisfy their ultimate costs.
One of the distinguishing features of the property and casualty
insurance industry is that it prices its products before it knows its costs, since insurers generally establish their premium rates before they know the amount of losses they will incur. Accordingly, our insurance subsidiaries establish premium
rates from forecasts of the ultimate costs they expect to arise from risks they have underwritten during the policy period. These premium rates may not be sufficient to cover the ultimate losses our insurance subsidiaries incur. Further, our
insurance subsidiaries must establish reserves for losses and loss expenses as balance sheet liabilities based upon estimates involving actuarial and statistical projections at a given time of what our