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Well over 30 years ago, as a novice in the industry, I was required by my employer at the time to successfully complete a business writing course. I well recall that the first directive taught to our class, was to convey negative news “upfront,” at the start of any letter.
Accordingly, I will now convey some negative news that is unprecedented in TNCRRG’s almost 20 years of operational existence. In 2007, your company experienced – on paper – a $16,485,878 operating loss.
No doubt you caught and are curious about my “on paper” reference. Before I explain my statement, I must ask that you bear with me and allow me to review some fundamental information regarding claim handling and the projection of claim experience for statutory accounting purposes.
A liability insurer’s claim experience can be described by three types of claims: closed; open with case reserves; and incurred but not reported (IBNR). Closed claims are those which have been investigated, mediated, negotiated, settled or adjudicated to finality, and upon which final payment was made during or prior to the insurer’s operational year of analysis. Open with case reserves claims are those which remain in process and have yet to be fully investigated, mediated, negotiated for settlement or are awaiting adjudication, as the operational year comes to a close. They have a reserve that has been established by the claim adjuster and which should represent her/his best estimate of the ultimate cost of the claim when it is eventually closed. Incurred but not reported claims represent the actuary’s best estimate of claim liabilities related to events that have already occurred, but which have not yet generated a reported claim. Note that IBNR additionally has a constituent element or category designated IBNER (incurred but not enough reserved). [Those older practitioners like me will remember this as RBNER –reported but not enough reserved.] IBNER gets absorbed or offset as the claim moves to its closure and the adjuster revises the case reserve. IBNR gets absorbed or offset by actual late reported claim results that develop/are reported over an extended period of years which are referred to as the liability insurer’s “tail”. This tail may be as long as two or more decades, but in TNCRRG’s case, represents a period of at least several years (dependent upon the coverage line). While claims are developing/gradually being reported during the tail period, the liability insurer is earning investment returns on its case and IBNR reserves. Note also that IBNR estimates are just that – they may be low, in which case claim development will ultimately exceed the actuary’s projection, or they may be high, in which case the IBNR reserves established will ultimately be shown to be redundant (i.e., unnecessary and excessive for the payment of claims that were eventually reported).
Why this “short course”? The reason is that 82.44% of TNCRRG’s posted 2007 loss is actually comprised by a year-end adjustment to our IBNR reserves. [N.B. We do “book” IBNR reserves throughout the course of the year, employing a formula promulgated by our actuaries.] 2.99% of the loss is actually produced by the dividends TNCRRG paid out to shareholders in 2007 based upon its 2006 profit. The remaining 14.57% ($2.4M) represents operational loss not resulting from dividends and not resulting from IBNR (“paper”) adjustments. So, $13.6M of TNCRRG’s 2007 loss is not money spent, but rather, money retained by the company and moved from Surplus to IBNR Reserves in a process known as “reserve strengthening”.
The Board authorized this shifting of funds as a conservative measure to ensure the long range financial stability and viability of TNCRRG. They actually chose the most conservative IBNR reserve value from a range of statutorily acceptable values calculated by our actuaries. The range itself had a $7.34M “spread” from lowest to highest value. The Board selected the high value, because our actuaries had observed some recent TNCRRG loss experience developments that were highly variable and were very difficult to interpret. Our actuaries were uncertain as to whether these recent events were predictive or anomalous. The Board decided that prudence dictated providing for the highest value scenario. |
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It is critical that you note that these results have already been provided to our regulators in Vermont, and also to all the other state regulators via our statutory filings with the  National Association of Insurance Commissioners (NAIC). Even in light of our results, TNCRRG: 1) has not been placed into, or had imposed upon it, any regulatory monitoring scheme or plan; 2) has not been required to revise its business plan; 3) has not been required to reduce its net retention to surplus ratio; 4) has not received any inquiries from regulators outside of Vermont; 5) has not received any type or nature of qualified opinion from its actuaries or auditors; 6) has not had its reinsurance program restricted in any way by our reinsurers; and 7) has not had its RBC (risk based capital) regulatory requirements impaired.
Even with substantially increased reserves, the company remains very well-capitalized, with significant surplus, further protected by its strong relationships with very secure and highly qualified reinsurers. Furthermore, the Board also approved the immediate implementation of a buffer layer rate increase and additionally authorized management to revise the experience modification program, to shift relatively more of the cost of risk to those policyholders that have been contributing disproportionately to TNCRRG’s losses. Note that we constantly monitor our results and will take whatever action is necessary to ensure a strong TNCRRG, and a return to long-term profitability for the company.
Meanwhile, TNCRRG results for 2007 reflect many highly positive accomplishments.
On the underwriting front, TNCRRG’s claims and underwriting operations were audited by home office teams from three of its reinsurers (Munich Reinsurance America, Hannover Re and Odyssey Re) and TNCRRG passed each time with “high marks” and no deficiencies noted. Additionally, we successfully placed six of the eight quote opportunities we were provided for our new $5M xs $10M coverage layer – an enviable “hit ratio.” [N.B. TNCRRG retains 20% of this historically loss free layer, for our own account.] We are now providing total limits of $14.75M xs $250K with this new optional excess layer of $14M xs $1M. Finally, we were able, with the assistance of our broker, to arrange a new excess layer coverage program with Endurance American Specialty Insurance Co., an A 15 Best rated carrier. This program was specifically pursued and effectuated in direct response to concerns expressed by many of our shareholders – and quite a few of our broker partners – regarding the difficulty of placing coverage excess of TNCRRG, because TNCRRG is not Best rated. This problem has been eliminated. The Endurance program provides $15M of limits (and on some risks up to $35M in limits), of essentially following form coverage that drops down over TNCRRG aggregated coverages, is very competitively priced, and will attach directly excess of TNCRRG.
VIRTUS® results in 2007 were again outstanding and can be reviewed in detail on page six (6) of
this report. It is noteworthy that in January 2007 we received the Award of Distinction for our “Keeping
the Promise Alive” Protecting God’s Children® refresher program video, at the Communicator Awards.
The “Communicator” is a prestigious international competition that honors excellence in video, film and multi-media production. VIRTUS programs have so far won six such awards of excellence from four different such organizations, in five different competitions. National Catholic remains far and away the undisputed leader in the provision of safe environment programs for the Church. We provide a greater variety of safe environment services, to more Catholic entities, in more places nationally, than any competitive program – by a very wide margin.
In closing, I want to thank all of our shareholders and other friends for your support, confidence and encouragement. You will not regret any of these. Rest assured that we will always do our very best to serve you and our Church.
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