To Our Shareholders:
In January, I presented my President’s Report to the Board of Directors at its Board meeting, immediately following the 21st Annual TNCRRG Winter Meeting. At that time, I characterized the 2011 performance of your company as a “rollercoaster ride.” Later, in early March, within my President’s Financial and Operational Commentary—TNCRRG, Inc. 2011 Results of Operations, I described the 2011 year as a “two steps forward and one step back” result. In each case I employed these expressions, because while the 2011 performance of TNCRRG reflects many very positive achievements, they are set against a backdrop of deteriorated financial circumstances. More specifically, after an excellent 2009 and a very good 2010, TNCRRG experienced a financial step backward in 2011 that eliminated all of 2010’s gains – plus a bit more. The most serious result was that company surplus declined from $18,739,053 at year end 2010, to $15,853,733 at year end 2011(or 15.4%).
“Drilling down” into the causative factors of this loss of surplus is revealing. While operating expenses did increase moderately year over year, they did so precisely as the result of planned expenditures (systems improvements and the opening of our new Tulsa office) that definitely enhance the operational capabilities, effectiveness and efficiency of TNCRRG. Similarly, while net investment income was reduced year over year, the reduction was quite insignificant when compared to the magnitude of TNCRRG’s operating loss ($3,133,931).
So what is the real culprit behind the disappointing results? Pure and simple, the essential and primary cause of TNCRRG’s operating loss and surplus decline in 2011 is dramatically increased loss experience. Year over year, total incurred losses increased 32.8%, from $9,056,128 to $12,028,239.
If there is any “silver lining” to this “dark cloud” of loss experience increase, it is that the vast majority of the increase was attributable to reserve adjustments on prior accident year excess layer claims, which claims were catastrophic in nature.
Why, you may wonder, is this positive news? There are several reasons why this result does represent more than a bit of a “silver lining.” These include: 1) TNCRRG’s excess layer really does not reflect any significant IBNR (incurred but not reported) development problems. In other words, we learn about these excess layer claims relatively quickly and after the close of an accident year, we don’t generally experience many new excess claims being reported that relate to prior years. Consequently, there is a solid likelihood that the three old accident years that damaged TNCRRG results so very badly in 2011, will do no more damage going forward. [N.B. It should be noted that 2011’s backslide was the result not of IBNR, but rather IBNER (incurred but not enough reserved).] 2) Meanwhile, more recent accident years reflect significantly improving loss ratios. 3) TNCRRG historical results do not demonstrate frequent or regular catastrophic experience, unlike the results of these three horrific accident years. Finally, 4) the largest reserve adjustment that deteriorated TNCRRG 2011 results, related to a claim that was produced by an exposure area – breach of contract – that we have excluded since 2009 (within a couple months of the claim itself). So no similar reserve adjustment will occur in the future.
Further, you should know that TNCRRG’s 2011 year end surplus of $15,853,733 substantially exceeded the projected 2011 year end surplus of $14,697,096 contained within our revised business plan approved by our Vermont regulators (which plan was developed employing factors generated by the 2008 Dynamic Financial Analysis produced by our actuaries at Milliman). Additionally, surplus has been replenished 64.2% since year end 2008 (when surplus ended at $9,656,332).