President’s Message

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 Michael J. BemiOperations, 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).


When perceived as a “financial scorecard,” at year end 2011, very positive elements include: TNCRRG’s cash position and liquidity were excellent, with no uncollectible receivables, all expenses fully accrued (and the vast majority already paid) and absolutely no debt whatsoever; TNCRRG’s reserve strength (both case and IBNR/IBNER) is excellent; TNCRRG posted realized and unrealized investment portfolio gains that were both substantial; TNCRRG’s expense controls were functioning very well; TNCRRG’s investment portfolio had been rebalanced in a fashion that significantly reduces operational volatility; and the accident year loss ratios for the last three years have each declined dramatically.
Rest assured that we will continue to 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. Through operation of the TNCRRG Remediation Plan, we have already made – and will continue to make as necessary – revisions to TNCRRG per claim/loss retentions; rates; exposure bases; underwriting protocols; investment portfolio allocations; reinsurer relationships; and risk control measures. The Board and management are confident that the TNCRRG Remediation Plan will ensure consistently profitable and stable operational results within the next few years.

Meanwhile, TNCRRG operational results for 2011 also reflect many highly positive accomplishments. These include:
1) Four new excess placements 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..
2) Provision of two TNCRRG Legal Defense Practice Workshops – TNCRRG’s highly lauded and exclusive service for the Church – one in Chicago, IL and one in San Jose, CA.
3) Addition of one new TNCRRG excess policy placement.
4) Opening of our VIRTUS® headquarters office in Tulsa, OK. This undertaking has already had the effect of substantially increasing operational efficiency and improving operational results, as compared to the previous outsourced arrangement for management of the VIRTUS Programs.
5) VIRTUS results in 2011 were again outstanding and can be reviewed in detail on page four (4) of this report. 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 highly awarded safe environment services, to more Catholic entities, in more places (nationally and internationally), than any competitive program – by a very, very wide margin.
In closing, I want to thank all of our shareholders and other friends for your support, confidence and encouragement – particularly during difficult times. You will not regret any of these. Rest assured that we will always do our very best to serve you and our Church.


Michael J. Bemi
President and CEO