1900 Winston Road, Suite 300•Knoxville, TN
37919
P.O. Box 30698•Knoxville, TN 37930
P 865.693.1000
March 25, 2009
VIA EDGAR
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-3628
Attention: Jim B. Rosenberg
Re: | Team Finance LLC |
Form 10-K for the Fiscal Year Ended December 31, 2007
Filed March 11, 2008
Form 10-Q for the Quarterly Period Ended June 30, 2008
Filed August 11, 2008
File Number: 333-132495
Dear Mr. Rosenberg:
Reference is made to the comments from Vanessa Robertson, Staff Accountant of the Securities and Exchange Commission (the “Commission”), made via a phone call on March 18, 2009 related to the Form 10-K for the fiscal year ended December 31, 2007 and the Form 10-Q for the quarterly period ended June 30, 2008, filed by Team Finance LLC (the “Company”) on March 10, 2008 and August 11, 2008, respectively. This letter is in response to those comments. To assist your review, we have retyped the text of those comments below:
Please refer to your response to Comment 1. Please revise your proposed disclosure to clarify that it is not possible to quantify the amount of the change in estimate by individual fiscal period or by individual occurrence year. Please explain in your disclosure why you are not able to provide this information and why you believe your reserve is properly recorded. Finally, please revise your disclosure to clarify what you mean by “enhanced risk management and claims management resources and initiatives” as well as “the improved legal environment”.
The Insurance Reserves section of the Management’s Discussion and Analysis will be revised to enhance the disclosure in regard to professional liability reserves as noted in Attachment I. The proposed changes are marked against the proposed revision to the Management’s Discussion and Analysis contained in Attachment II of the Company’s correspondence of March 6, 2009.
* * *
The Company’s management acknowledges the following:
• | the Company is responsible for the adequacy and accuracy of the disclosure in its filings; |
• | staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
• | the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Please do not hesitate to call David P. Jones at 865-293-5522 with any questions or further comments you may have regarding this filing or if you wish to discuss the above response.
Very truly yours, |
/s/ David P. Jones |
David P. Jones |
Chief Financial Officer |
Attachment I
Revision to Proposed Disclosure
Management Discussion and Analysis
Insurance Reserves. The nature of our business is such that it is subject to professional liability claims and lawsuits. Historically, to mitigate a portion of this risk, we have maintained insurance for individual professional liability claims with per incident and annual aggregate limits per physician for all incidents. Prior to March 12, 2003, we obtained such insurance coverage from commercial insurance providers. Subsequent to March 11, 2003, we have provided for a significant portion of our professional liability loss exposures through the use of a captive insurance company and through greater utilization of self-insurance reserves. Since March 12, 2003, the most significant cost element within our professional liability program consists of the actuarial estimates of losses by occurrence period. In addition to the estimated actuarial losses, other costs that are considered by the Company in the estimation of professional liability costs include program costs such as brokerage fees, claims management expenses, program premiums and taxes, and other administrative costs of operating the program including the costs to operate the captive insurance subsidiary. Net costs in any period reflect our estimate of net losses to be incurred in that period as well as any changes to our estimates of the reserves established for net losses of prior periods.
Our commercial insurance policy for professional liability losses for the period from March 12, 1999 through March 11, 2003 included insured limits applicable to such coverage in the period. Effective April 2006, we executed an agreement with the commercial insurance provider that issued the policy that ended March 11, 2003 to increase the existing $130.0 million aggregate limit of coverage. Under the terms of the agreement, we will make periodic premium payments to the commercial insurance company and the total aggregate limit of coverage under the policy will be increased by a portion of the premiums paid. We have committed to fund premiums such that the total aggregate limit of coverage under the program remains greater than the paid losses at any point in time. During fiscal year 2006, we funded a total of $11.0 million under this agreement. For the year ended December 31, 2007, we funded a total of $9.6 million and have agreed to fund an additional $1.5 million in the first quarter of 2008. We have the option to fund additional premium payments during 2008 and future periods which will be based upon the level of incurred losses relative to the aggregate limit of coverage at that time.
As of December 31, 2007, the current aggregate limit of coverage under this policy was $149.4 million and the estimated loss reserve for claim losses and expenses in excess of the current aggregate limit recorded by the Company was $19.7 million.
The accounts of the captive insurance company are fully consolidated with those of our other operations in the accompanying financial statements.
The estimation of medical professional liability losses is inherently complex. Medical professional liability claims are typically resolved over an extended period of
time, often as long as ten years or more. The combination of changing conditions and the extended time required for claim resolution results in a loss estimation process that requires actuarial skill and the application of judgment, and such estimates require periodic revision. A report of actuarial loss estimates is prepared at least semi-annually. Management’s estimate of our professional liability costs resulting from such actuarial studies is significantly influenced by assumptions, which are limited by the uncertainty of predicting future events, and assessments regarding expectations of several factors. These factors include, but are not limited to: historical paid and incurred loss development trends; hours of exposure as measured by hours of physician and related professional staff services; trends in the frequency and severity of claims, which can differ significantly by jurisdiction due to the legislative and judicial climate in such jurisdictions; coverage limits of third-party insurance; the effectiveness of our claims management process; and the outcome of litigation. As a result of the variety of factors that must be considered by management, there is a risk that actual incurred losses may develop differently from estimates.
The underlying information that serves as the foundational basis for making our actuarial estimates of professional liability losses is our internal database of incurred professional liability losses. The Company has captured extensive professional liability loss data going back, in some cases, over twenty years that is maintained and updated on an ongoing basis by our internal claims management personnel. Our database contains comprehensive incurred loss information for our existing operations as far back as fiscal 1997 (reflecting the initial timeframe in which we migrated to a consolidated professional liability program concurrent with the consummation of several significant acquisitions) and, in addition, we possess additional loss data that predates 1997 dates of occurrence for certain of our operations. Loss information reflects both paid and reserved losses incurred when we were covered by outside commercial insurance programs as well as paid and reserved losses incurred under our self insurance program. Because of the comprehensive nature of the loss data and our comfort with the completeness and reliability of the loss data, this is the information that is used in the development of our actuarial loss estimates. We believe this database is one of the largest repositories of physician professional liability loss information available in our industry and provides us and our actuarial consultants with sufficient data to estimate the ultimate losses under our self insurance program. In addition to the estimated losses, as part of the actuarial process, we obtain revised payment pattern assumptions that are based upon our historical loss and related claims payment experience. Such payment patterns reflect estimated cash outflows for aggregate incurred losses by period based upon the occurrence date of the loss as well as the report date of the loss. Although variances have been observed in the actuarial estimate of ultimate losses by occurrence period between actuarial studies, the estimated payment patterns have shown much more limited variability. These payment patterns are used by us to develop our estimate of the discounted reserve amounts. The relative consistency of the payment pattern estimates provides us with a foundation in which to develop a reasonable estimate of the discount value of the professional liability reserves based upon the most current estimate of ultimate losses to be paid andthereasonable likelihood of the related cash flows over the payment period. As of December 31, 2007, our estimated loss reserves are discounted at 4.0%, which is the current ten year U.S. Treasury rate which reflects the risk free interest rate over the expected period of claims payments.
In establishing our initial reserves for a given loss period, management considers the results of the actuarial loss estimates for such periods as wellasassumptions regarding loss retention levels and other program costs to be incurred. On a semi-annual basis, we will review our professional liability reserves considering not only the reserves and loss estimates associated with the current period but also the reserves established in prior periods based upon revised actuarial loss estimates. The actuarial estimation process employed utilizes a frequency severity simulation model to estimate the ultimate cost of claims for each loss period. The results of the simulation model are then validated by a comparison to the results from several different actuarial methods (paid loss development, incurred loss development, incurred Bornhuetter-Ferguson method, paid Bornhuetter-Ferguson method) for reasonableness. Each method contains assumptions regarding the underlying claims process. Actuarial loss estimates at various confidence levels capture the variability in the loss estimates for process risk but assume that the underlying model and assumptions are correct. Adjustments to professional liability loss reserves will be made as needed to reflect revised assumptions and emerging trends and data. Any adjustments to reserves are reflected in the current operations. Due to the size of our reserve for professional liability losses, even a small percentage adjustment to these estimates can have a material effect on the results of operations for the period in which the adjustment is made. Given the number of factors considered in establishing the reserves for professional liability losses, it is neither practical nor meaningful to isolate a particular assumption or parameter of the process and calculate the impact of changing that single item. The actuarial reports provide a variety of loss estimates based upon statistical confidence levels reflecting the inherent uncertainty of the medical professional liability claims environment in which we operate. Initial year loss estimates are recorded using the actuarial expected loss estimate, but aggregate professional liability loss reserves may be carried at amounts in excess of the expected loss estimates provided by the actuarial reports due to the relatively short time period in which the Company has provided for its losses on a self insured basis and the expectation that we believe additional adjustments to prior year estimates may occur as our reporting history and loss portfolio matures. In addition, the Company is subject to the risk of claims in excess of insured limits as well as unlimited aggregate risk of loss in certain loss periods. As the Company’s self insurance program continues to mature and additional stability is noted in the loss development trends in the initial years of the program, we expect to continue to review and evaluate the carried level of reserves and make adjustments as needed. During 2007, the Company recorded a reduction in professional liability reserves associated with prior year estimates in the amount of $32.1 million. Of the total reserve reduction, approximately $23.1 million was associated with loss estimates established in prior years for the self insurance program covering the loss occurrence periods from March 12, 2003 through December 31, 2006. The remaining reserve reduction of $10.8 million was associated with the estimated losses in excess of the aggregate limit of coverage under the commercial insurance program that ended March 12, 2003.It is not possible to quantify the amount of the change inour estimate ofprior yearlosses by individual fiscal period due to the nature of the professional liability loss estimates that are provided tous on an occurrenceperiod basis and the nature of the
coverage that is obtained in the commercial insurance market which isgenerallyunderwritten on a claims made or reportperiod basis. Even thoughwe are self insured for a significant portion ofour risk, due to customer contracting requirements and state insurance regulations,we still, at times, must place coverage on a claims made or reportperiod basis with commercial insurance carriers.When evaluating the appropriate carrying level of our self insured professional liability reserves, management considers the current estimates of occurrence period loss estimates as well as how such loss estimates and related future claims will interact with previous or current commercial insurance programs when projecting future cash flows.However, the complexity that is associated with multiple occurrenceperiods interacting with multiple report periods that contain risks and related reserves retained byus,as well as transferred to commercial insurance carriers, makes it impossible to allocate the change inprior year lossestimates to individual occurrenceperiods.Instead, the Companyevaluates the future expected cash flows for allhistorical loss periods in the aggregate and compares such estimates to the current carrying value of its professionalliability reserves. This process provides the basis for the Company to concludethatits reserves for professionalliabilitylossesare reasonable and properly stated.The adjustments to the prior year professional liability loss reserves were recorded in both the first and third quarters of 2007 and coincided with the receipt of revised actuarial reports of the Company’s estimated professional liability losses. Management considers the results of such actuarial studies when estimating the appropriate level of professional liability reserves and no adjustments to prior year loss estimates were made in periods where updated actuarial loss estimates were not available. Contributing to the reduction in professional liability reserves associated with prior years were improvements in the estimate of ultimate losses by occurrenceyearperiods contained in the actuarial reports received during 2007. Such actuarial reports reflected a reduction in the estimated ultimate undiscounted losses by occurrence period of between 12.6% and 13.9% (at various confidence factors) for the self insured loss period from March 12, 2003 through December 31, 2006. The actuarial report also reflected a reduction in the estimated undiscounted losses of between 13.3% and 14.9% (at various confidence factors) for the Company’s exposure in excess of the aggregate limit of coverage in place on the commercial insurance program that ended March 12, 2003. Due to the complexity of the actuarial estimation process, there are many factors, trends, and assumptions that must be considered in the development of the actuarial loss estimates and the Company is not able to quantify and disclose which specific elements are primarily contributing to the favorable development in the revised loss estimates of historical occurrence periods. However, we believe that our internal investments in enhanced risk management and claims management resources and initiatives, such as theemployment ofadditional claimsand litigationmanagementpersonnel andpractices andanexpansion of programs such asroot cause loss analysis,early claim evaluation,andlitigationsupport for insured providers,as well as the improved legal environmentresulting fromprofessional liabilitytort reform effortsin certain key jurisdictions such as Florida and Texas have contributed to the favorable loss development trends during the prior year occurrence periods.