(Ohio Casualty Corporation letterhead)
Michael A. Winner, CPA
Executive Vice President & Chief Financial Officer
February 13, 2006
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Mail Stop 6010
Washington DC 20549
Re: Ohio Casualty Corporation
Form 10-K for Fiscal Year Ended December 31, 2004
File No. 0-05544
Dear Mr. Rosenberg:
Ohio Casualty Corporation ("Corporation") acknowledges it has received
verbal comments from the staff of the Securities and Exchange Commission
(the "Staff" or "Commission") on January 26, 2006 (subsequently confirmed
telephonically on February 9, 2006) to its letter to the Commission dated
January 17, 2006. Further it is the Corporation's understanding the Staff
will not be providing written comments to confirm the aforementioned verbal
comments and the Corporation should respond to these verbal comments. For
ease of reference and confirmation we have restated the Staff's verbal
comments within our responses. Please note the comment number references
used below refer to the comment number from the Staff's original letter
dated December 20, 2005.
Comment #2:
- ----------
For each product line, please provide us, in disclosure-type format, a
description of the quantitative and qualitative factors used by management
to record reserves at an amount different from actuarial estimates.
Response:
Please see below response entitled "Response to Comments #2, 3 and 4"
9450 Seward Road, Fairfield, OH 45014 Telephone: 513-603-2267
Fax: 513-603-3134 mike.winner@ocas.com
Comment #3
- ----------
Please provide us in disclosure-type format a) a brief discussion of your
reserving process, including the methods for the various lines of business;
b) identify the key assumptions that the Company makes in booking its
reserve estimates and c) identify the reasonably likely changes that could
result due to changes in your key assumptions.
Response:
Please see below response entitled "Response to Comments #2, 3 and 4"
Comment #4
- ----------
The total reserves disclosed in the table presented do not tie to what was
reported on the Balance Sheet. Please reconcile.
Response:
We have revised the table referenced in the above comment to reflect
"gross" reserve amounts which now agree to the Balance Sheet. Please see
below response entitled "Response to Comments #2, 3 and 4"
Response to Comments #2, 3 and 4
In response to the above comments, the Corporation has provided a draft of
the proposed disclosure it intends to include in its Annual Report of Form
10-K for the year ending December 31, 2005. This proposed disclosure will
appear in the Critical Accounting Policies section of Management's
Discussion and Analysis of Financial Condition and Results of Operation as
follows:
Loss and Loss Adjustment Expense Reserves
The Group's largest liabilities are reserves for losses and LAE. Loss and
LAE reserves (collectively "loss reserves") are established for all
incurred claims without discounting for the time value of money. Before
credit for reinsurance recoverables, these reserves amounted to $2.9
billion and $2.8 billion at December 31, 2005 and 2004, respectively. As
of December 31, 2005, the loss reserves by operating segment were as
follows: $1.8 billion Commercial Lines, $0.7 billion Specialty Lines and
$0.4 billion Personal Lines. The Group purchases reinsurance to mitigate
the impact of large losses and catastrophic events. Loss reserves ceded to
reinsurers amounted to $0.7 billion and $0.6 billion at December 31, 2005
and 2004, respectively.
The Group conducts a quarterly review of loss reserves using the methods
described below, and records its best estimate each quarter based on that
review. In the opinion of management, the reserves recorded at December 31,
2005 represent the Group's best estimate of its ultimate liability for
losses and LAE. However, due to the inherent complexity of the estimation
process and the potential variability of the assumptions used, final claim
settlements may vary significantly from the amounts recorded. Furthermore,
the timing, frequency and extent of adjustments to the estimated
liabilities cannot be predicted with certainty since conditions and events
which established historical loss reserve development and which serve as
the basis for estimating ultimate claim costs may not occur in exactly the
same manner, if at all.
Loss reserves are an estimate of ultimate unpaid costs of losses and loss
adjustment expenses for claims that have been reported and claims that have
been incurred but not yet reported. Loss reserves do not represent an exact
calculation of liability, but instead represent estimates, generally
utilizing actuarial expertise and reserving methods, at a given accounting
date. These loss reserve estimates are expectations of what the ultimate
settlement and administration of claims will cost upon final resolution in
the future, based on the Group's assessment of facts and circumstances then
known. In establishing reserves, the Group also takes into account
estimated recoveries for reinsurance, salvage and subrogation.
The process of estimating loss reserves involves a high degree of judgment
and is subject to a number of risk factors. These risk factors can be
related to both internal and external events, such as changes in claims
handling procedures, economic inflation, legal trends and legislative
changes, among others. The impact of these items on ultimate costs for loss
and loss adjustment expenses is difficult to estimate. Loss reserve
estimation differs by product line due to differences in claim complexity,
the volume of claims, the potential severity of individual claims, the
determination of occurrence date for a claim and reporting lags (the time
between the occurrence of the policyholder loss event and when it is
actually reported to the insurer). Informed judgment is applied throughout
the process. The Group continually refines its loss reserve estimates in a
regular ongoing process as historical loss experience develops and
additional claims are reported and settled. The Group considers all
significant facts and circumstances known at the time loss reserves are
established. Due to the inherent uncertainty underlying loss reserve
estimates, final resolution of the estimated liability will be different
from that anticipated at the reporting date. Therefore, actual paid losses
in the future may yield a materially different amount than currently
reserved--favorable or unfavorable. The Group reflects adjustments to
reserves in the results of operations in the period the estimates are
changed.
The following table displays case, IBNR and LAE reserves by product line
gross of reinsurance recoverables. Case reserves represent amounts
determined for each claim based on the known facts regarding the claim and
the parameters of the coverage that our policy provides. The IBNR reserves
include provisions for incurred but not reported claim provisions for
losses in excess of the case reserves on previously reported claims, and
claims to be reopened. The IBNR provision also includes an offset for
anticipated salvage and subrogation recoveries. LAE reserves are an
estimate of the expenses related to resolving and settling claims. Reserves
ceded to reinsurers and reserves net of reinsurance are also shown.
Loss and LAE Reserves in millions of dollars as of December 31, 2005 and 2004
Gross Total Total
Year Operating Segment Case IBNR LAE Total Ceded Net
- --------------------------------------------------------------------------------------------
2005 Commercial Lines $ 700.9 $ 762.2 $351.5 $1,814.6 $165.4 $1,649.2
Workers
compensation 387.1 344.0 69.2 800.3 131.4 668.9
Commercial auto 103.2 109.7 44.6 257.5 6.0 251.5
General liability 59.4 117.3 92.6 269.3 5.2 264.1
CMP, fire & inland
marine 151.2 191.2 145.1 487.5 22.8 464.7
Specialty Lines 134.8 516.2 92.9 743.9 454.1 289.8
Commercial umbrella 116.4 516.1 85.9 718.4 442.4 276.0
Fidelity & surety 18.4 0.1 7.0 25.5 11.7 13.8
Personal Lines 194.8 126.1 67.4 388.3 65.1 323.2
Personal auto &
umbrella 164.1 91.3 50.6 306.0 64.1 241.9
Personal property 30.7 34.8 16.8 82.3 1.0 81.3
Total All Lines $1,030.5 $1,404.5 $511.8 $2,946.8 $684.6 $2,262.2
- --------------------------------------------------------------------------------------------
2004 Commercial Lines $ 611.8 $ 727.1 $331.9 $1,670.8 $106.4 $1,564.4
Workers
compensation 322.7 326.0 72.3 721.0 80.4 640.6
Commercial auto 99.6 126.2 44.7 270.5 9.8 260.7
General liability 55.2 106.3 89.5 251.0 4.9 246.1
CMP, fire & inland
marine 134.3 168.6 125.4 428.3 11.3 417.0
Specialty Lines 105.7 472.4 78.3 656.4 404.3 252.1
Commercial umbrella 93.1 470.9 73.2 637.2 398.7 238.5
Fidelity & surety 12.6 1.5 5.1 19.2 5.6 13.6
Personal Lines 214.7 137.9 76.6 429.2 59.6 369.6
Personal auto &
umbrella 184.2 97.7 59.4 341.3 56.5 284.8
Personal property 30.5 40.2 17.2 87.9 3.1 84.8
Total All Lines $ 932.2 $1,337.4 $486.8 $2,756.4 $570.3 $2,186.1
- --------------------------------------------------------------------------------------------
Reserve estimation methods
- --------------------------
Most of our insurance policies are written on an occurrence basis which
provides coverage if a loss occurs in the policy period, even if the
insured reports the loss many years later. In addition, final settlement of
certain claims can be delayed for years or decades due to litigation or
other reasons. For example, some general liability claims are reported 10
years or more after the policy period, and the workers compensation
coverage provided by our policies pays unlimited medical benefits for the
duration of the claimant's injury up to the lifetime of the claimant.
Occurrence based forms of insurance require estimation of future costs,
including the effect of judicial interpretations, societal litigation
trends and medical cost inflation, among others. Reserve development can
occur over time as conditions and circumstances change in the years
following the policy issuance.
Product lines are generally classified as either long-tail or short-tail,
based on the average length of time between the event triggering claims
under a policy and the final resolution of those claims. Short-tail claims
are reported and settled quickly, resulting in less estimation variability.
The longer the time before final claim resolution, the greater the exposure
to estimation risks and hence the greater the estimation uncertainty. Long-
tail product lines include workers compensation, commercial umbrella and
general liability. Short-tail lines include homeowners, property and bonds.
Product lines such as personal and commercial auto and commercial multi-
peril include some long-tail coverages and some short-tail coverages.
A key assumption in most actuarial analyses is that past patterns
demonstrated in the data will repeat themselves in the future, absent a
material change in the associated risk factors discussed below. To the
extent a material change affecting the ultimate claim liability is known,
such change is quantified to the extent possible through an analysis of
internal company data and, if available and when appropriate, external
data. Such a measurement is specific to the facts and circumstances of the
particular claim portfolio and the known change being evaluated.
The process for estimating loss reserves begins by assessing risks and
exposures. Data on individual reported claims, both current and historical,
is collected including paid amounts and individual claim adjuster
estimates, and this data is grouped by common characteristics and evaluated
in the analyses of ultimate claim liabilities by product line. Such data is
occasionally supplemented with external data such as industry development
factors as available and when appropriate. The process of analyzing
reserves is undertaken on a regular basis, generally quarterly, in light of
continually updated information.
Multiple estimation methods are available for the analysis of ultimate
claim liabilities. Each estimation method has its own advantages and
disadvantages, with no single estimation method being better than the
others in all situations. Generally more methods are used for long-tail
product lines because of the difficulty in estimating reserves for these
lines. Also, more methods are generally used for recent accident years
compared to
older accident years because the data available for recent accident years is
less mature. The relative strengths and weaknesses of the particular
estimation methods when applied to a particular group of claims can also
change over time based on the available facts and circumstances. Therefore,
the actual choice of estimation methods can change with each evaluation. The
estimation methods chosen are those that are believed to produce the most
reliable indication at that particular evaluation date for the claim
liabilities being evaluated.
The principal actuarial reserving methods utilized by the Group to
establish loss reserves include, but are not limited to:
1. Paid loss development - payment patterns of prior claims are used to
estimate future payment patterns which are applied to current payments
to derive an estimate of ultimate losses.
2. Incurred loss development - case incurred patterns of prior claims are
used to estimate future incurred patterns which are applied to current
incurred losses to derive an estimate of ultimate losses.
3. Expected loss ratio - loss ratios are determined for recent accident
years based on historical accident year loss ratios, recent economic
trends and changes in the book of business, including rate levels. The
expected loss ratio for each accident year is then applied to the actual
earned premiums to calculate ultimate losses.
4. Bornhuetter-Ferguson estimates - blends the expected loss ratio method
with either the paid or incurred loss development method using weights
based on the maturity of the accident year.
5. Claim count and severity estimates - ultimate claim counts and average
claim severities are developed separately and then multiplied to derive
an estimate of ultimate losses.
For short-tail lines, the paid loss and incurred loss development methods
are generally relied on for all accident years, and the Bornhuetter-
Ferguson method is also relied on for the most recent accident year. For
long-tail lines, all of the above methods may be used for the most recent
accident years, and as accident years mature, reliance is shifted to the
paid and incurred loss development methods.
The merits of each method are evaluated given the facts at hand. An
estimate of the ultimate losses is then made based upon the particular
method or combination of methods that is deemed most appropriate.
Reserves for losses and allocated LAE for asbestos and environmental
exposures are especially difficult to determine because of the high amount
of legal costs and the extended period of time required to settle these
claims. Methods used by the Group to estimate these loss reserves include
survival ratio estimates, curve fitting applied to both paid and case
incurred losses and allocated loss adjustment expenses, and frequency and
severity estimates.
Reserve variability and uncertainty
- -----------------------------------
There is a great deal of uncertainty in the loss reserve estimates and
unforeseen events can have unfavorable impacts on the loss reserve
estimates. Reinsurance is purchased to mitigate the impact of large losses
and catastrophic events. The estimate of reinsurance recoverables is
considered a critical accounting estimate and discussed in another section
of this Annual Report on Form 10-K.
Loss reserve uncertainty is illustrated by the variability in reserve
development presented in the Analysis of Development of Loss and LAE
Liabilities schedule which appears on pages xx and xx under Item 1 of this
document. This schedule shows cumulative loss reserve development for each
of the past ten years through December 31, 2005 on a gross and net of
reinsurance basis. The development on a net of reinsurance basis as a
percent of the original estimates ranges from adverse development of 17.2%
of original estimates for loss reserves at year-end 2000 to favorable
development of 0.9% of original estimates for loss reserves at year-end
2004. The oldest period shown, 1995, shows adverse development of 1.9% of
original loss reserves ten years after the original estimates.
To illustrate the uncertainty by operating segment, the following table
provides the before-tax amount of prior accident years' loss reserve
development by operating segment on a net of reinsurance basis for the
years ended December 31, 2005, 2004 and 2003, respectively:
Operating Segment 2005 2004 2003
- ----------------- ---- ---- ----
Commercial Lines $ 29.1 $(15.0) $ 41.0
Specialty Lines (12.3) (9.4) (21.3)
Personal Lines (36.9) 2.6 14.4
------- ------- -------
Total Prior Accident Years' Development $(20.1) $(21.8) $ 34.1
======= ======= =======
This table illustrates that favorable development can occur for one
operating segment while adverse development occurs for another, and that
development from year to year can be either favorable or adverse for an
operating segment.
Within each operating segment, development can also be favorable or adverse
by product line within the same period. For example, for the Commercial
Lines operating segment in 2005, the workers compensation product line had
adverse development of $42 million while the commercial auto product line
had favorable development of $30.6 million.
Reserve estimates are also uncertain by accident period. To illustrate
this, the following table provides the before-tax amount of prior accident
years' loss and LAE reserve development by accident year on a net of
reinsurance basis for all lines combined:
Accident Period 2005 2004 2003
- ---------------------------------------------------------------------------
Accident Year 2004 $(30.8) $ - $ -
Accident Year 2003 (32.0) (36.9) -
Accident Year 2002 (28.2) (10.4) (39.0)
Accident Year 2001 (7.6) (0.9) 8.0
Accident Year 2000 & prior 78.5 26.4 65.1
- ---------------------------------------------------------------------------
Total Prior Accident Years' Development $(20.1) $(21.8) $ 34.1
======= ======= ======
This table illustrates that recent accident periods have developed
favorably while the older periods have developed adversely. More than half
of the $78.5 million of adverse development for accident years 2000 & prior
in calendar period 2005 is attributed to our review of workers compensation
permanent cases which is discussed in more detail below. We do not believe
that older accident years will always develop adversely while more recent
years develop favorably. However, it should be understood that the "prior"
accident years' category includes claims covering many decades, many of
which are complex. Conversely, the recent accident years include a mix of
claims of varying degrees of difficulty for which many are relatively
straight-forward to establish loss reserves.
The Group does not prepare loss reserve ranges, nor does it project future
variability, when determining its best estimate, although the above
examples of actual historical changes in loss reserve estimates provide a
measure of the uncertainty underlying the current loss reserve estimates.
The Group has our categories of loss reserves that it considers highly
uncertain, and therefore, could have a material impact on future financial
results: workers compensation, asbestos and environmental liability,
construction defect exposures, and commercial umbrella. These categories
are described below with relevant historical data.
Workers compensation represents the Group's largest product line as
measured by the magnitude of loss reserves, representing approximately 30%
of the total on a net of reinsurance basis. The coverage provided includes
indemnity and medical benefits generally defined by state regulation.
Indemnity benefits compensate the injured worker for wage replacement,
while the medical benefits generally provide unlimited coverage for a work-
related accident for the life of the claimant. Many workers compensation
claims are small and are settled within a year or two of the accident date.
However, some of the claims are serious, resulting in costs that can extend
for decades. For workers compensation loss reserves net of reinsurance at
year-end 2005, approximately 60% are related to claims over five years old,
and approximately 35% are related to claims over ten years old.
During 2005, in response to industry wide development, our claims
department reviewed permanent workers compensation cases to re-assess life
expectancy and medical costs. The review resulted in increases to loss
reserves on approximately 25% of the inventory of approximately 1,200
permanent cases. These adjustments comprise a substantial part
of the $42 million adverse development for this product line in 2005. We
will continue to monitor these types of claims in the future.
In recent years, asbestos and environmental liability claims have expanded
greatly in the insurance industry. Historically, the Group has written
small commercial accounts with a focus on contracting business. Within the
manufacturing category, the Group has concentrated on light manufacturers.
Thus the Group's exposure to asbestos is related to installers and
distributors as opposed to the large manufacturers. Consequently, the Group
believes it has minimal exposure to the primary defendants involved in
major asbestos litigation. The Group's exposure to environmental liability
is due to policies written prior to the introduction of the absolute
pollution endorsement in the mid-80's and to underground storage tanks
mostly from New Jersey homeowner's policies in recent years. The Group has
limited exposures to the national priority list, a list of known or
threatened releases of hazardous substances, pollutants, or contaminants
throughout the United States. The Group also has limited asbestos and
environmental exposures related to assumed reinsurance business written
prior to 1980 with small policy limits.
In 2005 and 2004, respectively, the Group paid loss and LAE of $7.3 and
$7.0 for asbestos and environmental claims on a net of reinsurance basis.
At year-end 2005 and 2004, asbestos and environmental reserves net of
reinsurance were $95.8 and $82.6, respectively.
The Group defines construction defect exposure as liability for allegations
of defective work and completed operations losses from general, commercial
multiple peril and umbrella liability policies involving multiple-units
(condos/townhouses/apartments/tracts of single family homes), multiple
defendants (e.g. developers, sub-contractors), usually with multiple defect
issues, and often involving multiple insurance carriers. Loss reserves are
difficult to estimate for this exposure because of the complexity of the
claims and the late reporting which often occurs many years after the
policy term. The Group excludes from this definition claims related to
individual single family homes, apartments/townhomes or other residential
properties if the defect issues are limited in scope and volume.
Paid losses for construction defect claims, net of reinsurance, were $19.2
in 2005, compared to $9.9 in 2004 and $16.5 in 2003. Paid claims legal
related LAE, net of reinsurance, for construction defect claims were $6.1
in 2005, compared with $5.1 in 2004 and $4.3 in 2003. Loss and legal
related LAE reserves were $56.4, $78.3 and $86.7 at year-end 2005, 2004 and
2003, respectively. These totals exclude construction defect losses from
the state of California because the Group stopped writing in that state in
1993 and the remaining claims are minimal.
The Group writes commercial umbrella business with large policy limits. The
period of time between the loss occurrence, the reporting of the claim to
the insurer, and the settlement of the claim can extend over many years.
The large policy limits, complexity of claims, and the lengthy time period
required to reach settlement increase the uncertainty of loss estimates.
Reinsurance is purchased to mitigate the impact of these
large losses. For 2005 and 2004, commercial umbrella loss reserves prior
to reinsurance were $718.4 and $637.1, respectively, while loss reserves
net of reinsurance were $272.3 and $236.1, respectively.
Loss and LAE risk factors
- -------------------------
The major causes of material uncertainty ("risk factors") generally will
vary for each product line, as well as for each separately analyzed
component of the product line. In some cases, such risk factors are
explicit assumptions of the estimation method and in others, they are
implicit. Actual results will likely vary from expectations for each of
these assumptions, resulting in an ultimate claim liability that is
different from that being estimated currently.
Some risk factors will affect more than one product line. Examples include
changes in claim handling practices, changes in settlement patterns,
regulatory and legislative actions, court actions, timeliness of claim
reporting, state mix of claimants, and degree of claimant fraud. The extent
of the impact of a risk factor will also vary by components within a
product line. Individual risk factors are also subject to interactions with
other risk factors within product line components.
The effect of a particular risk factor on estimates of claim liabilities
cannot be isolated in most cases. For example, estimates of potential claim
settlements may be impacted by the risk associated with potential court
rulings, but the final settlement agreement typically does not delineate
how much of the settled amount is due to this and other factors.
The evaluation of data is also subject to distortion from extreme events or
structural shifts. While some changes in the claim environment are sudden
in nature (such as a new court ruling affecting the interpretation of all
contracts in that jurisdiction), others are more evolutionary. Evolutionary
changes can occur when multiple factors affect final claim values, with the
uncertainty surrounding each factor being resolved separately, in step-wise
fashion. The final impact is not known until all steps have occurred.
Sudden changes generally cause a one-time shift in claim liability
estimates, although there may be some lag in reliable quantification of
their impact. Evolutionary changes generally cause a series of shifts in
claim liability estimates, as each component of the evolutionary change
becomes evident and estimable.
Loss and LAE risk factors by product line
- -----------------------------------------
The following section details reserving considerations and loss and LAE
risk factors for the product lines representing most of our loss reserves.
Each risk factor presented will have a different impact on required loss
reserves. Also, risk factors can have offsetting or compounding effects on
required loss reserves. For example, in workers' compensation, the use of
expensive medical procedures that result in medical cost inflation may
enable workers to return to work faster, thereby lowering indemnity costs.
Thus, in almost all cases, it is impossible to discretely measure the
effect of a single risk factor and construct
a meaningful sensitivity expectation. The Group does not make explicit
assumptions for the risk factors described below.
Workers' Compensation
Workers' compensation is generally considered a long-tail coverage, as it
takes a relatively long period of time to finalize claims from a given
accident year. While certain payments such as initial medical treatment or
temporary wage replacement for the injured worker are made quickly, some
other payments are made over the course of several years, such as awards
for permanent partial injuries. In addition, some payments can run as long
as the injured worker's life, such as permanent disability benefits and on-
going medical care. Despite the possibility of long payment tail, the
reporting lags are generally short, settlements are generally not complex,
and most of the liability can be considered high frequency, moderate
severity. The largest reserve risk generally comes from the low frequency,
high severity claims providing lifetime coverage for medical expense
arising from a worker's injury. Overall, the claim liabilities for this
line create a somewhat greater than moderate estimation risk.
Examples of loss and LAE risk factors that can change and, thus, affect the
required workers' compensation loss reserves include, but are not limited
to, the following:
Indemnity claims risk factors
- -----------------------------
Time required to recover from the injury
Degree of available transitional jobs
Degree of legal involvement
Changes in the interpretations and processes of the workers' compensation
commissions' oversight of claims
Future wage inflation for states that index benefits
Changes in the administrative policies of second injury funds
Medical claims risk factors
- ---------------------------
Changes in the cost of medical treatments (including prescription drugs)
and underlying fee schedules
Frequency of visits to health providers
Number of medical procedures given during visits to health providers
Types of health providers used
Type of medical treatments received
Use of preferred provider networks and other medical cost containment
practices
Availability of new medical processes and equipment
Changes in the use of pharmaceutical drugs
Degree of patient responsiveness to treatment
Book of business risk factors
- -----------------------------
Injury type mix
Changes in underwriting standards
General workers' compensation risk factors
- ------------------------------------------
Frequency of claim re-openings on claims previously closed
Mortality trends of injured workers with lifetime benefits and medical
treatment
Degree of cost shifting between workers' compensation and health insurance
General Liability
General liability is considered a long-tail line, as it takes a relatively
long period of time to finalize and settle claims from a given accident
year. The speed of claim reporting and claim settlement is a function of
the specific coverage provided, the jurisdiction and specific policy
provisions. There are numerous components underlying the general liability
product line. Some of these have relatively moderate payment patterns (with
most of the claims for a given accident year closed within 5 to 7 years),
while others can have extreme lags in both reporting and payment of claims.
In addition, this line includes asbestos and environmental claims which are
reviewed separately because of the unique character of the exposures.
Defense costs are also a part of the insured costs covered by liability
policies and can be significant, sometimes greater than the cost of the
actual paid indemnity amounts. For most of our policies defense costs are
outside of policy limits, meaning that amounts paid are in addition to the
indemnity limits provided by the policy.
Major contributors to loss reserve estimate uncertainty for general
liability include the reporting lag (i.e. the length of time between the
event triggering coverage and the actual reporting of the claim), the
number of parties involved in the underlying tort action, whether the
"event" triggering coverage is confined to only one time period or is
spread over multiple time periods, the potential dollars involved (in the
individual claim actions), whether such claims were reasonably foreseeable
and intended to be covered at the time the contracts were written (i.e.,
coverage dispute potential), and the potential for mass claim actions.
Claims with longer reporting lags result in greater inherent risk.
Examples of loss and LAE risk factors that can change and thus affect the
required general liability loss reserves include, but are not limited to,
the following:
Claims risk factors
- -------------------
Changes in claim handling procedures
Changes in policy provisions or court interpretation of such provisions
New theories of liability
Trends in jury awards
Changes in the propensity to sue, in general and with specificity to
particular issues
Changes in statutes of limitations
Changes in the underlying court system
Distortions from losses resulting from large single accounts or single
issues
Changes in tort law
Shifts in law suit mix between federal and state courts
Changes in claim office structure (causing distortions in the data)
Changes in settlement patterns
Book of business risk factors
- -----------------------------
Changes in policy provisions (e.g., deductibles, policy limits, endorsements)
Changes in underwriting standards
Product mix (e.g., size of account, industries insured, jurisdiction mix)
Commercial Umbrella
Commercial umbrella is considered a long-tail line as it takes a relatively
long period of time to finalize and settle claims from a given accident
year. This line has many of the same characteristics and risk factors as
the general liability line described above. Additional risk factors for
this line are the attachment point and limit provided. The attachment point
is generally at least $1 million, and sometimes in excess of $25 million,
resulting in a greater reporting lag (and thus more variability) than that
of general liability. The limit provided by commercial umbrella varies from
$1 million up to $25 million. The higher limit policies create more
variability in loss reserve estimates than general liability policies.
Reinsurance is purchased to mitigate this additional uncertainty.
Commercial Multi-Peril
Commercial multi-peril provides a combination of property and liability
coverage and therefore includes both short and long-tail coverages. For
property coverage, it generally takes a relatively short period of time to
close claims, while for the liability coverages it takes a longer period of
time to close claims. The reserving risk for this line is dominated by the
liability coverage portion of this product, and has risk factors similar to
general liability described above.
Commercial Automobile
The commercial automobile product line is a mix of property and liability
coverages and, therefore, includes both short and long-tail coverages. The
payments that are made quickly typically pertain to auto physical damage
(property) claims and property damage (liability) claims. The payments that
take longer to finalize and are more difficult to estimate relate to bodily
injury claims. In general, claim reporting lags are minor, claim complexity
is not a major issue, and the line is viewed as high frequency, low to
moderate severity. Overall, the claim liabilities for this line create a
moderate estimation risk. Commercial automobile reserves are typically
analyzed in three components; bodily injury liability, property damage
liability, and physical damage claims. These last two components have
minimal loss reserve risk and fast payouts and, accordingly, separate risk
factors are not presented.
Examples of loss and LAE risk factors that can change and, thus, affect the
required commercial automobile loss reserves include, but are not limited
to, the following:
Claims risk factors
- -------------------
Trends in jury awards
Changes in the underlying court system
Changes in case law
Litigation trends
Frequency of claims with payment capped by policy limits
Change in average severity of accidents, or proportion of severe accidents
Subrogation opportunities
Changes in claim handling procedures
Frequency of visits to health providers
Number of medical procedures given during visits to health providers
Types of health providers used
Types of medical treatments received
Changes in cost of medical treatments
Degree of patient responsiveness to treatment
Book of business risk factors
- -----------------------------
Changes in policy provisions (e.g., deductibles, policy limits,
endorsements, etc.)
Changes in mix of insured vehicles
Changes in underwriting standards
Personal Automobile
The personal automobile product line has risk factors comparable to the
commercial automobile product line described above. In addition, this line
is subject to risk related to the effectiveness of the no-fault laws that
exist in some states.
Comment #5
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The bottom line of the cash flow statement does not tie to the cash line on
the Balance Sheet. Please reclassify what you are identifying as short tem
investments to cash equivalents, per the definition under paragraph 8 of
SFAS 95.
Response:
On a prospective basis, beginning with the Financial Statements included in
the Annual Report of Form 10-K for the year ending December 31, 2005, we
will reclassify the short term investments to cash equivalents.
In response to your previous request to include the following, please be
advised the Corporation reconfirms and acknowledges:
- that it is responsible for the adequacy and accuracy of the disclosure
in the filing;
- that 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 that the Corporation 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.
You may contact Debra K. Crane, Senior Vice President, General Counsel and
Secretary, by telephone at (513) 603-2213 or via fax at (513) 603-2208 or
email at Debra.Crane@ocas.com if you have questions or comments on the
responses of the Corporation.
Sincerely,
/s/Michael A. Winner
Michael A. Winner
Executive Vice President and
Chief Financial Officer