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  • IRS Audit ActivityP&C Insurance Companies

    A.M. Best Review & Preview ConferenceMarch 23, 2011

    Moderated by: Brian Z. Brown, FCAS, MAAAPrincipal & Consulting Actuary262-796-3391brian.brown@milliman.com

    Presented by: Susan J. Forray, FCAS, MAAAPrincipal & Consulting Actuary262-796-3328susan.forray@milliman.com

    Richard F. Riley, Jr.PartnerFoley & Lardner LLP202-295-4712RRiley@foley.com

  • 2Outline

    Macroeconomic Context Industry Reserve Development

    By Calendar Year By Statement Year

    Typical Characteristics of Audited Companies Isnt This Just a Timing Issue? Summary Observations Other Considerations

  • 3MACROECONOMIC CONTEXT

  • 4Federal Deficit(In Billions)

    $236.24 $128.24

    ($157.76)

    ($377.59) ($412.73)($318.35)

    ($248.18)($160.70)

    ($458.55)

    ($1,412.69)($1,294.07)

    -$1,600

    -$1,400

    -$1,200

    -$1,000

    -$800

    -$600

    -$400

    -$200

    $0

    $200

    $400

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    Source: Congressional Budget Office

  • 5RESERVE DEVELOPMENTProperty & Casualty Industry

  • 6Industry Reserve DevelopmentExcluding Mortgage & Financial GuarantyNet Loss & ALAE (In Billions), by Calendar Year

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    ($6.3)($8.8)($9.4)

    ($3.7)

    $1.1

    $11.9

    $22.8

    $14.2 $10.5

    $0.8

    ($6.8)($9.5)

    ($14.5)($11.5)($10.3)

    -$20

    -$15

    -$10

    -$5

    $0

    $5

    $10

    $15

    $20

    $25

    $30

    1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

  • 7Industry Reserve DevelopmentNet Loss & ALAE (In Billions), by Calendar YearSplit Between Prior and Recent Accident Years

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    $0.0 $1.6 ($2.5)

    ($6.2)

    ($11.6)($14.1)

    ($17.1) ($17.7) ($16.3)($15.3)

    $11.9

    $21.2

    $16.7 $16.7 $12.4

    $7.3 $7.6 $3.2 $4.8 $5.0

    -$25

    -$15

    -$5

    $5

    $15

    $25

    $35

    2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    Accident Years 2000 & Prior

    Accident Years 2001 & Subsequent

  • 8Statement Year DevelopmentBy Calendar Period, as of December 31, 2010Net Loss & ALAE (In Billions)

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    -$40

    -$20

    $0

    $20

    $40

    $60

    $80

    $100

    $120

    1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

    1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

  • 9Development by Statement YearNet Loss & ALAE (In Billions)As of December 31, 2010

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    $5.3 $11.7

    $27.3

    $51.7

    $80.2

    $106.8 $105.7

    $83.9

    $52.7

    $15.4

    ($8.3)

    ($28.6)($26.0)($16.4)

    ($10.3)

    $0.0

    -$40

    -$20

    $0

    $20

    $40

    $60

    $80

    $100

    $120

    1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

  • 10

    TYPICAL CHARACTERISTICSProperty & Casualty Industry Audited Companies

  • 11

    Reserve Development by Company Size2006 2010(Net, In Billions)

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    ($2.2)($13.1)

    ($14.4)

    ($23.1)

    Largest 2nd Largest3rd Largest Smallest

  • 12

    Line of Business2006 2010(Net, In Billions)

    Reserve Development

    EarnedPremium

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    Personal Auto($10.5)Auto Phys

    Dam($8.5)

    Homeowners($3.6)

    GL($2.5)

    Work Comp($0.4)

    CMP($5.1)

    Comm Auto($2.9)

    MPL($9.8)

    Other($9.4)

    Personal Auto$474.7 Auto Phys

    Dam$349.3

    Homeowners$293.1

    GL$203.7

    Work Comp$183.3 CMP

    $151.0

    Comm Auto$90.2

    MPL$47.7

    Other$341.5

  • 13

    Financial Strength2006 2010(Net, In Billions)

    Reserve Development

    EarnedPremium

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    A++$393.6 A+

    $691.3

    A$785.0 A-

    $147.6

    Other$62.7

    Not Rated$54.1

    A++($16.0)

    A+($18.7)

    A($10.1) A-

    ($6.1)Other$0.2 Not

    Rated($2.0)

  • 14

    Mutual Companies OnlyCalendar Year Reserve DevelopmentNet Loss and ALAE, In Billions

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    ($3.7)

    ($4.2)

    ($3.5)

    ($2.7)

    ($1.2)

    $0.3 $0.4

    ($1.1)

    ($1.6)

    ($2.1)

    ($2.6)($2.3)

    ($2.8)($2.6)

    ($4.2)

    -$5

    -$4

    -$3

    -$2

    -$1

    $0

    $1

    1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

  • 15

    Mutual Companies OnlyStatement Year Reserve DevelopmentNet Loss and ALAE, In Billions, as of December 31, 2010

    Source: Milliman analysis of Property & Casualty Statutory Annual StatementsExcludes Mortgage & Financial Guaranty

    ($5.9)

    ($4.8)

    ($2.6)

    ($0.4)

    $2.4

    $4.2

    $3.1

    $0.8

    ($1.6)

    ($3.5)

    ($4.7)($5.3)

    ($6.0)

    ($4.8)($4.2)

    $0.0

    -$8

    -$6

    -$4

    -$2

    $0

    $2

    $4

    $6

    1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

  • 16

    ISNT THIS JUST A TIMING ISSUE?

  • 17

    Isnt this Just a Timing Issue?In Some Ways, Yes

    Eventually, reserves develop to ultimate Over the long term, income will be recognized

    Settlements with IRS affect subsequent tax years Example: settlement of 2006 will affect 2007 tax

    2006 income increases, 2007 income decreases However

    Requires claiming a refund Can continue to audit subsequent years IRS unlikely to settle subsequent years immediately

  • 18

    Isnt this Just a Timing Issue?In Other Ways, No

    High interest rate on deficiencies Currently 5% for large corporate underpayments Increasing to 6% next quarter Has been as high as 10% for 2006 tax year

    IRS wasnt actively auditing reserves in prior years Cant collect interest on prior year overpayments Even if you could

    Interest rate on overpayments 4.5% less So currently 0.5%

    And reserve audits will likely slow again

  • 19

    SUMMARY OBSERVATIONS

  • 20

    Summary Observations P&C Industry Likely Not Over-Reserved

    In hindsight, 1995 2004 statement years under-reserved 2005 & subsequent statement years

    Have run off favorably to date But will likely develop adversely due to tail liabilities

    Typical Characteristics of Audited Companies Medium size Mutual structure Financially sound Medical professional liability (sometimes)

    Not Simply a Timing Issue High interest rate on underpayments Reserves audited selectively

  • 21

    OTHER CONSIDERATIONS

  • 22

    Other Considerations

    Accompanying Oral Discussion This document is not complete without the accompanying oral discussion and

    explanation of the underlying information and concepts as well as any interpretational limitations.

    Limited Distribution This document should not be distributed, disclosed or otherwise furnished, in whole

    or in part, without the express written consent of Milliman.

    Data Reliance We have relied upon data and other background information provided by the

    Congressional Budget Office and A.M. Best without audit or independent verification. We have performed a limited review of the data for reasonableness and consistency and have not found material defects in the data. If there are material defects in the data, it is possible that they would be uncovered by a detailed, systematic review and comparison of the data to search for data values that are questionable or relationships that are materially inconsistent. Such a review was beyond the scope of our assignment.