This excerpt taken from the ALL 10-Q filed Nov 1, 2005.
Our third quarter hurricane loss estimate is subject to uncertainty.
Management believes the estimated impacts of Hurricanes Katrina and Rita, including net loss reserves, are appropriately established and recorded based on available facts, information, laws and regulations. However, actual results may differ materially from the amounts recorded for a variety of reasons, including the following:
These hurricanes occurred near the end of the quarter, with Rita following relatively soon after Katrina.
Our policyholders ability to report and our ability to adjust claims have been impeded by the extent of the devastation, the size of the area affected, and the fact that some communities were hit by both storms.
Extensive and widespread floods in the New Orleans area and related government restrictions on access to the area have lengthened the claims adjusting process, complicating our ability to estimate losses.
It is particularly difficult to assess the extent of damage in the initial stages of adjusting residential property losses.
Our estimate for the ultimate costs of repairs may not prove to be correct because of increased demand for services and supplies in the areas affected by a hurricane.
The number of IBNR claims may be greater or less than anticipated.
The large number and nature of the claims and the need to have more claims adjusters to handle claims has increased pressure on our catastrophe claims settlement management process.
Litigation has been filed by several parties including policyholders and state attorneys general, which if ultimately decided against us, could lead to a material increase in our catastrophe claims and claims expense estimate.
The nature and level of catastrophes in any period cannot be predicted. Although the industry and we use models developed by third party vendors in assessing our personal lines homeowners exposure to catastrophe losses, which assume various conditions and probability scenarios, such models do not necessarily accurately predict future losses or accurately measure losses currently incurred.
Catastrophe models use historical information about hurricanes and earthquakes and also utilize detailed information about our in-force business. These models have been evolving since the early 1990s. While we use this information in connection with our pricing and risk management activities, there are limitations with respect to their usefulness in predicting losses in any reporting period. These limitations are evidenced by significant variation in estimates between models and modelers; material increases and decreases in model results over time due to changes in the models and refinement of the underlying data elements and assumptions; questionable predictive capability over time intervals, and post event measurements that have provided ranges of estimates that have not been well understood or proven to be sufficiently reliable. In addition, the models are not necessarily reflective of company or state-specific policy language, demand surge and loss adjustment expenses, which are subject to wide variation by storm, and to mold losses which also vary significantly by storm.