NAVG » Topics » Sensitivity Analysis

These excerpts taken from the NAVG 10-K filed Feb 21, 2008.
Sensitivity Analysis
We do not calculate a range of loss reserve estimates. We believe that ranges may not be a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. The numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves include: interpreting loss development activity, emerging economic and social trends, inflation, changes in the regulatory and judicial environment and changes in our operations, including changes in underwriting standards and claims handling procedures.
The Company’s actuaries use various assumptions in determining a best estimate of reserves for each line of business. The importance of any specific assumption can vary by both individual product within a line of business and underwriting year. If actual experience differs from key assumptions used in establishing reserves, there is potential for significant variation in the development of loss reserves, particularly for long-tail casualty classes of business.
As discussed above, our actuaries generally apply the loss ratio method to calculate the IBNR loss reserve for the most current underwriting year while the Bornhuetter-Ferguson method is used to calculate the IBNR loss reserves for all prior underwriting years except in certain situations such as when limited or insufficient historical data is available.
Set forth below is a sensitivity analysis that estimates the effect on the Company’s net loss reserve position of using alternative expected loss ratios for the underwriting years 2000 to 2007 and alternative loss development factors for the underwriting years 2000 to 2006 rather than those actually used in determining the Company’s best estimates at December 31, 2007. The analysis addresses each major line of business and underwriting year for which a material deviation to the Company’s overall reserve position is believed reasonably possible, and uses what the Company believes is a reasonably likely range of potential deviation for each line of business. The underwriting years prior to 2000 were not included given the maturity of such years and their

53


Table of Contents

relatively small contribution to the overall IBNR loss reserve amount at December 31, 2007. Such underwriting years are therefore deemed to be less likely to cause a material deviation to the Company’s overall loss reserve position. There can be no assurance, however, that actual reserve development will be materially consistent with either the original or the adjusted expected loss ratios or loss development factor assumptions, or with other assumptions made in the reserving process, or that a material deviation in loss reserves will not occur for underwriting years prior to 2000.
For the selected alternative expected loss ratios, our actuaries observed the range of ultimate loss ratios recorded for the underwriting years 2000 to 2006 for each major line of business at December 31, 2007. After evaluating the range of ultimate loss ratio variances for each underwriting year, our actuaries judgmentally selected a range of reasonably likely variations from the ultimate loss ratios recorded for each line of business for each underwriting year out of the range of reasonably possible variations for each underwriting year.
The reasonably likely ranges of potential deviation in the loss ratios for each line of business for the 2000 to 2007 underwriting years expressed in loss ratio points are as follows:
 
Sensitivity
Analysis






We do not calculate a range of loss reserve estimates. We
believe that ranges may not be a true reflection of the
potential volatility between carried loss reserves and the
ultimate settlement amount of losses incurred prior to the
balance sheet date. The numerous factors that contribute to the
inherent uncertainty in the process of establishing loss
reserves include: interpreting loss development activity,
emerging economic and social trends, inflation, changes in the
regulatory and judicial environment and changes in our
operations, including changes in underwriting standards and
claims handling procedures.





The Company’s actuaries use various assumptions in
determining a best estimate of reserves for each line of
business. The importance of any specific assumption can vary by
both individual product within a line of business and
underwriting year. If actual experience differs from key
assumptions used in establishing reserves, there is potential
for significant variation in the development of loss reserves,
particularly for long-tail casualty classes of business.





As discussed above, our actuaries generally apply the loss ratio
method to calculate the IBNR loss reserve for the most current
underwriting year while the Bornhuetter-Ferguson method is used
to calculate the IBNR loss reserves for all prior underwriting
years except in certain situations such as when limited or
insufficient historical data is available.





Set forth below is a sensitivity analysis that estimates the
effect on the Company’s net loss reserve position of using
alternative expected loss ratios for the underwriting years 2000
to 2007 and alternative loss development factors for the
underwriting years 2000 to 2006 rather than those actually used
in determining the Company’s best estimates at
December 31, 2007. The analysis addresses each major line
of business and underwriting year for which a material deviation
to the Company’s overall reserve position is believed
reasonably possible, and uses what the Company believes is a
reasonably likely range of potential deviation for each line of
business. The underwriting years prior to 2000 were not included
given the maturity of such years and their




53







Table of Contents






relatively small contribution to
the overall IBNR loss reserve amount at December 31, 2007.
Such underwriting years are therefore deemed to be less likely
to cause a material deviation to the Company’s overall loss
reserve position. There can be no assurance, however, that
actual reserve development will be materially consistent with
either the original or the adjusted expected loss ratios or loss
development factor assumptions, or with other assumptions made
in the reserving process, or that a material deviation in loss
reserves will not occur for underwriting years prior to 2000.






For the selected alternative expected loss ratios, our actuaries
observed the range of ultimate loss ratios recorded for the
underwriting years 2000 to 2006 for each major line of business
at December 31, 2007. After evaluating the range of
ultimate loss ratio variances for each underwriting year, our
actuaries judgmentally selected a range of reasonably likely
variations from the ultimate loss ratios recorded for each line
of business for each underwriting year out of the range of
reasonably possible variations for each underwriting year.







The reasonably likely ranges of potential deviation in the loss
ratios for each line of business for the 2000 to 2007
underwriting years expressed in loss ratio points are as follows:


 




This excerpt taken from the NAVG 10-K filed Mar 1, 2005.

Sensitivity Analysis

    Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In our sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect reasonably possible near-term changes in those rates. The term "near-term" means a period of time going forward up to one year from the date of the consolidated financial statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any actions that would be taken by us to mitigate such hypothetical losses in fair value.

    In this sensitivity analysis model, we use fair values to measure our potential loss. The sensitivity analysis model includes fixed maturities and short-term investments. The primary market risk to our market-sensitive instruments is interest rate risk. The sensitivity analysis model uses a 100 basis point change in interest rates to measure the hypothetical change in fair value of financial instruments included in the model.

    For invested assets, modified duration modeling is used to calculate changes in fair values. Durations on invested assets are adjusted for call, put and interest rate reset features. Duration on tax-exempt securities is adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of December 31, 2004.

54  —   A N N U A L   R E P O R T   2 0 0 4



    The sensitivity analysis model used by us produces a loss in fair value of market-sensitive instruments of $29.7 million based on a 100 basis point increase in interest rates as of December 31, 2004. This loss amount only reflects the impact of an interest rate increase on the fair value of our fixed maturities and short-term investments, which constitute approximately 46.6% of total assets as of December 31, 2004. The loss in fair value of market-sensitive instruments, as a result of a 100 basis point increase in interest rates as of December 31, 2004, is not material.


RISK FACTORS

        In addition to the items listed under "Note on Forward-Looking Statements," following are certain risk factors related to the Company.

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki