SFM Board of Directors James W. Benike Rochester, MN Kent D. Dixon Chaska, MN Robert S. Mars III Eden Prairie, MN Mary Ann Blade Plymouth, MN Truman L. Jeffers New Brighton, MN Gene R. Merriam Coon Rapids, MN Charles E. Clysdale Roseville, MN Robert T. Lund Plymouth, MN F. Clayton Tyler Minneapolis, MN SFM Corporate Officers Robert T. Lund President and Chief Executive Officer Terrence L. Miller Senior Vice President and Chief Financial Officer David E. Kaiser Senior Vice President and Chief Information Officer M. Scott Brener Senior Vice President and General Counsel Michael L. Happe, CPCU Senior Vice President, Business Development and Strategic Planning Steven T. Sandilla Senior Vice President, Strategic Business Operations, Established Markets Andrew W. Lynn Vice President and Senior Counselor Margaret L. Kasting Vice President, Claims 2013 review Jody L. Rogers Vice President, Human Resources Brian R. Bent, CPCU Vice President, Director of Underwriting Daniel M. Janiga, M.D. Medical Director Timothy L. Collin President and Chief Operating Officer, CompRehab, Inc. Annual Meeting 9:00 a.m., June 9, 2014 3500 American Blvd. West; Bloomington, Minnesota Our Mission To be the workers’ compensation partner of choice for agents, employers, and injured workers through our unrivaled service, expertise and commitment to workplace safety. SFM Companies 3500 American Blvd. West, Suite 700 Bloomington, Minnesota 55431 ©2014 SFM Mutual Insurance Company All rights reserved. pub-ar-0214 full annual review at sfmic.com sfmic.com SFM Mutual Insurance Company | SFM Select Insurance Company Dear SFM Policyholders, Agents and Friends Like many of your organizations, SFM suffered through the severe recession of 2008-2009 and the painfully slow economic recovery that ensued. But we emerged stronger than ever and have benefited from concentrating our business in the Upper Midwest, where economic indicators, from job creation and unemployment rates to consumer confidence and business investment, continue to improve. The old proverb “slow and steady wins the race” may not resonate on Wall Street but aptly describes successful long-term businesses on Main Street. It certainly applies to SFM, as we continue to enjoy steady, measured growth year after year. We continued to make targeted investments in technology in 2013, upgrading our custom-developed enterprise software, launching electronic policy delivery, and refining predictive analytics to give us a more reliable early-warning system for volatile claims. We understand that the earlier our professional adjusters can respond to a claim with appropriate care, the sooner the employee will return to work and the better the outcome for everyone. Striving to create a uniform, effective “post-injury procedure” for our policyholders led us to introduce a 24/7 nurse triage service to several policyholders on a trial basis in 2013. The results have been so impressive that we plan to roll out this telephonic service to most of our policyholder base in the next 12 to 24 months. Through a combination of disciplined risk selection, unrivaled claim and medical cost management, and careful use of our professional resources, SFM followed an exemplary 2012 with similar financial results in 2013. Net earnings topped $9 million, contributing to a return on policyholder surplus of 10% and a combined ratio under 100. But our most notable operational statistic is that over 94% of our customers renewed their policies with SFM in 2013; a remarkable achievement in our line of business and a testament to the sustainable competitive advantage we provide our agency partners. We are pleased that our renewing policyholders incurred an average pricing increase of less than 2.5% in 2013, largely because of the work we do with agents and employers to reduce the incidence and severity of claims and thereby lower employer experience ratings. These cooperative efforts contribute to lower premiums and a stable market, even as wages and medical costs continue to rise. Expertise, responsive service and long-term value: At SFM, where all we do is workers’ compensation, these are the ingredients of success. Robert T. Lund President and Chief Executive Officer Full 2013 Annual Review at sfmic.com Sampling of 2013 accomplishments n Workers’ compensation partner of choice for approximately 13,000 employers n 94 percent renewal rate 7,000 additional employers served through the Minnesota Assigned Risk Plan Financial highlights Statement of Financial Condition (in thousands) December 31, 2013 2012 Assets Bonds $352,487 $329,330 Cash and short-term investments 13,29311,347 Other invested assets 24,55117,967 Total investments 390,331358,644 n Over Premiums not yet received 50,13248,406 Accrued investment income & other assets 38,86638,478 Total assets $479,329$445,528 n More Liabilities and Surplus Loss & loss adjustment expense reserves $272,962 $252,720 Unearned premium 66,27064,419 Other liabilities 38,93836,598 Total liabilities 378,170353,737 than 2,500 workplace safety visits n Over 15,000 claims managed in 2013 n Top ranking for prompt action on lost-time claims, according to a Minnesota state report attorneys worked on more than 2,500 claims, with a 70 percent win rate on contested cases Policyholders’ surplus 101,15991,791 Total liabilities & policyholders’ surplus $479,329 $445,528 n In-house n Subrogation recoveries exceeded $1.3 million n Over $100 million in surplus n SFM Foundation enters its sixth year having awarded $433,000 in scholarships to 60 students Statement of Operations (in thousands) For the years ended December 31, Direct written premium Net earned premium 2013 $146,101 $139,808 2012 $140,055 $132,038 Net loss & loss adjustment expenses 109,977 102,580 Commissions & operating expenses 27,42626,693 Underwriting gain (loss) $2,405 $2,765 Net investment & other income $12,518 $13,464 Dividends to policyholders (3,315)(2,758) Federal income tax expense (2,526)(3,815) Net income $9,082 $ 9,656 Other changes to surplus 286 297 Increase to policyholders’ surplus $9,368 $9,953 Combined ratio (including dividends to policyholders) 99.99% 98.99% This presents consolidated financial information for SFM Mutual Insurance Company and its wholly owned subsidiary SFM Select Insurance Company. SFM Mutual’s loss and loss adjustment expense reserves are reviewed by independent actuary Deloitte Consulting, LLP. Detailed unconsolidated financial statements, audited by independent auditors Strohm Ballweg, LLP, are available upon request at www.sfmic.com > About SFM > Financial Information or by calling SFM at (800) 937-1181 ext 4280. Dear SFM Policyholders, Agents and Friends Like many of your organizations, SFM suffered through the severe recession of 2008-2009 and the painfully slow economic recovery that ensued. But we emerged stronger than ever and have benefited from concentrating our business in the Upper Midwest, where economic indicators, from job creation and unemployment rates to consumer confidence and business investment, continue to improve. The old proverb “slow and steady wins the race” may not resonate on Wall Street but aptly describes successful long-term businesses on Main Street. It certainly applies to SFM, as we continue to enjoy steady, measured growth year after year. We continued to make targeted investments in technology in 2013, upgrading our custom-developed enterprise software, launching electronic policy delivery, and refining predictive analytics to give us a more reliable early-warning system for volatile claims. We understand that the earlier our professional adjusters can respond to a claim with appropriate care, the sooner the employee will return to work and the better the outcome for everyone. Striving to create a uniform, effective “post-injury procedure” for our policyholders led us to introduce a 24/7 nurse triage service to several policyholders on a trial basis in 2013. The results have been so impressive that we plan to roll out this telephonic service to most of our policyholder base in the next 12 to 24 months. Through a combination of disciplined risk selection, unrivaled claim and medical cost management, and careful use of our professional resources, SFM followed an exemplary 2012 with similar financial results in 2013. Net earnings topped $9 million, contributing to a return on policyholder surplus of 10% and a combined ratio under 100. But our most notable operational statistic is that over 94% of our customers renewed their policies with SFM in 2013; a remarkable achievement in our line of business and a testament to the sustainable competitive advantage we provide our agency partners. We are pleased that our renewing policyholders incurred an average pricing increase of less than 2.5% in 2013, largely because of the work we do with agents and employers to reduce the incidence and severity of claims and thereby lower employer experience ratings. These cooperative efforts contribute to lower premiums and a stable market, even as wages and medical costs continue to rise. Expertise, responsive service and long-term value: At SFM, where all we do is workers’ compensation, these are the ingredients of success. Robert T. Lund President and Chief Executive Officer Full 2013 Annual Review at sfmic.com Sampling of 2013 accomplishments n Workers’ compensation partner of choice for approximately 13,000 employers n 94 percent renewal rate 7,000 additional employers served through the Minnesota Assigned Risk Plan Financial highlights Statement of Financial Condition (in thousands) December 31, 2013 2012 Assets Bonds $352,487 $329,330 Cash and short-term investments 13,29311,347 Other invested assets 24,55117,967 Total investments 390,331358,644 n Over Premiums not yet received 50,13248,406 Accrued investment income & other assets 38,86638,478 Total assets $479,329$445,528 n More Liabilities and Surplus Loss & loss adjustment expense reserves $272,962 $252,720 Unearned premium 66,27064,419 Other liabilities 38,93836,598 Total liabilities 378,170353,737 than 2,500 workplace safety visits n Over 15,000 claims managed in 2013 n Top ranking for prompt action on lost-time claims, according to a Minnesota state report attorneys worked on more than 2,500 claims, with a 70 percent win rate on contested cases Policyholders’ surplus 101,15991,791 Total liabilities & policyholders’ surplus $479,329 $445,528 n In-house n Subrogation recoveries exceeded $1.3 million n Over $100 million in surplus n SFM Foundation enters its sixth year having awarded $433,000 in scholarships to 60 students Statement of Operations (in thousands) For the years ended December 31, Direct written premium Net earned premium 2013 $146,101 $139,808 2012 $140,055 $132,038 Net loss & loss adjustment expenses 109,977 102,580 Commissions & operating expenses 27,42626,693 Underwriting gain (loss) $2,405 $2,765 Net investment & other income $12,518 $13,464 Dividends to policyholders (3,315)(2,758) Federal income tax expense (2,526)(3,815) Net income $9,082 $ 9,656 Other changes to surplus 286 297 Increase to policyholders’ surplus $9,368 $9,953 Combined ratio (including dividends to policyholders) 99.99% 98.99% This presents consolidated financial information for SFM Mutual Insurance Company and its wholly owned subsidiary SFM Select Insurance Company. SFM Mutual’s loss and loss adjustment expense reserves are reviewed by independent actuary Deloitte Consulting, LLP. Detailed unconsolidated financial statements, audited by independent auditors Strohm Ballweg, LLP, are available upon request at www.sfmic.com > About SFM > Financial Information or by calling SFM at (800) 937-1181 ext 4280. SFM Board of Directors James W. Benike Rochester, MN Kent D. Dixon Chaska, MN Robert S. Mars III Eden Prairie, MN Mary Ann Blade Plymouth, MN Truman L. Jeffers New Brighton, MN Gene R. Merriam Coon Rapids, MN Charles E. Clysdale Roseville, MN Robert T. Lund Plymouth, MN F. Clayton Tyler Minneapolis, MN SFM Corporate Officers Robert T. Lund President and Chief Executive Officer Terrence L. Miller Senior Vice President and Chief Financial Officer David E. Kaiser Senior Vice President and Chief Information Officer M. Scott Brener Senior Vice President and General Counsel Michael L. Happe, CPCU Senior Vice President, Business Development and Strategic Planning Steven T. Sandilla Senior Vice President, Strategic Business Operations, Established Markets Andrew W. Lynn Vice President and Senior Counselor Margaret L. Kasting Vice President, Claims 2013 review Jody L. Rogers Vice President, Human Resources Brian R. Bent, CPCU Vice President, Director of Underwriting Daniel M. Janiga, M.D. Medical Director Timothy L. Collin President and Chief Operating Officer, CompRehab, Inc. Annual Meeting 9:00 a.m., June 9, 2014 3500 American Blvd. West; Bloomington, Minnesota Our Mission To be the workers’ compensation partner of choice for agents, employers, and injured workers through our unrivaled service, expertise and commitment to workplace safety. SFM Companies 3500 American Blvd. West, Suite 700 Bloomington, Minnesota 55431 ©2014 SFM Mutual Insurance Company All rights reserved. pub-ar-0214 full annual review at sfmic.com sfmic.com SFM Mutual Insurance Company | SFM Select Insurance Company
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