Letter from the President
Dear SFM Policyholders, Agents and Friends—
Like many of our policyholders, SFM has been working hard to overcome the effects of a devastating recession and anemic (so far) economic recovery. We intend to be positioned for profitable growth when the economy shifts into a higher gear that produces jobs and greater prosperity for mainstreet America, where we do business.
Sluggish economy impacts payrolls and claims
In 2009, as a consequence of high unemployment and declining payrolls, SFM returned a substantial amount of audited premium to policyholders on a net basis for the first time in a quarter century. This net audit return continued in 2010 at a reduced level, reflecting a slowly improving job market but still highlighting the net number of positions lost in industries like construction, retail sales and heavy manufacturing.
Employers have struggled to provide transitional duty jobs for workers recovering from more serious injuries, and placement of injured employees who cannot return to their former line of work has been expensive and difficult in this economy. This challenging return-to-work environment tends to extend the duration and increase the wage-loss and rehabilitation benefits associated with lost-time claims.
Another factor that is adding to the cost and duration of claims is the aging workforce. The average age of an injured worker is now over 40, and workers over 65 represent the fastest growing cohort of employees in the Midwest. Although these older workers have more experience and generally fewer accidents than their younger co-workers, their injuries are often more severe, meaning they take longer to heal because of complications and collateral health issues and are two to three times more expensive. Moreover, we are seeing a significant increase in the most expensive lost-time claims—those alleging permanent total disability—from claimants over 50 years of age.
Medical cost escalation continues
Medical costs per claim have risen about 7 percent per year over the past five years, a rate that outpaces any measurement of core or wage inflation and also exceeds the earnings rate on our investment portfolio. Moreover, medical costs now account for about 60 cents of every workers' comp benefit dollar. Some of the medical cost drivers include:
Obesity is one of the most prominent factors in driving up claim costs. Obese employees are much more likely to suffer from co-morbidities like diabetes, hypertension and heart disease. Recent studies indicate that lost-time injuries involving obese workers cost at least three to five times more than the same injuries involving non-obese employees.
2010 a year of mixed results
SFM's financial results were modestly better than break-even in 2010. The good news for our policyholders is that competition among insurers has continued to facilitate a buyers' market for workers' compensation coverage. The average price of coverage for risks insured by SFM has declined six consecutive years, an overall reduction of almost 25 percent. As indicated above, both indemnity and medical costs per claim have steadily risen during this period, so how have insurers been able to reduce prices year after year? Consistent reductions in claim frequency have generally offset the increased cost of individual claims, at least until now.
In 2010, SFM experienced a 7 percent increase in claim frequency as well as adverse loss development from some earlier accident years, as the ultimate costs of the prolonged recession and jobless recovery have not yet been fully absorbed by the workers' comp system. The early and severe winter weather in Minnesota and Wisconsin contributed to a significant increase in serious slip-and-fall claims in November and December, despite SFM's aggressive marketing and loss prevention campaign to help policyholders avoid winter falls. All this contributed to an underwriting loss of about $12 million and a calendar year combined ratio of 110.
Given the extraordinary level of service and services SFM provides to agents, employers and injured workers, the premiums paid by our policyholders in 2010 were an extraordinary bargain. An industry leading 94 percent of our policyholders renewed their coverage with us in 2010, so we and our dedicated agency partners must be doing something right.
A combination of strong renewal business in Minnesota and Wisconsin, better than expected new business in Minnesota and a successful expansion into Iowa and Nebraska helped SFM increase written premiums by 9 percent to $109 million in 2010. We also managed expenses prudently, as evidenced by a miserly underwriting expense ratio of 18.7 percent.
SFM continued to make investments in technology and in the training and development of our professional staff in 2010. We developed an online wage reporting product for policyholders and made significant progress in upgrading our state-of-the-art insurance software suite. We also realigned our multi-functional business teams in order to provide even better service to our agents and policyholders. The pages that follow this letter highlight SFM's additional accomplishments in 2010.
Innovation and expertise are keys to success
At SFM we are excited about our future prospects, excited because we are committed to being the best workers' compensation insurer in the Upper Midwest, and we believe we have the resources, knowledge and expertise to accomplish our goal. In 2011, we'll work on innovative measures to identify and disarm potentially exploding claims before they become unmanageable. We'll continue our efforts to persuade policyholders to adopt employee wellness programs that improve productivity and reduce the incidence and severity of workplace injuries. We'll also expand programs to match claimants with the most effective doctors to treat their injuries, not the most enabling or expensive.
The great state of Wisconsin gave birth to the American workers' compensation system in 1911. The objectives of the system—to keep workers safe and productive and to compensate them fairly for their injuries—haven't changed much over the past 100 years, but there's always room to improve the methods to achieve the objectives and, of course, the actual results.
— Robert T. Lund