International Fidelity Insurance Company One Newark Center Newark, NJ 07102

Transcription

1 International Fidelity Insurance Company One Newark Center Newark, NJ Management s Discussion and Analysis of Financial Condition and Results of Operations For the year ending December 31, 2012 Prepared by: Mark Riccordella Senior Vice President & Chief Financial Officer March 31, 2013 Contact: Mark Riccordella Senior Vice President & Chief Financial Officer NAIC Group Code: 4705 NAIC Company Code: 11592

2 OVERVIEW International Fidelity Insurance Company ("IFIC") is the largest privately owned, independent Insurance Company that specializes exclusively in surety. The Company operates through a network of 31 Regional Profit Centers located throughout the continental United States utilizing the independent agency system that specializes in surety. The company is licensed in 50 states, Puerto Rico, Guam, and the District of Columbia. The company is treasury listed by the United States Treasury Department and is an authorized surety in all Federal Courts. IFIC writes five different lines of surety: Contract, Commercial, Bail, Specialty and Subdivision. accounting for 47.3%, 25.0%, 16.0%, 11.2% and.5%, respectively of the company s total direct written and direct assumed premium for Surety bonds written in each of these lines is written across the United States. IFIC owns one wholly owned subsidiary company: Allegheny Casualty Company (ACC.). ACC is a non-operating, non-risk taking regulated insurance company. It maintains capital and surplus in excess of $19 million and an AM Best rating of A-. ACC s Management s Discussion and Analysis of Financial Condition and Results of Operations provides a more detailed outline of this company.. HISTORY IFIC was formed in 1904 with the first surety license issued by the State of New Jersey. The company was initially formed as a subsidiary of the Singer Sewing Company as its captive provider of fidelity coverage. In 1964 IFIC was purchased by a group of investors led by agents specializing in surety bail bonds. Upon this sale, the company became a writer of surety bail bonds. Over the years, IFIC expanded into other types of non-bail, or in other words civil, surety bonds. Throughout the 1970 s, 1980 s and most of the 1990 s the company was a low capacity, nonstandard (secured) surety that operated primarily through one location writing both bail and civil surety. While the company s bail business had always been profitable, its civil surety business was not consistently profitable. Therefore, in the late 1990 s the company changed the type of civil surety business it wrote from non-standard (collateralized) to standard (unsecured/uncollateralized) in which its business would be marketed, underwritten and processed through a branch network of regional profit centers. In late 2009, IFIC established a new underwriting department called Specialty to write nonstandard surety business through a network of regional profit centers in which the employees are dedicated solely to Specialty. To support this new business, IFIC purchased 100% of ACC and the bonds written by the Specialty underwriting department will be issued in the name of ACC. This supports the Specialty line s unique rates, commissions and marketing identity. 2

3 STRATEGY The strategy of the company is to fulfill its mission statement. This mission is centered around providing long-term rewarding relationships with agents, shareholders and reinsurers. Management s plan to achieve long-term profitable growth is to continue to capitalize on the fact that over half of the company s regional office profit center locations have been established within the last five years and therefore have not yet reached their market share potential. Over half of these newer regional profit centers have been established during the last four years. Thus, management believes this recently expanded regional profit center network will provide a platform of profitable and sustainable growth over the next decade. This approach requires a commitment of additional overhead. Over the short-run this creates a drag on earnings while setting up the company to grow earnings over the long-term without lowering underwriting standards and/or pricing. The company s Specialty Underwriting Department was established to write bonds for contractors who may not be qualified for a surety bond on an unsecured basis but become qualified with some level of security being provided. Management believes the niche for this type of qualified contractor is underserved and growing. ACC was acquired to support the Specialty Department s separate identity, rates and commissions. While bonds written by the Specialty Underwriting Department will be issued by ACC, the risk will be undertaken by IFIC by way of an internal reinsurance agreement between IFIC and ACC. Management s philosophy includes being a consistent underwriting company as the economy cycles through recessions and expansions. Therefore, the company will not engage in reunderwriting business but at the same time will adjust underwriting practices with changing market conditions. To support this philosophy, the company has not established a risk-based credit scoring model of the accounts to which it extends surety credit. The company practices a philosophy of continuous improvement across all departments of its business, in its risk management, and corporate governance. This includes the development of a process to evaluate its counterparty exposure in collateral holdings and underwriting risks. A dedicated team was established to provide an enhanced audit process to measure underwriting compliance with the authority structure, guidelines and management of outstanding exposures was established. In the management of the company s over $200 million of cash and invested assets the company is implementing enhanced portfolio management techniques to further enhance the management of credit and market risks. FINANCIAL CONDITION The Company's Policyholders' Surplus at 12/31/12 is $103,822,969. The 2012 $7.4 million net income and a $2.4 million increase in non-admitted asset and realized capital gains resulted in an increase in surplus from the $94,054,412 at 12/31/11. The remaining non-admitted charges of unrealized losses on investments in marketable securities and accounts receivable are at acceptable levels. The company s policyholder surplus is made up of a liquid balance sheet with little leverage. Cash and invested assets comprised 91.7% and 91.8% of net admitted assets at December 31, 2012 & 2011 respectively. Net admitted assets increased 5.4% from $234,075,001 in 2011 to $246,825,231 in 2012, due to continued positive cash flow from operations. At 12/31/12, liabilities increased 2.1% from $140,020,588 to $143,002,263 as of the current period. This is mainly due to an increase in Unearned Premium. Reserves for losses, loss adjustment expenses, unearned premiums and collateral funds held for others continue to comprise the significant balance sheet liability accounts. 3

4 For the year ended December 31, 2012, IFIC had Total Adjusted Capital of $103,822,969 and an Authorized Control Level RBC of $16,669,715. Adjusted Capital represents approximately 623% of the Authorized Control Level RBC, considerably above any threshold requiring company or regulatory action. For the year ended December 31, 2011, the Company had Adjusted Capital of $94,054,412 and an Authorized Control Level RBC of $12,101,499. Adjusted Capital represented 777% of the Authorized Control Level RBC. In 2012 the company purchased 44,444 shares of its stock at a price of $45 per share. The stock is being held in a Trust. Over time the Trust will distribute all of these shares to IFIC employees on an as requested basis. In 2011 employees opted to buy 2,774 of these shares from the Trust. In 2012 employees have opted to buy an additional 12,169shares from the Trust. The remaining 51,501 shares are held as Treasury Stock by IFIC through the Trust. It is expected that the remaining shares will be distributed by the end of RESULTS OF OPERATIONS In 2012, the company reported a decrease of $1 million year on year for both direct written premium and $4 million year on year for direct earned premium. Direct written premium decrease to $126 million from $127 million and direct earned increased to $126 million from $121 million. In 2012, after tax net income was increased by 1.8% year on year. This is primarily due to an increase in earned premium. The company believes that we are in the part of the business cycle where losses will be at their highest. While we do not expect losses to return to the lower levels of 5 years ago for some time, we do expect that our loss experience will begin to moderate and gradually improve as the economy improves. Commission expenses to agents and company operating expenses remained unchanged in 2012 from 2011 as a percent of earned premium. Net Investment Income remained lower than the industry average as the Company pursued a policy of capital preservation over yield enhancement. The Company actively managed the duration of the portfolio down the yield curve and also improved the overall credit quality of the portfolio through diversification. This move into shorter duration and higher quality fixed income products resulted in lower yields but had the benefit of being less volatile. The Company's combined ratio at 12/31/12 was 89.9% an decrease from 91.6% for the prior year. The Company s net written premium to surplus continues at a very acceptable level. For 2012 it was 1.06% which was a slight increase from 1.14% in CASH FLOW Cash flow from operations was a positive $7.2 million, which is up from $6.2 in the prior period Premiums Collected Net of Reinsurance increased by $5 million in comparison to The increase in premium collections is due to an increase of $3 million in civil premiums.. Although lower year over year, management is still very comfortable with the level of positive cash flow generated from operations. 4

5 Cash flow from investments was a negative $7,075K. Cash and invested assets increased from $214 million to $226 million. Cash flow from financing and other sources was a negative $11. million, down from a positive $334,000 for the prior period. Management believes that future cash needs can be met from general operating cash flow and that the mix of short-term investments and maturity of fixed investments will provide adequate liquid resources to meet its cash needs. Furthermore, the company has no significant material commitments or plans for future capital expenditures. INVESTMENTS The company s current investment strategy is positioned for capital preservation. Return on invested assets may be limited to a level of risk where it can be reasonably expected that any short-term volatility would not have a negative material impact on the company s expected annual earnings. Investments in any individual equities or bonds are done only on a limited basis and are not a material part of our portfolio. The cash and invested assets as of December 31 for 2012 and 2011 are as follows: Invested Assets Cash & cash collateral $84,019, % $104,817, % Taxable Fixed Maturities $35,473, % $46,729, % Marketable Equity Securities 57,437, % 32,221, % Investment in Subsidiary 25,756, % 25,312, % Misc Invested Assets 11,981, % 2,765, % Tax Exempt Fixed Maturities 2,192,096 1.% 2,951, % Mortgage Loans 400,000.2% 155,200.1% Short Term Investments 9,083, % 0 0% Cash & Invested Assets $226,345, % $214,953, % At the 2012 FYE the company s cash and invested assets increase 5.3% from the prior period. The fixed income portfolio is comprised mostly of securities with maturities of five years or less, as shown below: EXPECTED MATURITY Adjusted Carrying Value One year or less $ 4,420,663 $ 10,485,096 One year through five years 29,725,294 38,118,387 Five years through ten years 3,519,836 1,077,599 Ten years through twenty years 0 0 Twenty years or greater 0 0 TOTAL Fixed Income Portfolio $37,665,793 $49,681,082 The overall duration of the fixed income portfolio is 2.1 years, down from 2.2 years in 2010, with an overall credit quality of Aa2/AA. Limited credit exposure helps the portfolio weather turbulent periods in the fixed-income markets, while the shorter bonds duration reduces our exposure to potential inflationary pressures. 5

6 Management believes that the mix of investments, in both type and length of maturity is appropriate in order to preserve capital, take advantage of investment opportunities, and provide the Company with sufficient liquidity to react to changing economic conditions while supporting business operations. The equity holdings are substantively hedged for market risk and the use of diversified mutual funds limits the single credit exposure of the portfolio. Holdings invested in both exchange traded funds and open-ended mutual funds provide diversified style-neutral exposure to both domestic and international markets. LOSS AND LOSS EXPENSE In 2012, the loss and loss expense ratio was 20.4%, Net pure loss ratios, which excludes Loss adjustment expenses, for the last five years are as follows: Year Net Pure Loss Ratio % % % % * % % % % * The Pure Loss Ratio for 2009 excluding Customs was 6.8%. The Company maintains a conservative level of Incurred But Not Reported Reserves ("IBNR") and recognizes more than 5% of inforce premiums. These reserves are adjusted each year based on an actuarial analysis of the historical loss data and ultimate net loss projections. In 2012, the Company s net loss and loss expense reserves included approximately $10,330,000 in net IBNR. The liabilities for unpaid losses and loss expenses are determined using case basis evaluations, and represent estimates to the ultimate net cost of all unpaid losses and loss expenses for each year. Anticipated salvage and subrogation is used to reduce the liability for unpaid losses. A conservative method is used to calculate anticipated salvage, producing redundancies in later years. These estimates are continually reviewed as historical experience develops. The liabilities are adjusted based on management s best estimate of the ultimate net loss, with such adjustments being charged to current year operations. For 2012, Schedule P-Part 2 - Summary displayed a redundancy of $6,454,000 and $4,356,000 for the One Year and Two Year Developments, respectively. As of December 31, 2011, the One-Year Development of Schedule P exhibited a redundancy of $123,000and the two-year development a redundancy of $12,029,004. As shown in the attached exhibit, Historical Redundancy of Incurred Losses, IFIC s reserves are consistently redundant after 11 years. No trends have been identified that are considered non-recurring or abnormal as of December 31, 2011, the most recent evaluation date. 6