A Message from our Chairman and from the President & CEO of the Companies
Dear fellow shareholders
Like many successful enterprises, BancInsure was born out of substantial challenge and extraordinary collaboration. During the banking crisis of the 1980’s, banking professionals faced the difficult task of acquiring insurance. As bank earnings were impaired and the regulatory environment grew more complex, many insurers lost interest in serving the banking industry. BancInsure was formed by bankers, for bankers, to provide our nation’s community banks with the essential insurance products that other insurers no longer wished to offer.
More than twenty years have passed since fifteen state banker association executives came together to form BancInsure and once again we find ourselves in the midst of economic turmoil. The banking and insurance industries have together faced extraordinary challenges while facing unprecedented demands by lawmakers, regulators, customers, and stakeholders.
Throughout the tumultuous year that was 2008, BancInsure’s commitment to the banking industry was steadfast. Our experience provided us with the skills we needed. The management team and board of directors provided the leadership to successfully withstand the global economic crisis, while possessing the vision to see beyond the market collapse and take steps toward the opportunities awaiting us.
Our tag line has never been more appropriate. We were made for times like these.
Investing in the future
Based on BancInsure’s financial performance in 2006 and 2007, the Board of Directors voted in early 2008 to apply 50% of Retained Earnings in the following manner:
• $0.866M in dividends were issued to shareholders - the first dividend payment since the firm changed leadership.
• $1.031M was used to retire a portion of the small amount of debt held by BancInsure.
Yet even as these reserves were being prudently deployed, storm clouds were beginning to quickly gather throughout the
global economy.
Navigating the financial perfect storm
There is no denying that 2008 witnessed a perfect storm in the financial services sector that devastated banks and
insurance carriers.
BancInsure was not spared by the crisis, incurring a Net Loss of ($7.179M), down from 2007 Profits of $3.089M. Statutory Capital and Surplus declined by 35.8% in 2008 to $29 million.
BancInsure’s financial performance was primarily driven by investment portfolio losses, a surge in severity of claims from the professional lines products and a significant increase in reinstatement premiums on reinsurance.
Investment portfolio losses
The global collapse of debt and equities markets in 2008 did not leave BancInsure unscathed. As of 12/31/08, Unrealized Investment Gains, Net of Taxes posted a ($5.397M) loss, compared to a $0.968M gain the year before.
These returns were yielded by a portfolio devoid of sub-prime mortgage investments, and with only one fixed income investment below investment grade.
While significant, the conservative investment strategies of the company and the leadership of our investment committee, led by Jim Wallis, minimized the severity of the losses. In fact, BancInsure’s investment portfolio returned (-8.6%), dramatically outperforming the S&P 500 (-37%).
Loss severity in professional lines
As the balance sheets of banks were battered by both investment losses and loan write-offs, an increasing number of insured losses followed closely in their wake. The result has been to significantly increase loss ratios for both Financial Institution Bond (FIB) and Directors & Officers (D&O) Liability products. (see Figure 1)
Incurred Losses/LAE for FIB products was ($6.294M) on Net Earned Premiums of $2.128M, for a Net Loss Before Expenses of ($4.166M). For D&O, Incurred Losses/LAE was ($11.154M) on Net Earned Premiums of $5.456M, resulting in a Net Loss Before Expenses of ($5.698M).
This was not a bank failure issue – in fact, we incurred no losses directly resulting from bank failures in the past nine years.
Increased reinsurance reinstatement premiums
The extraordinary economic circumstances and resulting losses in 2008 resulted in BancInsure expensing an unprecedented $4.3M in reinsurance reinstatement premiums. This amounts to a nearly $3.8M increase – 760% –
in the reinsurance expense typically paid on an annual basis.
Return to profitability
Underwriting discipline
A tradition of strong underwriting discipline is reflected by the fact that, despite holding a 23% share of the market, BancInsure was only exposed to potential claims from 12% of failed banks.
Once issues with the most problematic lines of business – FIB and D&O – became apparent in early 2008, BancInsure’s management team focused unprecedented attention on underwriting and took the following actions:
• In March 2008 the Chief Underwriting Officer position was created to enhance underwriting discipline.
• In June of 2008 BancInsure recruited and hired a new Director of Professional Lines Underwriting to implement underwriting practices intended to return the professional lines products (including FIB and D&O) to profitability. Among those practices implemented is a quarterly review of the professional lines book of business.
• During the fourth quarter of 2008, the entire book of professional lines business was reviewed and proactive underwriting action was taken on problematic accounts. This ultimately resulted in fewer – but higher quality – policies at increased rates, and positioned BancInsure well for the impending hardening of the market.
Pricing integrity
Despite increasing claims activity and growing concerns in the banking community, our competitors continued to place downward pressure on industry pricing in the D&O market. This continued downward pricing pressure ultimately began to jeopardize BancInsure’s profitable accounts.
By May of 2008, we clearly recognized an opportunity to demonstrate market leadership and change the course of pricing in the industry. BancInsure announced that it will no longer participate in a “race to the bottom” for pricing in the professional lines liability market. As a result, we perceived the market firming throughout the second half of 2008, and were ultimately able to increase prices across all lines of business.
Growth in profitable lines
Even in the midst of economic upheaval, we continued to grow policies (see Figure 2) in our profitable Property and Casualty, Workers’ Compensation and lender- related products.
Written premiums for products other than FIB and D&O grew by $3.525M in 2008 to $43.712M. The combined Net Profit Before Expenses for these products was $19.058M on Net Earned Premiums of $38.645M.
The profits generated by these lines provided the capacity to offset losses in our professional lines portfolio.
Outlook for 2009
As the issues we face grow even more complex and the nation continues to struggle with economic uncertainty, BancInsure continues to be a company dedicated to community banks - the majority of which are run with discipline and diligence. We are committed to our nation’s banking industry and remain confident in the American banker.
We also continue to pursue opportunities to realize higher margins through diversification in non-financial institution products. We are particularly enthusiastic about the potential in the following areas:
• Workers’ Compensation partnerships in South Dakota
• Matterhorn Financial Services offerings in both financial and non-financial products
• Oklahoma Workers’ Compensation managing general agency
• Partnership with C.L. Frates and Company to offer selected products for home builders in Oklahoma
We are confident that our business model, capital management plans, and underwriting actions will continue to yield improved results.
Our rich history of service to the banking industry spans times more challenging than these. We have the right team and the right discipline to thrive in this economy.
By Bankers – For Bankers, we were made for times like these.®
Galen Pate
Chairman of the Board |
Rodney N. Sargent
President and CEO of the Companies |