Full report - SGI Canada

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SGI CANADA has defined “industry” for MCT
and combined ratio purposes to represent
P&C companies (both domestic and foreign
branch) with net premium written exceeding
$6 million CDN and excludes all reinsurers,
Lloyd’s, Insurance Corporation of British
Columbia, Manitoba Public Insurance and the
Saskatchewan Auto Fund.
The Corporation targets an after-tax ROE based on its annual budget and it exceeded its target returning
23.1%. SGI CANADA’s ROE has been favourable compared to the industry over the years as well. The
industry’s pre-tax ROE for the year is estimated to be 13%, based on data available to the end of the third
quarter of 2010, the most recent time period available. By comparison, SGI CANADA’s consolidated pre-tax
ROE was 24.6%. The Corporation’s 10-year average pre-tax ROE is 23%, while the industry averaged 15%
for the same time period. Note that because SGI CANADA does not pay income tax on its Saskatchewan
operations, the most relevant ROE comparison to the industry is pre-tax.
For 2011, the target is to achieve a consolidated after-tax ROE of 16.6%, based on the Corporation’s
consolidated budget estimates.
Minimum Capital Test (MCT)
The MCT is a regulatory measure used to assess a company’s financial strength. The MCT is a risk-based
capital adequacy framework that assesses the riskiness of assets, policy liabilities and off-balance sheet
exposures by applying varying factors. From these calculations comes a ratio of capital available to capital
required. The regulatory minimum for this ratio is 150%. That is, capital available has to be at least 50%
more than capital required. The 50% cushion provides comfort for insurers to cope with volatility in markets
and economic conditions, innovations in the industry, consolidation trends, international developments
and to provide for risks not explicitly addressed, including those related to systems, data, fraud, legal and
other risks. The target for 2010 is based on the December 31, 2008, industry 3 average MCT.
The following table shows MCT results by legal entity:
Company December 31, 2010 December 31, 2009
SGI CANADA (consolidated) 247% 254%
SGI CANADA Insurance
Services Ltd. (consolidated) 361% 358%
Coachman 330% 385%
ICPEI 300% 269%
The above table indicates that all companies have a strong MCT at the end of 2010, well above the
regulatory minimum. SGI CANADA’s MCT remains adequate, however decreased slightly due to its 2010
dividend requirement. ICPEI’s increase in its MCT reflects its profitability in 2010, while Coachman’s MCT
declined due to increasing exposure and risks related to the significant growth in the auto book of business.
For 2011, the target is for consolidated operations to have an MCT at 250%. The dividend policy will be
structured to maintain the target MCT.
Manage administrative expenses
To ensure effective use of resources, SGI CANADA manages its allocated administrative expense budget
such that the Corporation remains within its targeted administrative expense ratio. The ratio is calculated
as total administrative expenses expressed as a percentage of net premiums earned. The actual
administrative expense ratio is compared to budgeted ratios within the specified time period. For 2010,
SGI CANADA exceeded its target with a 12.2% administrative expense ratio. The target for 2011 is 12.5%.
Enhance enterprise risk management (ERM) program
Given the nature of the insurance business, risk management is a particularly important objective.
SGI CANADA has been actively identifying, managing and prioritizing its risks for several years. Issues
such as quantifying risks using actuarial modelling techniques will be explored to determine the benefits
of this evolving process in risk management. In 2008, the Corporation completed a gap analysis on the
current process. In 2009, it developed an action plan for ERM, including components and a timetable for
the first implementation phase. The first phase was implemented in 2010.
ERM will continue to be a focus in 2011, but will be removed as a corporate measure on the balanced
scorecard.
Profitable growth
Key to the Corporation’s success is its ability to grow while maintaining profitability in a highly competitive
industry. Operations in provinces outside Saskatchewan continue to be crucial to SGI CANADA’s
diversification strategy, however, this strategy also includes maintaining the Corporation’s large market
share within Saskatchewan. It is a basic business principle for insurance companies to reduce the impact
of significant losses by having diversified operations – both geographically and in product mix. Losses
in one product or province can be made up through profits in other products and in other provinces. It is
important for the Corporation to continue to diversify its insured risks, although it is understood that it is
not possible for all segments or markets to be profitable each year. During 2010, 26.7% of direct premiums
written were from outside Saskatchewan, an increase of 4.5% from 2009.
While growth is key to long-term success, the Corporation overall must be profitable in order to sustain
growth. The Corporation recognizes that it cannot lose sight of the Saskatchewan marketplace, the market
where its success developed and that represents the majority of its overall premium base. SGI CANADA
strives to continue to grow profitable lines of business in Saskatchewan while maintaining its market share.
SGI CANADA uses a number of key performance indicators in its balanced scorecard to monitor the above
initiatives to ensure that it is on course with its strategies:
Legend: ○ achieved h did not achieve
Measure 2010 Target 2010 Results 2011 Target
$338.7 million ○ $344.3 million
Consolidated gross
$103.7 ○ $125.7 million
premium written -
$509.5 million
In-province gross
premium written
Out-of-province gross
premium written
Consolidated
combined ratio
Less than 98% ○ 96.8% 93.4%
In-province gross premium written and out-of-province gross premium written
In 1993, SGI CANADA began to diversify its operations with three goals in mind: spreading geographic
risk, creating jobs in Saskatchewan and increasing profits for its shareholder. The current strategy for all
operations is profitable growth. Targets for growth are set in the budget each year. The 2010 target for
in-province gross premium written was $338.7 million, which was exceeded by $5.6 million. The target
for out-of-province gross premium written was $103.7 million, which was exceeded by $22.0 million.
Coachman business contributed the majority of the growth in out-of-province operations, with $49.1 million
in direct premiums, compared to $31.7 million in 2009.
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