We are again seeing competition within the rural electric insurance program. The competition is primarily driven by what is referred to in the insurance industry as a “soft” insurance market. This soft market is not driven by rising interest rates or a booming stock market like in the past; it is simply the result of supply and demand where there is more capacity and not enough demand to absorb it. Bottom line, many companies are relaxing their underwriting standards in an attempt to achieve profit goals.

Pricing business based on market conditions rather than on system experience is certainly a questionable business practice. A.M. Best, an independent company that rates insurers and the banking industry on financial stability, on January 10, 2011, issued a revised 2011 outlook on the commercial insurance industry from stable to negative. The reason for the revised rating was based on soft pricing, competition and a smaller loss reserve cushion for insurers to access.

While we acknowledge and recognize market conditions, we believe that balance sheet strength and financial integrity are the ultimate determinants of the long-term financial stability that our members have come to expect. Federated’s surplus growth and stable operating performance is directly related to our strategic goal of operating at or below a 100 percent combined ratio, which is essentially an “at cost” program. If we are successful in operating on a breakeven basis from our underwriting operations and nothing out of the ordinary happens, this allows our investment income to be returned to you, our member-owners, in the form of patronage capital. Federated has achieved the goal of operating at or below a 100 percent combined ratio nine out of the past 11 years.

It’s clear that a focus on safety has contributed to making it a good year for Federated. Looking back on 2010, new claim counts totaled 12,282. This is the smallest number of new claims reported in the past five years. We see similar results in our workers’ compensation line of business as new claims reported peaked in 2005 and have trended downward since that year. While we are pleased to see the downward movement in claims reported, we continue to have a concern with the frequency and severity of public contact claims. With the addition of two public contacts reported in December 2010, total public contacts for the year grew to 118 with 31 fatalities. Those totals compare to 117 and 25 fatalities for calendar year 2009.

As you can see, it’s important that we keep our safety focus. In 2010, Federated launched an initiative to learn more about “leading” practices utilized throughout the cooperative program to reduce incidents and accidents. This information, along with what we gathered from the Safety Strategy Labs we sponsored, helped us identify some “leading” safety processes which, when implemented, help guide the way to exceptional performance. I encourage you to join us at our Annual Meeting in Orlando and learn more about the study and how you, our members, can get involved in sharing “leading” practices with your peers.

In November 2010, Federated’s Board authorized the retirement of all remaining year 2001 and 2002 member equity account balances. The cash distribution to Federated’s member systems in December 2010 totaled nearly $3.5 million. This was in addition to the $4.4 million of equity distributions that were made during the first quarter of that year. Since 1999, Federated has returned over $33.3 million in cash margins to our members. As you can see, there are real, tangible financial benefits of being a member of Federated.

However, the benefits do not stop here; Federated’s members can benefit through their participation in Federated’s Workers’ Compensation Group Retention Program, loss control contributions to statewide safety programs, safety resources and more.

Providing safe, reliable, and affordable electricity is a hallmark of the cooperative program. As you and your members strive to make the most of your resources, Federated will continue to provide leadership in minimizing risk, monitoring frequency and severity of losses, and preparing for the unexpected impact of unfortunate events. Remember, by working together cooperatively, we can achieve so much more than any one of us can achieve individually. We thank you for your support of Federated and look forward to seeing you in Orlando at our Annual Membership Meeting.