Michigan County Road Commission Self-Insurance Pool

Transcription

1 Michigan County Road Commission Self-Insurance Pool Comprehensive Annual Financial Report For the Fiscal Years Ended March 31, 2016 and 2015 Prepared by: Gayle A. Cummings, Administrator Kristi Pena, Assistant Administrator and Chief Financial Officer

2 Table of Contents

3 Contents Introductory Section Letter of Transmittal Certificate of Achievement for Excellence in Financial Reporting Organizational Chart List of Board and Staff i-v vi vii viii Financial Section Report Letter 1-3 Management s Discussion and Analysis 4-8 Basic Financial Statements Statement of Net Position 9 Statement of Revenue, Expenses, and Changes in Net Position 10 Statement of Cash Flows Notes to Financial Statements Required Supplemental Information Schedule of Claims Information for All Lines of Coverages - Fiscal Year Ended March 31, Reconciliation of Allowances for Unsettled Claims and Claims Adjustment Expenses by Type of Contract 29 OPEB Schedule of Funding Progress 30 Other Supplemental Information Schedule of Changes in Net Position by Policy Year for All Open Years from April 1, 2004 through March 31,

4 Contents (Continued) Financial Section (Continued) Other Supplemental Information (Continued) Schedule of Changes in Net Position by Policy Year - Fiscal Year Ended March 31, Budget-to-Actual Table - Twelve-month Period Ended March 31, Statistical Section Financial Trends: Net Position by Component Comparative Schedule of Revenue and Expenses - Years Ended March 31, 2007 through March 31, Revenue Capacity: Total Insured Value and Member Contributions 40 Principal Member Contributions 41 Aging of Receivables 42 Demographics and Economic Information: Reported Losses (Paid Losses Plus Case Reserves): All Coverages Claim Activity for the Ten-year Period Ended March 31, State of Michigan Statistics 46 Pool Statistics 47 Scope of Coverages 48 Operating Information: Loss Development Through March 31, 2016: All Coverages: Paid Losses Case Reserves Reported Losses (Paid Losses Plus Case Reserves) Incurred But Not Reported Reserves Reported Claim Counts 57 Closed Claim Counts 58

5 Contents (Continued) Statistical Section (Continued) Loss Development Through March 31, 2016 (Continued): General Liability: Paid Losses Case Reserves Reported Losses (Paid Losses Plus Case Reserves) Incurred But Not Reported Reserves Reported Claim Counts 67 Closed Claim Counts 68 Trunkline Liability: Paid Losses Case Reserves Reported Losses (Paid Losses Plus Case Reserves) Incurred But Not Reported Reserves Reported Claim Counts 77 Closed Claim Counts 78 Employment Practices Liability: Paid Losses Case Reserves Reported Losses (Paid Losses Plus Case Reserves) Incurred But Not Reported Reserves Reported Claim Counts 87 Closed Claim Counts 88 Property: Paid Losses Case Reserves Reported Losses (Paid Losses Plus Case Reserves) Incurred But Not Reported Reserves Reported Claim Counts 97 Closed Claim Counts 98

6 Introductory Section

7 MICHIGAN COUNTY ROAD COMMISSION SELF-INSURANCE POOL Board of Directors Chairman Brian A. Gutowski Emmet Vice Chairman Timothy J. Haagsma Kent Alan D. Cooper Wexford Douglas E. Fuller Washtenaw Timothy L. O Rourke Roscommon Dorothy G. Pohl Ionia Darrel A. Spragg Alpena Dennis J. Stanek Delta Joseph F. Valente Marquette Administrator Gayle A. Cummings Assistant Administrator-CFO Board Treasurer Kristi Peña Member Services Coordinator Board Secretary Kay Newberry Assistant Administrator Director of Loss Control Michael E. Shultz 417 N. Seymour Ave. Suite 2 Lansing, MI (517) (800) Fax: (517) July 15, 2016 To the Members and Board of Directors of the and The Michigan Department of Insurance and Financial Services I am pleased to present the Michigan County Road Commission Self-Insurance Pool s Comprehensive Annual Financial Report (CAFR) for the fiscal year ended March 31, We are required by Section of the Michigan Compiled Laws to file audited financial statements certified by an independent certified public accountant with our Members and with the Michigan Department of Insurance and Financial Services within 120 days after the end of the Pool s fiscal year. Introduction Management of the (the Pool) has responsibility for the accuracy, completeness and fairness of the presentation in the CAFR, including all disclosures. To the best of our knowledge and belief, the data, as presented, is accurate in all material respects and is reported in a manner that fairly presents the financial position and results of operations of the Pool as measured by its financial activity. These financial statements are presented in conformity with accounting principles generally accepted in the United States of America, and audited in accordance with generally accepted auditing standards. To provide a reasonable basis for making these representations, management of the Pool has established a comprehensive internal control framework that is designed to protect the Pool s assets from loss, theft or misuse and to compile sufficient reliable information for the preparation of the financial statements in conformity with the Governmental Accounting Standards Board (GASB). The internal control structure is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that: (1) the cost of the control should not exceed the benefits likely to be derived; and (2) the valuation of costs and benefits requires estimates and judgments by management. The Pool reported, for the first time in the 2009 CAFR, the requirements of GASB Statement No Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions. i

8 CAFR Transmittal Letter July 15, 2016 Page ii Plante & Moran, PLLC, a firm of licensed certified public accountants, has audited the Pool s financial statements. The goal of the independent audit was to provide reasonable assurance that the financial statements are free of material misstatement. The audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used by management, and evaluating the overall financial statement presentation. The independent auditor concluded, based upon the audit, that the Pool s basic financial statements are fairly presented for the fiscal year ended March 31, 2016, and that the financial statements are presented in conformity with accounting principles generally accepted in the USA. The independent auditor s unqualified opinion is presented as the first component of the Financial Section of this report. The CAFR has three sections: 1) The Introductory Section includes this letter, the Certificate of Achievement for Excellence in Financial Reporting, the Organizational Chart, and List of the Board of Directors and Staff. 2) The Financial Section includes the independent auditor s Report Letter, Management s Discussion and Analysis (MD&A), the Basic Financial Statements, Required Supplemental Information, and Other Supplemental Information. 3) The Statistical Section includes Financial Trend information, Revenue Capacity data, Demographics and Economic Information, and Operating Information consisting of Loss Development Schedules for all coverages provided by the Pool. The Governmental Accounting Standards Board requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of an MD&A. This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. The Pool s MD&A can be found immediately following the independent auditor s report. Profile of the Pool County Road Commissions in the State of Michigan established and created a governmental group insurance trust, known as the, pursuant to the provisions of Act 138 of the Michigan Public Acts of 1982, and began providing services on April 1, This statewide self-insurance pool was established to provide for joint and cooperative action relative to Members financial and administrative resources for the purpose of liability and property insurance and risk management services. Membership is restricted to Road Commissions in the state of Michigan and their related operations and activities. The Pool is funded by annual contributions from its Members, with equity among the Membership a primary goal of the Board s contribution policy. Total annual required contributions are actuarially determined and allocated to the Members based upon specific criteria set to rate the different lines of coverage and determine each Member s contribution requirements. The criteria and component composition for allocating the required contributions are: o General Liability - 50% based on exposure (miles & population); and 50% based on experience (using net paid capped losses) o Auto Liability - A rate per vehicle o Trunkline Liability (Automobile Liability only) - An actuarially computed rate per mile for exposures under the State Highway Maintenance Contract arrangements with MDoT. ii

9 CAFR Transmittal Letter July 15, 2016 Page iii o Employment Practices Liability/Public Officials Errors & Omissions - A flat rate charge to all Members, with 15% of the total collected based on experience, 50% of the remaining amount to be collected based on population and 50% based on number of employees. o Umbrella - A percentage of underlying coverage o Physical Damage - A rate per $100 of value o Employee Fidelity - A rate based on number of employees and amount of coverage New members may be accepted into the Pool upon application and approval from the Board of Directors. Prospective new members are underwritten using data obtained through a new member survey and the appropriate loss history data. Budgetary control is maintained through an annual budget resolution approved by the Board of Directors. Control at the functional level is maintained through financial reports that provide actual versus budgeted expenditure comparisons by budget category. The Pool s books are recorded on a full accrual basis in accordance with generally accepted accounting principles and the GASB. Assets of the Pool are invested in accordance with Section 10 of Act No. 138, Michigan Public Acts of 1982, and the policies adopted by the Board of Directors. Beginning September, 1993, Milliman was hired by the Board of Directors to perform an annual independent actuarial review which confirms the adequacy and reasonableness of the liabilities recorded as allowances for unsettled claims and claims incurred but not reported (IBNR). Their report is also submitted to the Board. Plante & Moran, PLLC, Certified Public Accountants, provides an objective, independent review of the fairness of the Pool s reported financial position and results of operations. Their examination includes the auditing procedures, which they deem necessary to express an opinion as to the fairness of the financial statements. Major Initiative and Future Projects Stability: Our focus for this year, as it has been for the last few years, was on positioning the Pool to continue to be successful while facing the possible loss of Members due to counties assuming the responsibilities of the Road Commissions with a Membership that has seen transportation funding levels decrease amid increasing costs. The Michigan Legislature passed a road funding package during our 2016 fiscal year that is expected to bring significant additional funding to our Members over the next five years. We will continue to watch developments in the state and work with our Members to educate the County Commissioners about our Pool and its role in building stability for the Road Commissions. We continue to monitor our costs and service delivery models to look for ways to keep contributions consistent. We continue to work on the restructuring of our claim services delivery model. Last year, our long time Third Party Administration firm went out of business. We have replaced that firm with a combination of Third Party Services and a new in-house claims staff currently overseen by the Administrator. Finding a Claims Director to lead the claims department will be high on our list for 2017, while our Members, Board, staff and defense attorneys will continue to work to improve the legal environment for Road Commissions. In 2014, we added the last eligible Road Commission to our Pool. We continue to be at 100% Membership. iii

10 CAFR Transmittal Letter July 15, 2016 Page iv Although there will continue to be challenges, we are committed to keeping our coverage consistent, the Road Commissions contributions stable, and our work focused on helping our Members manage their risk. Risk Management: Loss prevention and training continues to be of primary importance to the Pool. Our in-house safety and loss control staff continue to spend 100% of their time devoted to the important service of keeping our Members informed of appropriate safety measures for their buildings, equipment and road projects. We continue to train all of our Road Commissioners and managers to implement good policies and procedures for managing staff and complying with state and federal employment laws. We began a special training cycle for accident investigation techniques and methods of documenting serious events this year and expect to continue that training in the future. Our loss control staff will continue to be focused on our higher risk areas as we visit our Membership and promote training sessions for all levels of employees. Pool staff will continue to monitor the exposures and claims and will suggest further actions if they become necessary. Maximize Investment Revenue: Board and staff continue to work closely with our investment consultant to monitor the investment performance of the Pool s portfolio managers and our diversification strategy. The Pool s investment consultant and Investment Committee continue to meet often to review investment performance. We expect to see some manager changes in the coming year as our Investment Committee explores new ways to protect our returns on the downside while we maximize returns. Operational Efficiencies: Improving our use of technology to enhance our information systems continued to be of importance this year. Technology still proves to be an effective tool to communicate with our statewide membership. We purchased new computers for our in-house claims staff and updated our procedures to make better use of our claims management software. We will continue converting our documents to electronic storage. Our asset management software needs improvements. It will continue to be our challenge to identify the most cost effective ways to use technology to improve member services and streamline administrative operations. Transparency and Accountability: In addition to distributing our annual audit to all of our Members, we try to make sure we keep them up to date on our financial performance and claim activity during the year. To that end, my job includes speaking at many of the County Road Association regional and sectional meetings, and to other groups as invited. We have also developed a formal presentation to help new Road Commissioners to understand what we do, how we do it and the benefits we provide. Awards and Acknowledgements GFOA: The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the Michigan County Road Commission Self-Insurance Pool for its comprehensive annual financial report (CAFR) for the fiscal year ended March 31, This was the nineteenth consecutive year that the Pool has achieved this prestigious award. In order to be awarded a Certificate of Achievement, a governmental entity must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe that our current comprehensive annual financial report continues to meet the Certificate of Achievement Program s requirements and we are submitting it to the GFOA to determine its eligibility for certificate number twenty. iv

11 CAFR Transmittal Letter July 15, 2016 Page v AGRiP: The was recognized by the Association of Governmental Risk Pools (AGRiP) for being in general compliance with AGRiP s Pool Advisory Standards. This certification is valid for three years and is the fourth time the Pool received this recognition. This current certification is valid through October 21, Acknowledgements: As we complete 32 years of successful operations for our self-insurance and risk management programs, the remains strong, stable, secure and committed to Excellence for our Members. Our staff and professional partners have continued to do an exemplary job in support of our Board s positive, dedicated leadership, and the active support and cooperation of our Membership. It has been my continued pleasure to work with all of you as your Pool Administrator this year. Thank you all for the opportunity. Respectfully submitted, Gayle A. Cummings, CPA Administrator v

12 Government Finance Officers Association Certificate of Achievement for Excellence in Financial Reporting Presented to Michigan County Text38: Road Commission Self-Insurance Text53: Pool For its Comprehensive Annual Financial Report for the Fiscal Year Ended March 31, 2015 Executive Director/CEO vi

13 Organizational Chart MCRCSIP Members Board of Directors Administrator Claims Director Investments Consultant Actuary Claims Manager Auditors Claims Adjuster Administrative Assistant Information Systems Manager Member Services Coordinator Dir. of Loss Control & Training Asst. Administrator Chief Financial Officer Sr. Loss Control Specialist Administrative Assistant Office Manager vii

14 List of Board and Staff 2015/2016 BOARD OF DIRECTORS Brian Gutowski Emmet County Road Commission Tim Haagsma Kent County Road Commission Darrel Spragg Alpena County Road Commission Alan Cooper Wexford County Road Commission Dorothy Pohl Ionia County Road Commission Douglas Fuller Washtenaw County Road Commission Dennis Stanek Delta County Road Commission Timothy O Rourke Roscommon County Road Commission Joe Valente Marquette County Road Commission Chairman Vice Chairman Director Director Director Director Director Director Director STAFF Gayle Cummings Kristi Pena Michael Shultz Michael Phillips Kay Newberry Administrator Assistant Administrator Chief Financial Officer Assistant Administrator Director of Loss Control & Training Senior Loss Control Specialist Member Services Coordinator viii

15 Financial Section

16 Independent Auditor's Report To the Board of Directors Michigan County Road Commission Self-Insurance Pool Report on the Financial Statements We have audited the accompanying financial statements of the Michigan County Road Commission Self- Insurance Pool (the "Pool") as of and for the years ended March 31, 2016 and 2015 and the related notes to the financial statements, which collectively comprise the Pool's basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of the as of March 31, 2016 and 2015, and the changes in its financial position and its cash flows thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. 1

17 To the Board of Directors Michigan County Road Commission Self-Insurance Pool Other Matters Required Supplemental Information Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, schedule of claims information for all lines of coverage, reconciliation of claims liabilities by type of contract, and the schedule of OPEB funding progress be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, which considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplemental information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the 's basic financial statements. The schedule of changes in net position by policy year for all open years from April 1, 2004 through March 31, 2016, the schedule of changes in net position by policy year - fiscal year ended March 31, 2016, and the budget-to-actual table for the 12-month period ended March 31, 2016 as identified in the table of contents as other supplemental information, and the accompanying introductory section and statistical section, are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The schedule of changes in net position by policy year for all open years from April 1, 2004 through March 31, 2016, the schedule of changes in net position by policy year - fiscal year ended March 31, 2016, and the budget-to-actual table for the 12-month period ended March 31, 2016 are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of changes in net position by policy year for all open years from April 1, 2004 through March 31, 2016, the schedule of changes in net position by policy year - fiscal year ended March 31, 2016, and the budget-to-actual table for the 12-month period ended March 31, 2016 are fairly stated in all material respects in relation to the basic financial statements taken as a whole. 2

18 To the Board of Directors Michigan County Road Commission Self-Insurance Pool The accompanying introductory section and statistical section have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on them. July 15,

19 Management s Discussion and Analysis Using this Annual Report This annual report consists of the statement of net position, the statement of revenue, expenses, and changes in net position, and the statement of cash flows. Along with the notes, they provide detailed financial information concerning the Michigan County Road Commission Self-Insurance Pool (the Pool ). This section, the management s discussion and analysis, is intended to provide an overview of the Pool s financial condition, results of operations, and other key information. Financial Overview The Pool s operating objectives are to formulate, develop, and administer a program of insurance for its members to obtain lower costs for the coverages provided and to develop a comprehensive loss prevention program. As of March 31, 2016, 77 county road commissions and one county water authority within the state of Michigan participate in the Pool (78 members). Key financial statistics for the Pool would be the comparison of total member contributions to total estimated claims payments, measured discretely for each policy year. This comparison is known to the insurance industry as a loss ratio. Policy Year Ended Total member contributions $ 15,826,415 $ 15,124,189 $ 15,212,374 Total estimated claim payments $ 7,151,898 $ 6,470,262 $ 7,295,989 Loss ratio 45.2% 42.8% 48.0% Total estimated claim payments represent the sum of all claims paid through the fiscal year end (net of collections), estimates of the possible amounts to be paid for all known (open) claims as established by the third-party administrator, and an estimate of claims incurred but not reported as calculated by an independent actuary. The methods of making such estimates are established according to industry practice and are continuously reviewed by management. Changes to these estimates will have an impact on reported results of future periods. Claim payments can vary significantly from period to period because the ultimate amount paid for claims is dependent on the frequency and severity of claims filed, as well as negotiated settlements, jury decisions, court interpretations, and legislative changes. 4

20 Management s Discussion and Analysis (Continued) To reduce exposure to large, specific claims and aggregate policy year claims, the Pool enters into excess and reinsurance contracts to recover losses in excess of stated amounts (self-insured retention amounts or SIRs ) in the excess and reinsurance contracts. The self-insured retention for individual liability claims is $2 million per occurrence with a policy year aggregate limit of $12 million. The employment practices/public officials SIR is $500,000 for each claim. Property coverage for buildings and contents is subject to a $1 million SIR for any single loss and, for vehicles and equipment, the SIR is $150,000 per claim ($250,000 if Over the Road ) with a $750,000 aggregate. The combined retention for all property damage due to a single event is $2 million and the property policy s annual aggregate stop loss is $2.5 million, subject to a $25,000 SIR after exhaustion of the annual aggregate. Earthquake and flood exposures are subject to sublimits of a $35 million aggregate with a $1 million SIR per occurrence. This year, the Pool s total assets decreased by 10 percent ($7.0 million) from last year, and total liabilities decreased by over $2.5 million (15 percent). The decrease in total assets is primarily due to the decrease in the value of investments this year. Allowances for unsettled claims and claims incurred but not reported (long-term and current portions) comprise 20 percent of the Pool's total assets in 2016, 22 percent in 2015, and 20 percent in Due to the nature of self-insurance pools and the related claim reporting and settlements processes, it is anticipated, based on historical averages, that approximately 12 to 16 percent of the estimated unsettled claims and claims incurred but not reported will be closed during the next fiscal year. Cash and investments make up 95 percent of the Pool s total assets at March 31, 2016, 97 percent at March 31, 2015, and 99 percent at March 31, After making a $10,000,000 distribution to members, total net position is down $4.4 million, a reflection of the decrease in investment value net of the decrease in allowances for unsettled claims and claims incurred but not reported this year. 5

21 Management s Discussion and Analysis (Continued) The analysis below presents a comparison of the Pool s current year financial position to that of the prior two years: Assets Cash, cash equivalents, and investments $ 62,782,981 $ 71,265,283 $ 73,380,194 Capital assets 439, , ,868 Other assets 3,013,156 1,503, ,126 Total assets $ 66,236,063 $ 73,221,782 $ 73,986,188 Liabilities and Net Position Current Liabilities Accounts payable $ 66,831 $ 190,552 $ 31,661 Current portion of allowances for unsettled claims and claims incurred but not reported 2,600,000 2,900,000 2,300,000 Total current liabilities 2,666,831 3,090,552 2,331,661 Long-term Liabilities Allowances for unsettled claims and claims incurred but not reported - Net of current portion 10,924,103 13,053,686 12,393,430 Postretirement obligation 736, , ,202 Total long-term liabilities 11,660,305 13,789,888 13,059,632 Total liabilities 14,327,136 16,880,440 15,391,293 Net Position Invested in capital assets 439, , ,868 Unrestricted 51,469,001 55,888,300 58,361,027 Total net position 51,908,927 56,341,342 58,594,895 Total liabilities and net position $ 66,236,063 $ 73,221,782 $ 73,986,188 6

22 Management s Discussion and Analysis (Continued) The following table shows the major components of income from operations for 2016, 2015, and 2014: Revenue Member contributions $ 15,826,415 $ 15,124,189 $ 15,212,374 Investment income and other (78,119) 5,408,812 8,214,793 Total revenue 15,748,296 20,533,001 23,427,167 Expenses Total provision for claims (2,592,371) (4,704,644) (2,909,758) Reinsurance and excess insurance premiums and state assessments (5,367,231) (5,390,222) (5,217,981) Service fee (83,975) (775,325) (894,000) Claim administration expenses (183,177) - - Investment and rental expenses (622,714) (646,429) (644,821) Administrative expenses: Salaries and wages (504,034) (471,859) (388,227) Postretirement benefits - (70,000) - Taxes and insurance (173,933) (176,200) (175,736) Professional fees (339,641) (252,920) (264,309) Office expenses (89,632) (77,424) (66,773) Depreciation (45,295) (60,210) (63,067) Other (178,708) (161,321) (167,368) Distributions to members (10,000,000) (10,000,000) (10,000,000) Total expenses (20,180,711) (22,786,554) (20,792,040) Change in Net Position (4,432,415) (2,253,553) 2,635,127 Net Position - Beginning of year 56,341,342 58,594,895 55,959,768 Net Position - End of year $ 51,908,927 $ 56,341,342 $ 58,594,895 Member contributions increased 4.0 percent for the policy year. The actuarial estimate of risk was down again for this year, and the cost savings was passed through to the members. Contributions for general, auto, and umbrella liability increased 3.0 percent, employment practices liability increased 12.6 percent, and contributions for physical damage increased 6.7 percent while still keeping the rate per $100 level. Other revenue is down primarily due to less investment earnings this year. We reported investment earnings of 0.0 percent this year, 9.0 percent on our investments in 2015, and 12.5 percent in

23 Management s Discussion and Analysis (Continued) Investment fees decreased 4 percent on a 12 percent decrease in investments. Office expenses increased 16 percent and professional fees increased 34 percent. Salaries and wages increased 7 percent primarily due to our reorganization to bring claim services in-house. We have added two positions to our staff for providing claim services. Taxes and insurance continue to remain consistent with the prior fiscal year. Reinsurance and excess insurance premiums also remained consistent with the prior fiscal year. While the rates for the Michigan Catastrophic Claims Association and the State of Michigan Assigned Claims Plan increased, in total, for two of the last three years, the rate per vehicle for the Michigan Catastrophic Claims Association assessment decreased for this fiscal year. Our expense decreased by 15 percent in 2016, increased by 8 percent in 2015, and decreased by 6 percent in The amount paid for the State of Michigan Assigned Claims Plan (assessment) increased 4 percent for , decreased 5 percent for , and increased 42 percent for Service fees decreased by 90 percent ($691,000) and rental expenses decreased 2 percent due to the reorganization to bring claim services in-house. Equity distributions to members are determined annually by the board of directors after reviewing the previous year s audited financial information and comparing our net position to actuarial estimates. The comparisons are used to determine if we have excess net position. Any amounts determined to be excess are available for distribution to the members. In 2015, the board returned $10,000,000 of equity to the members. Economic Factors and Next Year s Rates Member contributions will decrease overall for the policy year due to a 2.1 percent decrease in expected losses. MCCA and assigned claims assessments are expected to increase by 2 percent and 36 percent, respectively. We expect to continue to increase our costs as we build our in-house claims department, but still expect to continue to realize a net savings for those services. We are unaware of any economic events or legislative events that would have a significant impact on the operations of the Pool. Contacting the Pool s Management This financial report is intended to provide our members and regulators with a general overview of the s finances. Questions concerning the information provided in this report or requests for additional financial information should be addressed to the Assistant Administrator - CFO, Michigan County Road Commission Self- Insurance Pool, 417 Seymour Ave., Suite 2, Lansing, MI

24 Basic Financial Statements

25 Statement of Net Position March 31, 2016 March 31, 2015 Assets Current Assets Cash and cash equivalents (Note 2) $ 1,644,524 $ 3,671,068 Current investments (Note 2) 44,725,738 47,754,925 Receivables: Accrued interest on investments 170, ,376 Members 46,775 19,519 Reinsurance recoverable 535,286 1,260,607 Prepaid assets 2,260,895 35,955 Total current assets 49,383,418 52,929,450 Noncurrent Assets Noncurrent investments (Note 2) 16,412,719 19,839,290 Capital assets - Net (Note 3) 439, ,042 Total noncurrent assets 16,852,645 20,292,332 Total assets $ 66,236,063 $ 73,221,782 Liabilities and Net Position Current Liabilities Accounts payable $ 66,831 $ 190,552 Current portion of allowances for unsettled claims and claims incurred but not reported (Note 6) 2,600,000 2,900,000 Total current liabilities 2,666,831 3,090,552 Noncurrent Liabilities Allowances for unsettled claims and claims incurred but not reported - Net of current portion (Note 6) 10,924,103 13,053,686 Postretirement obligation (Note 9) 736, ,202 Total noncurrent liabilities 11,660,305 13,789,888 Total liabilities 14,327,136 16,880,440 Net Position Net investment in capital assets 439, ,042 Unrestricted 51,469,001 55,888,300 Total net position 51,908,927 56,341,342 Total liabilities and net position $ 66,236,063 $ 73,221,782 The Notes to Financial Statements are an Integral Part of this Statement. 9

26 Statement of Revenue, Expenses, and Changes in Net Position Year Ended March Operating Revenue Member contributions $ 15,826,415 $ 15,124,189 Other 10,364 16,296 Total operating revenue 15,836,779 15,140,485 Operating Expenses Provision for claims (Note 6): Payments 5,021,954 3,444,388 Change in unpaid claims and claims adjustment expenses (2,429,583) 1,260,256 Total claims 2,592,371 4,704,644 Reinsurance and excess insurance premiums and state assessment (Note 5) 5,367,231 5,390,222 Service fees 83, ,325 Claims administration expenses 183,177 - Administrative expenses: Salaries and wages 504, ,859 Postretirement benefits (Note 9) - 70,000 Taxes, benefits, and insurance 173, ,200 Professional fees 339, ,920 Office expenses 89,632 77,424 Depreciation (Note 3) 45,295 60,210 Other 178, ,321 Total operating expenses 9,557,997 12,140,125 Operating Income 6,278,782 3,000,360 Nonoperating Income (Expenses) Interest and dividend income 1,774,801 2,057,628 Investment expenses (530,190) (551,939) Change in market value of investments (1,965,481) 3,237,386 Rental income 102,197 97,502 Rental expenses (92,524) (94,490) Distribution to members (Note 7) (10,000,000) (10,000,000) Total nonoperating expenses (10,711,197) (5,253,913) Change in Net Position (4,432,415) (2,253,553) Net Position - Beginning of year 56,341,342 58,594,895 Net Position - End of year $ 51,908,927 $ 56,341,342 The Notes to Financial Statements are an Integral Part of this Statement. 10

27 Statement of Cash Flows Year Ended March Cash Flows from Operating Activities Cash received from member contributions $ 15,809,523 $ 15,123,596 Cash paid for reinsurance and excess insurance premiums (5,367,231) (5,390,222) Cash paid for claims (4,296,633) (4,704,995) Cash paid to employees (617,584) (476,998) Cash paid to suppliers and others (3,284,177) (1,120,447) Rental income 102,197 97,502 Rental expense (92,524) (94,490) Net cash provided by operating activities 2,253,571 3,433,946 Cash Flows from Noncapital Financing Activities - Distributions to members (10,000,000) (10,000,000) Cash Flows from Capital and Related Financing Activities - Purchase of capital assets (32,179) (279,384) Cash Flows from Investing Activities Interest and dividend income 1,261,787 1,493,141 Purchase of investments (43,488,266) (73,884,738) Proceeds from sale or maturity of investments 47,978,543 79,244,736 Net cash provided by investing activities 5,752,064 6,853,139 Net (Decrease) Increase in Cash and Cash Equivalents (2,026,544) 7,701 Cash and Cash Equivalents - Beginning of year 3,671,068 3,663,367 Cash and Cash Equivalents - End of year $ 1,644,524 $ 3,671,068 The Notes to Financial Statements are an Integral Part of this Statement. 11

28 Statement of Cash Flows (Continued) A reconciliation of operating income to net cash from operating activities is as follows: Year Ended March Reconciliation of Operating Income to Net Cash from Operating Activities Operating income $ 6,278,782 $ 3,000,360 Adjustments to reconcile operating income to net cash from operating activities: Depreciation expense 45,295 60,210 Rental income 102,197 97,502 Rental expense (92,524) (94,490) Changes in assets and liabilities: Receivables (27,256) (16,889) Reinsurance recoverable 725,321 (1,260,607) Other assets (2,224,940) 158,713 Accounts payable (123,721) 158,891 Postretirement obligation - 70,000 Allowances for unsettled claims and claims incurred but not reported (2,429,583) 1,260,256 Net cash provided by operating activities $ 2,253,571 $ 3,433,946 The Pool had a net unrealized loss on investments of $4,159,710 and $2,358,818 for the years ended March 31, 2016 and 2015, respectively. The Notes to Financial Statements are an Integral Part of this Statement. 12

29 Notes to Financial Statements March 31, 2016 and 2015 Note 1 - Nature of Business and Significant Accounting Policies The (the Pool ) was established April 1, 1984 under the laws of the State of Michigan as a governmental group self-insurance trust. The accounting policies of the Pool conform to accounting principles generally accepted in the United States of America (GAAP) as applicable to governmental units. Activity relating to the formation of the Pool, including the selection of the board of directors, began in October 1983 under the sponsorship of the County Road Association of Michigan. The Pool provides liability coverage to its members, including general, automobile, employment practices, public official errors and omissions, and commercial crime. The Pool also provides physical damage coverage for property, vehicles, and equipment. The members are Michigan county road commissions. Road commissions applying for membership in the Pool may be admitted with a two-thirds vote of the board of directors of the Pool. Members in the Pool may withdraw from the Pool by giving 60 days notice. Upon approval of withdrawal, the withdrawing road commission is responsible for its claims incurred subsequent to withdrawal and will be denied any future dividends that are distributed. As of March 31, 2016, there were 78 members participating in the Pool. The Pool utilizes the accrual method of accounting. Operating revenue is defined as member contributions and other operating revenue. Operating expenses are defined as all expenses incurred related to claim management and settlement, excess insurance coverages, and administration. Nonoperating revenue and expenses are defined as all investment income net of expenses earned from investment activities, rental income net of expenses for the use of its building by outside parties, and distributions to members as dividends. All revenue is recorded ratably over the period to which it applies, and all expenses are recognized in the period in which they are incurred. The estimated total claim losses are accrued based on the estimate of claims that will be ultimately filed and paid for each insurance period. It is anticipated that, to the extent that an insurance period has an excess or deficit, the board of directors will determine the manner of disposition or recovery of such excesses or deficits. The Pool may assess members a supplemental assessment in the event of deficiencies. Cash Equivalents - The Pool considers all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents. Investments - Investments are stated at fair value (see Note 2). Investment income is recognized when earned. Accounts Receivable - Receivables from members are stated at invoice cost. Receivables from reinsurance are based on the applicable reinsurance contract and paid claims. Collectibility of balances is reviewed periodically. Any amounts deemed to be uncollectible are written off at that time and membership is terminated. Management has determined all amounts are collectible and no allowance for doubtful accounts is required. 13

30 Notes to Financial Statements March 31, 2016 and 2015 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Prepaid Assets - Payments made to vendors for services that will benefit periods beyond the current fiscal year are recorded as prepaid expenses. A current asset for the prepaid amount is recorded at the time of the purchase and an expense is reported in the year in which the services are consumed. Prepaid assets at March 31, 2016 and 2015 are made up of the following: Insurance and workers' compensation $ 4,429 $ 4,280 Dues 3,637 3,337 Employee benefits 8,778 7,676 Software licensing - 20,662 Reinsurance premiums 2,243,676 - Deposits Total $ 2,260,895 $ 35,955 Capital Assets - Capital assets are recorded at cost. Depreciation is computed primarily using the straight-line method over the useful lives of the assets. The estimated useful life of the building is 31.5 years. The estimated useful life of building improvements is 10 years. The estimated useful life of office equipment ranges from three to five years. The Pool s policy is to capitalize assets over a $500 threshold. Federal Income Tax Status - The Pool is treated as a governmental trust that distributes its accumulated net earnings to members. Accordingly, no provision has been made for taxes on income. Allowances for Unsettled Claims and Claims Incurred but Not Reported - Allowances for unsettled claims and claims incurred but not reported represent the estimated liability for unpaid insurance losses and related expenses from reported claims and claims incurred but not reported. Changes to such estimates are reflected in current year earnings. Postretirement Benefits - The Pool offers retiree healthcare benefits to retirees. The Pool used the alternative measurement method to compute the annual required contribution (ARC) necessary to fund the obligation over the remaining amortization period. The Pool reports the full accrual cost equal to the current year required contribution, adjusted for interest and adjustment to the ARC on the beginning of year underpaid amount, if any. Premium Deficiency - Anticipated investment income is considered in determining if a premium deficiency exists. No premium deficiency reserve was required at March 31, 2016 or

31 Notes to Financial Statements March 31, 2016 and 2015 Note 1 - Nature of Business and Significant Accounting Policies (Continued) Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Upcoming Accounting Pronouncements - In February 2015, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 72, Fair Value Measurement and Application. The requirements of this Statement will enhance comparability of financial statements among governments by requiring measurement of certain assets and liabilities at fair value using a consistent and more detailed definition of fair value and accepted valuation techniques. This Statement also will enhance fair value application guidance and related disclosures in order to provide information to financial statement users about the impact of fair value measurements on a government s financial position. GASB Statement No. 72 is required to be adopted for years beginning after June 15, The Pool is currently evaluating the impact this standard will have on the financial statements when adopted, during the Pool's 2017 year end. In June 2015, the GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, which addresses reporting by governments that provide postemployment benefits other than pensions (OPEB) to their employees and for governments that finance OPEB for employees of other governments. This OPEB standard will require the Pool to recognize on the face of the financial statements its net OPEB liability related to its participation in the Pool's OPEB plan. The Statement also enhances accountability and transparency through revised note disclosures and required supplemental information (RSI). The Pool is currently evaluating the impact this standard will have on the financial statements when adopted. The provisions of this Statement are effective for the Pool's financial statements for the year ending March 31,

32 Notes to Financial Statements March 31, 2016 and 2015 Note 2 - Deposits and Investments The Pool's investment policy authorizes the Pool to make deposits in the accounts of state or federally chartered banks and trust companies. The Pool's investments are held in the Pool's name. The Pool has designated JPMorgan Chase Bank, NA and Comerica Bank for the deposit of its funds. The Pool's cash and investments are subject to several types of risk, which are examined in more detail below: Deposits Cash and cash equivalents include demand accounts and money market funds. Cash and cash equivalents totaled $1,644,524 and $3,671,068 at March 31, 2016 and 2015, respectively. Custodial Credit Risk of Bank Deposits - Custodial credit risk is the risk that in the event of a bank failure, the Pool s deposits may not be returned to it. The Pool had total bank deposits (checking accounts) of $715,567 and $3,953,298 at March 31, 2016 and 2015, respectively. These deposits were fully collateralized and/or insured. The Pool evaluates each financial institution with which it deposits funds and assesses the level of risk of each institution; only those institutions with an acceptable estimated risk level are used as depositories. Investments - Investments are reported at fair value. As of March 31, 2016 and 2015, the Pool had the following investments: Fair Value Fixed-income securities $ 17,639,891 $ 20,236,165 Equities 37,702,593 40,677,111 Money market funds 5,795,973 6,680,939 Total fair value of portfolio $ 61,138,457 $ 67,594,215 Interest Rate Risk - Interest rate risk is the risk that the value of investments will decrease as a result of a change in interest rates. The Pool s investment policy restricts investment maturities of fixed-income securities by limiting the effective maturity of any single security to 30 years or less. The policy also specifies that the dollar weighted average duration of the fixed-income portfolio should be within 25 percent of the dollar weighted average duration of the style index established in the policy. The Pool s policy minimizes interest rate risk by structuring the investment portfolio so that few funding transfers are made to cover cash flow requirements. 16