MONTANA STATE FUND BOARD OF DIRECTORS MEETING November 13, 2009

Transcription

1 5 South Last Chance Gulch P.O. Box 4759 Helena, MT Customer Service: or Fraud Hotline: (888-MT-CRIME) MONTANA STATE FUND BOARD OF DIRECTORS MEETING The (MSF) Board of Directors meeting was held at the Best Western Helena Great Northern Hotel in Helena, Montana. Directors Attending Jane DeBruycker, Dutton Ken Johnson, Missoula Boyd Taylor, Butte Tom Heisler, Great Falls James Swanson, Glendive Wallace Yovetich, Billings State Fund Staff Attending Laurence Hubbard, President/CEO Sherrie Handel, Special Asst to Pres/CEO Nancy Butler, General Counsel Mark Barry, Corporate Support VP Dick Root, Insurance Operations VP Al Parisian, Chief Information Officer Peter Strauss, Operations Support VP Rick Duane, HR Vice President Curtis Larsen, Legal Counsel Dan Gengler, Internal Actuary Patti Grosfield, Internal Auditor Carl Kochman, Communications Leader Rene Silverthorne, Controller Philip Woodland, Support Services Leader Jeff Bryant, Team 5 Underwriter Others Attending Russell Greig, Tillinghast Towers Perrin Angus Maciver, Legislative Audit Division Bob Biskupiak, IIAM Rep. Chuck Hunter, Legislative Liaison Mari Kindberg, State Auditor s Office Ann Conway, Towers Perrin Pat Murdo, Legislative Services Brenda Miller, Liberty Northwest Mark Bruno, OBPP Webb Brown, Montana Chamber of Commerce I. Meeting Preliminaries A. Call to Order Acting Chairman Ken Johnson called the meeting to order at 9:00 a.m. B. Approval of September 25, 2009 Boyd Taylor moved to approve the September 25, 2009 minutes as presented. The motion was seconded by Jane DeBruycker. Acting Chairman Ken Johnson asked for any questions or comments from those present. There being none, the vote was taken and the motion was unanimously approved. Montana s insurance carrier of choice and industry leader in service.

2 II. Miscellaneous A. Miscellaneous Laurence Hubbard, President/CEO President Hubbard welcomed Pat Murdo, Legislative Services and noted that the Economic Affairs Meeting will be the same week as s next board meeting (January 22, 2010). Pat Murdo, Legislative Staffer with the Economic Affairs Committee, advised the board that the meeting is presently scheduled for January 19 and 20; however, she is attempting to move the meeting to January 20 and 21 to allow for board members to attend. President Hubbard encouraged members to attend the Economic Affairs Committee if at all possible in order to help the committee in their study of workers compensation under SJR30. The Satterlee case has been decided by the Montana Supreme Court. President Hubbard explained that the court upheld the Workers Compensation Court s decision that held the statute constitutional. It s the statute that allows for termination of permanent total disability benefits when an injured employee attains Social Security retirement age and is eligible to receive Social Security benefits. There was a challenge to the statute that it was unconstitutional, which may have had the effect of giving lifetime permanent total benefits for any worker that was permanently and totally disabled. He expressed his relief, along with that of many others at MSF, that the case has been decided once and for all. President Hubbard stated that the real issue threatening the stability of the workers compensation system in the long run with these constitutional challenges is the retroactivity of court decisions and the fact that many of our claims remain open for so many years. The threat of retroactive liability was not resolved by this court decision. Next, President Hubbard discussed the Labor-Management Advisory Council s (LMAC) work on workers compensation cost drivers and their work with the Economic Affairs Committee s study. They are also involved with WorkSafeMT, of which Carl Kochman is chair. s Annual Medical Conference was underway in the hotel and the board and guests were invited to join them at lunch. B. Legislative Audit Division Performance Audit Angus Maciver, LAD Auditor Mr. Maciver stated that MSF management and the board have addressed most of the recommendations made in their audit and are working on completing a few others. They will be doing a follow-up to the audit and reporting to the Legislative Audit Committee on corporate governance issues at. He said he welcomes the opportunity to come back and go over the follow-up audit. Mr. Maciver said the important part of their report is about principles that lie behind a good culture of corporate governance. Mr. Maciver was pleased to say that the work the Legislative Audit Division did affirmed that incorporates those principles in the way it operates, not only in the work management undertakes but also in the way board members approach their role as independent directors of this corporation. He noted that the principles are often about small things, the day-to-day things that corporations do and the way a board approaches issues. He commented that the board and management team have made good progress on implementing recommendations with only a few areas needing further action and encouraged everyone to not let up on the details. Pursuing these issues and going after them on a recurring basis is the best way to ensure the continued success of this organization. Audit follow-up work will continue in early 2010 when the auditors will check on the status of their recommendations and then report to the Legislative Audit Committee on the findings of the follow-up. Page 2 of 12

3 President Hubbard thanked Mr. Maciver for his assistance, commended the Legislative Audit Division (LAD) for their professionalism and commented that LAD continuously and consistently execute as professionals with regard to s business. He asked Mr. Maciver if any state agencies or other governance entities within the state had gone through a performance audit since (or before) s audit; for example, the retirement system. Mr. Maciver replied that this project was unique as is unique in its structure (as a public corporation rather than a state agency) and was the only one audited. Jim Swanson asked Mr. Maciver to remind the board of the several small details to which Mr. Maciver had referred. The Internal Audit Charter was given as an example by Mr. Maciver. There was a finding in the report that discussed wording of the Internal Audit Charter to make it clear that the Internal Auditor, who works under the direction of the President/CEO can also have a dual reporting relationship with the board. According to President Hubbard, MSF believes it has that type of relationship, but the recommendation strengthens the language. Ken Johnson encouraged Patti Grosfield, Internal Auditor, to meet alone with the Chairman or other directors. In response to questions from Acting Chairman Johnson, Ms. Grosfield answered that she has not made any appointments with individual board members but the option is there should she feel the need arises. She encouraged board members to contact her should they have concerns and she would be happy to meet with them individually. Jim Swanson and Jane DeBruycker requested that the Internal Auditor be free of concerns about being dismissed by the President/CEO should a bad report be given to the board. Functionally, Ms. Grosfield reports to the Board of Directors while administratively, she reports to President Hubbard. Jim Swanson wanted to know if the Internal Auditor had an adverse relationship the CEO, would the CEO have the ability to fire the Internal Auditor. He wants the Internal Auditor to be able to speak freely without fear of losing his/her job. President Hubbard agreed and said that MSF has an anti-retaliation policy as a matter of policy. President Hubbard noted that a Compensation Committee would be proposed to the board for discussion and, hopefully, adoption later in the meeting. In discussions with Chairman Dwyer, President Hubbard reported that the Chairman recommended starting out with a committee charter structure like that with a Compensation Committee and that could evolve to an Audit Committee. President Hubbard assured the board that they can pick up the phone and call the Internal Auditor and she can do the same with board members at any time either deems it necessary without reporting the conversation to the CEO. Ms. Grosfield noted that, when the Internal Audit Charter was revised, one of the wording changes was that, if there was an issue involving the CEO or that required more interaction, the Internal Auditor will be in contact with the board. C. Report of Internal Auditor Patti Grosfield An internal audit was performed on agent incentives and was recently completed allowing dividend checks to be mailed to agencies. If the board were to declare a dividend today, an internal audit would be done as well before the checks were sent to policyholders. LAD s Financial Audit has been wrapped up and Ms. Grosfield hopes to have a draft report from them in several days. All indications are that it will be an unqualified opinion and that our financial statements can be relied upon. We are not aware of any recommendations. The statutory audit is underway and an Eide Bailey representative will be back on site in December. We should have a final report the end of January. As referenced by Mr. Maciver, three of the six Performance Audit recommendations have been completed with the others in progress. One of those is the Compensation Committee Charter. 1. Compensation Committee Charter (Board Action) Ms. Grosfield explained that the Compensation Committee Charter is a result of Mr. Maciver s recommendation in the Legislative Audit Divisions audit that MSF consider Page 3 of 12

4 adopting some committee structures to help the board in its functioning. She acknowledged her appreciation for the assistance received from Rick Duane, Human Resources Vice President. Together they looked at other AASCIF State Funds and companies for common threads on what works and what does not work in this area. They captured those common points and yet kept the draft charter simple, flexible and not too restrictive. Ms. Grosfield noted that it is meant to be a living document and may be changed by the board at their discretion. There are five basic sections which include Mission, Membership Meetings, Authority, Responsibility and Committee Performance Evaluation. A discussion followed Ms. Grosfield s explanation with Jim Swanson expressing his belief that committee process reduces the effectiveness of the seven-man board. He recommended that the entire board be members of this committee rather than the three suggested. President Hubbard stated that any sub-committees of the board are subject to the open-meeting laws. Anything having to do with performance or individual right of privacy is subject to closure. The sub-committee is intended to act as a body of expertise or in the development of expertise within certain members of the board to facilitate and assist the full board and not to replace the full board s decision-making responsibility. Ken Johnson moved that the board approve the Compensation Committee Charter as presented. The motion was seconded by Boyd Taylor. Acting Chairman Johnson asked for any questions or comments from those present. A discussion followed. Tom Heisler asked and it was confirmed that the sub-committee would make recommendations but would not have any authority. In response to concerns raised by Jane DeBruycker, Acting Chairman Johnson informed those present that the charter indicates that authority and responsibility is not limited to the committee members and it says that the Board of Directors shall assess compensation periodically and make any changes deemed necessary and appropriate. Acting Chairman Johnson again asked for questions or comments from those present. There being none, he called for the vote. Boyd Taylor, Tom Heisler, Wally Yovetich and Ken Johnson voted in favor of the motion. Jim Swanson and Jane DeBruycker voted against the motion. The motion carried. D. Building Update Philip Woodland, Support Services Team Leader Mr. Woodland advised board members that the final guaranteed maximum price for the new building came in at $26.7M. The architects put the drawings out for bid when they were 80 percent complete. Currently, we are at $24.1M, which is remarkable considering the drawings were only 80 percent complete. His construction update included the following: Raised flooring to be completed the first week in December Exterior siding installation was started on November 12 Windows and curtain walls are being installed Sheet rocking, taping and painting has started Installation of one elevator to start around November 23 Skylights are being installed Flood testing of the garden roofs has been completed The entrance paved into the south side of the parking structure The chiller for the water-cooling system is the last of the heavy equipment on site The tower crane is to come down the first week of December MSF staff activities include a review of the telephone system requests for proposals this week with an award date of late December. The furniture bid is due November 19 th. Details for the moving company bid are being compiled at this time. Page 4 of 12

5 The move timeline for MSF staff begins March 3, 2010 when IT begins developing the Data Center. By mid-april, we hope to have new work stations set up. Ancillary furniture moves in sometime in May and the first day for all in the new building is June 1, Mr. Woodland noted that 98 percent of the site waste (770 tons) has been recycled. In order to receive a LEEDS Gold Rating, points are required and we had 47 points at the last house review. III. Insurance Operations Support Peter Strauss, V.P. Operations Support A. Administrative Rules Proposed Amendments to ARM Method for Assignment of Classifications of Employments and ARM Retrospective Rating Plans (Board Action) Mr. Strauss requested two rule reference changes. Administrative Rule provides for a policy services underwriting manual, which is published once a year. The publication includes all of the changes from the prior year. Mr. Strauss asked the Board to update the rule to reference the most recent Underwriting Manual publication date. Administrative Rule is our retrospective rating plan that the board approves on a regular basis. NCCI updated their retrospective rating plan manual during the past year and those changes were approved by the Montana Department of Insurance. The changes eliminated redundancies, simplified language for the retrospective rating plans, reduced duplicate references within the manual, and reformatted it to make it easier to read. With this change, we can continue to meet the same standards used by our competitors. Mr. Strauss requested the board approve making the same changes approved by the Department of Insurance to the MSF Retrospective Rating Plan rule. Jane DeBruycker moved that the board direct staff to proceed to file notice of the proposed amendments to the rules as recommended. Jim Swanson seconded the motion. Acting Chairman Johnson asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. IV. Corporate Support A. FY10 First Quarter Financial/Budget Report Rene Silverthorne, Controller Ms. Silverthorne s overview of the New Fund s financial results for the first quarter of fiscal year 2010 reflected net earned premium of $41,926,972. The fiscal year 2010 year-end projection is $169,197,035, a 17 percent decline from fiscal year 2009 s premium of $204M. Operating results are as follows: FY10-1 st FY10 Year-End FY10 SBP Quarter Projection Incurred Losses $40.9M $144.5M $157.3M Loss Expenses $6.7M $21.6M $22.3M Underwriting Expenses $4.3M $26.6M $25.1M Investment Income $11.7M $47.9M $46.7M Ms. Silverthorne pointed out that, included in the losses, there are recoverable estimates including those from our reinsurance contracts. The current structure of our reinsurance program plays a very important role in mitigating a higher level of risk and provides stability in our earnings. She followed with an overview of reinsurance. Page 5 of 12

6 Net Income before dividends is projected to be $19.1M, which is $5.9M below the SBP estimate of $25M. The majority is from a decrease in premiums. With regard to policyholder equity, MSF had a net unrealized gain on investments of $10.7M. Projected FY2010 equity stood at $229.9M, an estimated increase of $28.9M from FY2009 ending equity of $201M. Next, Ms. Silverthorne reported on the first quarter financial summary for the Old Fund, which included: Total assets are $18.1M, a decrease of $4.3M from FYE Total Loss and LAE Reserves stand at $63.6M. Investment income is projected at $354K or $217K less than FYE $1.3M projected operating loss ($46.8M) projected unfunded liability The budget status for fiscal year 2010 is shown below: FY 2010 Budget Projection As of September 30, 2009 Condensed Balance Sheet Q1 FY 2010 FYE 2009 Variance ADMITTED ASSETS Bonds 925,345, ,459,736 16,886,048 Equity Securities 94,484,641 81,742,906 12,741,736 Real Estate Investments 16,843,807 12,732,565 4,111,242 Cash and Short-term Investments 21,768,130 33,585,750 (11,817,620) Other Investments - Collateral 225,205, ,758,454 49,447,393 Total Investments and Cash 1,283,648,210 1,212,279,411 71,368,798 Other Admitted Assets 76,200,286 71,802,904 4,397,382 Total Admitted Assets 1,359,848,496 1,284,082,315 75,766,181 LIABILITIES AND EQUITY Reserve for Unpaid Losses 745,827, ,247,613 10,579,603 Reserve for Unpaid LAE 80,764,911 78,057,100 2,707,811 Other Liabilities 320,824, ,745,703 51,078,886 Total Liabilities 1,147,416,715 1,083,050,415 64,366,300 Policyholders' Equity 212,431, ,031,900 11,399,881 Total Liabilities and Equity 1,359,848,496 1,284,082,315 75,766,181 Variance from Percent of Budget Projection Budget Budget Expended Personal Services $22,770,780 $22,270,561 $500, % Operating Expenses 24,339,228 22,750,450 1,588, % Equipment/Intangible Assets 4,673,639 4,673, % ALAE 4,573,637 4,873,077 (299,440) % Total Operational Expenditures $56,357,284 $54,567,227 $1,790, % Claim Payments - MSF $122,461,770 $125,992,224 ($3,530,454) % Claim Payments -Old Fund 10,979,552 8,111,441 2,868, % Total Claim Payments $133,441,322 $134,103,665 ($662,343) % Total MSF Budget $189,798,606 $188,670,892 $1,127, % Page 6 of 12

7 B. Analysis of Surplus Adequacy and Policyholder Dividend Program Russell Greig, Consulting Actuary and Ann Conway, of Towers-Perrin Ann Conway reported on the first part of the presentation followed by Russell Greig. She explained that MSF management requested that Towers Perrin assist in addressing several interrelated questions: How much policyholder equity does MSF need in order to support long-term viability and stability for Montana employers and MSF s long-term business plans and projections? She said that there are several things to consider. First, what is MSF s long-term business objective? Ms. Conway answered that it s to provide a stable workers compensation market for Montana employers. It s also to provide a competitively priced product that s attractive to employers. Unlike commercial insurers, MSF is the market of last resort. Any employer that a private insurer doesn t want to write, whether it s the class of business or that it s in Montana, MSF will write that insured. The second thing Towers Perrin thinks about is, How is the required amount of policyholder equity affected by changes in the business environment? Ms. Conway discussed the financial tsunami, the worst since the Great Depression and the impact it had on MSF as well as the equity relative to where it was a year ago. It also affected reinsurers as discussed by Ms. Silverthorne in her presentation. The last question is, Does the current financial situation support a dividend? There are pluses and minuses. A plus is that there is positive income ($13M before dividends) at fiscal year-end There has also been a fair amount of activity on the part of management to mitigate some of the adverse, long-term trends. There are also the general economic factors that must be considered. From 2001 to around 2006, the premium level roughly doubled. MSF is essentially 70 percent of the Montana workers compensation market. Reserves have more than doubled from about $300M in 2001 to over $800M today. Most of that has been driven by the growth in premium. Depending on the year, the loss ratio that goes into that premium is somewhere between 70 percent to an excess of 100 percent. Those dollars of premium then convert to loss reserves, which are then paid out to claimants. The equity started off at around $120M, decreased around fiscal years 2003 or 2004 because of adverse development, and now it has started to increase, leveling off in fiscal year Towers Perrin believes that MSF s policyholder equity has done its job extremely well in recent years by absorbing unprofitable years (fiscal years 2003 and 2004), absorbing adverse loss emergence that is primarily due to medical on older years, and LAE reserve development, absorbing retroactive benefit changes reflected in court decisions, absorbing a volatile investment climate, and allowing relatively stable rates, especially since As a result of handling these key responsibilities, equity has not grown as much as the business. They ve determined that MSF s financial position is adequate for safe and sound insurance operations. An important priority continues to be building equity to achieve greater financial strength. They determined that MSF has the financial performance and financial strength to declare a small dividend this year. MSF s adjusted policyholder equity significantly exceeds regulatory thresholds ($68M to $103M). MSF held $201M at June 30, 2009 and is projecting June 30, 2010 equity of $228M before dividend (equates to $278M at June 30, 2009 and $315M at June 30, 2010 on an adjusted basis). Management forecasts FY2010 net income of $25M prior to a policyholder dividend. Various strategic considerations would support declaring a small dividend this year and include: Consistency of dividend performance Incentives and rewards for best policyholders with a focus on safety Positioning to attract and retain good business Page 7 of 12

8 Management has taken the appropriate steps to address the financial and operating results Financial markets rebound Russell Greig shared that policyholder equity serves a key role for the proper management of a property-casualty insurance company. He explained that policyholder equity based on sound industry standards stabilizes costs to business and fosters regional economic competitiveness for Montana. Ultimately, equity is intended to assure that the insurer will be able to fulfill its obligations to policyholders and injured employees via management of the risks in the insurer s underwriting and investment portfolios. MSF s historical experience also illustrates the difficulty of quantifying workers compensation obligations even after policies have expired. Mr. Greig explained that policyholder dividends are an important element of the long-term relationship between the insurer and the employer. Policyholder dividends return a portion of earnings to policyholders. They are a means of sharing positive overall results with policyholders when underwriting/loss experience are better than expected and investment returns are better than expected. A dividend plan is designed to provide returns to the policyholders who produced the favorable results via low loss ratios. The insured see results two years later compared to four years later with experience rating. The incentive value to employers is for them to focus on safety and loss prevention and early return to work and exhibits a clear relationship between their actions and their financial rewards. It also builds long-term relationships/partnerships by rewarding policyholders that are contributing to the stability and financial strength of ; there are still profitable individual policyholders even when all policyholders as a group produce lower-than-expected results. Towers-Perrin evaluated s current policyholder equity position against a progressive series of benchmarks as shown below: Policyholder Equity Position EXCELLENT: Aligned with other companies that are recognized as being rated financially and operationally excellent ADEQUATE: Policyholder equity is most likely adequate to support current obligations and future operating plans and reasonably absorb foreseeable ranges of variations in results MARGINAL/WEAK: Possibly enough equity for current activities, but moderate variations could impair company. Potential regulatory intervention Implications Stable rates and stable marketplace presence that foster economic development across the region Greater potential volatility in WC insurance costs to businesses Potential large cost increases to businesses; potential market dislocations; legislative intervention They also considered the heightened awareness of potential exposures to terrorism and other catastrophes. Catastrophic events can occur in any state and include industrial events (boiler explosions, cargo, mine explosions and mass transit accidents), natural disasters during the work day and terrorist events. While these events occur rarely, they come with potentially large costs. Reinsurance protection for these events is more available, but it is still relatively expensive. Federal coverage is still unlikely to provide any meaningful financial response to a terrorism event in Montana. s policyholder equity exists to protect against these events as well as normal financial and actuarial variation. Page 8 of 12

9 Mr. Greig stated that their annual pricing review supports s objective of producing a modest operating income. Operating income serves several purposes by recognizing the risk and uncertainty inherent in pricing future business, making ongoing contributions to growing policyholder equity, and supporting ongoing dividend strategy. For fiscal year 2009, MSF earned net income of $9M versus a target of $21M (from original 2009 MSF Strategic Business Plan). Towers Perrin s analysis suggests several general policyholder equity considerations. Workers compensation must be supported by significant levels of equity (due to the volatility risk to the insurer) exacerbated by the long recognition period and the tendency for good and bad years to run in strings. Mr. Greig noted that the real world poses more risks than models can measure. In addition, no reasonable amount of equity can fully guarantee against an insurer s failure. Management intervention is required to keep an insurer on track. There is no one correct level of equity for all time periods. It is dependent on the business risks facing the company; e.g., underwriting growth and profitability; investment performance; reserve development; economic, demographic, social, legislative and judicial shifts; and catastrophe. It is also dependent on use of risk management tools such as reinsurance and balancing conflicting objectives. Mr. Greig pointed out that there is a balance to have enough equity so MSF does not become insolvent and has time to take corrective actions when necessary. We do not want to have a repeat of the Old Fund, thereby becoming a burden to Montana taxpayers. According to Mr. Greig, MSF s policyholder equity has done its job extremely well in recent years. It has grown dramatically since Premium volume has more than doubled. Loss reserve volume has also more than doubled and will continue to grow. Equity has absorbed unprofitable years (FY s 2003 and 2004), absorbed adverse loss and loss adjustment expense reserve development, absorbed retroactive benefit changes reflected in court decisions, absorbed a volatile investment climate, and allowed relatively stable rates, especially since As a result of handling these key responsibilities, equity has not grown as much as the business, but MSF s financial position is adequate for safe and sound insurance operations. After Russell s presentation, Ms. DeBruycker asked what was paid in dividends last year ($4M) and if, by giving dividends in this adverse climate, does President Hubbard thinks MSF might increase rates next year. She said she has a hard time giving a dividend and then going back next year and raising premiums. President Hubbard explained the difference between the definition of a dividend and rates. The dividend the board was considering is for performance on policies back in fiscal year Employers who have good safety records are rewarded. Rate actions are based on what the actuaries think are the expected costs of claims yet to happen in the future for the year rates are being set. Mr. Greig added that when Towers Perrin receives their December 30, 2009 year-end data, they will conduct their analysis. Up to that point, he cannot state if the rate indication is going to the positive or negative. C. Surplus Level Determination and Declaration of Dividend Laurence Hubbard (Board Action) President Hubbard referred board members to page six of the Mr. Greig s presentation and explained that the last 12 to18 months have been an unprecedented financial situation since the Depression. s equity has weathered the storm and stayed stable. President Hubbard pointed out that we had to use equity during massive medical inflation in the past, but s equity did its job. Equity is there to mitigate risk (actuarial, investment, underwriter pricing, catastrophic events, and court decisions). Page 9 of 12

10 The Board of Directors annually reviews management s recommendation regarding the potential for a dividend declaration. The basis for the recommendation encompasses many areas including level of surplus, accident year financial results, trends in losses, workers compensation market conditions and the potential impact on future dividend declarations. The Board of Directors clearly understands insurance dividends cannot be guaranteed. In making his recommendation, President Hubbard asked that due consideration is given to the following: 1. s current year financial results, including: The current financial condition of and the current level of surplus; The level of underwriting and operating profitability achieved in the period for which the dividend is to be declared; and The level of underwriting and operating profitability anticipated for periods subsequent to the dividend period, including future periods. 2. Current market conditions for workers compensation in Montana recognizing s objective of being a stabilizing influence in the market. Next, President Hubbard noted that item number six states that, in certain instances, the board shall determine that a dividend is not available in any year or years. Those situations will include, but will not be limited to a significant occurrence eroding the surplus of Montana State Fund, intrusion by legislative or regulatory bodies restricting the operations or business of the Montana State fund or a board determination of the need for additions to surplus. The information presented by Ms. Conway and Mr. Greig indicates that MSF equity is not eroding but, in fact, has done very well at maintaining itself. President Hubbard recommended that a $2M dividend be declared by the Board of Directors and noted that about 54 percent of MSF policyholders will see a return on their safety efforts. In a recent study, a Conning and Company Study entitled Workers Compensation State Funds-Evolution of a Competitive Force found that policyholder dividends paid by about half of the existing State Funds that exist are considerably higher than private companies on average. The dividend distinction may be important in promulgating one of the most prominent goals of State Funds: improved loss control and safety performance. Policyholder dividends provide critical incentives missing from advisory loss prevention programs alone. Furthermore, insurance buyers value loss prevention and control initiatives and are always eager to link such initiatives to reducing total cost of risk. The overall effect is to help to build customer loyalty and may be a significant factor in the strong market position funds hold in many states. Boyd Taylor moved that the board, based on the FY2009 unreserved surplus of $201 million dollars on a statutory accounting principles basis, declare a dividend to dividend year 2007 policies of approximately $2 million dollars not to exceed two percent above or more than two percent below the declared dividend exclusive of any uncashed warrants. Jim Swanson seconded the motion. Acting Chairman Johnson asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. V. Dividend Distribution Mark Barry, V.P. Corporate Support A. Minimum Dividend Payment and Warrant/Credit to Account Amount (Board Action) Page 10 of 12

11 Mr. Barry asked the board to approve a minimum dividend payment amount of $10 and a minimum warrant amount of $100. If the dividend is less than $100, a credit would be applied to the policyholder s account. Jane DeBruycker moved that the board approve a minimum dividend payment amount of $10 and a minimum warrant amount of $100. Wally Yovetich seconded the motion. Acting Chairman Johnson asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. B. Authority to Issue Warrants to Policies Pending Forced Cancellation (Board Action) Mr. Barry asked the board to approve the following: If an account has not been cancelled but is in pending cancellation status, the dividend is issued as a warrant to the account. Some pending forced cancellation accounts do not have a balance due to. There may be a problem with a missing payroll report or other issue that does not mean they owe us money. Boyd Taylor moved that the board approve the issuance of warrants to policies pending forced cancellation. Jim Swanson seconded the motion. Acting Chairman Johnson asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. C. Table of Dividend Factors and Actuarial Certification of Approved Table of Dividend Factors Dan Gengler, Internal Actuary (Board Action) Mr. Gengler explained that the dividend is an integral component of MSF s pricing programs and it s useful to think of the dividend as a retroactive rate reduction targeted to those policyholders who had favorable results and have had at least some evidence of commitment to loss control and workplace safety. The $2M dividend declaration for those policyholders receiving the dividend averages to a 1.2 percent rate reduction for those policyholders and provides at least some degree of price signal to the policyholders that loss control and workplace safety are important. Mr. Gengler assured the board that MSF s consulting actuary has reviewed the calculations on the Table of Dividend Factors. Towers Perrin reviews these calculations and then provides a certification that the Table of Dividend Factors that MSF is recommending is consistent with generally accepted actuarial principles as well as being consistent with applicable administrative rules. Mr. Gengler described some of the principles established for this process. The first is objectivity followed by equity and simplicity. The final principle followed is creating the right set of incentives, that we match the percentage of premium to the return in proportion to incenting the right kinds of behavior (loss control and workplace safety). The general pattern by which the dividend factors vary in terms of loss ratio is the lower the loss ratio the higher the dividend. The other pattern is the dividend factors increase as the account size increases. This has nothing to do with the fact that larger accounts are more profitable than smaller accounts. Every row in the table distributes approximately the same percentage of premium no matter what the account size. Actuarially determined profit was explained by Mr. Gengler. If we gave away all of the profit on profitable accounts, we would have nothing left over to pay for the losses on unprofitable accounts. It has to do with how accounts of various sizes statistically distribute themselves. As an example, Mr. Gengler stated that if he were to flip a coin two times and it came up heads two times, that would not be a particularly remarkable event. But if he was to flip that coin 100 times and they all came up heads, either we observed an incredibly improbable event or there s something special about that coin. By analogy, an employer with one or two employees that happens to go a year without any losses could simply be due to good Page 11 of 12

12 luck. But an employer with 100 employees that goes an entire year without any losses is probably not due to random chance. That employer is probably doing something right. You would want to reward that employer more strongly because it s due to operating a safe workplace. Jane DeBruycker moved that the board approve the table of dividend factors as presented and as certified by the independent actuary and distribute the dividend to all qualifying policyholders with new or renewal dates within the dividend year of July 1, 2006 through June 30, 2007 and who had at least six months continuous coverage during their policy period. Boyd Taylor seconded the motion. Acting Chairman Johnson asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. VI. VII. Old Business/New Business None Public Comment Representative Chuck Hunter suggested that the board consider at next year s dividend meeting, the fact that there are employees who contribute to good safety records and to consider whether some of the dividend money be in recognition that employees are following safety measures as well. The meeting was adjourned at 12:30 p.m. The next scheduled board meeting will be held on Friday, January 22, 2010 at the Holiday Inn Ballroom on Helena s Downtown Walking Mall. Respectfully submitted, Sherrie Handel Special Assistant to the President/CEO Page 12 of 12