MONTANA STATE FUND BOARD OF DIRECTORS MEETING

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 Montana State Fund (MSF) Board of Directors meeting was held in Montana State Fund s Board Room at 855 Front Street, Helena, Montana Directors Attending Joe Dwyer, Chairman Tom Heisler, Great Falls Boyd Taylor, Butte 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 Rick Duane, HR Vice President Dan Gengler, Internal Actuary Others Attending Marlys Rulon, Eide Bailly, LLP Brenda Miller, Liberty Northwest Jacquie Helt, LMAC Larry Jones, Liberty Northwest Representative Tom Berry Lt. Governor John Bohlinger Mary Peter, Eide Bailly, LLP Senator Ryan Zinke Bob Worthington, LMAC Jane DeBruycker, Dutton Ken Johnson, Missoula Wallace Yovetich, Billings Carl Kochman, Communications Leader Patti Grosfield, Internal Auditor Rene Silverthorne, Controller Ken Jeschke, Business Planning & Special Projects Coordinator Christy Weikart, Underwriting Services Leader Dennis Lee, Support Services Leader Shannon Copps, IT Leader-Plans & Controls Mark Martens, Eide Bailly, LLP Lance Zanto, HCBD Russ Hill, DOA Jerry Keck, Department of Labor Andy Shirtliff, Lt. Gov. Staff Keith Kelly, Department of Labor Representative Scott Reichner Jason Miller, LMAC I. Meeting Preliminaries A. Call to Order Chairman Joe Dwyer called the meeting to order at 8:32 a.m. and asked those present to introduce themselves. B. Approval of November 12, 2010 Boyd Taylor moved to approve the November 12, 2010 minutes as presented. The motion was seconded by Ken Johnson. Chairman Dwyer 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 introduced Dennis Lee, MSF s new Facilities Leader, who is from Northern California with extensive background in facilities management. The Montana Business Research Institute, through the University of Montana, conducts Economic Outlook Seminars around the state. He said the economists at last week s seminar in Helena sounded guardedly optimistic for the first time in a long while. They re using new terminology, balance or rebalance, which means that the economy has contracted so much that it now looks the way it would have looked if the 90 s and early 2000 s had not done so well. The outlook is good for commodities in Montana and it seems to be doing well in comparison to other states. Next, President Hubbard advised the board that there are nine bills currently that address workers compensation insurance. Issues include medical marijuana, illegal alien coverage, increasing penalties for workers compensation fraud, settlements and lump sums. House Bill 118 sponsored by Rep. Chuck Hunter is the requirement adopted by the Economic Affairs Interim Committee to retain a board member on the MSF board with executive or financial level management experience with an insurance company. When the Governor appoints a member to the board, he would be required by law to find someone willing to serve in that capacity; however, a competitor cannot be appointed to the board of directors. Chairman Dwyer commented that it might be hard finding someone with that experience in the state and asked if someone could be brought in from out of state. There are no residency restrictions listed in the bill according to President Hubbard. Another bill sponsored by Rep. Hunter is HB186 that is to continue the allocation to WorkSafe MT through the Department of Labor of assessment monies charged to insurance companies based on their business writings in Montana. His bill is asking the legislature to appropriate $500K. The bill has been heard but to date there has been no executive action taken. Senator Jim Keane has requested a draft bill to transfer State Fund s management of workers compensation Old Fund to the successful bidder. The Old Fund claims are a liability of the state of Montana s General Fund. By law, MSF has been managing them with an administrative cap of $1.25M per year. Currently, MSF spends between $900K and $975K for administrative services for the Old Fund. That amount will diminish as the claims are closed. Upon questioning by Chairman Dwyer, President Hubbard explained that the bill draft is not clear as to whether or not MSF would be allowed to bid on management of the Old Fund. If the work left MSF, 13 staff could be impacted, but they also manage some of the New Fund claims so President Hubbard would estimate that five to ten staff would be reduced if the bill passes and MSF was not awarded the management of the Old Fund. The greatest impact, however, would be the physical transfer of the Old Fund files. There are still boxes in storage of hard copy files and on microfiche. The administrative effort would be substantial, and the draft bill does not mention an allowance for that transfer. Wally Yovetich inquired if the bill lists the length of time the contract would run. Nancy Butler shared that, because the state would be responsible for the Request for Proposal (RFP) process, the law usually states that contracts run for seven years. President Hubbard advised the board that staff that could potentially be affected by this bill have and/or are acquiring New Fund examiner skills at the present time. B. Report of Internal Auditor Patti Grosfield, Internal Auditor Ms. Grosfield covered two audit reports from external auditors. The first one was the statutorily-mandated annual audit performed by the Legislative Audit Division on MSF s governmental financial statements for Montana State Fund and the state of Montana s Old Page 2 of 17

3 Fund, for which was an unqualified opinion was issued with no recommendations for improvement in internal controls or operations. Boyd Taylor commented that receiving clean audits year after year is not done anywhere like it is at MSF. He commended President Hubbard, MSF staff and the Board of Directors for achieving this distinction and noted that, as a CPA, he has been part of audits for many years and he was impressed. The second audit was on MSF s statutory financial statements, though not part of required reporting, are prepared by MSF staff and audited by an outside firm, Eide Bailly, in order to have a comparison to private insurance companies and to enable MSF to benchmark appropriately. Ms. Grosfield introduced lead auditors, Mark Martens of Fargo, North Dakota and Marlys Rulon of Phoenix, Arizona from Eide Bailly, who has performed the audit the past two years. Before that time, Galusha, Higgins & Galusha audited MSF. A Request for Proposal was issued several years ago and Eide Bailly was the successful respondent at that time. Mark Martens explained that one of his specialty areas is insurance and Eide Bailly is currently number five in the US for doing statutory insurance work and audits for insurance companies. He noted that on page one (Independent Auditor s Report), these audits were conducted in accordance with audit standards generally accepted in the US. They perform the audits to obtain reasonable but not absolute assurance about whether financial statements are free of material misstatement. In order to have absolute assurance, they would have to look at every single transaction in the company. MSF requests the statutory statement audit to provide an apples-to-apples comparison with other insurance companies and, in Eide Bailly s opinion, MSF presents fairly in all material respects admitted assets, liabilities and equities of MSF in a basis of accounting described in Note No. 1 (describes statutory accounting that is prescribed or permitted by the state of Montana). That is a basis of accounting that s different than the GASB (governmental audit standards) upon which the Legislative Audit Division s report is based. Mr. Martens shared that statutory accounting is more on a liquidation basis of accounting. Marlys Rulon stated that she works with the Eide Bailly Regulatory Team assisting with financial exams and market conduct exams. She also performs statutory audits as well as GAAP (generally accepted audit principles) audits of insurance companies. According to Ms. Rulon, Note 15 highlights the differences between MSF s GAAP (governmental-based accounting report) and MSF s statutory accounting report. She noted on the bottom of Note 15, the second set of numbers starting with Statutory Equity reconciles the equity shown in their report to the equity shown in the governmental audit report. The largest difference is the bonds. Statutory accounting requires that bonds be accounted for on an amortized basis over the life of the bond as opposed to at fair market value. Governmental accounting standards require all bonds be reported at fair market value, so every time you do a financial statement, they go up and down with the market. The needs of government to know if they are going to be able to meet their requirements are a little different than the needs of an insurance company. Insurance company reporting is meant to be more stable in its reporting and also extremely conservative. The top of Note 15 shows reconciliation of non-admitted assets. Besides the valuation of bonds, the theory of non-admitted assets is the biggest difference from GAAP. The statutory basis of accounting prescribes that assets that could not be used in the payment of claims be non-admitted. She explained that, while it doesn t mean that they re worthless, it means that to value statutory equity, some assets won t be counted so you better make sure you have enough to pay claims and other liabilities. For GAAP statements, if you have accounts receivable, you measure what you think will be uncollectible using an allowance. For statutory statements, there is a cutoff. If accounts receivable haven t been received and they are at 90 days, you write them off and do not get to count them as an asset. The measurement differences, Page 3 of 17

4 according to Ms. Rulon, are laid out between the two notes to assist management and the board in reconciling them. Ms. Rulon advised the board that, for all audits (GAAP or statutory), the auditors are required to issue two letters: 1) The required communication to those that govern (Required Communication to the Board of Directors); and 2) The accounting policies used by the entity (Report on Internal Control to the Board of Directors and Management). She commended the Finance Department for their work and for the clean audit. Mr. Johnson complimented MSF staff for the excellent audit results and said they make the board s job easier because of it. C. Performance Audit Executive Compensation President Hubbard discussed the performance audit done by Angus Maciver of the Legislative Audit Division, which included aspects of corporate governance (creation of sub-committees for board work in developing expertise in various areas of MSF, review of the gain sharing program, incentive program and compensation structure of MSF). One recommendation that remains outstanding is compensation of the top five highest-paid executives at MSF. When appearing before the Legislative Audit Committee (LAC) last fall, he was asked by a member of that committee for MSF s response to that recommendation. President Hubbard stated that he needed guidance from the board with regard to how MSF will report executive compensation. The other recommendation, which had not been implemented at the time of the LAC meeting, was the clawback provision in the gainsharing program, which is being implemented. Publicly held corporations in the private world who report to regulators report in their annual statements the compensation levels of the five top-paid officers. President Hubbard recommended that MSF include in its annual report, along with a summary of the financial reports, a statement that says that the detailed financial statements and compensation of the top five officers of the company can be obtained by contacting MSF. He committed to the board that, during his annual performance review, he will report the salaries of those top five to the board of directors. Chairman Dwyer asked if President Hubbard thought his recommendation would suffice and asked who receives the annual report that is pushing this issue. Our policyholders receive the annual report but the issue is being driven by the legislative process. President Hubbard replied that we send the Governor, Lt. Governor and legislature a copy of the annual report each year. President Hubbard stated that Angus Maciver s recommendation was to publish the compensation and noted that no other public entity in the state of Montana publishes salaries of any of its employees. Ken Johnson asked why MSF would publish salaries when no others do so. President Hubbard pointed out that the standards used in the corporate governance audit were private sector standards. As an independent public corporation, MSF is still public but it s a very gray area. Chairman Dwyer suggested that President Hubbard s commitment to the board to report the salaries of the top five highest paid executives at the fall board meeting when President Hubbard s annual performance review is complete be used to fulfill the audit recommendation. The board meeting minutes are public, are posted on the MSF website and are easily accessible to anyone who wants to view them. Chairman Dwyer emphasized that it breeds discontent for legislators to compare the salaries of MSF with state employees, because they are totally different. President Hubbard agreed that the minutes will be the public vehicle for viewing the top five highest-paid executives at MSF. A poll of the board members by Chairman Dwyer revealed that board members were in agreement. Page 4 of 17

5 D. Enterprise Risk Management Presentation Mary Peter, Eide Bailly, LLP Ms. Peter presented information on the Enterprise Risk Management (ERM) project. ERM is an integrated approach to addressing all forms of risk to an organization; it is a top-down assessment of risk and opportunity for the organization as a whole and a process to align risk strategies to support further growth and protect existing assets. ERM is a proactive approach to the increased visibility of how risk is managed in an organization while leading to informed decision making and helping preserve and enhance value. Ms. Peters explained how ERM has evolved and listed the drivers, which include: Board of Directors, stakeholders, regulators/rating agencies, credit and rating analysts, activists, customers, peers and competitors. The sample rating agency classifications used as an example are shown below: Excellent Strong Adequate Weak Advanced capabilities to identify, measure & manage all risks within tolerances Advanced implementation, development & execution of ERM parameters Consistently optimizes risk adjusted returns throughout organization Clear vision of risk tolerance and overall risk profile Risk Control exceeds adequate for most major risks Has robust processes to identify and prepare for emerging risks Incorporates risk management & decision making to optimize risk adjusted returns Has fully functioning control systems in place for all major risks May lack a robust process for identifying and preparing for emerging risks Not fully developed process to optimize risk adjusted returns Incomplete control process for one or more major risks Inconsistent or limited capabilities to identify, measure or manage major risk exposures Ms. Peter shared some of the benefits and the value of ERM: More effective strategic planning, increased understanding of exposure to risk, improved decision making, enhanced market perception and enhanced internal culture and operations. The way that the integration of ERM and strategic planning apply to MSF s SBP for 2012 and beyond were discussed by Ms. Peter. The role of the Eide Bailly ERM team is a hands-on team approach. Their team facilitates the full six-step ERM process along with MSF-designated leaders, while MSF makes all management, risk, control and any risk-related decisions with respect to the ERM process and plan. She noted that communication is the key. ERM sponsors are the executive sponsors of the ERM program and communication of the ERM program sets the tone at the top. The ERM executive oversight team review recommendations for MSF ERM and reviews ERMrelated information for alignment with MSF s culture and mission. The ERM project team leadership are knowledgeable in their industry and how ERM will benefit the company and its constituents, assist in facilitating workshops and interviews to obtain inter-related risk discussions and are able to identify ERM risks, including emerging risks with the project team. The ERM project team is a cross-functional working team that will do risk identification, risk assessment and risk response planning, assist in designing MSF s customized ERM program Page 5 of 17

6 and outcomes (aligning them with the company s goals and objectives), assist in developing the ERM process, communications and monitoring and review data and make recommendations. The current timeline in place has three steps--first, the establishment of the foundation from October 2010 to early January Risk identification has been underway since mid- November and should be completed by mid-march. Risk assessment is beginning in February 2011 and should be completed by the end of this fiscal year. Ms. Peter advised the board that there will be a full report to the board of where they are in the process at the June, 2011 board meeting. E. Communications Update Carl Kochman, Communications Leader Mr. Kochman shared that MSF publications are in the process of going completely electronic, including Perspectives, Annual Report, Agent Update, Provider Bulletin and even our Christmas card is going to be electronic. Various staff members are working to ensure that we have accurate addresses. An blast will notify people that the first issue of Perspectives is available online. For the first one, Communications will send a post card to advise people to look at the MSF website. The electronic First Report of Injury is close to completion. It offers someone who has been injured (or their employer) the ability to quickly complete a first report and get the claim processed quickly. To date in fiscal year 2011, 53 Speakers Bureau gatherings have been held. Mr. Kochman expressed his satisfaction with the response and reported on the various comments made by those who have attended. About a dozen of the gatherings have been for the No Jack campaign for young workers. Mr. Kochman and his department have been working on an ergonomics video how to set up your desk, keyboard, work monitor, etc. and one for auto repair workers on how to safely bend over a fender. Two dealerships in Bozeman allowed the use of their facilities and staff for filming. MSF s Safety Management Consultants in the field have copies of the videos and hand them out where appropriate. When calling the main MSF number, callers now hear music thanks to the efforts of Mr. Kochman and Joe Palmer. The average time for a person on hold is 26 seconds, so about every 17 seconds, callers hear a message about safety and then it goes back to music. It does two things; first, it gets MSF s safety message out and second, it lets people know their call hasn t been dropped. Regarding WorkSafeMT, Mr. Kochman gave the board members an update on progress. They are in the process of becoming a stand-alone, non-profit corporation in Montana. Work is being completed on the Articles of Incorporation and by-laws. Mr. Kochman reported that four-day Safety Fests have been big hits. So far, they ve been held in Helena, Missoula and Great Falls with plans for more throughout the state, including Glasgow in two weeks and one in Billings. Curricula include OSHA certification, trenching, grain handling and agriculture chemicals. There is no charge, because WorkSafeMT exists on corporate donations. They are planning tracks for youth, the hospitality industry and healthcare. Page 6 of 17

7 F. FY11 Strategic Business Plan Update Ken Jeschke, Business Planning & Special Projects Coordinator Mr. Jeschke began by reminding the board of MSF s Key Success Measures for fiscal year 2011 that include: Generate Total Net Earned Premium of $153.9M Achieve Fiscal Year Loss Ratio of 83.6 percent Achieve Expense Ratio of 27.8 percent or less Attain Investment Income of $46.3M Generate Net Operating Income of $23.9M (before dividend) Achieve Enterprise-Wide Initiatives Enterprise-Wide Initiatives were reported on as follows: Workforce-Talent Retention Knowledge Transfer is on track for completion Customer Service-Document Management is behind schedule Customer Service-External FNOL is on track for completion Customer Service-Utilization & Treatment Guidelines has been completed Customer Service-Reserve Rewrite is behind schedule but is expected to be completed by fiscal year end. Customer Service-Claim QA Review has been completed Customer Service-WorkSafe Champions is on track for completion Infrastructure-Enterprise Risk Management is on track for completion Infrastructure-Business Team Alignment is on track for completion III. Workers Compensation Reform Legislation A. Labor-Management Advisory Council on Workers Compensation Jason Miller & Bob Worthington, Co-Chairs Senator Ryan Zinke shared that there are, at the present time, three workers compensationrelated bills: Representative Chuck Hunter s bill from the Interim Economic Affairs Committee, the LMAC bill and the bill carried by Representative Scott Reichner and endorsed by the leaders of the House and Senate. According to Senator Zinke, the Senate supports Representative Reichner s bill with a minor tweak to establish a fair and impartial board made up of medical experts to review the case at the end of 60 months as well as partial disability cases, of which there are about 6,000 cases. The bill looks very hard at Class 1 cases and elimination of those claims for disability payments. He thought it would be prudent to look at two things: Does the injury adversely affect job performance and does that injury result in longterm wage loss? Discussing the cost drivers to the system, Senator Zinke pointed out the primary driver is not the State Fund. MSF operates under the law and there are problems under that law. It emphasized that the savings from the bill go back to businesses. If there are savings within state agencies, Senator Zinke said the legislature wants to make sure the savings go back to the General Fund and not to the agency. His belief is that HB 334 is a good bill needing just a few minor revisions and he thanked Representative Reichner for his hard work on the bill. Lt. Governor Bohlinger made introductory remarks to the board and those present at the meeting. He gave the group some background on how and why the Labor-Management Advisory Council was formed. In 2004, when Governor Schweitzer and Lt. Governor Bohlinger campaigned, they traveled the state and, when they spoke to business people, the first concern expressed was, What are you going to do about work comp rates? Because of the state s high rates, employers said they were not able to expand their businesses or give employees a raise. That prompted the Governor to consult with Keith Kelly, Commissioner of Page 7 of 17

8 the Department of Labor and Industry and to find out what other states have done to address the same problem. It was then agreed that a labor and management committee would be established made up of five members representing labor, five members representing management, five Republicans and five Democrats, who, in a bipartisan way would study the cost drivers and issues. That council has worked over the past four years to examine the question of why Montana has such high rates and why the benefits are poor according to the Lt. Governor. After the four-year study, LMAC brought forth legislation that was given to Representative Chuck Hunter, who was prepared to bring forward the bill. They found that the bill needed some adjustments. Rather than introduce that bill, which might be poorly understood, LMAC decided they should have a new, fresh bill. This is the bill that Senator Zinke is going to carry in the Senate. Bob Worthington, Co-Vice Chair of the Labor-Management Advisory Council on the management side, gave the board his perspective of the process including the makeup of the council (five from labor and five from management with no insurance company participation) was intentional. He explained the workers compensation pact is between employers and employees. Mr. Worthington referred to the Oregon study and Montana s ranking four years ago as number two or number three, but now we are number one. He claimed that the problems can t be fixed in a day and a bill cannot fix it. As LMAC looked at the cost drivers and the issues facing them in the process, they made some assumptions to put in front of the legislature that certain results would come about, especially in the permanent partial disability area. LMAC took steps and, at the same time, created measurement tools that the Department of Labor could utilize to measure the potential outcomes. That information was given to the Interim Economic Affairs Committee in the summer of 2010 and was put in the bill that Representative Hunter was to have carried. However, LMAC and the Interim Economic Affairs soon learned that their assumptions were wrong and the bill wouldn t work for management or labor. He opined that as the reason why the workers compensation problem cannot be solved with a bill. It will be a long-term process. The challenge now is to work together and find a solution; the worst thing that could happen during this legislative session would be to do nothing. Next, Mr. Worthington spoke to the amended LMAC bill referred to by Senator Zinke, which he felt shows some of the compromise and issues that management and labor have dealt with for many years. He related that the cost drivers include too many injuries in Montana, injured employees staying off of work for too long, and medical fees being too high. He referenced WorkSafe MT and the work that Carl Kochman is doing in the safety arena, the use of the fifth edition versus the sixth edition of the American Medical Association s Guides to the Evaluation of Permanent Impairment, the 30-day period for the insurer to accept or deny the claim sometimes taking as long as six weeks and the financial burden it has on an injured worker because for the first four days, the injured worker isn t paid, and the ability of attorneys to collect fees on medical benefits that they recover. Wrapping up his comments, Mr. Worthington stated, We didn t get here in a day. We didn t get here in a week. We didn t get here in a year. This is an ongoing process. This is a great step and we ve got to come out of this legislative session with some pieces that will start that process. But it s not an end. It s a start to a process. It s going to be long term to solve the problem and not just bring us down quickly from number one in the Oregon study but get us to someplace normal in the country. And we need to all work together to do that. Jason Miller, Co-Vice Chair of LMAC for labor and lobbyist for Teamster s Local 190, commented that LMAC s studies have shown that the total volume of dollars in the workers Page 8 of 17

9 compensation system is at least twice as large as it needs to be about $400M. If you look at the recommended changes in both LMAC s and Representative Reichner s bills, they re well over 25 percent in savings. The other 25 percent has to come with the high incidence rate in Montana. He emphasized the compromise that happened between labor and management during their four years of study. In the Workers Compensation Act, labor and management have entered into a compact whereby workers give up their ability to sue their employer in exchange for the knowledge that their injuries will be addressed. This deal is vitally important for allowing commerce to happen in the state of Montana according to Mr. Miller. It provides the model for the modern employer/employee relationship; it provides stability and predictability. That s why LMAC picked solutions that meet the needs of both labor and management. A system that heavily favors one side or the other would not last and that s why LMAC has been working toward solutions that have the consensus of both labor and management. Mr. Miller listed the following items that LMAC designed to cut costs and improve efficiencies for Montana employers: 1. LMAC reached consensus on the modern definition of the course and scope of employment. He mentioned workers compensation cases where employees have been injured on break or at company functions and the concern that both employers and employees know when workers compensation benefits are applicable. LMAC made changes that exclude injuries that occur on breaks or at company functions. 2. LMAC reached consensus on the statutory closure of claims, which allows claims to be closed three years from the date of injury or the date of the last indemnity payment or the date of the last use of medical benefits. Those provisions were made with the understanding the claims can be reopened within the following two years, but once that time has passed, the claim is closed. 3. LMAC reached consensus on the settlement of future medical benefits. Claims can be settled once the anticipated future medical needs are made to the benefit of all parties. 4. LMAC endorsed the concept of setting medical fees no higher than 65 percent of what Medicare pays for the same services. They felt it s not possible to deal effectively with the high cost of workers compensation and not deal with the fact that 75 cents of every dollar is spent on medical fees. They believe the high cost of medical fees are due to three factors: 1) Our medical fees are high (nearly 200 percent of Medicare) for workers compensation in the state of Montana; 2) The duration of injuries in Montana is longer than average and therefore, medical services are utilized more often; and 3) The ways that medical services are utilized are sometimes more expensive than they need to be, which is why LMAC reached consensus on the adoption of Utilization and Treatment Guidelines, which provide for a set of standard practices for doctors, provide for greater efficiencies and better predictability and tremendous cost savings. 5. LMAC reach consensus on funding for WorkSafe MT. The very first thing LMAC did was work on safety, because reducing incident rates is the most effective way to reduce costs and improving job site safety is the best way to improve a worker s life at work. Mr. Miller stated that the LMAC recommendations would save Montana s workers compensation system $122M or 31 percent. According to Mr. Miller, the recommendations of the LMAC preserve the balance in meeting the needs of the most affected parties in the system: labor and management. Jerry Keck, Employment Relations Division Administrator in the Department of Labor and Industry advised the board that his department has provided staff support to LMAC over the last four years and he shared some of the more specific pieces that are in the LMAC bill and compared them to HB334 (Exhibits A1 and A2). Mr. Keck acknowledged that premiums are Page 9 of 17

10 too high in Montana but stressed that most of the savings from HB334 come from a reduction in benefits to injured workers. B. Representative Scott Reichner Representative Reichner thanked the LMAC members for their efforts and followed with an explanation of how he became involved in the drafting of a bill by the leadership of both the House and Senate. He and other legislators were told that high unemployment was partially caused by high workers compensation rates. LMAC was between labor and management, so he reached out to businesses, insurance companies and providers to iron some of the kinks. He commended President Hubbard and staff for their cooperation and education. He submitted HB334 to the House recently and stated that percent of HB334 was taken from the LMAC bill with some minor tweaks along the way. The savings quoted earlier by Lt. Governor Bohlinger are in HB334 as well; however, NCCI will not process them without enough data. He stressed that he doesn t know how much the savings will be or how quickly they will be seen. Representative Reichner and his counterparts heard from the people of Montana that immediate change is needed and those areas include medical costs and duration. At five years, 98 percent of injured workers reach the Maximum Medical Improvement (MMI) threshold. Current law allows five years of coverage from the last time benefits are used and allows benefits to drag on for years. There was no intent to hurt anyone; however, they needed to have a closure date within the permanent partial (PPD) injury arena. Statistics show it s at that five-year mark. For the approximate two percent of injured workers who still have active claims at the five-year mark, they created a panel within the bill to determine if the injured worker needs continued treatment and, if so, they would receive another two years of treatment within the system. Representative Reichner noted that 55 percent of PPD claims continue after five years and is a significant medical cost that will be reduced in HB334. And the majority of those costs are in prescriptions and most of those costs are for narcotics. They made a policy decision that we don t want to pay for long-term narcotic drugs, because they are harmful in the long run. It is a key component of the bill. In order to access programs offered at the federal level, injured employees must have their state benefits closed, so HB334 allows injured employees who truly need the assistance the opportunity to utilize those benefits. The total immediate savings estimated by NCCI is 20 to 44 percent although Representative Reichner acknowledged that there are more issues surrounding rate setting which the board must consider. He noted that this bill would represent the largest workers compensation reform dollar number in the state of Montana s history and opined that it s what is needed. Jane DeBruycker asked Representative Reichner for the actual dollar savings amount with this bill. He answered that the range given by NCCI is 20 to 44 percent and each item in the bill is priced individually. HB334 shows 20 percent of $400M is around $80M and 40 percent would be $160M. Those are year one s loss cost savings. There will be three- to five-year savings in the utilization and treatment guidelines, but don t know the actual figures because it can t be priced by NCCI. Upon further questioning, Representative Reichner stated he felt comfortable that employees would still be well served. Ken Johnson remarked on the fact that the board works for the policyholders and noted the goal is to reduce costs to employers as well as serve the injured workers. Representative Reichner stated that it s a balance, but we have to acknowledge that we re in a deep hole. Montana is not competitive with its neighboring states. We have to move 40 percent in reduction in costs just to get to mid-point. He said he s cognizant of the need to protect employees as well and has worked with LMAC as part of that process. Page 10 of 17

11 Wally Yovetich s personal observation was that there is an institutionalized mentality in Montana that, if you get hurt, you re going to be taken care of whether anyone wants to admit it or not. He felt it is one of the key issues that need to be restructured through this legislation and also through education (WorkSafe MT) to teach the people of this state not to get hurt. He would like to see something instituted beginning in the eighth grade teaching students that they don t need to get hurt. He also mentioned the relationship between their class of business and their performance in that class. He argued that many of the employers LMAC heard from said that their work comp rate is too high, but if they checked, they might have a high incidence of injury. As that seriously injured worker is affecting the employer s overall rate (up), you have a relationship that needs to be understood between how an injury inside of a class actually affects that employer relative to every other employer in that class. He opined that employers and employees will each have to give up a little bit and hope that we end up with something that works. He further commented that in April of each year when the board does their rate setting for the upcoming fiscal year, the board compares MSF rates to NCCI s national rates. In most business classes, MSF stays at the NCCI rate or within a small range of it. How we are going to realize savings and be able as a board to be able to interpret how we can adjust rates in the short term remains to be seen. President Hubbard thanked those who presented and echoed Mr. Worthington s comments that Failure is not an option. Addressing future savings, he commented that there is almost a desperation in the air to identify the dollars that the system will save. Like so many challenges, managing expectations is often very difficult. He clearly stated that insurance companies, including MSF, use the NCCI loss costs filing as a basis for rates. Whatever is in the NCCI loss costs filing and whatever legislation finally evolves, NCCI will make an effort to price it. They will include in their filing rates effective July 1, 2011 what they believe is the appropriate loss costs for Montana for all accidents going forward. We will include those and they will be included by our actuary in the analysis presented to the Board of Directors for ratemaking. The quicker the bill is passed and priced, the better for all insurance companies. Chairman Dwyer expressed his pleasure that this issue is being addressed but concern that during the four years LMAC has been working, he didn t think any one group was cut out of the deal and asked for someone to address the allegation. Jason Miller responded that the table was a group of strictly labor and management but the meetings were open to the public and there were approximately 60 meetings during that time. He said all of the industries have their fingerprints on the LMAC legislation. The original compact was only between labor and management. He said it makes sense that, if workers compensation is a deal between labor and management, the very core of the deal are the workers who receive the benefits and the employers who pay the benefits while acknowledging that the industry that services them needed to give input as well. Chairman Dwyer asked why all parties involved couldn t work together on a bill in the works for four years. Representative Reichner answered that his bill was not to diminish the work done by LMAC; however, they ran into some obstacles so he reached out to providers. Chairman Dwyer said he thought that management and businessmen were the same thing. Representative Reichner wasn t sure that the message sent to him and others in the Legislature showed that all businesses had been heard and that they wanted savings quicker. He also emphasized the large amount of the LMAC bill adopted was included in HB 334. Upon further questioning by Chairman Dwyer, Representative Reichner noted that Mike Milburn, Speaker of the House and former Legislative Liaison to the MSF Board of Directors, and others felt the LMAC bill was headed in the wrong direction. There were approximately 30 amendments requested on the bill and Speaker Milburn did not want to do it that way. Rather, he asked that a separate bill be drafted although four years of work was Page 11 of 17

12 not diminished because approximately 80 to 85 percent of the LMAC bill was included in HB 334. After further discussion, Chairman Dwyer shared his belief that every member of the board supports any effort to make this a better system, while Wally Yovetich emphasized that MSF s job is to follow the rules that the legislature develops. IV. Corporate Support Mark Barry, Vice President A. FY10 Annual Financial Report (Board Action) Mr. Barry asked for approval from the board to utilize the statutory financial statements as a basis for MSF s Annual Report so it can be published. Ken Johnson moved that the board approve the financial statements prepared on a statutory accounting basis for the fiscal year 2010 Annual Report as audited by Eide Bailly along with a financial reconciliation of surplus between the audited GASB financial statements and the audited statutory financial statements. Jane DeBruycker seconded the motion. Chairman Dwyer asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. B. FY11 Budget and Financial Reports Mr. Barry discussed the budget status for fiscal year 2011 as shown below: Mr. Barry noted the total budget is 9.7 percent under budget at the end of the second quarter. Operationally, we are under only about 0.6 percent under budget, which is being managed tight and is being watched closely. On claims payments, there are more savings. With the New Fund, we re projected to be under budget by about $16M and Old Fund benefit payments by about $1.3M. On benefit payments for Montana State Fund, we are estimating to be under budget in indemnity by $11.7M. Initial budgeting was done anticipating a slight increase in our benefit payments over last year; however, we ve been seeing a decrease in the number of claims reported and with the decrease of premiums, we are seeing that indemnity payments are dropping as well. Medical payments are running slightly under budget approximately $4.7M. Page 12 of 17

13 With regard to the Old Fund, Mr. Barry shared that MSF is on par with budget on indemnity payments and medical is seeing some relief by about $1.3M. Operational expenses are estimated to be over budget in Personal Services by 1.1 percent or $239K. The reason is we have decreased our FTE by 15 this year and had also budgeted a higher vacancy savings rate, but we re not experiencing the vacancy savings. We also have some retirement payouts that have hit the budget. Another item is executive merit adjustments that were not budgeted. Operationally, we are approximately $375K-$376K under budget with the biggest driver being the statewide cost allocation plan. It s a program where the state negotiates indirect costs with the federal government to apply to federal grant programs (cost allocation for central services) such as administration, the human resources function, payroll processing, the state s accounting division, the Governor s budget office and Legislative Services Division. These indirect costs are assessed to MSF as well. The federal government reviewed the program and found that costs were over-allocated and MSF is seeing savings of $233K. Equipment is between $18K and $19K under budget and allocation loss adjustment expense (ALAE) is about $154K under budget, so it s very tight. Mr. Barry estimated that MSF will be at $163M in net earned premium this fiscal year (six percent above plan) and $3M of that amount has to do with the restructuring of our reinsurance program. Because of a declining premium base, MSF renegotiated our aggregate stop loss reinsurance program to generate some savings and $6M of it is the result of coming in higher than had been planned (see slide below). The decrease in premium is on top of the four percent rate action taken by the board. Mr. Barry mentioned discussion about Montana State Fund not taking the 6.4 percent decrease (only took a four percent decrease on our rates); however, if you look at the history, for rates in 2005, NCCI came in with a 12 percent increase while we only took about a three percent increase. It can t just be said that MSF is not taking decreases, because we re also not taking all of the increases as indicated. As mentioned by President Hubbard earlier, we base our rates off of loss costs and will set rates accordingly. As a comparison, Liberty Northwest s overall adjustment was not the 6.4 percent either. It was closer to a 1.5 percent decrease. MSF was at a high in 2007 of $238M in premium; last year we ended up at $166M in premium. This year we are estimating $163M, significant declines from previous years. Page 13 of 17

14 15.00% 10.00% 5.00% 0.00% -5.00% % MSF Rate NCCI Lost Cost Incurred losses are projected to be $126M when we had planned $128M. Our loss ratio is 77 percent as compared to our business plan ratio of 83.6 percent. We re seeing $5.3M on prior year development. At the time we set our plan, we were planning for reserve strengthening and development of $9M, so we re much further below what was seen in the past. With regard to investment income, MSF is projecting $47.3M of investment income which includes realized gains of $3.7M that has to do with a $2M sale of equities and another $1M gain on sale of bonds. Total projected income for the year is $28M after a $4M dividend. Mr. Barry shared that we are coming down in combined ratio and projecting 106 percent. He explained that combined ratio is the losses and the loss adjustment expense plus underwriting expenses divided by premium. It does not include investment income. Unrealized gains on equity holdings have increased by $24M this year. Last year they only increased $12M. Year to date, MSF has seen an increase in equity holding value of 23 percent. Last year we closed out our end-of-year equity at $241M; it s projected to be $295M at the end of this year. Investments have grown by $51.8M, which does not include the decrease in securities on loan. That s just the bonds, equities, real estate investment and cash. We ve increased loss in reserves by $18M. At the end of the quarter, policyholder equity stands at $290M and we are projecting to grow that by another $5M. Next, Mr. Barry explained the reserve-to-equity ratio as shown on the chart below: 500% $350,000, % 397.9% $300,000,000 $250,000, % 340.0% 354.6% 344.8% 362.2% 341.0% 347.4% 347.2% 295.6% 305.4% $200,000, % $150,000,000 $100,000, % $50,000,000 0% Q2 Proj SBP $- Policyholder Equity Reserve to Equity Page 14 of 17

15 The Old Fund Second Quarter indicates: Total assets $5.6M (decrease of $6.1M since FYE2010) Total loss and LAE reserves $53.8M Investment income projected at $116K Projected operating loss ($1.3M) Projected unfunded liability ($49.5M) V. Insurance Operations Support Christy Weikart, Underwriting Services Leader A. Administrative Rules-Proposed Adoption of Amendments to ARM Method for Assignment of Classifications of Employments (Board Action) Ms. Weikart explained that the first item for board consideration is the update of annual Administrative Rule changes. In November, the board acted on two housekeeping items: changing the company s street address and the updating the date of our Underwriting Manual that is contained in our Administrative Rules. The comment period has now closed and no comments have been received. Boyd Taylor moved that the board adopt the amendments to the administrative rules as proposed. Jane DeBruycker seconded the motion. Chairman Dwyer asked for any questions or comments from those present. Hearing none, he called for the vote and it passed unanimously. B. Experience Modification Eligibility Amounts for FY12 (Board Action) Preparation for July 1 st renewals have already begun and Ms. Weikart requested that the board approve continuation of MSF s existing experience rating thresholds of coverage. She reminded the board that MSF has been using these same thresholds since If, with the legislative actions underway, Wally Yovetich wanted to if these levels will be affected or cause any issues if that legislation is passed. President Hubbard answered that it would not, because it s based solely on the amount of premium generated by employers. Chairman Dwyer moved that the board adopt experience modification eligibility amounts for new or renewal policies with effective dates in fiscal year 2012 in accordance with the following rules: A risk qualifies for experience rating if its data within the most recent 24 months of the experience period develops a subject premium of at least $10,000. If a risk does not qualify based on the above rule and has more than the amount of experience in the above rule, then to qualify for experience rating, the risk must develop an average annual subject premium of at least $5,000. Ken Johnson seconded the motion. Chairman Dwyer asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. C. Construction Industry Premium Credit Program Approval (Board Action) This program acknowledges a higher rate of pay for construction industry employers and levels the premium. The table must be updated each year to acknowledge the increase in the state s average weekly wage (see chart on next page). Page 15 of 17

16 Montana State Fund Construction Industry Premium Credit Program Applicable to policies effective July 1, 2011 to July 1, 2012 Average Hourly Wage Credit Percentages $18.47 or less 0.00% $18.48 to $ % $18.84 to $ % $19.25 to $ % $19.71 to $ % $20.23 to $ % $20.81 to $ % $21.47 to $ % $22.21 to $ % $23.05 to $ % $24.00 to $ % $25.07 to $ % $26.28 to $ % $27.65 to $ % $29.20 to $ % $30.95 to $ % $32.93 to $ % $35.17 to $ % $37.71 to $ % $40.58 to $ % $43.83 or more 29.74% Jane DeBruycker moved that the board adopt for Montana State Fund s Construction Industry Premium Credit Program the plan of credit percentages as proposed by Montana State Fund management effective July 1, Boyd Taylor seconded the motion. Chairman Dwyer asked for any questions or comments from those present. There being none, he called for the vote and the motion passed unanimously. D. Classification Code Update The board accepted the written report included in the board packet on the Classification Codes. VI. Old Business/New Business Wally Yovetich asked about the previously discussed legislation and if it has the potential of a significant reduction of income to MSF in the short term with the continual level of payout we ve had. He asked if MSF is going to have an imbalance of premium versus expenses for up to a year and, if so, how does MSF plan to deal with it? President Hubbard responded that it depends on the amount of cost reductions to the system. As business expands and contracts, we have either lessening or increasing pressure on our expense ratio. What we try to do is budget for essential operations of the company. He emphasized that claims do not go away just because the premium going forward drops. It is the largest of MSF s operational costs. There may be upward pressure on expense ratio as premiums and the Page 16 of 17