FWCJUA Board of Governors Meeting: June 9

The Florida Workers’ Compensation Joint Underwriting Association (“FWCJUA”) Board of Governors (“Board”) met via teleconference on June 9, 2009.

The FWCJUA General Counsel presented an update on House Bill 903, which was signed into law by Florida Governor Charlie Crist on May 29.  With an effective date of July 1, 2009, HB 903 amends s. 440.34, F.S., to remove all statutory language providing for “reasonable” attorneys’ fees in workers’ compensation cases and specifies that fee awards cannot exceed the amount authorized by a statutory attorney fee schedule.  Thus, claimants’ attorneys’ fees in workers’ compensation cases would be calculated in the manner they had been from the effective date of 2003 Florida workers’ compensation reform legislation, up to the 2008 Florida Supreme Court decision in Murray v. Mariner Health.

On June 3, as a result of the passage of HB 903, Florida Insurance Commissioner Kevin McCarty announced approval of a revised National Council on Compensation Insurance (“NCCI”) rate filing, which proposed that the voluntary market roll back the rates and rating values to January 1, 2009 levels.  The revised NCCI rate filing takes effect on July 1, 2009. 

 

The Board considered a revision of the FWCJUA Seventh Amended Bylaws to permit the annual meeting to be conducted by teleconference in an effort to reduce administrative and travel expenses.  The Bylaws currently do not address the issue.

Other clarifications to the Bylaws included changing all references to “FWCJUA producers” to “Producers and Agency Producers,” and replacing former FWCJUA Chairman Ray Neff’s name to current Chairman Charlie Clary. 

The Board approved the amended Bylaws, which will be filed with Florida Office of Insurance Regulation (“OIR”) to become effective upon approval by the OIR.

 

Investment Committee Report

At the May 27 FWCJUA Investment Committee meeting, the FWCJUA investment manager had advised that, regarding the current economic climate, “less bad is good.”  With less volatility in the market, positive economic indicators include an unexpected spike in consumer confidence, which rose 14 points in May, and a rebound in the corporate bond market.  In the short term, inflation is not viewed as a matter for concern.  The investment manager said that developments in the housing market are a key economic factor, and the expectation is that a real estate market bottom is now being established.

The FWCJUA’s current cash and invested assets are yielding 3.17 percent with an average maturity of 1.2 years, which represents a decrease from the return of 4.5 percent in January 2008.  Rated at “AA,” the FWCJUA portfolio is performing better than United States Treasury bonds.  Approximately $33.2 million of investments will mature during the rest of 2009, and that money will be reinvested at lower yields as interest rates remain low.  The investment manager and Committee members considered options for higher yields, but agreed to continue with the current, more conservative course.

The Committee recommended continued holding of currently authorized exceptions to the FWCJUA Investment Policy.  The FWCJUA maintains nine bonds downgraded below an “A” rating in its portfolio, including those issued by Home Depot, Anheuser Busch, Lehman Brothers, SunTrust, CitiGroup and Vulcan Materials.  The Vulcan bond was further downgraded on May 5 from “BBB+” to “BBB” with a stable outlook.

The Board passed a motion to continue holding the downgraded bonds as authorized exceptions to the FWCJUA Investment Policy.

 

At its March 27 meeting, the Investment Committee considered whether any changes in the FWCJUA’s Investment Policy, investment strategy or cash management were warranted, given the state of the investment marketplace and the FWCJUA’s portfolio performance.  Upon review, the Committee determined that no changes were warranted in the FWCJUA’s investment strategy or cash management; however, it did see an opportunity to improve the Investment Policy.

The Committee members agreed that the FWCJUA should formalize its current procedures related to the investment manager providing timely notice of security downgrades.  Accordingly, the Committee recommended that the Board adopt a revision to the Investment Policy to require the investment manager to notify the Executive Director of any security downgraded below acceptable investment parameters. The Executive Director would then be responsible for communicating directly with the Investment Committee.

The Board passed a motion to adopt the Investment Committee’s proposed change to the FWCJUA Investment Policy.

 

The Committee recommended that the Board continue its current relationship with Evergreen Investment Management.  The current fee structure paid by the FWCJUA, which has not changed since Evergreen became the FWCJUA’s investment manager in August 1995, is extremely competitive.  This was most recently confirmed in May 2007 when the FWCJUA conducted a competitive solicitation for investment management services and was unable to identify another opportunity in which proposed fees did not exceed the fee structure now paid by the FWCJUA by at least 35 percent.

In addition, the FWCJUA investments have consistently outperformed its comparable benchmarks.  Given the FWCJUA’s restrictive investment policy, its staff believes that the investment manager is achieving the best returns possible. 

It was noted that Evergreen Investment Management, formerly of Wachovia, is now under the auspices of Wells Fargo, but has not made a name change at this point.  The Committee decided it would examine the relationship in more detail during 2010.

The Board passed a motion to continue its relationship with Evergreen.

 

Board member Laura Lopez gave a brief financial report:

• FWCJUA policy decline has been higher than anticipated.  The number of policies in March 2009 was down 78 percent from March 2008.
• Investment income has fallen 19 percent since 2008.
• The net earned premium for the first quarter of 2009 is 26 percent of what was expected.
• As of May 18, the FWCJUA Investment Portfolio was earning 3.17 percent–down from 4.2 in January.  A total of $43 million will mature over next 12 months.  Because rates are very low, CDs are being utilized at a two percent return; rates will continue to decline as reinvestments are made at a lower return.
• Overall, the only real investment failure was related to Lehman Brothers, and otherwise, the FWCJUA has done very well, largely in part due to its conservative investment policy.

 

Operations Committee Report

FWCJUA Executive Director Laura Torrence presented the 2008 Operations Report, with the following highlights:

• There was a 35 percent reduction in policy count from 2007 to 2008;
• 53 percent of policies issued were in the construction industry and 33 percent were in the service industry;
• There was a 15 percent increase in policy retention from 2007 to 2008;
• There was an 11 percent reduction in mid-term cancellations from 2007 to 2008;
• There was a 33 percent reduction in the number of claims reported from 2007 to 2008;
• 79 percent of claims were reported within seven days of the accident date;
• 73 percent of claims reported in the 2008 accident year closed by year end;
• 10.5 percent of policies received a loss survey in 2008, compared to 13.3 percent in 2007;
• 60 percent of loss surveys completed in 2008 were on construction risks;
• There was a 31.5 percent reduction in the number of accounts referred to Travelers Premium Special Investigations Unit, with 57 percent of accounts referred for payroll suppression; and
• There was 98 percent compliance with service provider performance standards.

 

Additional Operations Report highlights:

• On April 2, 2009, the Florida Department of Financial Services and the Florida Office of Insurance Regulation (“OIR”) were notified that in 2008, the FWCJUA had gross written premiums of $6,427,550 and fixed administrative expenses totaling $2,559,384.
• Committee members received a favorable report regarding the disposition of checks issued.  As of May 15, only 39 checks remained outstanding from a total of 459.

 

At its May 29 meeting, the Operations Committee discussed the following budget expenses:

• Computer room air-conditioning reconfiguration:  The $5,000 expenditure was anticipated, and thus allotted in the business plan.  The FWCJUA solicited three quotes, all of which recommended the condenser be located outside of the building. The lowest bid for reconfiguration work was $4,035, and accompanying electrical work $965, totaling $5,000 as budgeted.  The Board approved the expenditure.
• On-line interactive application process:  The Operations Committee opted to forward this recommendation directly to the Board for consideration without a Committee recommendation, given the magnitude of the expense.  The expenditure of $530,000 to implement an on-line interactive application process by January 1, 2010, would be a capital expense, although it was in the business plan to be carried out as deemed appropriate by the Board.  After consideration of what resources were available in-house, FWCJUA Staff decided that some outsourcing is necessary in order to build the optimal system.  Tropics Policy System, which is built specifically for workers’ compensation applications, is considered to be the primary candidate.  An interactive on-line application process would allow streamlined processing and reduced costs for employers, producers and the FWCJUA.  Ms. Torrence said that the extreme slowdown of FWCJUA business and its current surplus of $80 million made this an optimal time to consider enhancing the application process, which would serve the FWCJUA especially well when the market cycle changes and growth occurs.  Recurring expenses would include approximately $28,000 for annual Oracle software maintenance and an annual maintenance fee of $45,000 for Tropics.

Ms. Torrence spoke in favor of implementation, noting that it would allow for a 45 percent decrease in staff, as well as cutting mail processing and accounting time and costs in half.  When the market turns around, the reduced underwriting staff will be able to handle greater volume.  A producer present at the meeting concurred with Ms. Torrence’s assessment.

The FWCJUA is required to have a competitive solicitation process when acquiring goods and services over $25,000, according to FWCJUA Bylaws.  Ms. Torrence said the Committee had met the requirement in the bidding process that determined Tropics was the best choice.  Two other bidders’ systems would ultimately cost more than $1 million, and would not be specifically tailored to workers’ compensation needs.

The Board passed a motion to move forward with the project.

 

Rates and Forms Committee Report

The Rates and Forms Committee recommended that FWCJUA Staff draft correspondence to OIR outlining the FWCJUA’s program for eliminating the 2008 Subplan D deficit, which relied on the use of money from the contingency reserve.  Given that the FWCJUA had a $80 million surplus in 2008, it is not statutorily required to submit a deficit elimination plan to the OIR.  However, with Subplan D posting a deficit of $2,818,667, the Board previously agreed to update its plan to eliminate this individual rating plan deficit and submit the updated plan to the OIR. 

FWCJUA Staff proposed that the filing be based on the Subplan D cash flow model updated through May and that the FWCJUA be authorized to finalize the draft letter and submit the plan to the OIR no later than August 6, which is 90 days from the date that the audit was filed (May 8).  Ms. Torrence said she is waiting for the May figures before finalizing the draft.  The Board passed a motion to accept the Committee’s recommendation.

 

At its May 29 meeting, the Rates and Forms Committee agreed to recommend that the Board confirm the booking of the 2009 losses utilizing the latest 2009 filed rates, along with the loss ratios evaluated as of the end of 2008.  This procedure was adopted in 2008 at the recommendation of Milliman consultants and thus, was used to estimate the FWCJUA’s 2008 net loss ratios by rating tier.  Milliman’s analysis utilized the April 1, 2009, filed rate changes, along with the loss ratios from the loss evaluated as of December 31, 2008.

Milliman does not recommend any changes to the FWCJUA’s current procedure for booking the current year’s losses.  Milliman updated its analysis and rating tiers to reflect the effect of HB 903 becoming law, and FWCJUA Staff will book any adjustments to the projected 2009 net loss ratios as appropriate.

The Board passed a motion to confirm booking the 2009 losses utilizing the current methodology.

 

The Board considered the Rates and Forms Committee recommendations to:  maintain current rates until the FWCJUA undergoes its normal rate evaluation in September; and direct Staff to send a letter to the OIR explaining that, although voluntary market rates are going down July 1, 2009, as a result of HB 903 becoming law, the reality of the FWCJUA is much different.

FWCJUA Staff said two outcomes of the 2009 Legislative Session must be taken into account in considering a rate change:

• Restoration of the attorney fee schedule for workers’ compensation cases with HB 903; and
• The lack of a $750,000 budget appropriation for the FWCJUA’s administrative expenses.

As previously discussed, the NCCI’s rate filing in response to HB 903 was approved on June 3.  Accordingly, effective July 1, 2009, the January 1, 2009 voluntary market rates will be reinstated in lieu of the current April 1, 2009 voluntary market rates.  The January 1 rates did not include any impact related to the Murray v. Mariner decision.  The April 1 rates reflected a first year increase of 6.4 percent related to the decision.

On March 2, 2009, the FWCJUA filed to implement the approved April 1, 2009 voluntary market rate increase of 6.4 percent as a result of the Murray v. Mariner decision.  The estimated premium effect of the April 1, 2009 voluntary market rates on the FWCJUA book was an increase of 4.2 percent.  The target premium change was an increase of 3.7 percent above the January 1, 2009 FWCJUA rate level.

A Board member said he had recently discussed the issue with Florida Insurance Commissioner Kevin McCarty, who was adamant in his belief that the FWCJUA should roll back its rates in consideration of the action on HB 903, since the Murray v. Mariner decision was responsible for FWCJUA rates going up.

Considering the absence of the $750,000 budget appropriation for the FWCJUA, Ms. Torrence argued that the FWCJUA could find itself in a deficit situation if it rolled back rates on July 1 with the voluntary market.  Another Board member countered that the FWCJUA had an obligation to the market and consumers to be in sync with the voluntary market, despite being an insurer of last resort.

Earlier this year, Commissioner McCarty had requested that the FWCJUA explore any means possible to reduce costs.  In light of that, members were deeply concerned that, with the surplus so high, it would be untoward to not roll back rates on July 1.  Members also were concerned that the seemingly considerable profit would draw undue attention upon the FWCJUA, in light of tightening finances in all State operations.

Mark Mulvaney, of Milliman, said actuarial standards require consideration of all the costs and sources of revenue when setting rates, including anticipated expenses and losses.  He said expenses could become problematic for the FWCJUA, considering the fall in policy volume.  Dropping rates now would very likely lead to increased rates on January 1, 2010, due to higher expenses.  While the effect of HB 903 is expected to reduce some costs, all costs must be included in the rate.  While the $80 million surplus is available for future expenses, actuarial standards prevent it from being considered in subsidizing rates. 

Ms. Torrence also noted that this year, the FWCJUA instituted a dividend program and, since it is paying out that money, the surplus will not continue to grow at the same rate.

The Board passed a motion to reverse the April 1 rate filing along with that of the voluntary market on July 1.

 

The Board is scheduled to hold its next meeting via teleconference on Tuesday, September 8 at 8:30 a.m.

 

Should you have any questions or comments, please contact Colodny Fass.

 

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