SB19 Study Committee September 23, 2002

1. SB19 Study Committee September 23, 2002

2. Presentation Outline • Review of Montana State Fund-current condition • Financial overview • Review of Montana State Fund proposed statutory structure • Significance of legislation for Montana businesses and economic development efforts • Details of proposed legislation • Costs associated with proposal

3. MSF Structure • Non-profit workers compensation insurer • Guaranteed market • Governed by 7 member Board of Directors • Appointed by the Governor • Set rates, surplus level, declares dividends • Approves strategic business plan and budget • Provides management and oversight control • Subject to open meeting and public document laws

4. MSF Structure • Currently state agency exemptions • Pay and classification • Personal leave • Budget • Printing and insurance related contracts • Authority to donate to charitable causes • Relationship with Board of Investments

5. MSF Structure • Team environment focusing on service • 251.25 FTE • Status as state employees • Market compensation • Gainsharing & incentive plans

6. MSF by the Numbers

7. MSF by the Numbers

8. MSF by the Numbers

9. MSF by the Numbers

10. MSF by the Numbers

11. Review of MSF proposal • Why now? • Benefits of legislation • Ensuring that operational reserves will be protected for the benefit of employers and employees in the state • Having MSF regulated in a manner more consistent with other insurance carriers • Operational Flexibility

12. Review of MSF proposal • Benefits of legislation • Bolstering the state’s economic development plan by creating a structure that can respond quickly to changing market conditions and the needs of Montana’s existing or prospective employers • Enhancement of state General Fund

13. Review of MSF proposal • Scope of legislation • To operate in a manner more consistent with other insurance carriers, but maintaining role as guaranteed market • Not interested in writing other lines of insurance or operating in other states • Continued legislative oversight through audits and reports

14. The Workers’ Compensation Crisis of the 1980s

15. The Solution

16. Issues • Premium tax • Federal tax exempt status • Guaranty Fund • Rate making authority • Insurer for state agencies • Employee benefits • Regulation/Oversight • Surplus

17. The Role of surplus Surplus for an insurance company serves as a contingent liability fund which safeguards policyholders and injured employees from adverse developments

18. Potentially greater volatility of results The Role of surplus • Extremely long-term obligations associated with workers compensation claims • MSF writes one line of insurance • MSF writes in a single state • MSF provides a guaranteed market • Unlike a stockholder-owned insurance company, MSF cannot access additional capital to finance future growth or to cover adverse financial results MSF needs a stronger than average surplus to address these issues

19. Building a Win-Win Situation • Transfer of Excess funds not required to pay Old Fund Claims to the General Fund • Projected $13 million in FY 2003 • Projected $4.7 million in FY 2004 • Projected $3.4 million in FY 2005 (NOTE: Subject to independent actuarial determination) • MSF pays Premium Tax of 2.75% beginning in FY05 ($2.86 million on $104 million of written premium) • MSF as Public Corporation requests purchase of MSF building from Land Board (market value approximately $6 million)

20. Significance of Legislation for Montana • Surplus is safeguarded for policyholders • Increased operational efficiencies and effectiveness for the benefit of Montana employers • Meshes with economic development efforts to streamline public sector • Regulates MSF more like private sector insurers

21. Significance of Legislation for Montana • Modification of Old Fund statute will result in positive impact on General Fund in the future • Payment of 2.75% premium tax will result in $2.8 million to the General Fund on current $104 million annual premium • $$$ to General Fund will fluctuate with premium levels

22. Montana State Fund Legislative History • 1989- Legislature creates State Compensation Mutual Insurance Company effective January 1, 1990 • 1990 Special Session-Separated the liabilities incurred before July 1, 1990 (Old Fund), and provided a separate funding source rather than premium dollars (Old Fund Liability Tax). The Legislature directed the new Montana State Fund to be responsible for claims that occurred on and after July 1, 1990. Montana State Fund modified through legislation to function more like state agency

23. Montana State Fund Legislative History • 1993- Legislation granting budget authority to Board of Directors, fraud programs, safety culture act • 1997-MSF Board increased to 7, given authority to market through independent agents. $20 million paid to General Fund and $63.8 million paid to Old Fund. Legislature established “adequate funding” test for the end of the payroll tax. (Payroll tax terminated 12/31/98). Authorization to provide “other states” coverage. • 1999-Surplus requirements strengthened, exclusion from state procurement act for insurance related services, Board given authority to establish appropriate surplus before declaring dividends, ability to diversify into equities.

24. Montana State Fund Legislative History • 2001-Allowed MSF to set multiple tiers for pricing, change in annual leave, establishment of charitable contributions and scholarship program, exemption from state printing requirements for marketing and educational purposes, expanded employer insurance coverages. • 2002-Provided for a transfer of $4 million of Old Fund excess to the General Fund in FY03

25. Key elements of MSF Legislative Initiative • MSF will be structured as a non profit public corporation • Will generally function as a domestic mutual insurer- with a new name: Montana Mutual Insurance Company • Montana Mutual will no longer be a state agency • Exception will be grandfathering of current employees in state retirement system • After a transition period, will provide all current state services internally • Will not be state employees

26. Key elements of MSF Legislative Initiative • Will be regulated by the Insurance Commissioner’s office (with exceptions) • Premium rates will be established by the MSF Board. The Insurance Commissioner role will be for actuarial review and issuance of a report on reserve and rate adequacy • Montana Mutual will not be required to solely use NCCI rates and classifications • Montana Mutual may not be dissolved by the Insurance Commissioner • Title 33, Chapter 3, mutual statutes exception • Report on a fiscal year rather than a calendar year for annual report, premium tax and risk based capital requirements • Exception from investment of assets by Board

27. Key elements of MSF Legislative Initiative • Will continue as guaranteed market for Workers’ Compensation insurance in Montana • Will pay premium tax (2.75%) and be a member of the Casualty and Property Insurance Guaranty Association • Will follow insurers investments, the insurance contract, and unfair trade practices chapters • Will utilize Title 33 Insurance Fraud Protection Act • Federal tax exempt status will be maintained, as provided under Federal IRS law

28. Key elements of MSF Legislative Initiative • Authority will be for workers’ compensation insurance and related coverage's • The Governor will continue to appoint the Board of Directors (7 under current law) • Has proposed law amendment to potentially allow for purchase of office building by Montana Mutual from state • Will continue as sole carrier for state agencies

29. Key elements of MSF Legislative Initiative • Under the Montana constitution, Montana Mutual will be subject to open meetings, public documents, and investment of assets by the Board of Investments • Modification to Old Fund statute so that any excess is returned to the General Fund • Strengthening of language in regards to policyholders surplus

30. Costs of restructuring • Technology Costs estimated upon passage of legislation • Additional Security and licensing • Initial capitalization: $820,000 • ISP service, WWW Connectivity and ongoing licensing costs: • Annually: $174,000

31. Costs of restructuring • Additional Costs Including • Banking services, telecommunications equipment and services, mail processing, insurance coverage's, (not personnel related) insurance department regulation • Initial Capital investment: $675,000 • Annual On-going Costs: $622,000

32. Costs of restructuring • Personnel related Costs (Annually) • Additional health insurance costs to maintain current coverage's: $300,000 • Benefits administration : $196,000

33. Savings from Restructuring • Savings from separating from the state including: • Insurance • Warrant • Telephone • Mail processing • Payroll processing • Dept. of Justice Fraud • Other efficiencies Total Annual savings: $1,504,000

34. Total Costs of Restructuring • Initial capitalization: $1,496,000 • Annual ongoing costs: $1,293,000 • Identified savings: $1,504,000 • Net decrease in annual cost: $211,000

35. SB19 Study Committee September 23, 2002