2019 Annual Report

 

Letter from the Leadership of Montana State Fund

President John F Kennedy once said, “The time to repair the roof is when the sun is shining.” These words sum up Montana State Fund’s (MSF) operational philosophy since 1990. Our “roof” is a financially sound organization that can weather any unforeseen catastrophe.

And today, as we face COVID-19, MSF has no leaks. We are financially strong. We can assure Montana’s hardworking men and women that we can fulfill our obligation to take care of them when called upon. Our ability to meet these challenges successfully has resulted from years of financial strengthening to weather such unexpected storms.

With that, we present MSF’s 2019 annual report.

Financial Stability
Last year we made solid financial gains. Strong investment market returns boosted policyholder equity from $512.5million in 2018 to $550.7 million in 2019. We also held premium rates steady. In fact, rates are at their lowest level in history dating back to July 1990. And for the 23rd consecutive year, we awarded a policyholder dividend; nearly 23,000 of our safety conscience customers shared $30 million.

Signs of Safety
Other uplifting news for 2019 was the downward trend of on-the-job injuries. While we believe this trend is encouraging, it’s still imperative that we remain diligent and committed to workplace safety. In that vein, we capitalized on two successful safety initiatives. The intensive year-long WorkSafe Champions program trained and graduated 96 Montana workers from 29 businesses. The youth focused Growing a Safer Montana program awarded safety gear to 25 Montana high school construction trade and industry classrooms. Plus, 15 college students studying Occupational Safety and Health / Industrial Hygiene or Construction Trade and Industry each received a $4,000 academic scholarship to further their career paths.

Online Innovation
Keeping pace with the demands for innovative online tools for our customers and employees is key for our future success. This innovation is reflected in our multi-year policy and billing system initiative. Last year our team worked feverishly to develop and test five new applications that will be well vetted prior to our 2020 launch and implementation.

But in the end, nothing would materialize without the dedication of MSF’s 290 employees and our Board of Directors. We thank them for striving each day to achieve our mission – to partner with employers and their employees to care for those injured on the job and champion a culture of workplace safety for our fellow Montanans.

And finally, as we move forward in these uncertain times, please take comfort that Montana State Fund will continue to do our part to keep Montana’s workforce safe and be a responsible fiscal agent for what may lie ahead.

Now more than ever, be safe and take care of others.

 

Laurence A Hubbard
President/CEO

 

Lance Zanto Chair
Montana State Fund

Executive Team

Laurence Hubbard

President / CEO

Kevin Braun

General Counsel

Mark Burzynski

Vice President of
Corporate Support

Rick Duane

Vice President of
Human Resources

Sam Heigh

Vice President of
Operations Support

Julie Jenkinson

Vice President of
Operations

Al Parisian

Chief Information Officer

Board Members

Lance Zanto

Email

Chair Helena

Term ending: May 1, 2021

Cliff Larsen

Email

Helena

Term ending: May 1, 2021

Matt Mohr

Email

Big Sky

Term ending: May 1, 2023

James Molloy

Email

Helena

Term ending: May 1, 2021

Lynda Moss

Email

Billings

Term ending: May 1, 2021

Jack Owens

Email

Missoula

Term ending: May 1,  2023

Jan VanRiper

920 University St Helena, MT 59601

Term ending: May 1, 2023

%

On average, 95% of MSF policyholders receive a dividend each year.

2019 Highlights

Our new Signs of Safety statewide media campaign hit the airwaves in September 2019.

Nearly 23,000 safety-minded policyholders shared a $30 million dividend. Since 1999 we have returned $286 million of total dividends to our safety conscience policyholders.

Montana workers across the state attended our 36 free safety workshops.

WorkSafe Champions, our intensive safety education program, graduated 65 employees from 8 policyholder businesses. Our centralized classes graduated 31 employees from 18 policyholder businesses and 3 non policyholder businesses.

In 2019, our Safety Services Specialist facilitated 16 trainings at the Montana Department of Labor’s SafetyFestMT held in Missoula, Billings and Butte.

We added three new safety educational videos to our library that are found on our safety focused website safemt.com.  In all, MSF has produced 19 safety videos that have been accessed by workers from around the world.

We presented a $25,000 check to Kids’ Chance of Montana.  The organization provides college scholarships to children of workers who have been injured or killed on the job.

We distributed safety equipment to 25 Montana high school construction trade and industry classrooms through our Growing a Safer Montana Initiative. Since the program’s start in 2017, we invested $30,000 in safety gear for more than 4,600 students.

Fifteen college students studying Occupational Safety and Health / Industrial Hygiene or Construction Trade and Industry each received a $4,000 academic scholarship. MSF began these scholarships in 2017. In that time the number of scholarships and the amounts has risen. In all, we have awarded 36 students a total of $108,000 in scholarship monies.

Over 200 medical providers and workers’ compensation professionals from across Montana attended our 19th annual medical education conference, Examining the Challenges: Advancing Medical Management. The yearly event offers participants several continuing education credits.

We awarded 15 nonprofit organizations safety and health grants through our ACE (Assisting Charitable Endeavors) program.  Since its’ start in 2001, 260 organizations have received help from the program. The average grant is $1,797 with a grand total of $467,191 dispensed.

Seven higher education students were awarded a total of $8,000 in scholarship money.  The scholarship aids children and spouses of workers who were fatally injured in a work-related accident.

Vice President of Corporate Support, Mark Barry, retired after 25 years with MSF.

Our employees contributed $43,032 to the State Employee Charitable Giving Campaign (SECGC). This was a $6,151 increase from 2018. In addition, employees contributed to the Helena Food Share Turkey Challenge and the Pads for Paws Foundation.

Report of Leadership

The Leadership of the Montana State Fund (MSF) is responsible for the results and stewardship of the resources entrusted to it, which is reflected in its financial statements and all other information presented in the Annual Report. MSF governance, culture, values, and system of internal controls are designed to provide reasonable assurance that resources are used appropriately, assets are safeguarded against loss, and that transactions are executed and recorded promptly and accurately in accordance with Leadership’s direction, authorization, and State of Montana statutes. These functions, attributes, and tools include the organizational structure and corporate governance practices, selection and training of personnel, communication and enforcement of policies and procedures, strategic and financial planning and budgeting, enterprise risk management, monitoring, and ongoing internal and external audit programs. The effectiveness of these systems, controls, and tools are continually being evaluated by Leadership.

MSF’s financial statements are presented on its website for the year ending December 31, 2019, and include financial results and balances, based on the best estimates and judgment of MSF Leadership. These results are presented on a statutory basis, which is consistent with insurance industry financial statement presentation. Inasmuch as MSF, which is domiciled in the State of Montana, is under the auspices of the Montana State Auditor, it compiles and reports its financial results according to Statutory Accounting Principles (SAP), which are the principles and standards required by the Montana State Auditor’s Office.

The financial overview and results included in this Annual Report should not be considered MSF’s audited financial statements. The results presented herein are summarized from the audited financial statements produced by the independent public accounting firm, Eide Bailly, LLP, for the year ending December 31, 2019. Eide Bailly issued a “clean” auditor’s opinion, which means that MSF financial statements fairly represent results and balances and there were no material misstatements identified. MSF’s complete audited financial statements, including the accompanying notes, are available on MSF’s website. Furthermore, inasmuch as MSF is a component unit of the State of Montana, it is required by statute that the State of Montana’s Legislative Audit Division (LAD) conduct an audit of MSF’s financial statements in accordance with generally accepted accounting principles (GAAP) as prescribed by the Governmental Accounting Standards Board (GASB). The governmental financial statements and the related audit opinion for the year ending December 31, 2019, will be available on the State of Montana Legislative Audit Division’s website once they have been presented and approved by the Legislative Audit Committee. Due to reporting differences between SAP and GASB, it should be noted that the statutory financial results differ from the GASB results. Therefore, a financial reconciliation of policyholder equity between the GASB financial statements and the SAP financial statements follows:

 

A comparison of Statutory Policyholders’ Equity to GASB Net Assets
For the year ended December 31, 2019
 
Statutory policyholders’ equity (SAP) $ 550,665,280
Adjustments to get GASB Net Position:
Non-admitted assets 1        16,665,673
Change in investment value of bonds to fair market value 2      34,941,775
Change in investment lot inventory method 3          1,689,846
Change in investment value of other invested assets to equity method 4 1,077,312
Change in allowance for doubtful accounts 5        (1,879,181)
Effect of differences in pension accounting
standards on income and policyholders’ equity 6      (24,025,356)
Effect of differences in OPEB accounting
standards on income and policyholders’ equity 7        (1,043,309)
Rounding differences                     7
GASB net position (subject to audit) $ 578,092,047

1 Non-admitted assets – Under Statutory accounting standards, assets that are not readily convertible into cash and cannot be used to fulfill policyholder obligations are categorized as “non-admitted assets” and removed from the balance sheet via a direct charge to policyholders’ equity.  Under GASB standards, these assets are recognized on the balance sheet subject to certain valuation allowances.

2 Change in investment value of bonds to fair market value – Statutory accounting standards require investment valuation practices that differ from those required by governmental accounting standards.

3 Change in investment lot inventory method – Statutory accounting standards require investment valuation practices that differ from those required by governmental accounting standards.

4 Change in investment value of other invested assets to equity method – Statutory accounting standards require investment valuation practices that differ from those required by governmental accounting standards.

5 Change in allowance for doubtful accounts – Governmental accounting standards regarding accounts receivable require an assessment of collectability and the establishment of an allowance for doubtful accounts on the balance sheet. Statutory accounting standards require doubtful accounts to be charged directly against the income statement.

6 Effect of differences in pension accounting standards on income and policyholders’ equity – Governmental pension accounting standards (GASB 68) require recognition of an allocation of the state’s unfunded retirement plan liability at the agency level. Under SAP, the recording of a portion of the unfunded liability is not required for a reporting entity, which participates in a plan sponsored by another entity, but is not directly liable for the obligations under the plan (SSAP No. 102 paragraph 86); however, the amounts contributed to the plan by MSF are recorded as expense in the current period.

7 Effect of differences in OPEB accounting standards on income and policyholders’ equity – Governmental postemployment benefit accounting standards (GASB 75) require recognition of an allocation of the state’s Other Post-Employment Benefit liability at the agency level. Under SAP, the recording of a portion of the liability is not required for a reporting entity which participates in a plan sponsored by another entity, but is not directly liable for the obligations under the plan (SSAP No. 92 paragraph 100).

 

Quick Facts as of December 31, 2019
 
Net earned premium $156,871,129
Number of policies serviced 26,313
Number of new claims processed 8,899
Investment income earned $54,790,168
Net income after dividends $11,914,725
Policyholder dividends $30,006,671
Loss and LAE reserves $956,593,643
Statutory equity $550,665,280
Reserves to equity ratio (after dividend) 1.74
Premium to equity ratio (after dividend) 0.28
 
Transparency in Government

As part of the corporate governance practices of MSF, the following is the list of the top five compensated employees in the organization as well as their compensation for 2019.

 
Laurence Hubbard President/Chief Executive Officer  $403,328
Albert Parisian Chief Information Officer  $259,865
Julie Jenkinson Vice President – Insurance Operations $258,189
Kevin Braun General Counsel $210,976
Richard Duane Vice President – Human Resources $188,578

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We typically retain more than 90% of our business from year to year (based on premium dollars), which is a very high retention rate by industry standards.

Financials

2019 Financial Statements

MSF annually files audited financial statements and all other required reports and documentation with the Montana State Auditor’s Office (SAO) Commissioner of Securities and Insurance (CSI). The MSF Board of Directors (Board) approved rate reductions of 8.6% for policies effective July 1, 2019.  During 2019, the Board of Directors declared that a $30 million dividend be returned to 95% of policyholders.  Since 1999, MSF has returned a total of $286 million to policyholders through dividends. After issuance of the dividend, MSF recorded net income of $11.9 million for 2019.   Decreasing claim benefit costs and continued strong investment market returns supported MSF policyholder equity increasing $38.2 million to $550.7 million at the end of 2019. MSF’s strong financial condition allows MSF to offer efficacious safety programs and training, stable year-to-year costs for workers’ compensation coverage, and dividends rewarding policyholders for safe workplaces.

”Graphs Tell the Story

 

The average wage-loss claim currently costs an estimated $69,000, although the most catastrophic of claims can cost several million dollars.  About 70% of workers’ compensation claim costs are for medical services, which is a fast growing driver of Montana claim costs.  Wage replacement (indemnity) costs have been relatively constant over the past 10 years.  However, workers’ compensation medical costs were rising 6% per year prior to 2012, but are currently rising about 2.5% per year after HB334 benefit reforms were enacted in 2012.

 

MSF predominantly serves small employers in Montana who would not otherwise have access to affordable workers’ compensation insurance.  However, MSF’s role as a competitive guaranteed market allows MSF to maintain lower and more stable rates as well as a high level of customer service for all policyholders (the premium volume from medium and large account employers who choose to insure with MSF creates economies of scale and reduces financial variability, benefiting all Montana employers regardless of size).

 

Claim frequency is measured in claims per exposure volume written in order to account for changes in business volume and rate level.  MSF total claim frequency has declined by 3% per year over the past decade.  NCCI finds a general pattern of declining workers’ compensation claim frequency throughout the country.  NCCI research suggests that innovations which improve labor productivity in the economy tend to have secondary impacts on workplace injury rates.  Reductions in claim frequency have helped offset increases in medical costs.

 

Since 1999 when MSF began returning general dividends to its policyholders, we have returned a total of $286 million to policyholders through the general dividend program.  Primarily as a result of interest income and stock market gains, MSF’s last five dividend returns have exceeded $30 million each year.  MSF’s dividend program helps stabilize rates by distributing excess capital when conditions are favorable as opposed to having rates increase and decrease in unpredictable ways depending on the whims of financial markets.  About 95% of MSF policyholders receive a dividend each year.  Dividends are an effective incentive in favor of workplace safety that is noticed by policyholders when they receive a reward for having no or few employee injuries that year.

 


Since the inception of the Montana State Fund in 1990, private carriers have variously expanded and contracted their written workers’ compensation insurance volumes in Montana, depending on the business conditions at the time.  General economic conditions also affect the number of insured employers.  As the guaranteed market, we insure any Montana business, offering employers a stable, locally controlled, reliable, and competitively priced source for workers’ compensation insurance.

 

In the soft market conditions of the late 1990s, MSF’s retention of written premium was relatively low by industry standards.  However, in the last few years as market conditions have changed, MSF’s retention of written premium has dramatically improved.  In recent years, we typically retain more than 90% of our business from year to year (based on premium dollars), which is a very high retention rate by industry standards.

 

MSF manual rate levels rose in the early 2000s due to increasing medical costs and statutory and judicial benefit expansions.  Rate levels have decreased since 2007, particularly as a result of legislative benefit level reforms enacted with HB334 in 2012.  MSF rates effective July 1, 2020 are now 47% below the 2007 level and are the lowest rates ever in the history of the Montana State Fund.