liability & property pool - mml.org final audit 2018.pdf · michigan municipal league liability...

LIABILITY & PROPERTY POOL

Financial Report

With Supplemental Information

December 31, 2018

Michigan Municipal League Liability and Property Pool

Contents

Independent Auditor's Report1-2

Management's Discussion and Analysis3-16

Basic Financial Statements

Statement of Net Position17

Statement of Revenue, Expenses, and Changes in Net Position18

Statement of Cash Flows19

Notes to Financial Statements20-28

Required Supplemental Information29

Schedule of Claims Information for All Lines of Coverage30-31

Schedule of Reconciliation of Net Reserves for Losses and Loss Adjustment Expenses32

Independent Auditor's Report

To the Board of DirectorsMichigan Municipal League Liability and Property Pool

Report on the Financial Statements

We have audited the accompanying financial statements of Michigan Municipal League Liability and PropertyPool (the "Pool") as of and for the years ended December 31, 2018 and 2017 and the related notes to thefinancial statements, which comprise the basic financial statements of the Pool.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordancewith accounting principles generally accepted in the United States of America; this includes the design,implementation, and maintenance of internal control relevant to the preparation and fair presentation of financialstatements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted ouraudits in accordance with auditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audits to obtain reasonable assurance about whether the financialstatements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of therisks of material misstatement of the financial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express nosuch opinion. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of significant accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion.

Opinion

In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financialposition of Michigan Municipal League Liability and Property Pool as of December 31, 2018 and 2017 and thechanges in its financial position and its cash flows for the years then ended in accordance with accountingprinciples generally accepted in the United States of America.

1

Carol.Rendak

New Stamp

Carol.Rendak

New Stamp

To the Board of DirectorsMichigan Municipal League Liability and Property Pool

Required Supplemental Information

Accounting principles generally accepted in the United States of America require that the management'sdiscussion and analysis, schedule of claims information for all lines of coverage, and schedule of reconciliation ofnet reserves for losses and loss adjustment expenses by type of contract, as identified in the table of contents, bepresented to supplement the basic financial statements. Such information, although not a part of the basicfinancial statements, is required by the Governmental Accounting Standards Board, which considers it to be anessential part of financial reporting for placing the basic financial statements in an appropriate operational,economic, or historical context. We have applied certain limited procedures to the required supplementalinformation in accordance with auditing standards generally accepted in the United States of America, whichconsisted of inquiries of management about the methods of preparing the information and comparing theinformation for consistency with management's responses to our inquiries, the basic financial statements, andother knowledge we obtained during our audit of the basic financial statements. We do not express an opinion orprovide any assurance on the information because the limited procedures do not provide us with sufficientevidence to express an opinion or provide any assurance.

April 24, 2019

2


Management’s Discussion and Analysis

3

This section of Michigan Municipal League Liability and Property Pool’s (the “Pool”) annual financial report presents our discussion and analysis of the Pool’s financial performance during the year ended December 31, 2018. Please read it in conjunction with the Pool’s financial statements, which immediately follow this section.

The Reporting Entity

The Michigan Municipal League (MML) formed Michigan Municipal League Liability and Property Pool pursuant to the Michigan Intergovernmental Cooperation Act, P.A. 138 of 1982, as amended. The Pool became operational in December 1982. The mission of the Pool is to provide a long-term, stable, cost-effective risk management alternative to members and associate members of the MML. The Pool provides services intended to reduce the frequency and severity of losses occurring in the operation of local government functions. It also defends and indemnifies its members against legal liability or loss in accordance with the terms of its Intergovernmental Agreement and Coverage Document.

The Pool is comprised of municipalities and related agencies throughout the state of Michigan including cities, villages, townships, counties, public authorities, and special districts. As a condition of membership in the Pool, each public agency must be either a member or an associate member of the MML.

The legal basis of the Pool and its organization is set forth under the terms of a Pool Intergovernmental Contract which is entered into and signed by each Pool member. The Pool’s board of directors must approve the admission of each Pool member.

Our discussion and analysis of the Pool’s financial performance provides an overview of its financial activities for the years ended December 31, 2018 and 2017. Please read it in conjunction with the Pool's financial statements, which begin on page 17.

Financial Overview

This annual statement consists of three parts - management’s discussion and analysis (this section), the basic financial statements, and required supplemental information.

The three basic financial statements presented are as follows:

Statement of Net Position - This statement presents information reflecting the Pool’s assets, liabilities, and net position and is categorized into current and noncurrent assets and liabilities. For purposes of the financial statements, current assets and liabilities are those assets and liabilities with immediate liquidity of which are collectible or becoming due within 12 months of the statement’s date.

Statement of Revenue, Expenses, and Changes in Net Position - This statement reflects the

operating and nonoperating revenue and expenses for the previous two fiscal years. Operating revenue consists primarily of member contributions, with the major sources of operating expenses being claims and claims adjustment expenses, general and administrative expenses, and reinsurance costs. Nonoperating revenue consists primarily of investment income.

Statement of Cash Flows - This statement is presented on the direct method of reporting and

reflects cash flows from operating activities and investing activities. Cash collections and payments are reflected in this statement to arrive at the net increase or decrease in cash and cash equivalents for the calendar year.


Management’s Discussion and Analysis (Continued)

4

The Pool’s accounting records are maintained on an accrual basis, which is in accordance with accounting principles generally accepted in the United States of America. Financial data is presented for both the current and prior fiscal year. Financial data is also compared to an annual budget adopted by the board of directors. Additional Information - Notes to the Financial Statements

The notes provide additional information that is integral to a full understanding of the financial information presented in the financial statements. The notes to the financial statements begin on page 20.

Supplemental Information

In addition to the basic financial statements and accompanying notes, this report also presents certain supplemental information regarding the Pool’s 10-year claims development history and a reconciliation of the Pool’s net reserves for losses and loss adjustment expenses by type of contract. The determination of current member rates to cover the assumed risk of possible future loss occurrences is largely guided by claim development. Trends in claim development indicate whether losses are increasing, decreasing, or static. Required supplemental information is located on pages 29-33.

Financial Highlights

Total assets of $80.9 million exceeded liabilities of $35.0 million, resulting in the net position of $45.9 million, a 9.8 percent decrease from the prior year.

Membership levels remained stable and net ratable exposures and payrolls increased during the

year. The return of $2.0 million dividend to renewed members helped the Pool retain 99 percent of its members.

Loss and loss adjustment expense reserves, including incurred but not reported claim reserves,

increased by 11.8 percent from the prior year. During 2018, ultimate loss and loss adjustment expense development, net of specific retentions, show a $0.4 million overall deterioration on prior years’ results, driven by unfavorable emergence in the public official’s liability partially offset by favorable emergence in auto liability. The development of the other lines of coverage generally offsets each other.

The Pool reported a change in net position of ($5.0) million in 2018, compared to a change in net

position of $2.3 million in 2017.



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Comparative Statement of Net Position

2018 2017 2016Assets

Current assets:Cash and cash equivalents 1,224,234$ 1,229,010$ 403,077$ Investments at fair value 7,599,068 7,588,736 5,583,001 Premiums receivable 149,539 160,505 61,324 Reinsurance receivables on paid claims 399,396 1,028,990 699,307 Other accounts receivable - - - Claim deductibles receivable 293,721 229,047 193,594 Prepaid lease - Current portion 20,000 20,000 20,000 Accrued interest receivable 263,605 213,687 232,169 Other current assets 633,738 565,374 535,728

Total current assets 10,583,301 11,035,349 7,728,200

Noncurrent assets:Investments at fair value 64,239,684 65,974,177 67,621,802 Investment in NLC Mutual Insurance Company 5,548,643 5,057,900 4,363,025 Prepaid lease - Net of current portion 548,334 568,334 588,334

Total noncurrent assets 70,336,661 71,600,411 72,573,161

Total assets 80,919,962 82,635,760 80,301,361

LiabilitiesCurrent liabilities:

Accounts payable 86,115 98,111 74,977 Net reserve for losses and loss adjustment expenses 4,703,489 4,294,053 4,098,974 Net reserve for incurred but not reported losses

and loss adjustment expenses 4,654,536 3,924,117 3,640,651 Unearned member premiums - Net 9,510,233 8,884,962 8,482,723 Dividends payable 17,218 17,645 7,944

Total current liabilities 18,971,591 17,218,888 16,305,269

Noncurrent liabilities:Net reserve for losses and loss adjustment

expenses - Net of current portion 8,057,146 7,566,952 8,140,212 Net reserve for incurred but not reported losses

and loss adjustment expenses - Net of current portion 7,973,289 6,915,052 7,230,022

Total noncurrent liabilities 16,030,435 14,482,004 15,370,234

Total liabilities 35,002,026 31,700,892 31,675,503

Net Position - Unrestricted 45,917,936$ 50,934,868$ 48,625,858$

December 31



6

Operating Results and Changes in the Pool’s Net Position

2018 2017 2016Operating Revenue

Member premiums 21,349,872$ 20,517,131$ 19,900,528$ Less reinsurance premiums expense (7,402,067) (7,077,221) (7,159,030)

Net member premium earned 13,947,805 13,439,910 12,741,498

Operating ExpensesLoss and loss adjustment expenses - Net of

reinsurance 12,175,837 10,690,880 10,681,435 Service agent fee 4,125,079 4,101,958 4,516,009 Administrative expenses 409,778 330,791 357,110

Total operating expenses 16,710,694 15,123,629 15,554,554

Operating (Loss) Income (2,762,889) (1,683,719) (2,813,056)

Nonoperating Income (Expenses)Interest and dividend income 2,028,842 1,440,275 1,487,127 Realized and unrealized (loss) gains on (2,728,786) 3,921,857 1,868,448 Income from investment in NLC Mutual Insurance 490,741 694,875 470,453 Other income 1,099 58,946 5,418 Distributions to members (2,045,939) (2,123,224) (2,294,753)

Net nonoperating (expenses) income (2,254,043) 3,992,729 1,536,693

Change in Net Position (5,016,932) 2,309,010 (1,276,363)

Net PositionBeginning of year 50,934,868 48,625,858 49,902,221

End of year 45,917,936$ 50,934,868$ 48,625,858$

Year Ended December 31

In addition to net position, when assessing the overall health of the Pool, the reader needs to consider other nonfinancial factors such as the legal climate in the state of Michigan, the general state of the financial markets, and the level of risk prevention undertaken by the Pool and its members.

The Pool’s total assets have increased 0.8 percent over the past three years, from $80.3 million

to $80.9 million. This slight increase is the result of positive returns from NLC Mutual offset by decreases in the investment portfolio and the collection of reinsurance. The Pool’s investment in NLC Mutual has increased by 27.2 percent over the past 3 years. Conversely, the Pool’s investment portfolio has decreased by 1.9 percent and reinsurance receivables decreased 42.9 percent over the past 3 years.

The investment portfolio consists of a variety of fixed-income and equity securities. The fixed-income securities, representing 65 percent of the portfolio, range from Treasury and Agency type securities, AAA to BBB rated securities, to high yield corporate bonds.

The average life of the fixed-income securities is 4.08 years with an effective duration of 3.65 years and averaging a yield to maturity of 2.95 percent.



7

Pool equity investments, representing 35 percent of the portfolio, consist of funds invested in both a domestic international high dividend exchange traded funds comprised of blended large cap, value, and growth stocks; and diversified emerging stocks.

Premium receivables represent amounts due from members that have policies effective in

December. Ninety-nine percent of premiums billed are also collected during the year. The offer to return dividends following renewals encourages members to promptly pay their renewal premiums in anticipation of receiving their dividend checks.

Reinsurance receivables on paid claims decreased 61.2 percent in 2018 compared to 2017. The

year-end receivable represents amounts due from reinsurers for three auto no-fault and three property claims paid during 2018 and prior. The 2018 reinsured claim activity included a net increase of about $900,000 on 11 large reinsured claims and collections of $1.5 million from reinsurers during the year.

Prepaid expenses include the prepaid asset balance of $568,334 for the Lansing Capitol Office

building. The Pool paid $800,000 to MML for acquiring and renovating the Lansing Capitol Office. The $800,000 pre-payment will be amortized over 40 years.

The Pool’s Investment in NLC Mutual Insurance Company increased 9.7 percent for the year, at a

value of $5.5 million, which represents 3.71 percent of NLC Mutual’s total members’ equity.

Total liabilities increased 10.5 percent since 2016, from $31.7 million to $35.0 million. This

increase is partly the result of reserve increases of 9.9 percent from 2016 to 2017. In addition, in 2018, net reserves for losses and loss adjustment expenses (case reserves) increased 7.6 percent. The net reserves for incurred but not reported losses increased 16.5 percent. The 2018 year-end actuarial analysis reveals an overall deterioration of prior years’ reserves, resulting in an overall increase in total net loss reserves.

Net position decreased 5.6 percent, from $48.6 million in 2016 to $45.9 million in 2018. The

decrease in the Pool’s financial position is the result of both the deterioration of the investment market and prior year claim reserves.

Capital Assets and Debt Administration

The Pool has no long-term debt. All material commitments and contingencies are disclosed in Note 7 to the financial statements. The Pool has no plans to encumber any debt or enter into additional commitments in the foreseeable future.



8

Member Premiums Earned

During 2018, the Pool provided insurance coverage to 432 members. Pool coverage includes general liability, police, errors and omissions, property, auto, crime, inland marine, and cyber security liability.

Written premiums for 2018 totaled $21.8 million, a 4.9 percent increase over 2017, and an 8.2 percent increase over 2016. Variations in written premium result from changes in member coverage limits and deductibles, variations in applied underwriting credits and debits, and changes in ratable exposures, including property values, number of vehicles, and employee payrolls. Written premiums are recognized as earned on a pro-rata basis over the life of the policy term.

For the year ended December 31, 2018, the Pool reported earned premiums of $21.3 million compared to $20.5 million and $19.9 million for the years ended December 31, 2017 and 2016, respectively.



9

Reinsurance Premiums Expense

The Pool retains the first $500,000 of each casualty loss and $100,000 of each property loss. Reinsurance coverage is obtained to protect the Pool against losses in excess of the $500,000 casualty and $100,000 property retentions. Casualty reinsurers participate on various layers ranging from $500,000 up to $15,000,000. Participating casualty reinsurers in 2018 were Munich Reinsurance Company, Everest Reinsurance Company, Lloyds of London, and National League of Cities (NLC) Mutual Insurance Company.

Munich Re 100%

Munich Re 40% Everest Re 25% 50

NLC Mutual 15% Lloyd's of London 20%







# of Members

$5,000,000 xs $10,000,000Individual Casualty Losses

1

432

$3,000,000 xs $2,000,000

$5,000,000 xs $5,000,000

$500,000 Retention

$500,000 xs $500,000

Reinsurance Program

$1,000,000 xs $1,000,000

Property reinsurance is provided by Lexington Insurance Company for losses in excess of $100,000 up to $250,000,000. Boiler and machinery coverage is provided by XL Insurance America, Inc. for losses in excess of $100,000 up to $100,000,000.

Property

$250,000,000 Limit

Boiler & Machinery

$100,000,000 Limit

Lexington Insurance Company XL Insurance America, Inc.

AIG Greenwich Insurance Company

Parent Company Parent Company

$100,000 Deductible Per Occurrence $100,000 Deductible Per Occurrence

Subject to a Excess Aggregate Stop Loss = $2,800,000

Reinsurance premiums expense is reported at $7.4 million for 2018, $7.1 million for 2017, $7.2 million for 2016. Reinsurance premium expense also includes assessments to the Michigan Catastrophic Claims Association (MCCA) to protect the Pool against automobile no-fault losses in excess of $555,000 and $545,000 for policies issued or renewed during the two-year periods of 2017-2019 and 2015-2017, respectively. Annual MCCA assessment rates have increased over the past three years ranging from $160.00 for 2016-2017, $170.00 for 2017-2018, up to $192.00 for the 2018-2019 fiscal year.



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Investment Income

The Pool’s investment portfolio consists of fixed income and equity securities. The fixed income portfolio generated interest income totaling $1.2 million during 2018, a 14 percent increase compared to 2017; and a 12 percent increase compared to 2016. The equity portfolio generated dividend income totaling $0.7 million for 2018, and $0.4 million for both 2017 and 2016, a 75 percent increase from 2017 and 2016.

Net Change in the Fair Market Value of Investments The Pool experienced a $2.7 million net decrease in the fair market value of investments in 2018, compared to the $3.9 million net increase in 2017 and the $1.9 million net increase in 2016. The portfolio generated a total negative return of 1.22 percent for 2018, declining for the first time in several years on weakness in the equity allocation. Uncertainty over global growth, trade and the impact of Fed rate increases caused investors to shun risk assets late in the year resulting in negative returns for equities. This was somewhat offset by positive returns from the fixed income allocation. The fixed income allocation in the Pool’s portfolio, comprising 65 percent of the total portfolio assets, returned 1.46 percent for the year, 9 basis points (0.09 percent) ahead of the Bank of America Merrill Lynch Government/Credit 1-10 Year Index’s return of 1.37 percent. The Pool strategically transitioned from a short-term fixed income strategy to an intermediate strategy in the first half of 2018, resulting in the new benchmark noted above which became effective April 1, 2018. The objective of the change in strategy is to support prudent risk taking and flexibility to maintain/enhance the fixed income portfolio yield. The fixed income portfolio has outperformed its respective benchmark(s) for the last three and five-year time periods by 13 basis points (0.13%) and 12 basis points (0.12%), respectively, on an annualized basis. The Pool’s portfolio benefitted from an overweight position in agency and commercial mortgage-backed securities while the underweight position in Treasuries and overweight to corporate bonds detracted from relative performance. Positive security selection in the corporate bond sectors more than offset the negative allocation effect there. Maturity structure contributed positively as well given the modestly longer relative average duration.

The Pool’s equity allocation consists of two passive equity index exchanged traded funds (ETFs): the Vanguard Total Stock Market ETF and the Vanguard International High Dividend Yield Index ETF. The Vanguard Total Stock Market ETF invests in a blend of large capitalization growth and value stocks while the International ETF focuses on large capitalization value stocks with an emphasis on dividend yield. Both ETFs generated negative returns for the year given the fourth quarter’s spike in volatility and investors shunning of risk assets given the increasing uncertainties. In contrast to the prior couple of years, the Vanguard Total Stock Market ETF returned -5.20% for 2018. VTI accounts for 33% of portfolio assets. Fears of a broader trade war with China, recession and the Fed raising rates too far weighed on investor sentiment and a shift away from equity risk. For perspective, 2018 was the first year since 2008 that the S&P 500 has posted a negative annual total return. The remaining 4% of the Pool’s equity allocation was invested in the Vanguard International High Dividend Yield Index ETF. This ETF generated a total return of -12.81%. Slowing growth in both Europe and China as well as trade war fears weighed heavily on international stocks.



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The returns generated from the Pool’s fixed-income and equity funds resulted in a total negative return of 1.22 percent for 2018, compared to positive returns of 8.24 percent and 5.17 percent for 2017 and 2016, respectively.

Income from Investment in NLC Mutual Insurance Company

The Pool invested in NLC Mutual Insurance Company (NLC Mutual) in 1987. In accordance with current accounting guidance, the Pool accounts for the investment using the equity method, recognizing the Pool’s 3 percent share of NLC Mutual’s equity income within the financial statements.

NLC Mutual acts as a “pool of pools,” It provides liability, property and workers’ compensation reinsurance coverage to thousands of cities, towns, and villages through 27 league sponsored risk pools.

The income from NLC Mutual for 2018, 2017 and 2016 amounts to $490,741, $694,875, and $470,453, based on the equity values of $5,548,643, $5,057,900, and $4,363,025 as of December 31, 2018, 2017, and 2016, respectively. NLC Mutual also distributed dividend income of $141,170 during 2018.

Losses and Loss Adjustment Expenses Incurred, Net of Reinsurance

The Pool administers claims and pays for covered losses experienced by its members. All claims are processed and managed by a third-party administrator. Attorneys, medical experts, and other professionals are contracted on an as-needed basis. Between the time a claim is reported and the time it is resolved, reserves are established for the estimated amount that will be paid at some future date to settle the loss. Reserves are also established for claims that have occurred but are not yet known to the Pool and for reported claims that are expected to develop. These IBNR (incurred but not reported) reserves are recognized in the current year for claims that will either not be reported until future periods or will increase in severity. This process allows a matching of current year premium with estimated total losses that will be incurred as the result of the member’s current year coverage.

Incurred losses and loss adjustment expenses represent payments and changes in reserves for the year. Incurred loss and loss adjustment expenses were $12.2 million for 2018, $10.7 million for both 2017 and 2016.



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The value of incurred claims has increased 14.0 percent over the past two years, while claim counts have increased only 8 percent during the same period, which is indicative of an increase in claim severity. The average severity of claims for the latest 17 years for general liability is lower than the all years’ combined averages while for public officials and police coverages, the average severity for the latest 16 years is more than the all years’ combined averages. Loss ratios have averaged 70 percent over the past 10 years. The high loss ratio in 2014 is predominantly driven by unfavorable claim activity in the property line of coverage. For all the non-auto liability lines, early indications for the 2018 year show somewhat higher loss ratios than 2017. The 2018 unfavorable police liability loss ratio is subsidized by the favorable loss ratios of the general and public official’s liability lines of coverage.

Service Agent Fees

The Pool is sponsored and administered by the Michigan Municipal League (MML) as a service for MML members and other public sector entities. The Pool has no employees. As such, the Pool contracts with MML and AmeriTrust (AMT) (formerly Meadowbrook Insurance Group) for most administrative services.

Service agent fees represent the services fees paid pursuant to the MML and AMT contracts. The MML contract provides for risk management and financial management services as well as facilities and equipment at an annual cost of $1,428,694. The MML service fee is adjusted annually for inflation. During 2007, the Pool agreed to pay MML $800,000 for use of common office space and facilities within the League Capitol Office. The $800,000 payment is accounted for as a pre-payment for the Pool’s usage of the space and amortized over a 40-year period, the term of the lease agreement. The 2018 unamortized balance is reported at $568,334.

The AMT contract provides for marketing, underwriting, claims administration, and loss control risk services at an annual fee of $2,553,576. Effective July 1, 2017, the AMT annual fee was adjusted downward (approximately 10 percent) to properly realign the service fee to the actual cost of services provided. Additionally, the Pool’s contract with AMT provides for a profit-sharing payment equal to the lesser of 50 percent of the Pool’s net underwriting gain or $250,000. The Pool experienced a net underwriting loss for 2018, thus no additional profit share fee was warranted.

Service agent fees also include bank charges, custodial fees, investment management, and advisory fees that total $143,159 for 2018, a 7.8 percent decrease when compared to 2017, and a 19.4 percent decrease when compared to 2016.



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Administrative Expenses

In providing coverage and other member services, the Pool incurs administrative expenses and contract service fees. All administrative expenses are budgeted and monitored monthly for compliance with budgetary limits. Administrative expenses include actuarial, financial audit, and legal fees; board meetings and travel; information and technology services; printing and office supplies; subscriptions and memberships; office rent; etc.

Administrative expenses of $409,778 for 2018 represent a 23.9 percent increase compared to 2017 and a 14.7 percent increase compared to 2016. Costs associated with appraisal fees, legal fees, audit fees, claims monitoring, actuary fees, trustee travel/meeting expenses, and promotional expenses increased during the year. All other expenses decreased; specifically, costs associated with information technology expenses, loss control, management consulting fees, and subscriptions/memberships.

Distributions to Members

Distributions to members amounted to $2.0 million, $2.1 million, and $2.3 million in 2018, 2017, and 2016, respectively. Members who have participated continuously during the previous five years share in a pro-rata distribution in accordance with the percentage that their annual premium equates to the Pool’s total written premium during the preceding year. Members who have participated in the program for less than five years receive proportionally reduced shares. New or returning members are not eligible to participate in the distribution, although the board approved a distribution schedule that provides for graduated participation over a five-year period in the event future dividends are declared.



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Budgetary Highlights

Each year the Pool adopts an annual operating budget for the current year. The budget is presented to the Pool’s board of directors for final review and adoption. The board approves any interim amendments to the annual budget. The Pool administrator prepares the budget and reviews expenditures on a monthly basis to assure compliance with the adopted budget.

Budgeted Actual

Variance

Positive

(Negative)

Member premiums earned 21,080,000$ 21,349,872$ 269,872$ Less reinsurance premiums expense (7,400,000) (7,402,067) (2,067)

Net member premiums earned 13,680,000 13,947,805 267,805

Investment income including change in fair valueof investments and other income 1,805,000 (208,104) (2,013,104)

Total revenue 15,485,000 13,739,701 (1,745,299)

Expenses:Loss and loss adjustment expenses incurred - Net of reinsurance 9,150,000 12,175,837 (3,025,837) Service agent, marketing, and risk control fees 4,188,209 4,125,079 63,130 Administrative expenses 451,500 409,778 41,722 Distributions to members 2,100,000 2,045,939 54,061

Total expenses 15,889,709 18,756,633 (2,866,924)

Excess of expenses over revenue (404,709)$ (5,016,932)$ (4,612,223)$

The following is an explanation of the significant variances of the budget to actual for 2018.

Earned premiums exceeded the 2018 budget parameter by 1 percent. The Pool gained eight and lost one member during the year, netting an increase in written premiums of $62,941. The Pool renewed 99 percent of the total Pool membership with the majority of members renewing premiums at a higher level. Net premium increases averaged 4 percent or netting to approximately $922,637 in additional premium. The policy of returning dividends to members following their 2018 renewals has helped to retain members within this competitive environment.

Reinsurance premiums were slightly higher (less than 1 percent) than the budgeted parameters. The budget anticipated increased premium levels to which the reinsurance rates are applied, flat casualty reinsurance renewal rates, and $1.1 million for MCCA assessments. Actual liability reinsurance premium rates averaged a 5 percent decrease over all layers, while the average base premiums increased 4 percent. Property reinsurance renewed at the same rate as last year, while there was a 3.0 percent increase in property values due to new members, appraisals and annual value adjustments. The 2017-2018 MCCA final assessment came in at $1.1 million as budgeted. The 2018-19 estimated assessment is slightly higher at $1.2 million.

The combination of investment income, the change in fair market of the investment portfolio, and NLC Mutual’s equity income fell short of the budgeted parameter by about $2 million. The Pool’s portfolio decreased in overall value by $1.7 million. The portfolio earned a total negative return of 1.22 percent for 2018. Additionally, NLC Mutual’s equity income, budgeted at $100,000, exceeded the budget parameter by about $532,000.



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Overall, losses and loss adjustment expenses, net of reinsurance, were higher than the budget anticipated due to the overall deterioration in prior year reserves. Net claim payments decreased during the year, while the change in case and IBNR reserves both increased during the year, resulting in a 33 percent negative budget variance.

Service agent, marketing, and risk control fees came within the budgeted parameters. The MML service fee is adjusted annually for inflation. The AMT service fee reflects revised terms that became effective July 1, 2017. Investment manager and bank fees came within budget because of the lower investment values.

Administrative expenses include various expenses such as legal fees, actuarial fees, audit fees, loss control, information technology, director expenses, etc. All expenses were lower than anticipated in the budget, except for property appraisal fees and claims monitoring expenses. Property appraisals help the Pool to value property exposures accurately during the underwriting process. More appraisals were conducted during the year than originally anticipated leading to a 5.6 percent budget variance. Although not budgeted, the Pool incurred claims monitoring costs that’s designed to protect the Pool against fraudulent activity.

Economic Factors

Prudent Management and Governing Board Oversight

The mission of the Pool is to be long term, stable, and cost effective. The Pool is managed by a nine-member board of elected and appointed officials. The board meets quarterly to review operations, and meets annually to conduct strategic planning and goal-setting. An audit committee reviews the year-end financial statements and makes recommendations in that regard to the full board of directors. The Pool is audited on a tri-annual basis by the State of Michigan Department of Insurance and Financial Services and files a Comprehensive Annual Financial Report.

Investment Risk

A significant portion of the Pool's annual net income is derived from its investments. Investments are professionally and independently managed, with quarterly reports to the governing board. Additionally, a professional investment advisory firm provides quarterly reports to the governing board, which independently reviews the investment manager’s performance.

The deposits and investments of the Pool are exposed to risks that have the potential to result in losses. As such, there is the risk that the Pool will not earn expected returns and that investments may lose value. The Pool may be exposed to common deposit and investment risks that relate to credit risk, concentration of risk, interest rate risk, and foreign currency risk. In accordance with Statements No. 40 of the Governmental Accounting Standards Board, disclosures are presented in Note 3 on pages 22-24 of the audit report to inform readers about deposit and investment risks that could affect the Pool’s ability to provide services and meet its obligations.

Risk of Inadequate Loss Reserves

With quarterly reserve reviews by an independent actuary, and regular independent claim reviews, management considers the risk of using significant amounts of surplus to strengthen loss reserves to be low.



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Reinsurance Cost

Reinsurance costs are subject to market fluctuations and losses worldwide over which the Pool has little control. The MCCA assessment, in particular, is one of these areas. However, given the Pool’s loss experience, management expects Pool casualty reinsurance costs to remain relatively stable in the future.

Future Projects

In light of the Pool’s surplus position, the Pool board of directors approved a plan to distribute a $2.1 million dividend to current members, to be paid upon their renewal in the program throughout 2019. After careful consideration of the Pool’s current financial position and future volatility of the investment markets, it is determined that this dividend distribution will not affect the Pool’s strong financial position.

Contacting the Pool’s Management

The financial report is designed to provide our members, customers, and the general public with a general overview of the Pool’s finances and to demonstrate the Pool’s accountability for the money it receives. For more information about the Michigan Municipal League Liability and Property Pool, visit our website at www.mml.org.


Statement of Net Position

December 31, 2018 and 2017

2018 2017

AssetsCurrent assets:

Cash and cash equivalents $ 1,224,234 $ 1,229,010Investments at fair value (Notes 3 and 8) 7,599,068 7,588,736Accounts receivable:

Premiums 149,539 160,505Reinsurance 399,396 1,028,990Claim deductibles 293,721 229,047

Prepaid expenses and other assets:Prepaid lease (Note 7) 20,000 20,000Accrued interest income 263,605 213,687

Other current assets 633,738 565,374

Total current assets 10,583,301 11,035,349

Noncurrent assets:Investments at fair value (Notes 3 and 8) 64,239,684 65,974,177Investment in NLC Mutual Insurance Company (Note 2) 5,548,643 5,057,900

Prepaid lease - Net of current portion (Note 7) 548,334 568,334

Total noncurrent assets 70,336,661 71,600,411

Total assets 80,919,962 82,635,760

LiabilitiesCurrent liabilities:

Accounts payable 86,115 98,111Net reserve for losses and loss adjustment expenses (Note 4) 4,703,489 4,294,053Net reserve for incurred but not reported losses and loss adjustment

expenses (Note 4) 4,654,536 3,924,117Unearned member premiums - Net 9,510,233 8,884,962

Dividends payable 17,218 17,645

Total current liabilities 18,971,591 17,218,888

Noncurrent liabilities:Net reserve for losses and loss adjustment expenses - Net of current

portion (Note 4) 8,057,146 7,566,952Net reserve for incurred but not reported losses and loss adjustment

expenses - Net of current portion (Note 4) 7,973,289 6,915,052

Total noncurrent liabilities 16,030,435 14,482,004

Total liabilities 35,002,026 31,700,892

Net Position - Unrestricted $ 45,917,936 $ 50,934,868

See notes to financial statements. 17


Statement of Revenue, Expenses, and Changes in Net Position

Years Ended December 31, 2018 and 2017

2018 2017

Operating RevenueMember premiums $ 21,349,872 $ 20,517,131

Less reinsurance premiums expense (7,402,067) (7,077,221)

Net premium revenue earned 13,947,805 13,439,910

Operating ExpensesLoss and loss adjustment expenses - Net of reinsurance (Note 4) 12,175,837 10,690,880Service agent fees 4,125,079 4,101,958

Administrative expenses 409,778 330,791

Total operating expenses 16,710,694 15,123,629

Operating Loss (2,762,889) (1,683,719)

Nonoperating Income (Expenses) Interest and dividend income 2,028,842 1,440,275Realized and unrealized (losses) gains on investments (2,728,786) 3,921,857Distributions to members (2,045,939) (2,123,224)Other income 1,099 58,946

Income from investment in NLC Insurance Company 490,741 694,875

Total nonoperating (expenses) income (2,254,043) 3,992,729

Change in Net Position (5,016,932) 2,309,010

Net Position - Beginning of year 50,934,868 48,625,858

Net Position - End of year $ 45,917,936 $ 50,934,868



Statement of Cash Flows

Years Ended December 31, 2018 and 2017

2018 2017

Cash Flows from Operating ActivitiesReceipts from member premiums $ 22,025,225 $ 20,749,718Receipts from reinsurers 1,532,891 3,906,805Receipts from claim deductibles 402,711 340,311Payments on claims (10,858,233) (15,712,817)Payments to reinsurers (7,441,183) (7,006,750)Payments for expenses (4,595,217) (4,419,261)

Net cash and cash equivalents provided by (used in)operating activities 1,066,194 (2,141,994)

Cash Flows Used in Noncapital Financing Activities - Distributions tomembers (2,046,366) (2,113,523)

Cash Flows from Investing ActivitiesReceipts from interest income 1,978,924 1,458,757Purchases of securities (48,690,346) (47,414,710)Sales and maturities of securities 47,686,818 51,037,403

Net cash and cash equivalents provided by investingactivities 975,396 5,081,450

Net (Decrease) Increase in Cash and Cash Equivalents (4,776) 825,933

Cash and Cash Equivalents - Beginning of year 1,229,010 403,077

Cash and Cash Equivalents - End of year $ 1,224,234 $ 1,229,010

Reconciliation of Operating Income to Net Cash from OperatingActivities

Operating loss $ (2,762,889) $ (1,683,719)Adjustments to reconcile operating loss to net cash and cash equivalents

used in operating activities - Changes in assets and liabilities:Premiums receivable 10,966 (99,181)Claim deductibles receivable (64,674) (35,453)Reinsurance receivables on paid claims 629,594 (329,683)Prepaid expenses and other assets (48,364) (9,646)Net reserve for losses and loss adjustment expenses 899,630 (378,181)Net reserve for incurred but not reported losses and loss adjustment

expense 1,788,656 (31,504)Unearned member premiums - Net 625,271 402,239

Accounts payable (11,996) 23,134

Net cash and cash equivalents provided by (used in)operating activities $ 1,066,194 $ (2,141,994)

Noncash Investing Activities - Net unrealized gains (losses) on investments $ 2,101,346 $ (4,678,210)



Notes to Financial Statements


Note 1 - Nature of Business

Michigan Municipal League Liability and Property Pool (the "Pool") was established in 1982 under PublicAct 138 of 1982, as amended by Public Act 36 of 1988, to develop and administer a group program ofliability and property self-insurance for Michigan municipalities. The objectives of the Pool are to establishand administer a municipal risk management service, reduce the incidence of property and casualtylosses occurring in the operation of local governmental functions, and defend members of the Poolagainst stated liability or loss.

Any city or village that is a member of the Michigan Municipal League (the "League") or any municipalityof any city or village or any governmental entity that holds service associate status with the League iseligible to participate in the Pool. There were 432 and 425 members in the Pool at December 31, 2018and 2017, respectively.

Member premiums are combined to provide each member with coverage for liability and property claims.Any funds not needed to pay claims and maintain prudent reserves will be available for distribution to themembers or credit toward future member premiums, as determined by the board of directors (the"board"). Dividend expenses and liabilities are recorded when a dividend has been approved by theboard. Alternatively, the board may increase liability limits or offer additional services to the members.

Note 2 - Significant Accounting Policies

Basis of Presentation

The accompanying financial statements are presented using the accrual method of accounting inconformity with accounting principles generally accepted in the United States of America, as applicable togovernmental entities.

The Pool distinguishes operating revenue and expenses from nonoperating revenue and expenses.Operating revenue and expenses generally result from providing services in connection with the Pool'sprincipal ongoing operations. The principal operating revenue and expenses of the Pool relate topremium revenue, reinsurance premium expense, loss and loss adjustment expenses, service agentfees, and administrative expenses. Premium contributions received covering future contract periods aredeferred and recognized over the related contract periods. Net investment earnings and distribution tomembers are reported as nonoperating revenue.

Cash and Cash Equivalents

Cash includes cash on hand and demand deposits. Cash equivalents include short-term investments witha maturity of three months or less when purchased. Cash equivalents consist of an investment in aFederated Government Obligations money market mutual fund at December 31, 2018.

Investments

The Pool is invested primarily in fixed-maturity securities and equity securities, which are stated at fairvalue. All investment income, including changes in the fair value of investments, is recognized as revenuein the statement of revenue, expenses, and changes in net position.

Receivables

Receivables from members are stated at net invoice amounts. Receivables from reinsurers and fordeductibles are computed based on the applicable treaty. Collectibility of balances is reviewedperiodically. Any amounts deemed uncollectible are written off at that time. No allowance for bad debtshas been recorded because management considers all receivables to be collectible.

20




Note 2 - Significant Accounting Policies (Continued)

NLC Mutual Insurance Company

NLC Mutual Insurance Company (NLC Mutual) is a captive insurance company formed by risk poolsassociated with certain state municipal leagues, including the Pool. The Pool invested in NLC Mutual in1987 as a prerequisite for membership. The Pool recognizes as revenue the Pool's share of NLCMutual's income within its financial statements. As of December 31, 2018 and 2017, the Pool'sinvestment in NLC Mutual was $5,548,643 and $5,057,900, respectively. There were no distributionsreceived in 2018 and 2017.

Unearned Member Premiums

Unearned member premiums represent premiums received in the current year for policies remainingeffective into the next fiscal year.

Net Reserves for Losses and Loss Adjustment Expenses

The Pool establishes claims liabilities based on estimates of the ultimate cost of claims, including futureallocated and unallocated claims adjustment expenses, that have been reported but not settled, and ofclaims that have been incurred but not reported (IBNR). The length of time for which such costs must beestimated varies depending on the coverage involved. Estimated amounts of subrogation andreinsurance recoveries are deducted from the liability for unpaid claims. Because actual claims costsdepend on such complex factors as inflation, changes in doctrines of legal liability, and damage awards,the process used in estimating claims liabilities does not necessarily result in an exact amount,particularly for coverage such as general liability. Claims liabilities are estimated periodically using avariety of actuarial and statistical techniques to produce current estimates that reflect recent settlements,claims frequency, and other economic and social factors. A provision for inflation in the calculation ofestimated future claims costs is implicit in the calculation because reliance is placed both on actualhistorical data that reflects past inflation and on other factors that are considered to be appropriatemodifiers of past experience. Adjustments to claims liabilities are charged or credited to expenses in theperiods in which they are made. The Pool retains a qualified, independent actuarial firm to perform anannual actuarial review of the risk retained by the Pool. As claims are paid over a period of time, the Pooldiscounts its loss reserves to present value (as allowed by the State of Michigan Department of Insuranceand Financial Services). The Pool utilized a 2.0 percent discount in 2018 and 2017.

Premium Deficiency Reserve

Premium deficiency is defined as the amount by which expected claims costs (including IBNR) and allexpected claims adjustment expenses exceed related unearned premiums. The Pool determines whethera premium deficiency reserve is necessary, including investment income as a factor in the premiumdeficiency calculation. No premium deficiency reserve was required at December 31, 2018 and 2017.

Member Premiums

Member premiums related to amounts to be expended for reinsurance coverage, claim payments, andcertain administrative expenses are recognized as revenue in the year to which they apply. Memberpremiums are established at rates determined in accordance with rating guidelines authorized by theboard of directors pursuant to the recommendation of the Pool's actuarial firm.

Federal Income Tax Status

The Pool is a municipal self-insurance entity operating pursuant to the State of Michigan Public Act 35, asamended, of the Public Acts of 1951. This law allows local governmental units to provide joint funding forrisk management and self-insurance purposes and, as such, is not subject to federal income tax underInternal Revenue Code Section 115 of the Internal Revenue Code of 1986. Accordingly, no provision forincome taxes is reflected in the financial statements.

21




Note 2 - Significant Accounting Policies (Continued)

Risk Management

The Pool is exposed to various risks of loss related to property loss, torts, and errors and omissions. ThePool has purchased commercial insurance for all claims. Settled claims relating to the commercialinsurance have not exceeded the amount of insurance coverage since inception.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expenses during the period. Actualresults could differ from those estimates. Significant estimates related to allowances for unsettled claimsand claims incurred but not reported are described in Note 4.

Upcoming Accounting Pronouncement

In June 2017, the Governmental Accounting Standards Board issued GASB Statement No. 87, Leases,which improves accounting and financial reporting for leases by governments. This statement requiresrecognition of certain lease assets and liabilities for leases that previously were classified as operatingleases and recognized as inflows of resources or outflows of resources based on the payment provisionsof the contract. It establishes a single model for lease accounting based on the foundational principle thatleases are financings of the right to use an underlying asset. Under this statement, a lessee is required torecognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognizea lease receivable and a deferred inflow of resources. The Pool is currently evaluating the impact thisstandard will have on the financial statements when adopted. The provisions of this statement areeffective for the Pool's financial statements for the year ending December 31, 2020.

Note 3 - Investments

Although the Pool is not subject to any legal restriction on types of investments, the board has elected toadopt an investment policy that allows for specific investments that conform to the requirements of theMichigan State Law for Public Retirement Funds. In general, this Michigan law allows investments inobligations issued, assumed, or guaranteed by a solvent entity created or existing under the laws of theUnited States or of any state, district, or territory of the United States, which are not in default as toprincipal or interest.

The Pool's investment policy further prohibits any transactions involving short sales, margin purchases,and the purchase of derivatives securities and the securities of the investment manager's corporation.The investment policy also restricts the purchase of mortgage-backed securities, including collateralizedmortgage obligations limited to 35 percent of the portfolio's fixed-income securities market value. Nounrated corporate securities are to be purchased. All fixed-income securities, excluding U.S. governmentsecurities, are limited to 5 percent of the portfolio at the market value per issuer.

The Pool's investment policy allows for investments into equity-type securities. Investment allocation tothe entity portfolio is defined in terms of the Pool's reserves and surplus. The reserve component isbased on the number of undiscounted reserves expected to be paid after a period of 10 years. Thesurplus component is limited to 40 percent of the Pool's surplus, i.e., net position. The sum of the reserveand surplus components represents the maximum amount, at market value, of the Pool's equityinvestment.

The Pool's investments are held in the Pool's name. The Pool has designated Key Bank and JPMorganfor the deposit of its investments.

22




Note 3 - Investments (Continued)

The Pool's cash and investments are subject to several types of risk, which are examined in more detailbelow:

Custodial Credit Risk of Bank Deposits

Custodial credit risk is the risk that, in the event of a bank failure, the Pool's deposits may not be returnedto it. The Pool has a deposit policy for custodial credit risk. The Pool believes that, due to the dollaramounts of cash deposits and the limits of FDIC insurance, it is impractical to insure all deposits. As aresult, the Pool evaluates each financial institution with which it deposits funds and assesses the level ofrisk of each institution; only those institutions with an acceptable estimated risk level are used asdepositories.

At December 31, 2018, the Pool had $1,290,430 of uninsured funds.

Interest Rate Risk

Interest rate risk is the risk that the value of investments will decrease as a result of a rise in interestrates. The Pool's investment policy does not restrict investment maturities. The Pool's policy minimizesinterest rate risk by structuring the investment portfolio so that securities mature to meet cashrequirements for ongoing operations, thereby avoiding the need to sell securities in the open market andlimiting the average maturity in accordance with the Pool's cash requirements.

At December 31, 2018, the Pool had the following fixed-income investments subject to interest rate risk:

Investment Type Fair Value

Weighted-average Maturity

(Years)

U.S. government securities $ 23,185,187 3.86U.S. government mortgage-backed securities 6,472,189 3.27Corporate mortgage-backed securities 2,944,778 2.10Corporate bonds 13,939,158 4.58

Total $ 46,541,312

At December 31, 2017, the Pool had the following fixed-income investments subject to interest rate risk:

Investment Type Fair Value

Weighted-average Maturity

(Years)

U.S. government securities $ 15,634,006 1.95U.S. government mortgage-backed securities 5,848,920 3.36Corporate mortgage-backed securities 5,054,516 1.33Corporate Bonds 20,230,399 2.65

Total $ 46,767,841

23





Credit Risk

The Pool's fixed-income investment portfolio consists of a variety of securities ranging from Treasury andagency-type securities and AAA-rated to BBB-rated securities. The overall quality rating of the fixed-income portfolio is equal to an AA-rated portfolio on a market value weighted basis. No unrated corporatesecurities are purchased.

The rating organization used by the Pool to rate its investments is Standard & Poor's. For securities notrated by Standard & Poor's, Moody's or Fitch ratings are provided.

At December 31, 2018, the credit quality rating of debt securities (without regard to investment type) is asfollows:

Rating Fair ValueQuality

Weightings

U.S. government $ 29,657,376 63.72AAA 2,161,524 4.64AA 783,254 1.68A 6,556,346 14.09BBB 7,382,812 15.86

Total $ 46,541,312

At December 31, 2017, the credit quality rating of debt securities (without regard to investment type) is asfollows:

Rating Fair ValueQuality

Weightings

U.S. government $ 21,482,926 45.93AAA 4,765,328 10.19AA 1,095,799 2.34A 12,648,873 27.05BBB 6,774,915 14.49

Total $ 46,767,841

Concentration of Credit Risk

The objective of the Pool's investment policy is to generate a well-diversified portfolio without anyinappropriate credit concentrations. Other than direct obligations of the U.S. government, no individualissue can exceed 5 percent of the portfolio per the investment policy guidelines. This restriction reducesthe Pool's exposure to the risk of credit concentration. The Pool's investments were in compliance with itsstated investment policy regarding concentration at December 31, 2018 and 2017.

24





Foreign Currency Risk

Foreign currency risk is the risk that an investment denominated in the currency of a foreign country couldreduce its U.S. dollar value as a result of changes in foreign currency exchange rates. The Pool'sportfolio has no non-U.S. dollar investments, although such investments are not specifically prohibited bythe investment policy. As such, the Pool is not subject to any foreign currency risk.

Note 4 - Net Losses and Loss Adjustment Expenses

The Pool establishes reserves for both reported and unreported insured events; reserves includeestimates for future payments of losses and related loss adjustment expenses. The following representsa summary of the Pool's changes in net losses and loss adjustment expenses for the years endedDecember 31, 2018, 2017, and 2016 (amounts are net of the effects of reinsurance):

2018 2017 2016

Net losses and loss adjustment expenses(undiscounted) - Beginning of fiscal year $ 23,391,177 $ 23,855,892 $ 22,018,728

Incurred losses and loss adjustment expenses:Provisions for insured events of the current fiscal

year 11,972,049 10,963,916 9,875,312Change in provision for insured events of prior

fiscal years 203,788 (273,036) 806,123

Total incurred losses and loss adjustmentexpenses 12,175,837 10,690,880 10,681,435

Payments:Losses and loss adjustment expenses attributable

to insured events of the current fiscal year 3,555,668 3,186,490 2,141,434Losses and loss adjustment expenses attributable

to insured events of the prior fiscal year 5,836,992 7,969,105 6,702,837

Total payments 9,392,660 11,155,595 8,844,271

Net losses and loss adjustment expenses(undiscounted) - End of year 26,174,354 23,391,177 23,855,892

Discount of net losses and loss adjustment expenses (785,894) (691,003) (746,033)

Net discounted losses and loss adjustmentexpenses - End of year $ 25,388,460 $ 22,700,174 $ 23,109,859

During 2018 and 2017, there were favorable and unfavorable developments in incurred loss and lossadjustment expenses related to prior accident years, respectively. These favorable and unfavorabledevelopments primarily related to the resolution of certain litigated claims.

Note 5 - Reinsurance Agreements

The Pool uses reinsurance agreements to reduce its exposure to large losses on all types of insuredevents. Reinsurance permits recovery of a portion of claims from reinsurers, although it does notdischarge the primary liability of the Pool as direct insurer of the risks reinsured. The portion of claimscovered by reinsurance is not reported as a liability, nor is the related recoverable from the reinsurerrecorded as an asset.

Accordingly, reserves have been reduced by approximately $3,500,000 and $2,500,000 at December 31,2018 and 2017, respectively, for amounts recoverable from reinsurers.

25




Note 5 - Reinsurance Agreements (Continued)

The Pool has obtained specific excess reinsurance and aggregate excess reinsurance for liability andproperty coverages, a portion of which is contracted with NLC Mutual, a related party. The table belowdisplays the amount of risk retained by the member, the Pool, and the reinsurers by policy type:

Policy Member Responsibility Pool Coverage Reinsurance

LiabilityLiability $0 to $125,000 per

occurrence; mostmembers have $0

deductible

Individual claims betweenmembers' responsibilityand $500,000 plus anadditional $1,000,000aggregate reinsurance

deductible

Property Property $1,000 to $50,000deductible per

occurrence; mostmembers have $1,000

deductible

Individual claims up to$100,000 after themember deductible

Property - Boiler andmachinery

Property - Boiler andmachinery

$1,000 to $50,000deductible per


deductible

Individual claims up to$100,000 after themember deductible

Cyber liability anddata breach

Cyber liability and databreach

$2,500 to $10,000deductible per


deductible

All claims are 100%reinsured after member

deductible

In addition to the reinsurance described above, the Pool has aggregate loss coverage for liability claimsbeginning at $20,000,000 up to $32,000,000 for the period from April 1, 1997 through April 1, 2009. Totalaggregate reinsurance coverage is limited to $500,000 per occurrence and $5,000,000 total.

Prepaid reinsurance premiums are netted against the related unearned member premiums. Prepaidreinsurance premiums were approximately $1,265,000 and $1,226,000 at December 31, 2018 and 2017,respectively.

In the event a reinsurance company does not meet its obligation to the Pool, responsibility for payment ofany unreimbursed claims will be paid by the Pool using funds contributed by members for this purpose.

The following table summarizes the net impact of reinsurance arrangements on member contributionsand claims and claims adjustment expenses paid:

2018 2017

Member premiums:Direct $ 21,349,872 $ 20,517,131Ceded (7,402,067) (7,077,221)

Net member premiums $ 13,947,805 $ 13,439,910

Claims and claim adjustment expenses incurred 14,078,529 16,669,185Reinsurance recoveries (1,902,692) (5,978,305)

Net claims and claim adjustment expenses incurred $ 12,175,837 $ 10,690,880

26




Note 6 - Net Position

At the discretion of the board of directors, net position may be returned to members in the form ofdividends. The board declared dividends totaling $2,045,939 and $2,123,224 as of December 31, 2018and 2017, respectively.

Note 7 - Commitment

The Michigan Municipal League provides certain administrative services to the Pool, includingadministrative, risk management, data processing, staff travel, printing, and supplies. Effective January 1,2007, the Pool entered into a management agreement with the League. After December 31, 2007, theagreement automatically renews for a one-year term on January 1. Beginning in 2007, the Pool beganpaying the League a flat rate of $1,080,000, with an annual increase of the lesser of the U.S. Departmentof Labor Consumer Price Index or 5 percent. Administrative fees expensed by the Pool wereapproximately $1,429,000 and $1,393,000 for 2018 and 2017, respectively. In June 2007, the Poolentered into a lease agreement with the League through 2047 for the use of common space and facilitieswithin the League's Capitol Office. The Pool prepaid the total rent of $800,000, which will be amortizedover the lease term. Total rent expense under the new agreement was $20,000 at December 31, 2018and 2017.

Note 8 - Fair Value Measurements

The Pool categorizes its fair value measurements within the fair value hierarchy established by generallyaccepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fairvalue of the assets and liabilities. Level 1 inputs are quoted prices in active markets for identical assets;Level 2 inputs are significant other observable inputs; Level 3 inputs are significant unobservable inputs.Investments measured at fair value using net asset value per share (or its equivalent) as a practicalexpedient are not classified in the fair value hierarchy below.

In instances whereby inputs used to measure fair value fall into different levels in the fair value hierarchy,fair value measurements in their entirety are categorized based on the lowest level input that is significantto the valuation. The Pool’s assessment of the significance of particular inputs to these fair valuemeasurements requires judgment and considers factors specific to each asset.

The Pool has the following recurring fair value measurements as of December 31, 2018 and 2017:

Assets Measured at Fair Value on a Recurring Basis

Quoted Prices inActive Markets

for IdenticalAssets

(Level 1)

Significant OtherObservable

Inputs(Level 2)

SignificantUnobservable

Inputs(Level 3)

Balance atDecember 31,

2018

Debt securities:U.S. government securities $ - $ 23,185,187 $ - $ 23,185,187U.S. government mortgage-

backed securities - 6,472,189 - 6,472,189Corporate mortgage-backed

securities - 2,944,778 - 2,944,778Corporate bonds - 13,939,158 - 13,939,158

Total debt securities - 46,541,312 - 46,541,312

Equity securities 25,297,440 - - 25,297,440

Total $ 25,297,440 $ 46,541,312 $ - $ 71,838,752

27




Note 8 - Fair Value Measurements (Continued)

Assets Measured at Fair Value on a Recurring Basis

Quoted Prices inActive Markets

for IdenticalAssets

(Level 1)

Significant OtherObservable

Inputs(Level 2)

SignificantUnobservable

Inputs(Level 3)

Balance atDecember 31,

2017

Debt securities:U.S. government securities $ - $ 15,634,006 $ - $ 15,634,006U.S. government mortgage-

backed securities - 5,848,920 - 5,848,920Corporate mortgage-backed

securities - 5,054,516 - 5,054,516Corporate bonds - 20,230,399 - 20,230,399

Total debt securities - 46,767,841 - 46,767,841

Equity securities 26,795,072 - - 26,795,072

Total $ 26,795,072 $ 46,767,841 $ - $ 73,562,913

Equity securities classified in Level 1 are valued using prices quoted in active markets for thosesecurities.

The fair value of U.S. government securities, U.S. government mortgage-backed securities, corporatemortgage-backed securities, and corporate bonds at December 31, 2018 and 2017 was determinedprimarily based on Level 2 inputs. The Pool estimates the fair value of these investments using otherinputs, such as interest rates and yield curves, that are observable at commonly quoted intervals.

28

Required Supplemental Information

29


Required Supplemental InformationSchedule of Claims Information for All Lines of Coverage

December 31, 2018

Claims Development Information

The table on the following page illustrates how the Pool earned revenue (net of excess insurance) and investmentincome compared to related costs of loss (net of loss assumed by excess insurers) and other expenses assumedby the Pool as of the end of each of the last 10 years. The rows of the table are defined as follows:

1. This line shows the total of each fiscal year’s gross earned contribution revenue and investment revenue,contribution revenue coded to excess insurers, and net earned contribution revenue and reportedinvestment revenue.

2. This line shows each fiscal year’s other operating costs of the Pool, including overhead and claimsexpense not allocable to individual claims.

3. This line shows the Pool’s gross incurred claims and allocated claim adjustment expenses, claimsassumed by excess insurers, and net incurred claims and allocated adjustment expenses (both paid andaccrued) as originally reported at the end of the first year in which the event that triggered coverage underthe contract occurred (called policy year).

4. This section of 10 rows shows the cumulative net amounts paid as of the end of successive years for eachpolicy year.

5. This line shows the latest re-estimated amount of claims assumed by excess insurers as of the end of thecurrent year for each accident year.

6. This section of 10 rows shows how each policy year’s net incurred claims increased or decreased as of theend of successive years. This annual re-estimation results from new information received on known claims,re-evaluation of existing information on known claims, as well as emergence of new claims not previouslyknown.

7. This line compares the latest re-estimated net incurred claims amount to the amount originally established(line 3) and shows whether this latest estimate of net claims cost is greater or less than originally thought.

As data for individual policy years matures, the correlation between original estimates and re-estimated amountsis commonly used to evaluate the accuracy of incurred claims currently recognized in less mature policy years.The columns of the table show data for successive policy years.

30


Required Supplemental InformationSchedule of Claims Information for All Lines of Coverage (Continued)

(in thousands)

December 31, 2018

Policy Year Ended December 31 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1. Required contributions and investmentincome:

Earned $ 29,178 $ 24,655 $ 19,697 $ 21,636 $ 23,569 $ 21,512 $ 19,892 $ 23,732 $ 26,633 $ 21,142Ceded 8,138 7,135 6,911 6,538 6,664 8,047 7,239 7,159 7,077 7,402

Net 21,040 17,520 12,786 15,098 16,905 13,465 12,653 16,573 19,556 13,740

2. Expenses other than allocated claimadjustment expenses 4,803 4,839 4,805 5,109 5,121 4,791 5,158 4,873 4,433 4,535

3. Estimated claims and allocated claimadjustment expenses - End of policy year:

Incurred 14,334 14,442 13,425 10,377 11,016 14,241 11,486 10,866 13,089 13,701Ceded 10 1,296 1,087 475 820 3,198 1,417 991 2,125 1,729

Net 14,324 13,146 12,338 9,902 10,196 11,043 10,069 9,875 10,964 11,972

4. Cumulative paid claims and allocated claimadjustment expenses:

End of policy year 2,521 2,439 2,789 2,034 2,225 3,361 2,798 2,141 3,186 3,556One year later 4,611 4,199 4,382 3,794 3,648 4,873 4,404 3,587 4,281 -Two years later 6,589 6,242 5,345 4,465 5,078 6,966 6,217 5,231 - -Three years later 7,894 8,034 6,568 5,357 6,488 8,259 7,975 - - -Four years later 8,119 9,837 7,256 5,693 8,671 9,051 - - - -Five years later 8,593 10,309 7,896 5,994 9,055 - - - - -Six years later 8,627 10,844 8,069 6,006 - - - - - -Seven years later 8,670 11,517 8,142 - - - - - - -Eight years later 8,668 11,611 - - - - - - - -Nine years later 8,666 - - - - - - - - -

5. Re-estimated ceded claims and expenses 20 1,056 847 599 3,130 4,365 3,198 773 2,248 1,729

6. Re-estimated incurred claims and allocatedclaim adjustment expenses:

End of policy year 14,324 13,146 12,338 9,902 10,196 11,043 10,069 9,875 10,964 11,972One year later 14,036 13,536 10,999 8,485 8,760 10,416 10,509 9,765 9,817 -Two years later 12,003 11,498 8,766 7,113 8,447 10,710 10,877 9,670 - -Three years later 10,616 11,334 8,903 6,661 8,933 9,842 11,532 - - -Four years later 10,067 11,204 8,455 6,410 9,897 10,441 - - - -Five years later 9,159 11,220 8,624 6,143 10,125 - - - - -Six years later 9,026 11,732 8,271 6,156 - - - - - -Seven years later 8,963 11,844 8,287 - - - - - - -Eight years later 8,862 11,920 - - - - - - - -Nine years later 8,851 - - - - - - - - -

7. (Decrease) increase in estimated incurredclaims and allocated claim adjustmentexpenses subsequent to initial policy yearend (5,473) (1,226) (4,051) (3,746) (71) (602) 1,463 (205) (1,147) -

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Required Supplemental InformationSchedule of Reconciliation of Net Reserves for Losses and Loss Adjustment Expenses

By Contract Type

Fiscal and Policy Years Ending December 31

2018 2017 2016

Liability

Property,Boiler, andMachinery Total Liability

Property,Boiler, andMachinery Total Liability

Property,Boiler, andMachinery Total

Net Losses and Loss AdjustmentExpenses (Undiscounted) -Beginning of fiscal year $ 23,426,655 $ (35,478) $ 23,391,177 $ 23,576,129 $ 279,763 $ 23,855,892 $ 22,240,506 $ (221,778) $ 22,018,728

Incurred losses and loss adjustmentexpenses:

Provision for insured events of thecurrent fiscal year 9,651,108 2,320,941 11,972,049 8,973,355 1,990,561 10,963,916 8,441,417 1,433,895 9,875,312

Change in provision for insuredevents of prior fiscal years 140,838 62,950 203,788 (46,142) (226,894) (273,036) 434,833 371,290 806,123

Total incurred losses and lossadjustment expenses 9,791,946 2,383,891 12,175,837 8,927,213 1,763,667 10,690,880 8,876,250 1,805,185 10,681,435

Payments - Net of reinsurancerecoveries and member deductibles:

Losses and loss adjustmentexpenses attributable to insuredevents of the current fiscal year 2,163,416 1,392,252 3,555,668 1,590,076 1,596,414 3,186,490 1,171,093 970,341 2,141,434

Losses and loss adjustmentexpenses attributable to insuredevents of prior fiscal years 5,721,183 115,809 5,836,992 7,486,611 482,494 7,969,105 6,369,534 333,303 6,702,837

Total payments 7,884,599 1,508,061 9,392,660 9,076,687 2,078,908 11,155,595 7,540,627 1,303,644 8,844,271

Net losses and loss adjustmentexpenses (undiscounted) - End ofyear 25,334,002 840,352 26,174,354 23,426,655 (35,478) 23,391,177 23,576,129 279,763 23,855,892

Discount of net losses and lossadjustment expenses (779,814) (6,080) (785,894) (684,889) (6,114) (691,003) (736,913) (9,120) (746,033)

Net Discounted Losses and LossAdjustment Expenses - End offiscal year

$ 24,554,188 $ 834,272 $ 25,388,460 $ 22,741,766 $ (41,592) $ 22,700,174 $ 22,839,216 $ 270,643 $ 23,109,859

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