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MONTANA STATE FUND

BOARD MEETING September 21, 2012

The Montana State Fund (MSF) Board Compensation Committee meeting was held September 21, 2012 at

Montana State Fund, 855 Front Street, Helena, Montana.

Directors Attending Joe Brenneman, Kalispell Jim Swanson, Glendive

Ken Johnson, Missoula Wayne Dykstra, Billings

MSF Staff Attending Laurence Hubbard, President/CEO Rick Duane, Human Resources VP

Verna Boucher, Special Asst to Pres/CEO Shannon Copps, Team Leader

Nancy Butler, General Counsel Patti Grosfield, Internal Auditor

Mark Barry, Corporate Support VP Rene Silverthorne, Controller

Peter Strauss, Insurance Ops Support VP Ken Jeschke, Strategic Planning

Dick Root, Insurance Operations VP Dan Gengler, Internal Actuary

Joan De Pasquale, Team Leader Erika Ayers, Team Leader

Marianne Krpan, Team Leader Darcie Dunlap, Actuary

Pat Haffey, Team Leader Mary Boyle, Communications Specialist

Others Attending Russell Greig, Towers Watson Joe Dwyer, Teamsters 190

Brenda Miller, Liberty Northwest Pat Murdo, Legislative Services

David Bammer, Legislative Audit Bob Biskupiak, IIAM

Representative Chuck Hunter (Leg. Liaison) Neville Kenning, Hay Group

Mari Kindberg, State Auditor’s Office Kris Wilkinson, Legislative Finance Division

I. Meeting Preliminaries

A. Call to Order

Joe Brenneman called the meeting to order at 8:30 a.m. Mr. Brenneman explained that Chair

Elizabeth Best was unable to attend this meeting and had requested that he fill the position of

Chair in her absence. Chair Brenneman then welcomed everyone to the meeting and reminded

board members to use their microphones for speaking so that the members of the public can

hear and have access to the proceedings. Board members introduced themselves as did staff and

members of the public. He also welcomed Representative Chuck Hunter and former Board

Chair Joe Dwyer and thanked them for joining the meeting.

B. Approval of June 15, 2012 Board Meeting Minutes (Board Action)

Chair Brenneman noted that the first agenda item was the approval of the Board meeting

minutes for the June 15, 2012 meeting and asked Board members for any corrections or

additions. There were none.

Ken Johnson made a motion to approve the June 15, 2012 minutes. The motion was seconded

by Jim Swanson. Chair Brenneman asked for discussion from those present. There being none,

he called for the vote and the motion was unanimously approved.

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II. Miscellaneous

A. Miscellaneous – Laurence Hubbard, President/CEO

President Hubbard clarified for the record that the four Board members present did constitute a

quorum. He explained further that all four must agree on a motion and vote on the motion

favorably, if there is a dissenting vote, then the motion would fail automatically because the

rules and statute require the majority of the Board members to pass a motion. He noted that

proxies were held for the absent Board members: Chair Brenneman carried Elizabeth Best’s

proxy, Ken Johnson carried Jane DeBruycker’s proxy and Jim Swanson carried Tom Heisler’s

proxy. Mr. Hubbard also noted that it was preferable to not use the proxies but they were

available, if necessary.

Mr. Hubbard reported that the Economic Affairs Interim Committee held a meeting the previous

week and he was given an opportunity to provide a review of the state of Montana State Fund.

He provided an overview of MSF’s financial performance and also gave them with a sense of

the challenges that MSF has dealt with, a view of how MSF has weathered the 2007 to date

recession and the effects and efforts regarding implementation of HB334. The legislation

creates a challenge for all workers’ compensation carriers. President Hubbard noted that it

called for the implementation of the Utilization and Treatment Guidelines and medical

management with the intention of controlling medical costs to achieve the proposed savings.

He has received reports that there is some skepticism from others that the proposed savings

cannot be achieved but Mr. Hubbard believes it can be accomplished. It will just take work and

focus to maximize the intent of the legislation. He noted that MSF has implemented a number

of measures that focus on medical management and provide the best outcomes possible for

injured workers at reasonable cost. Twelve and half percent, half of the proposed savings, are

from the termination of medical benefits after five years of the date of injury provision for most

permanent partial disability cases. Those claims will not hit threshold until 2016 so a lot of

unknowns still remain. MSF’s goal is a very limited number of disputed claims and preferably

the majority of cases would be recovered, restored as fully as possible and back to work.

Committee members asked a few questions regarding whether or not Mr. Hubbard felt there

were more reforms needed in addition to HB334. He stated that he urged the Committee to use

caution and allow the reforms to wend their way into the system and allow the data to mature to

provide for continued stabilization of the system. He recommended decisive incremental

changes as opposed to sweeping broad changes that could result in unintended consequences.

President Hubbard reported that Representative Hunter also provided the Committee with an

update on MSF’s June Board meeting at which the business plan was adopted.

President Hubbard then noted there was a recent merger of Western States Insurance with Payne

Financial Group. Combined they control about 16 percent of the accounts that MSF

underwrites, but about 37 percent of the premium that MSF writes. MSF will monitor and

review any necessary changes this merger may bring about to the organization of MSF teams

and how the accounts are serviced. He noted that he doesn’t anticipate this merger changing

MSF’s approach to the excellent relationships currently held with the small, independent

agencies in rural Montana.

Chair Brenneman called for questions from the board and the public. There were none.

President Hubbard then asked Mary Boyle, Communications Specialist, to provide a status

update on the Communications Plan.

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Ms. Boyle presented the Choices Campaign which began in August. Past campaigns have

focused on safety but this campaign was designed to focus on the qualities that set MSF apart

from its competitors and make MSF a positive choice for workers’ compensation insurance

coverage. To develop this campaign, focus group discussions with MSF employees were held

resulting in an approach that addressed three key points: 1) we are Montanan, we live here, and

we understand doing business in Montana 2) we utilize a medical staff that works directly with

our claims team to resolve claims in a positive manner, and 3) we know workers’ compensation;

that is all we do and our customer service specialists go the extra mile for our customers. This

campaign utilized MSF employees, not actors in the photos to help show the real faces of MSF.

Choices was an eight week statewide campaign and ran in the major cities; Billings, Butte,

Bozeman, Kalispell, Great Falls, Helena and Missoula through print, radio, billboards and on-

line banner ads. Participating employees for the print campaign included, Heidi Gold,

Customer Service Specialist, Team 1; Jan Rouse, Nurse; April Pulfrey, Claims Examiner; Brad

Cozzi, Claims Examiner; and Wendy Forgey, Safety Management Specialist. The billboard ad

employees were Marie Tobin, Customer Service Specialist, Team 5; Jim Hultin, Claims

Examiner, Team 2; and Cheri Juers, Customer Service Specialist, Team 4. To develop the radio

ads, lines from kudos letters that were sent to MSF regarding the excellent service customers

had received from our employees were pieced together to create two radio ads that were aired

throughout the campaign. The banner ads ran on the on-line newspaper sites and if users

clicked on the ad they were redirected to the SafeMT site. The cost of this campaign was as

follows: $157,000 and $140,000 was placement in the media, $17,000 was for creation,

development and production. Measurements of the site hits will be through the hits on the

SafeMT site. This campaign will be run again next spring so it will be repurposed. We will

also run Work Heals campaign again in January for four to five weeks during the 2013

Legislative Session.

Chair Brenneman called for questions or comments from the Board and the public. There were

none.

B. Report of Internal Auditor – Patti Grosfield, Internal Auditor

Ms. Grosfield reported that MSF is currently experiencing quite a bit of ongoing audit activity.

Within MSF, she recently audited the Human Recourse area, reviewing the merit pay for

performance system. She has reviewed MSF’s market based salary adjustments for the year and

reminded Board members that MSF’s merit pay for performance system is a rigorous program

through which employees are evaluated based on their actual performance with set individual

goals and a set of competencies or skill sets. These are not automatic adjustments, any increase

in salary is earned by the employee and fully documented.

The process of auditing through the year-end financial and operational results will begin soon.

Ms. Grosfield mentioned that a key component of strong internal controls is the maintenance of

a high level of expertise in various operational areas to complete the jobs required at MSF. This

involves encouraging both internal staff training and enrichment and utilization of experts and

consultants in various areas where there is a special critical need. In furtherance of staff

development and training, a number of MSF claims examiners and others participated in the

Governor’s Conference on Workers’ Compensation.

She reported that the Legislative Audit Division (LAD) Auditors are on site at MSF performing

a very thorough review of our governmental financial statements for Fiscal Year 2012. She

welcomed David Brammer, the lead auditor on the MSF audit conducted by LAD. The FY12

LAD Audit Report will be completed and ready for review in either late fall or early winter.

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Chair Brenneman called for questions, there being none, he moved to the next agenda item.

C. Independent Actuary Contract Amendment

President Hubbard stated this agenda item required Board action which would include

consideration and approval of the independent consulting actuary contract for November 1,

2012 to October 31, 2013. The proposed contract changes the hourly rate for Mr. Russell Greig

from $510 per hour to $530 per hour which is a 3.9 percent change and for Ms. Ann Conway

from $630 per hour to $650 per hour which is a 3.2 percent change. Justin Zu and Gwen

Thomas would be replaced by Karen Whaley at $300 per hour, Bryan Starke at $300 per hour

and Ian Mackenzie at $275 per hour. The key point of this contract is that the total contract

price is not to exceed $380,500 which is an increase from $313,500 as a maximum contract

price. The increase is principally due to the engagement of Towers Watson to do a refined data

analysis called the Dynamic Financial Analysis (DFA) of the level of adequacy of MSF’s

equity. The report on the analysis of policyholder equity that includes the DFA will be

conducted and the results presented at the next Board meeting when the Board will be

considering whether or not to declare a dividend. This analysis is completed every few years

and provides data modeling that stresses various economic and catastrophic loss scenarios,

actual performance or likely scenarios that might impact MSF’s surplus. This is an important

tool that is utilized as a best practice for organizations evaluating the adequacy of their

surplus/equity levels.

Chair Brenneman called for discussion or questions.

Wayne Dykstra made a motion to approve the proposed amendment of the independent actuary

contract with Russell Greig of Towers Watson. The motion was seconded by Ken Johnson.

Chair Brenneman asked for any questions or comments from those present. There being none,

he called for the vote and the motion passed unanimously.

D. Montana State Agency Premium Payment Option – Laurence Hubbard – Board Action

Mr. Hubbard provided some background on the state agency premium payment option agenda

item that was before the Board. He stated under current law, Montana state agencies are

required to insure with MSF for workers’ compensation insurance. During the last session, the

Department of Administration was given the authority to carry either multiple or single policies

with MSF. Historically, there have been 34 to 35 separate policies with MSF and each agency

had its own experience rating and budgeted for its workers’ compensation premium. For many

years, state agencies have been given the ability to pay their workers’ compensation premium in

arrears on a quarterly basis; this is not the case for most policyholders. The state agencies, by

board action in 1993, were given the ability to pay in arrears on a quarterly basis. They have

now requested to make one annual payment at the end of the policy term. A Memorandum of

Understanding (MOU) has been prepared that outlines the intent of the requested payment plan

and also describes and acknowledges the impact on state agency rates or loss costs going

forward, because by law, MSF must discount its rates by anticipated invested income on those

rates. If state agencies do not pay until the end of the policy term, MSF will not be collecting

the cash flow that was anticipated and that will be reflected in future years in the loss costs to

state agency rates. MSF had a discussion with Department of Administration and the

Administration chose not to execute the MOU. I am asking that the Board of Directors approve

this requested payment plan because we realize the consequences from MSF’s side and also

historically, the Board of Directors set the payment options and has not revisited or altered these

since 1995. Because the Board of Directors has taken action in the past, Mr. Hubbard requested

that they do so on this request as well.

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He also noted that a second motion to grant the CEO/President the ability to make changes in

payment plans for customers or for MSF either as a group or individually, and then advise the

Board of Directors accordingly, may be necessary as well. He clarified that the first motion was

only to address the request by the State of Montana to pay their premium in one single payment

at the end of the policy term.

Ken Johnson asked if there was a representative from the State attending this Board meeting

representing this motion.

President Hubbard reported that there was not a representative present and that MSF had shared

the agenda containing this item with the representative from the State, Lance Zanto. Mr.

Hubbard stated that his request to approve the State’s requested payment plan was going to be

presented to the board regardless of whether or not the Administration chose to sign the MOU.

Jim Swanson asked Mr. Hubbard if he knew the reason for this request by the Administration.

Mr. Hubbard stated that he was advised that the Administration stated they would rather realize

the earned interest than have MSF earn the interest.

Wayne Dykstra requested that this issue be tabled until the Board had an opportunity to meet

with a representative of the Administration or one could be present. He stated that he had a

number of questions with respect to this issue and he was not prepared to vote on it without

additional information.

Wayne Dykstra made a motion to table this matter until the next board meeting pending an

opportunity to have a member of the Administration be present to answer some questions and

provide some clarification as to the background of this request. Jim Swanson seconded the

motion. Chair Brenneman called for discussion or comments.

President Hubbard stated that the state agencies report and pay quarterly, and their first quarter

payroll is due mid September. Typically, if a customer does not report and pay by the due date,

they are placed in forced cancellation. Mr. Hubbard did not think that would be an appropriate

action to take for the state agencies. He asked that the Board grant him the authority to not

cancel the state agency accounts if they do not make the payment until this issue can be

resolved in a manner that meets the Board’s needs in terms of understanding the request and

therefore doesn’t put MSF in a juxtaposition to the state administration with a forced

cancellation. Mr. Johnson noted that though the State agencies are a large customer, he is not

granted that kind of leverage if his payment is late. Mr. Dykstra stated that this was a pretty

significant issue and troubling in that it seemed to be of some priority to the state yet no one

found the need to come and address any questions that the Board might have. He also

expressed concern that the Administration has elected not to sign the MOU. He stated that he

had no issue with allowing the President the requisite authority to try and work through this but

as a Board member he was offended that the Administration couldn’t give the courtesy of at

least coming and explaining the need. Chair Brenneman clarified that the current motion is to

table this agenda item until the next meeting when the Department of Administration sends a

representative to speak with the Board of Directors. Mr. Swanson questioned Mr. Hubbard

whether this would allow MSF enough time to proceed. Mr. Hubbard noted that the deferred

discussion would not create a critical issue before the November meeting however; the ability to

not treat the state agencies as non-payment cancellations could arise if the Administration chose

not to pay.

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Chair Brenneman called for further discussion or comments from the Board and the public;

there were none. He called for a vote. Jim Swanson, Wayne Dykstra and Ken Johnson voted

yes, Joe Brenneman voted no. The board members had the option to utilize their proxies or to

allow the motion to fail.

Discussion continued. Mr. Johnson requested clarification as to Chair Brenneman’s no vote.

Mr. Brenneman said he believes we need to have this discussion with the Department of

Administration at our November meeting but he is not sure anything will be gained by tabling

the motion. He also stated that he was not sure a subsequent motion to not send out a notice of

cancellation would actually pass. So the motion that is in limbo right now just states that we

need to table until November, until we have a chance to meet. In the meantime, there are these

actions that have to take place. He stated that he wasn’t sure the benefits to MSF to just table

the motion until further discussion outweigh the downside of not addressing the MOU. He then

asked Mr. Swanson and Mr. Johnson if they wished to use their proxies.

Mr. Dykstra, in consideration of the Chair’s comments, changed his vote to no. Mr. Swanson

did not wish to vote his proxy and changed his vote to no. Mr. Johnson voted his proxy for Ms.

DeBruycker by voting yes. The motion failed with three nays and two ayes.

Chair Brenneman then reviewed some of the options available to the Board regarding this issue.

Ken Johnson made a motion to disapprove the request of the state of Montana, through the

Department of Administration, Health Care and Benefits Division, to pay premium on an

annual basis in arrears, effective July 1, 2012 and furthermore allowing the President,

Laurence Hubbard the authority to not send notice of cancellation until the Board can meet at

November’s Board meeting. Wayne Dykstra seconded the motion. Chair Brenneman called for

further discussion from the Board, there was none and he called for questions or comments

from the public. There being none he called for the vote. The motion passed unanimously.

E. Authority to President to Adopt and Modify Premium Payment Plans – Board Action

President Hubbard requested that this item also be deferred until the November Board meeting.

The Board members agreed and the item was deferred.

III. Reserve and Financial Reports – New Fund

A. Introduction – Laurence Hubbard, President/CEO

Mr. Hubbard introduced Russell Greig to present the New and Old Fund unpaid loss and loss

adjustment expense recommendations from Towers Watson. He also stated that Mark Barry

would then present the FY12 Preliminary Financial Report.

B. Montana State Fund FY12 Reserve Report – Russell Greig, Consulting Actuary, Towers Watson

Mr. Greig explained the objectives of the Towers Watson analysis, which were to estimate the

aggregate amount of unpaid claims benefits giving a range of estimates and include a provision

for loss adjustment expenses (LAE). Mr. Greig explained the application of their

methodologies. For the New Fund, their analysis encompassed injuries occurring between July

1, 1990 and June 30, 2012. The paid loss development method is key for the actual projections

and it is defined as the changes in insurance data over time. Over the last six months, the

decrease in their total projections was generally spread across the 2006/2007 through 2010/2011

accident years. The dollar change in ultimates in that period was $1.5 million or a -0.1

percentage change in ultimate loss. Over the last six months, actual total payment activity is

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approximately $700 thousand below expectations and included $1.0 million better than

expected in indemnity payments and $0.3 million worse than expected in medical payments.

Mr. Greig noted that periods of favorable development and periods of adverse development tend

to run in cycles. The current evaluation of 2012 continues a downward trend that started in

2005, so the changes in operations and in medical cost management are starting to bear fruit.

Because the aggregate amount of unpaid claims benefits is an estimate, there are several

contingencies that can impact actuarial projections and future analyses: medical costs may

increase more than expected due to medical technology, utilization and higher frequency of

severe diagnoses, trends (both frequency and severity), benefit changes, litigation/attorney

involvement, court cases that retroactively increase benefits, economic cycles and social trends,

and duration of injury.

On the medical side, development patterns have been problematic in recent years. Development

in the last six months is above the range of expectations due to acceleration of medical

payments from settlements. Actual-versus-expected payments were $0.3 million in the last six

months and were $0.9 million for 12 months. The key issue is the same as the last several years

and is: Will actuarial indications for prior accident year medical liabilities stabilize?

Additionally, will 1991 and 2011 statutory changes plus changes in claim management produce

more favorable “tail” development on New Fund years compared to Old Fund?

On the indemnity side, Mr. Greig shared that development patterns have been generally well

behaved and have explicitly accounted for major statutory changes although judicial changes

are more difficult to evaluate until we have sufficient loss experience after the court decision.

Actual payment activity has been within the range of expectations. Actual-versus-expected

payments were $-1.0 million the past six months and $-2.8 million for 12 months. The claim

frequency has decreased in 2011/2012 after holding relatively steady over the prior three years.

Mr. Greig reported that recent severity trends are up and medical severity trends continue to be

positive and claim frequency trends are decreasing again.

Mr. Greig’s conclusions on the aggregate amount of unpaid claims were as follows:

Total estimated (actuarial central) unpaid benefits were $579.6 million for medical and

$183.8 million for indemnity for a total of $763.4 million.

This excludes most liabilities associated with the Schmill/Stavenjord court decisions,

other states coverage claims, and employers’ liability claims.

Mr. Greig stated that there is a considerable range of uncertainty around our actuarial central

estimate shown below, but MSF’s equity provides a substantial cushion. MSF’s equity is

required to support the continued growth of MSF and to minimize the impact of unexpected

events on MSF’s financials.

Low Estimate Actuarial Central Estimate High Estimate

Unpaid Loss

June 30, 2012 $688.0M $763.4M $867.8M

MSF’s equity could be significantly impacted in the case of a sustained change in expected

trends. For example, if medical inflation rates exceed long-term averages by two percentage

points annually for the next ten years, medical payments would increase by approximately

$92.3M above our actuarial central estimate.

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A portion of future loss payments will be recovered from reinsurers. Total estimated recoveries

based on paid loss and case reserves (excess of loss reinsurance only) are $17.0M. Estimated

ultimate recoverables (excess of loss and aggregate stop loss) are $24.3M to $41.3M.

Reinsurance recoverable is routinely recognized as an asset on property/casualty insurer balance

sheets and is estimated at $41.3M (actuarial central estimate). The range is $25.0 million to

$84.2 million.

Mr. Johnson asked for clarification on MSF’s reinsurance.

Mark Barry, Vice President, Corporate Support reported that since 2003 MSF’s ceded premium

has been $28.7 million for the excess of loss program and has recorded recoverable of $12.8

million under the program. For the aggregate stop loss program, the risk margin to our reinsurer

is $15.7 million with a recoverable after 2003 of $24.3 million.

Mr. Johnson requested a better understanding of the value to MSF of reinsurance.

Mr. Greig compared reinsurance to homeowner insurance. Reinsurance is a strategic business

decision and is constantly evaluated to see if the risk transfer is worth the cost.

Mr. Johnson asked from which company MSF obtained its reinsurance.

President Hubbard explained that depending on the program offered, the companies include

Hanover Re, Lloyds of London, Axis, for example, and these programs provide layers of

coverage. The reinsurance is to protect MSF from a catastrophic financial loss such as an event

at the Capitol complex like an earthquake in the middle of the day. MSF tries to anticipate and

model what the potential exposure could be and purchase the reinsurance accordingly.

Mr. Greig went on to discuss claim administration expense and Towers Watson’s methodology

of examining recent relationships between claim payments and claim administration expense.

Their observations were that, from the date of an accident, MSF loss adjustment expense or

LAE (17 percent of benefit costs) is less costly than typical private carriers (21 percent). The

selected reserve provision of 12.9 percent of future loss payments recognizes that a significant

portion of LAE occurs when a claim is first reported.

Towers Watson’s overall conclusion as of June 30, 2012

Unpaid claims benefits – Actuarial Central Estimate

Medical $579.6 million

Indemnity $183.8

Unpaid claims administration expense $ 98.5

Total gross unpaid benefits & administration $861.9 million

Reinsurance (41.3)

Total net unpaid benefits & administration $820.6 million

Considerable uncertainty is associated with projections of unpaid claims

Low estimate, $692.6 million

High estimate, $954.8 million

Chair Brenneman called for questions from the Board.

Mr. Dykstra requested some clarification on the built-in inflationary estimations and the length

of time those will be applied and if they are subject to inflation increases in future years.

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Mr. Greig explained there are two estimations; one on indemnity severity trends for which he

applies 1 percent, and for medical trends he applies 7 percent reviewing trends for the past two

years. He further explained that economic factors and inflation considerations are embedded in

future projections.

President Hubbard explained that some benefits could be subject to inflationary increases and

other inflationary factors which further illustrates a key reason for the importance of MSF’s

equity level remaining strong.

C. Montana State Fund FY12 Reserve Recommendations – Laurence Hubbard, President/CEO

Mr. Hubbard explained that it is customary for MSF management to make recommendations

regarding the ultimate liabilities that are recorded for financial statements as well as items that

Towers Watson does not address in their recommendation, such as court decisions, other states

coverage and employers’ liability that create additional claims exposure.

He explained that the data table depicted above was designed to simplify a very complex

process when establishing MSF reserve recommendations. It distinguished each element of the

loss and LAE estimate plus accounts for the reinsurance recoverable estimate to arrive at the net

of $861.9 million for the Towers Watson estimate. MSF recommended some management

adjustments to Mr. Greig’s suggested loss reserves. Though the unpaid losses, LAE and gross

losses recommended by Towers Watson and MSF arrive at the same amount, MSF’s estimates

for the reinsurance return are $37.1 million and is slightly more conservative than Towers

Watson’s recommended $41.3 million. Management recommended a set aside of $44.4 million

in reserve strengthening to cover the risk of the assumed savings in HB334. This increased

reserve strengthening will allow MSF to hedge against long-term error on the assumed savings

for incurred liabilities. Management recommends $9.8 million in reserves for the estimated

liability of pending outcomes from court decisions. There is also a line item for other states

coverage and employers’ liability. This essentially allows MSF to provide coverage for

employers from Montana that go to other states to work. That exposure is $3.7 million. An

additional LAE of $7.2 million associated with these loss adjustments is recommended.

Management’s total recommended loss and LAE is $889.9 million.

Chair Brenneman called for questions from the Board and the public. There were none.

D. FY12 Preliminary Financial Report – Mark Barry, V.P. Corporate Support

Towers

Watson MSFUnpaid Losses $763.4 $763.4

LAE 98.5 98.5

Gross Loss and LAE $861.9 $861.9

Adjustments:

Reinsurance (41.3) (37.1)

Reserve Strengthenning 44.4

Court Decisions 9.8

Other States/EL 3.7

Additional LAE (MSF) 7.2

Net Loss and LAE Reserve $820.6 $889.9

Total MSF Recommended Loss and LAE:

Losses $784.2

LAE 105.7

Total MSF Loss and LAE $889.9

As of June 30, 2012 (in millions)

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Mr. Barry clarified that MSF would be asking the Board to approve, based on the consulting

actuary’s analysis, the loss and loss adjustment expense reserves to be included in the financial

statements. Approval of the audited financial statements will be requested in a later meeting.

The following two tables display the FY12 recommended loss and LAE reserves compared to

the prior year and a condensed version of the preliminary balance sheet.

As of June 30, 2012 (Unaudited)

(in 000’s)

FY12 Balance Sheet Information

He noted that there was development on prior years of $2 million. In consideration of the

Towers Watson’s loss estimate, we are only adding to our loss reserves $5.5 million. The

suggested amount for MSF’s reinsurance recoverable is the amount that has been incurred for

those losses that attach to the reinsurance programs. We have an additional recoverable of $4.9

million under the excess of loss program due to the Montana Department of Correction’s bus

accident that occurred in 2008 and is experiencing significant development on those claims.

MSF also estimates an increase in the amount recoverable of $3 million in the aggregate stop

loss program. Management is recommending adding $12.4 million in additional reserve

strengthening to address the uncertainty in provisions of HB334. With the recommendation to

add $6.3 million to LAE reserves, total losses and LAE would increase $15.1 million from a

year ago to the total recommended level of $889.9 million.

Mr. Barry reported that policyholder equity or surplus increased from $296 million to $317

million which increases our equity by $21.2 million for FY11. There has been an increase in

Towers-Watson Best Estimate

FY 2012 FY 2011 Change

Current Accident Year Ultimate Losses 113,175 - 113,175

Prior Accident Years Ultimate Losses 2,453,185 2,451,215 1,970

Less: Cumulative Paid (1,802,934) (1,693,336) (109,598)

Net Loss Reserves (Towers-Watson) 763,426 757,879 5,547

MSF Management Adjustments

Est. Reinsurance Recoverable - Excess of Loss (12,807) (7,962) (4,845)

Est. Reinsurance Recoverable - Agg Stop Loss (24,289) (21,174) (3,115)

Other States Coverage and EL 3,704 4,847 (1,143)

Court Decisions 9,800 9,800 -

Reserve Strengthening 44,400 32,000 12,400

Total Losses 784,234 775,390 8,844

Loss Adjustment Expense Reserve 105,707 99,413 6,294

Recommended Loss and LAE Reserves 889,941$ 874,803$ 15,138$

Condensed Balance Sheet

FY 2012 FY 2011 Variance

ADMITTED ASSETS

Bonds 1,035,226,380 1,001,286,533 33,939,847

Equity Securities 141,839,697 137,532,240 4,307,457

Real Estate Investments 27,974,845 28,507,880 (533,035)

Cash and Short-term Investment 26,496,118 19,972,374 6,523,744

Securities Lending Collateral 149,464,962 89,189,742 60,275,220

Total Investments and Cash 1,381,002,002 1,276,488,769 104,513,233

Other Admitted Assets 110,799,115 108,417,183 2,381,933

Total Admitted Assets 1,491,801,117 1,384,905,951 106,895,166

LIABILITIES AND EQUITY

Reserve for Unpaid Losses 784,233,347 775,389,747 8,843,600

Reserve for Unpaid Loss Adjustment Exp. 105,707,227 99,413,137 6,294,090

Securities Lending Liability 149,464,962 89,189,742 60,275,220

Other Liabilities 134,727,835 124,570,785 10,157,050

Total Liabilities 1,174,133,370 1,088,563,411 85,569,959

Policyholders' Equity 317,667,747 296,342,540 21,325,207

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invested assets of $44 million which doesn’t count the securities lending collateral. The

investments in bonds grew $34 million and equities $4.2 million. The real estate investment

refers to the building net of depreciation expense. The charts below show the invested asset

distribution as of June 30, 2012 (unaudited) compared to 2011and indicates that there is really

no significant change in distribution.

Mr. Barry reported that MSF is down $23 million in premium or about a 13 percent decrease

from a year ago but considering the 20 percent rate reduction this amount was expected to be

lower. The difference reflects some stabilization in payrolls and increase in payrolls that offsets

those changes.

Next, Mr. Barry discussed the income statement for the year and noted that the net income after

dividends was $23.8 million, up from 2011 by $1.4 million.

Mr. Barry explained that MSF determined there was a $7 million accounting error due to

applying the reinsurance credits incorrectly and had included that discrepancy in the

calculations for the FY12 end of period equity.

He then requested that the Board approve the Loss and LAE reserves of $889.9 million included

on our financial statements; both statutory and GASB.

84%

12%2%2% FY11

Bonds

Equity Securities

Real Estate

Cash/STIP

84%

12%

2% 2% FY12

Bonds

Equity Securities

Real Estate

Cash/STIP

Condensed Income Statement

FY 2012 FY2011 Variance

Net Premium Earned 150,482,457 173,605,442 (23,122,985)

Losses Incurred 119,493,829 130,505,436 11,011,607

Loss Expenses Incurred 23,370,622 32,871,562 9,500,940

Underwriting Expenses Incurred 23,517,807 30,480,452 6,962,645

Net Underwriting Loss (15,899,801) (20,252,008) 4,352,207

Net Investment Income Earned 44,544,238 44,070,315 473,923

Net Realized Capital Gains (Losses) 4,888,091 6,424,612 (1,536,521)

Net Income after Dividends 23,802,085 22,367,399 1,434,687

Prior Year End Policyholders' Equity 296,342,540 241,545,529 54,797,011

Net Unrealized Gains (Losses) on Investments 3,251,769 30,412,063 (27,160,294)

Change in Non-admitted Assets 1,295,951 2,017,549 (721,598)

Other Adjustments (7,024,598)

End of Period Equity 317,667,747 296,342,540 21,325,207

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There were no questions from the Board.

E. Adoption of Montana State Fund FY12 Unpaid Loss and Loss Adjustment Expenses Reserve

Estimate – Laurence Hubbard, President/CEO

Chair Brenneman asked Board members if there were questions or if they were prepared to take

action.

Based on the actuary’s best estimate of unpaid losses and loss adjustment expenses, adjusted

for reinsurance recoverable and for President Hubbard’s recommendation for additional loss

reserves for Other States coverage, Employers’ Liability, reserve strengthening, and a

contingency for court decisions, undiscounted as of June 30, 2012,Wayne Dykstra made a

motion that the board adopt $784,233,347 as the unpaid loss expense reserve and

$105,707,227 as the unpaid loss adjustment expense reserve estimates for the financial

statements of the Montana State Fund for the fiscal year ending on June 30, 2012. Jim

Swanson seconded the motion. Chair Brenneman asked for any questions or comments from

those present. There being none, he called for the vote and the motion passed unanimously.

IV. Reserve and Financial Reports – Old Fund

A. Overview of Old Fund Statutes – Mark Barry, V.P. Corporate Support

Prior to this presentation, Mr. Dykstra requested clarification on MSF’s responsibility, financial

or otherwise for the Old Fund liabilities and if those didn’t exist, was MSF reporting the Old

Fund liabilities on its financial statements.

President Hubbard explained that the Old Fund liabilities are paid out of the State of Montana’s

General Fund and that these liabilities are not an expense to MSF, however, MSF administers

the claims processing for the Old Fund claims and those transactions are what will be reported

but the liabilities for the Old Fund are not reported on MSF’s financial statements.

Mark Barry noted that there are two statutes that require separation of the Old Fund claims and

expenses from the MSF claims and expenses. He advised the board that Section 39-71-2351,

MCA separates the Old Fund liability for funding of claims from the Montana State Fund (New

Fund). The legislature has determined that the most cost-effective and efficient way to provide a

source of funding for, and to ensure payment of the unfunded liability and the best way to

administer the unfunded liability is to separate the liability on the basis of whether a claim is for

an injury resulting from an accident that occurred before July 1, 1990, or an accident that occurs

on or after that date. Section 39-71-2352, MCA calls for a separate payment structure and

sources for claims for injuries of the Old Fund and the MSF. It requires a determination of the

cost to administer and pay claims of the Old Fund and separately determine the cost to

Loss and LAE Reserves

FY 2012

Net Unpaid Loss Reserves (Towers-Watson) 763,426,074

MSF Adjustments:

Estimated Reinsurance Recoverable (37,096,412)

Court Decisions 9,800,000

Reserve Strengthening 44,400,000

OSC and EL 3,703,686

Total Unpaid Losses 784,233,347

Loss Adjustment Expenses Reserves 105,707,227

Total Unpaid Loss and LAE 889,940,574

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administer and pay claims of MSF. Administrative expenses and benefit payments for the Old

Fund and MSF must be funded separately from the sources provided by law. The MSF

independent actuary will project the unpaid claims liability of the Old Fund. "Adequately

funded" means the present value of: (a) the total cost of future benefits remaining to be paid;

and (b) the cost of administering the claims.” If in any fiscal year the Old Fund is not

adequately funded, any amount necessary to pay claims for injuries resulting from accidents that

occurred before July 1, 1990, must be transferred from the General Fund.

B. Old Fund FY12 Reserve Report – Russell Greig, Consulting Actuary, Towers Watson

Mr. Greig reported that Tower Watson’s objective in their analysis is to estimate the aggregate

amount of unpaid future claims benefits with a range of estimates. It includes a provision for

claim administration expense as well as a provision for future Department of Labor

assessments. In addition, because Montana statute requires an estimate of the present value of

unpaid liabilities for purposes of determining whether the old fund is adequately funded, it’s

necessary to forecast the timing of the payout. Mr. Greig noted that the Old Fund analysis

encompasses all injuries occurring prior to July 1, 1990. He then reviewed the methodologies

used to arrive at the aggregate amount of unpaid claims.

His indemnity observations are that in fiscal year 2012, payment activity has been consistent

with his projections. The range of unpaid loss indications were at a low of $5.9 million to a

high of $28.2 million. Unadjusted case reserves stand at $24.9 million, while case reserves

adjusted for development potential are at $26 million. The actuarial central estimate for unpaid

losses is below the middle of paid projections and their selected ultimates are slightly increased

from last year by $0.1 million. They are projecting a continued decline in indemnity payment

activity as the Old Fund claims age and he noted that the last payment is forecasted for fiscal

year 2049-2050. In recent fiscal years, actual medical payment activity has been above

expectations. They are forecasting that by June 30, 2013, indemnity payments will be $2.3

million.

In recent fiscal years, actual medical payment activity has been above expectations. Towers

Watson has been weighting this higher activity level into its projections. Long term patterns are

still given considerable weight in their selections.

There is a wide range of indications with a low of $13.6 million and a high of $58.3 million.

Unadjusted case reserves are $110.9 million while case reserves adjusted for adequacy,

development and inflation are $67.0 million.

Selected unpaid losses are significantly lower than the case reserve indications with the

actuarial central being $36.3 million. Mr. Greig stated that Towers Watson is increasing their

selected ultimates again this year by $3.6 million for medical. He stated Towers Watson has

been increasing their estimate of the medical losses in previous years at each evaluation as

follows:

$3.0M increase @ 6/30/11

$3.0M increase @ 6/30/10

$4.7M increase @ 6/30/09

$2.1M increase @ 6/30/08

$6.3M increase @ 6/30/07

$5.0M increase @ 6/30/06

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They are predicting a less gradual decline in medical payment activity. Old Fund medical

payments have not been declining as expected over recent fiscal years; as a result, estimated

ultimate losses have been increased.

His conclusion on the aggregate amount of unpaid claims is that the ultimate cost of Old Fund

claims should increase $3.7 million and the total undiscounted future benefit payments is $48.5

million.

Mr. Greig provided a comparison of open claims by accident year as of June 30, 2011, June 30,

2012 and what was forecast for June 30, 2013. This comparison established that claims are

closing much slower so their forecasted claims number for June 20, 2012 has only been reduced

by two. The forecast of the timing of the payout provides a benchmark to test against in the

following year as well as to estimate the present value of unpaid liabilities. In order to establish

the timing, historical payment patterns are reviewed considering what is going on in the long

term and what has occurred in recent years. The selected payment patterns consider the impact

of statutory benefit changes occurring in the Old Fund years, June 30, 1990 and prior. Towers

Watson judgmentally considers the impact of prior court cases occurring on Old Fund claims

and recognizes the increasing maturity of old claims and then balances that to estimated total

unpaid claims. The forecast for 2010-2013 is $7.7 million.

In determining the claim administration expenses, Mr. Greig explained that recent relationships

between claim payments and claim administration expense are examined, which recognizes that

a large part of the expense occurs when the claim is first reported. He noted that claim

administration expenses, as a percentage of the claim payments, have been growing and

remarked that this trend is true for most workers’ compensation carriers; however, MSF is still

spending less than the industry. It reflects a greater investment into better claim management

procedures and it produces more appropriate (lower) claim payments. The selected provision

for claim expense is 14.4% of future loss payments which is a slight increase from 14.3% for

last year.

Montana law imposes a Department of Labor and Industry assessment with the maximum being

no higher than 3% of each year’s paid losses. Unlike current claims, there is no offsetting

income for this assessment. The selected provision for this assessment is 3% of unpaid loss.

Mr. Greig’s overall conclusion as of June 30, 2012 for estimated unpaid losses and claims

adjustment expenses is that the unpaid claim benefits for medical are $36.3 million and

indemnity is $12.2 million for a total of $48.5 million. Unpaid claims administration expense is

$7.0 million, the future DLI assessment is $1.5 million making the undiscounted claim related

unpaid amounts $57.0 million.

There were no questions from the Board or the public.

C. Old Fund FY12 Reserve Recommendations – Laurence Hubbard, President/CEO

President Hubbard asked Mr. Barry to present management’s recommendation.

Old Fund - Loss and LAE Reserves

FY 2012

Prior Year Ultimate Losses (Towers-Watson) 1,226,671,511

Change from Prior Year 3,790,972

Balance (Towers-Watson) 1,230,462,483

Less: Cumulative Paid 1,181,943,143

Add: Court Case Contingency 2,200,000

Net Loss Reserves (Undiscounted) 50,719,340

Add: LAE Reserve 8,442,365

Total Loss and LAE (Undiscounted) 59,161,706

Loss and LAE at Prior Year End 64,621,356

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Mr. Barry stated there is an increase in loss selections of $3.8 million. He explained that due to

court decisions, MSF recommends an additional contingency reserve of $2.2M be included in

the Towers Watson recommendation. He recommended that the Old Fund undiscounted loss

reserve be set at $50.7 million and the loss adjustment expense reserve be set at $8.4 million.

When the $2.2 million is added in the total undiscounted reserve as determined by Towers

Watson, MSF management is recommending loss and LAE reserves of $59.1 million in the Old

Fund.

Chair Brenneman asked what the Department of Labor does to earn their 3 percent.

Mr. Barry stated that the Department of Labor is the regulator for worker’s compensation

benefits in Montana so they are paid an administrative fee for providing those regulatory

services.

D. Adoption of Old Fund FY12 Unpaid Loss and Loss Adjustment Expense Reserve Estimate –

Laurence Hubbard, President/CEO

Ken Johnson made a motion that the Board adopt for the Old Fund, based on the actuary’s best

estimate of unpaid losses and loss adjustment expenses for Fiscal Year 2012, plus a contingency

for court decisions, the amount of $59,161,706 undiscounted as of June 30, 2012. Wayne

Dykstra seconded the motion. The Chair called for questions or discussion from the board and

the public, there being none, he called for the vote. The motion passed unanimously.

V. Corporate Support

A. FY12 Final Budget Report – Rene Silverthorne, Controller

Ms. Silverthorne reported that net earned premiums were about 13 percent above plan at $150.5

million, originally planned to be $132.9 million. The plan factored in a 20% rate reduction but

that wasn’t experienced to that level due to an increase in reported payroll and only a very slight

reduction in policy counts.

She explained the overall budget for

FY12 was $4.6 million or 2.9 percent under the Board approved budget. If we were to exclude

the budget amendment of $4.5 million, the actual expenditures would have been under the

original budget by $127,612 or less than one tenth of one percent. Benefit payments would

have been slightly over the budget amount but operational expenses would have been under

budget. The budget amendment was requested because the estimates were too close to risk

SBP

Estimate Actual Variance

Actuals as %

of Budget

MSF Net Earned Premiums $132.9 $150.5 $17.6 113.3% (Pending Audit Review)

Actual as %

MSF Expenditures Budget Actual Variance of Budget

Operational Expenditures $46.7 $45.7 $1.0 97.8%

Claim Benefit Payments $109.9 $110.8 ($0.9) 100.8%

Total MSF Expenditures $156.6 $156.5 $0.1 99.9%

Budget Amendment $4.5 $0.0 $4.5 0.0%

MSF TOTAL VARIANCE $161.1 $156.5 $4.6 97.1%

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going over budge and not having the authority to make benefit payments. She noted that claim

benefits account for the majority of MSF annual expenditures or 71 percent of the total FY12

expenditures of $156.5 million. The MSF operation expenditures comprise 29 percent of the

total budget.

Ms. Silverthorne went on to review the funding estimate of the Old Fund. The Old Fund no

longer has assets and is funded by General Fund transfers. For FY12, MSF had estimated the

total funding for the Old Fund would be $10 million and the actual expenditures were $9.8

million.

Chair Brenneman called for questions from the Board and the public, there were no questions.

B. Data Measurement Criteria for Premium & Incurred Losses for Potential Dividend Declaration

– Rene Silverthorne, Controller

Ms. Silverthorne explained that there is a requirement under the administrative rules that the

board must approve the date to value the premium and incurred losses on new and renewal

policies for potential dividend calculations purposes. Management is recommending June 30,

2012.

Wayne Dykstra made a motion that the Board approve management’s recommendation to

utilize June 30, 2012 as the date to value premium and incurred losses on new and renewal

policies from July 1, 2009 through June 30, 2010 for potential dividend calculation purposes.

The motion was seconded by Ken Johnson. Chair Brenneman called for questions or

comments, there being none he called for the vote. The motion passed unanimously.

VI. Public Meeting on FY12 Strategic Business Plan Performance

A. Presentation of Results – Ken Jeschke, Business Planning and Special Projects Coordinator

Mr. Jeschke reviewed the Board Meeting progression noting that the cycle begins with the

spring meeting and the presentation and approval of pricing actions for the next fiscal year. The

June meeting provides the forum for the presentation and approval of the Business Plan and

requisite budget for the upcoming fiscal year. This meeting provides the discussion of the

results of the recently completed fiscal year and how they compare to the Business Plan

presented and approved the previous June. The Business Plan is divided into two distinct

sections: 1) Key Success Measures – They are quantitative in nature and form the financial

foundation of our planning efforts and are prominently displayed in our Business Plan

publication; and 2) Enterprise-Wide Initiatives – Although these have obvious financial

implications, they are generally qualitative in nature and each is supported by a unique Project

Charter, led by a Project Manager(s), and guided by an Executive Sponsor/Owner.

Funding Actual as %

Estimate Actual Variance of Estimate

Expenditures

Operating Expense $218,270 $208,620 $9,650 95.6%

ALAE 220,537 187,706 32,831 85.1%

Benefit Payments 8,766,803 8,568,523 198,280 97.7%

Total Expenditures $9,205,610 $8,964,849 $240,761 97.4%

Administrative Costs $829,525 $810,534 $18,991 97.7%

Total Funding $10,035,135 $9,775,383 $259,752 97.4%

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Our Key Success Measures were:

Generate Net Earned premium of $132.9 million

o Achieved $150.5 million

Achieve Fiscal Year Loss Ratio of 76.7 percent

o Achieved 79.4 percent

Achieve Expense Ratio of 32.3 percent or Less

o Achieved 31.2 percent

Attain Investment Income of $41.0 million


General Net Operating Income $24.0 million before dividend


Enterprise Wide Initiatives categories and Executive Sponsors are:

Workforce - Rick Duane, Dick Root and Nancy Butler

Customer Service – Peter Strauss, Dick Root, Al Parisian and Mark Barry

o Workplace Safety

o Document Management

o Refine Tiered Rating

Claim Medical Management – Peter Strauss and Dick Root

o Legislative Reform

o Provider Relationships

o Medical Expertise on Claim Files

Infrastructure – Mark Barry and Nancy Butler

o Enterprise Risk Management

Workforce

Success Measures Results

Complete FY 2011 apprenticeship pilot

and recommend future actions (October

2011)

Completed September 2011.

Develop a comparison/analysis of Claims

Examiner training formats and

recommend future actions (March 2012)

Completed March 2012

Finalize on-boarding program outline and

template (March 2012)

Completed March 2012

Deliver leadership development program

on MSF business knowledge areas with

80 percent overall satisfaction rating

(April 2012)

Delivered by April 2012 with additional

training in June. Overall satisfaction rating of

80.4 percent

Train leaders in MSF business knowledge

areas with a 70 percent pass rate (April

2102)

Delivered by April 2012 with additional

training in June. Overall pass rating of 82.9

percent

Customer Service

Success Measure Results

Achieve Fiscal Year loss ratio for Work Safe

Champions graduate businesses at or below

FY loss ratio of 61.8 percent vs. PLAN of

76.7 percent. Class III combined

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FY2012 plan. Decrease accident frequency

by 3 percent for June 2010 WSC graduates

frequency increased, but over loss costs

were reduced.

Graduate 75 percent of WSC Class IV in

June 2012

72 percent graduation rate (policy

cancellations)

WSC post-graduates engagement through

participation in safety education programs

WSC Alumni provided local safety

presentations, electronic distribution of

safety articles and participated in Safety

Seminars

Deliver 50 MSF Speakers Bureau events

including safety messages through a variety

of communication vehicles. Deliver 60 state

wide safety seminars with 80 percent

satisfaction level.

126 Speakers Bureau events were

delivered. 87 state wide safety seminars

were delivered with 90 percent satisfaction

level.

WorkSafeMT participation including funding

and in-kind assistance

MSF provided financial support, leaders

and staff were active on the Board and

Committees, and provided experts for

SafetyFest presentations

Implement a document management system

(150 claim/policy) including Info Page

allowing users to directly modify document

language and layout

Info Page deferred to FY13. All other

documents implemented as planned.

Educate MSF stakeholders on changes to

tiered rating program by May 2012 and

implement changes for rates effective July 1,

2012

Extensive internal training to underwriters,

customer service specialists and safety

management consultants. Board provided

program overview and agents notified.

Programming completed ahead of

schedule and implemented February 2012.

Claim and Medical Management


Communicate medical management changes

to stakeholders consistent with HB334 by

August 1, 2011.

Medical management law change

meetings held throughout the state

FAQs for providers published July

2011

Create a provider relations program and

develop measures for provider relations effort

by October 1, 2011

Provider relations program created

July 2011

Provider and Claims Examiner

customer surveys crafted and

administered.

Develop measures to monitor medical

outcomes for claims by October 1, 2011

Performance measures recommended with

partial implementation

Implement HB334 Stay At Work/Return to

Work program by June 30, 2012

New SAW/RTW program to meet

statutory requirements implemented and

training completed

Infrastructure


Align and link ERM with FY2013 business Evaluation/ranking of MSF top risks

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planning and budgeting processes by January

1, 2012

occurred October 2012 with Project Team

and Executives

Deliver risk mitigation response plans for 3-5

high impact risks, including actions,

responses, monitoring and reporting by

January 1, 2012

Mitigation Response Plans for 5 high

impact risks submitted to Executives for

consideration in planning November 2012

Establish customized reporting and

monitoring of ERM to meet MSF’s needs by

January 1, 2012

Risk Matrix populated and continues

to be reviewed and monitored

Risk Committee established and

meeting monthly to review risk action

plans and new/emerging risks

Establish risk users guidelines for Risk

Owners to assist in preparation for

Risk Action Plans

ERM transition plan approved by

ESPM November 2011

Trains MSF staff to ensure smooth transition

of the ERM process throughout the

organization by January 1, 2012

MSF employees trained on ERM process

and risk reporting December 2011

Key Success Measures KSM summary

Enterprise-Wide

Initiatives Summary

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Chair Brenneman called for questions from the Board and from the public; there were none.

VII. President/CEO Compensation and Incentive Plan

A. Compensation and Incentive Plan Update – Neville Kenning, Hay Group

Mr. Kenning stated that the purpose of his presentation was to provide context in the public

setting for when the board moved into the private setting to discuss the CEO’s compensation.

He reminded board members that MCA 39-71-2317 sets authority for the Board to appoint and

set compensation for the CEO and the additional statute of MCA 2-18-103 exempts the

president’s position from the state’s classification and compensation plan. The current plan for

the CEO had its genesis back in 2000 when a policy was adopted by the board to set the policy

position at 95% of the national average. The reason it was set at 95% was the consideration of

the Montana factor, which stated that the labor rate in Montana is not as high as the national

average. The market target was revisited in 2004 and a regional cut of State Fund CEO’s was

taken into account. The President and CEO has both a base salary and an incentive opportunity.

The Hay Group has been consulting with state funds since October 1989 and as a response to

the increase in the frequency of requests for compensation data, Hay Group has for the past 16

years conducted an annual state fund CEO Compensation survey. This is conducted in

December each year as the majority of State Fund CEO compensation reviews for non-state

agency state fund CEO’s occur in the period January 1 – March 1. Mr. Kenning summarized

the findings of Hay’s December 2011 survey in which 24 funds participated.

As in previous years, there is not a strong correlation between the size of the fund in terms of

premium income/number of employees and the CEO compensation. The strongest correlation

is between the Groups and the CEO compensation. The analysis indicates that the level of base

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September 21, 2012

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salary and incentive compensation is strongly linked to the extent to which the Board has the

“freedom” from state government constraints to set a compensation package based on the

national/regional insurance market rather than the state government agency head market within

a particular state.

Mr. Kenning emphasized that while it is not the intention of the Hay Group to present specific

recommendations for the compensation of the CEO within this report, it is important to set out

the factors that are typically taken into consideration in setting CEO compensation. They

include 1) current pay relativity to the chosen market; 2) current mix of fixed and variable pay;

3) time in position, not that Hay Group advocates paying for tenure, but with time comes

experience and organizational knowledge; 4) the investment in retention versus the cost of

replacement; and, the most important of all 5) the performance of the incumbent against the

performance standards established.

In summary, as of December 2011, the average total cash compensation for incentive eligible

CEO’s was $419,011, an increase of 2.0 percent from the previous year. The average total cash

compensation for the 9 Group C funds is $296,848, an increase of 2.76 percent over the past

year.

Mr. Kenning stated that MSF’s guiding principles say that all change in pay, whether for the

CEO or all employees, is performance based.

Chair Brenneman called for questions from the Board.

Mr. Dykstra noted that Hay Group had prepared a questionnaire for the senior executives,

collected their responses and then consolidated and forwarded that information to the board

members. He wondered if Board members could also provide questions to be included in the

questionnaire.

Mr. Kenning said the questionnaire is designed by MSF, Hay Group’s role is that of protecting

the confidentiality and impartiality in collecting the responses and distributing them to Board

members. Board members could absolutely add any questions they want to see included in that

document.

Rick Duane, Vice President of Human Resources at Montana State Fund

Mr. Duane reported that in June of 2011, the Board approved the President and CEO incentive

program for FY12. A few years ago the net earned premium computation was taken out of the

plan with the intent to focus on the bottom line rather than the top line. Net operating income is

the gatekeeper, nothing happens unless that is met. Mr. Duane explained the breakdown of the

percentage weighting.

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The results for net operating income were $5.8 million better than planned and just shy of

target. The loss ratio came it at 2.7 percent worse than planned therefore there is no payout for

that element of the plan because it did not achieve its threshold. The net investment income was

$44 million which exceeds outstanding and caps out at the calculation for outstanding. The

expenses ratio was 1.1 percent better than planned and just shy of target and our enterprise-wide

initiatives were rated at 81 percent. This results in a CEO Incentive plan is 15.1448 percent for

FY 2012.

Chair Brenneman called for questions.

VIII. President/CEO Compensation and Incentive Plan

Introduction – Notice of Closure of Meeting Joe Brenneman, Chair of the Board

Chair Brenneman asked Mr. Hubbard if he wished to waive his right of privacy to his individual

performance review. Mr. Hubbard stated that he did not wish to waive his right to privacy, he

would however waive his right if the board wished to consult with Mr. Kenning, Nancy Butler

or Rick Duane. Chair Brenneman clarified that Mr. Hubbard would be present for a portion of

the meeting but then would leave for the board’s private discussion. Chair Brenneman closed

the meeting and stated that it would be reopened after the discussion of the President/CEO’s

individual performance review for action by the Board on the President/CEO’s compensation.

XI. President/CEO Compensation and Incentive Plan – Closed Meeting

A. Call to Order

B. President/CEO’s Compensation/Incentive Plan Performance Review

X. President/CEO Compensation and Incentive Plan

Chair Brenneman called the meeting back to order at 3:05 pm.

A. Introduction – Chair of the Board

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Chair Brenneman noted that the agenda reported that Chair Best was to give an introduction and

he noted that she wasn’t there and he didn’t have one so he moved to the next agenda item.

B. President/CEO’s Annual Compensation and FY12 Incentive Plan Payment

He called for discussion or questions from the Board, there were none.

Ken Johnson moved that Laurence Hubbard, President and CEO of the Montana State Fund, in

accordance with the level of achievement of performance objectives in the President/CEO’s

Incentive Plan for fiscal year 2012, receive a payment of 18 percent of his fiscal year 2012 base

salary earned and have it reflected that this adjusts the enterprise wide initiatives to 90 percent.

Jim Swanson seconded the motion. Chair Brenneman called for discussion from those present,

seeing none he called for the vote. The motion passed unanimously.

Chair Brenneman called for any additional motions.

Mr. Dykstra made a motion that the annual base compensation of Laurence Hubbard, President

and CEO of Montana State Fund, be set by the board at $273,000 effective September 8, 2012.

Ken Johnson seconded the motion. Chair Brenneman called for discussion from members of

the Board and members of the public; there was none. The vote was called for and the motion

passed unanimously.

C. FY13 Budget Amendment

Chair Brenneman noted that the last action item for this meeting was to pass a budget

amendment for FY13.

Ken Johnson made a motion that the Fiscal Year 2013 budget be amended to include the

increase to the President/CEO’s base compensation and the payment due for the achievement of

the Incentive Plan. Jim Swanson seconded the motion. Chair Brenneman called for questions

or comments, there being none, he called for the vote. The motion passed unanimously.

XI. Old Business/New Business

Mr. Dykstra noted that during his CEO review preparation interviews with MSF Executive Staff, he

became concerned that MSF may be unprepared for the imminent issue of the potential retirement of a

significant percentage of eligible employees. He made a motion that Mr. Hubbard and staff prepare a

report for the November meeting advising the Board how MSF plans to address the retirement issue and

MSF’s strategic vision.

Chair Brenneman noted that the issue before them should be addressed as a component of strategic

planning and specifically addresses the issues of retirement likely facing MSF. He noted that a motion

probably wasn’t necessary, the Board could simply request the report.

President Hubbard assured the Board members that such a report could be prepared but requested

further clarification regarding the specifics that Mr. Dykstra wanted addressed.

Mr. Dykstra stated that he did not believe the resources to adequately address the issue of a large

number of staff retirements was available within the existing framework of the MSF organizational

structure due to everybody wearing so many hats and being over tasked.

Chair Brenneman advised framing the question or instruction in the framework of what policy the Board

would like to see addressed which is planning for continuity in light of the retirement issues facing

MSF.

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Mr. Johnson also recommended that this issue has been looked at through Enterprise Risk Management

and that previous work could be utilized to provide the report Mr. Dykstra recommended.

President Hubbard stated that MSF staff will prepare a report specifically focused on the impending

retirement of staff and key personnel turnover related to strategy going forward and what options are

available to us. He also noted that this would be included on the agenda as an action item for the

November Board meeting.

XII. Public Comment

Mr. Dykstra commented on the willingness of MSF staff to meet with him individually and share their

candid insights regarding Mr. Hubbard and MSF. He said he wanted to convey his pleasure of working

with the MSF team. He noted that they are first class people and give him sound advice and insights

and that every one of them is a keeper. He is proud to be part of this organization.

President Hubbard thanked the Board and his staff for the tremendous support he receives as the

President/CEO. He noted that he gets unblemished, unfiltered feedback from his Executive Staff

regarding all issues that affect MSF and it makes him able to do his job well for the Board.

There were no other items.

Jim Swanson made a motion to adjourn the board meeting, Wayne Dykstra seconded the motion. There

being no discussion, the vote was taken and the motion passed unanimously.

The meeting was adjourned at 3:21p.m. The next scheduled board meeting will be held on Friday,

November 16, 2012 at Montana State Fund, 855 Front Street, Helena, Montana in the first floor Board

Room.

Respectfully submitted,

Verna Boucher Special Assistant to the President/CEO

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