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State of West Virginia Board of Risk and Insurance Management (An enterprise fund of the primary government of West Virginia) Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2012
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State of West Virginia Board of Risk and Insurance Management (An enterprise fund of the primary government of West Virginia) Comprehensive Annual Financial Report For the Fiscal Year Ended June 30, 2012 and 2011 Monroe County Quilt Trail This Trail features quilt designs painted on large boards and hung on various buildings and barns around the county. Many individuals and organizations in Monroe County and the state of West Virginia worked together to make the Trail possible. On the Cover Civil War Fans Based on actual quilt made from Union and Confederate uniforms located at Second and Main Streets, Union. Photographs used in this report were courtesy of photographers, Helen Graves and Burke Shires, with the Monroe County Tourism. State of West Virginia Board of Risk and Insurance Management (An enterprise fund of the primary government of West Virginia) Comprehensive Annual Financial Report For the Fiscal Years Ended June 30, 2012 and 2011 Earl Ray Tomblin Governor Ross Taylor Acting Secretary Department of Administration Charles E. Jones, Jr., Executive Director West Virginia Board of Risk and Insurance Management Prepared by Stephen W. Schumacher, CPA, Chief Financial Officer West Virginia Board of Risk and Insurance Management State of West Virginia Board of Risk and Insurance Management (An enterprise fund of the primary government of West Virginia) Comprehensive Annual Financial Report For the Fiscal Years Ended June 30, 2012 and 2011 TABLE OF CONTENTS INTRODUCTORY SECTION Principal Officials...2 Letter of Transmittal...3 Organizational Chart...10 Certificate of Achievement...11 FINANCIAL SECTION Report of Independent Auditors...14 Management s Discussion and Analysis...16 Financial Statements: Statement of Net Asset...24 Statements of Revenues, Expenses, and Changes in Net Assets...25 Statements of Cash Flows...26 Notes to Financial Statements...28 Required Supplemental Information: Ten Year Claims Development Information (Unaudited)...58 Reconciliation of Unpaid Claims and Claims Adjustment Expense Liability by Type of Contract (Unaudited)...59 STATISTICAL SECTION Statistical Section Narratives...63 Schedule 1 Comparative Statement of Net Assets and Changes in Net Assets (Deficiency) Last Ten Fiscal Years...64 Schedule 2 Premiums by Line of Business for the Past Ten Years...66 Schedule 3 Top 10 State Agency Premiums and Top 20 Senate Bill 3 Premiums for Fiscal Year 2012 and Fiscal Year Schedule 4 Investment Income and Premium Revenue...68 Schedule 5 Principal Employers Current Year and Nine Years Ago...69 Schedule 6 Demographic and Economic Indicators Calendar Years Schedule 7 Full-Time Equivalent Employees Fiscal Year End through Schedule 8 Claims Dollars Incurred by Customer Type for Fiscal Years 2003 through Schedule 9 Type of Losses Incurred by Coverage for Fiscal Years 2003 through Schedule 10 Industry Averages Compared to BRIM...75 Schedule 11 Projected Ultimate Retained Losses for State Agencies and Senate Bill Schedule 12 Listing of Coverages in Effect for Fiscal Year Oak Leaf Located on Route 219, Pickway. This quilt piece was painted by artist/former AmeriCorps volunteer Joan Menard and donated by the Menard Family. Introductory Section State of West Virginia Board of Risk and Insurance Management PRINCIPAL OFFICIALS Earl Ray Tomblin, Governor Acting Secretary of Department of Administration Ross Taylor Board of Directors John Lukens, Chairperson Bruce Martin, Vice Chairperson S.A. Cunningham, CPA, Member Martin Glasser, Member Dr. Robert B. Walker, Member Executive Staff Charles E. Jones, Jr., Executive Director Stephen W. Schumacher, CPA, Chief Financial Officer STATE OF WEST VIRGINIA DEPARTMENT OF ADMINISTRATION BOARD OF RISK AND INSURANCE MANAGEMENT 90 MACCORKLE AVENUE SW, Suite 203 (304) ADMINISTRATION SOUTH CHARLESTON, WV (304) FAX (800) TOLL FREE WV Earl Ray Tomblin Ross Taylor Governor Charles E. Jones, Jr. Acting Cabinet Secretary Executive Director Formal Transmittal of Comprehensive Annual Financial Report (CAFR) December 15, 2012 Honorable Earl Ray Tomblin, Governor State of West Virginia Board of Directors West Virginia Board of Risk and Insurance Management Charles E. Jones, Jr., Executive Director West Virginia Board of Risk and Insurance Management Ladies and Gentlemen: The Comprehensive Annual Financial Report (CAFR) of the West Virginia Board of Risk and Insurance Management (BRIM) for the year ended June 30, 2012, is hereby respectfully submitted. This report was prepared by the Finance Department of BRIM. Responsibility for both the accuracy of the presented data and the completeness and fairness of the presentation, including all disclosures, rests with management of BRIM. We believe the data, as presented, is accurate in all material respects; that it is presented in a manner designed to fairly set forth the financial position and results of operations and cash flows of BRIM. All disclosures necessary to enable the reader to gain an understanding of BRIM s financial activities have been included. The financial statements of BRIM have been prepared on an accrual basis in conformity with Generally Accepted Accounting Principles (GAAP) for governmental entities as prescribed or permitted by the Governmental Accounting Standards Board (GASB). GAAP requires that management provide a narrative introduction, overview and analysis to accompany the basic financial statements in the form of Management s Discussion and Analysis (MD&A). This letter of transmittal is designed to complement the MD&A and should be read in conjunction with it. BRIM s MD&A can be found immediately following the report of the independent auditors. Management is responsible for establishing and maintaining internal control designed to ensure that the assets of BRIM are protected from loss, theft or misuse and that the preparation of the financial statements is in conformity with GAAP. Internal control is designed to provide reasonable, but not absolute, assurance that these objectives are met. The concept of reasonable assurance recognizes that (1) the cost of a control should not exceed the benefits likely to be derived from it, and (2) the valuation of costs and benefits requires estimates and judgments by management. Management of BRIM has established a comprehensive internal control framework that is designed to provide a reasonable basis for making representations concerning the finances of BRIM. Because the cost of internal control should not outweigh its benefits, BRIM s comprehensive framework of internal control has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatements. As management, we assert that, to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. PROFILE OF BRIM BRIM is reported as an enterprise fund operating as a single business segment, included in the primary government in the State of West Virginia s CAFR. BRIM is governed by a board of up to five members appointed by the governor. BRIM operates by the authority granted in Chapter 29, Article 12; and Chapter 33, Article 30 of the West Virginia Code as amended, and the provisions of Executive Order The day-to-day operations of BRIM are managed by the Executive Director, who is responsible for the implementation of policies and procedures established by the Board of Directors. BRIM is charged with providing insurance coverage to all state agencies, which number 167. Additionally, BRIM provides these services to cities, counties, and non-profit organizations throughout the State under the provisions of Senate Bill 3 (SB 3). Currently, BRIM insures approximately 940 of these organizations. BRIM also provides a coal mine subsidence reinsurance program that allows homeowners and businesses to obtain insurance coverage up to $75,000 for collapses and damage caused by underground coal mines. Currently, BRIM underwrites over 15,000 commercial and personal mine subsidence policies annually. In December 2001, the West Virginia Legislature passed House Bill 601 which authorized BRIM to provide medical malpractice and general liability coverage to private health care providers. This bill was created as a result of the medical malpractice insurance crisis created by private sector insurance companies non-renewing policies for health care providers on a national level, and in the State. The private physician part of this program was novated to the West Virginia Physician s Mutual Insurance Company on July 1, 2012 Comprehensive Annual Financial Report All HB601 policies were non-renewed as of June 30, However, BRIM still maintains the runoff of claims that were made during the effective period or claims relating to tail coverage purchased. This tail coverage covers the insured on any IBNR claims during the policy period. See further discussion of House Bill 601 program in the MD&A section. Effective July 1, 2005, BRIM established an annual pre-funding trust program with a financial institution that covers all liability claims with loss dates occurring after June 30, With this program, a separate sub-account that coincides with the current claim and fiscal year is created within the trust account. The sub-account for the current claim/fiscal year is then fully funded by BRIM during the current fiscal year. This advance deposit funding ensures that each year s sub-account covers the total actuarially determined estimated liability claims costs for those liability claims with loss dates whose occurrence corresponds with that specific claim/fiscal year. The financial institution, acting as trustee, holds these funds within the sub-accounts in the trust to cover BRIM s estimated liability claims costs for all liability claims. In fiscal year 2010, BRIM transferred the remaining advance deposits being held in accounts maintained by the insurance company, or carrier, into the existing BNY trust vehicle to fund all outstanding liability claims with loss dates before July 1, A sub-account was established with sufficient funding to cover the total actuarially determined estimated liability claims costs for all of those claims with loss dates whose occurrence are dated June 30, 2005 and earlier. The funds, together with their earnings, are used to pay claims and claims adjustment expenses related to these liability claims. As escrow agent, the financial institution periodically transfers monies from the trust to the insurance company administering these claims in order to reimburse the insurance company for payments that they have issued on these claims and claims adjustment expenses on BRIM s behalf. BRIM is not indemnified by the carrier, and the carrier is compensated for claims handling by a negotiated fixed fee that is paid directly to the carrier. Property losses are retained by BRIM up to $1 million. Additional coverage is provided up to a limit of $400 million through various excess policies. This coverage provides reimbursement of loss at the stated or reported value less a $1,000 deductible. Under the mine subsidence program, ceding insurers pay BRIM a reinsurance premium. In exchange the ceding insurers are paid a commission for the business they placed with BRIM. ASSESSING BRIM S FINANCIAL CONDITION Net Assets One of management s major goals was to eliminate the net asset deficiency that existed in prior years. The deficiency in net assets developed in the past due to several factors, including unanticipated losses and adverse loss development in state agency and Senate Bill 3 entity coverages for general liability and medical malpractice lines of business. Declining investment returns also were a contributing factor. In fiscal year 2004, management adopted a financial stability plan to address the 5 deficiency in net assets. As of June 30, 2012, BRIM has total net assets of $221,515,000 reflected on the Statement of Net Assets. Management anticipates that net assets will continue to remain positive. For more detailed information see the MD&A included in the financial section of this report. The chart below shows the net assets/deficiency for the past ten years. The years in black represent positive net assets and the years in red represent a net asset deficiency (or unfunded liability). BRIM s improvement in financial position has generally outperformed the commercial insurance industry over the past several years. Combined Financial Ratio The combined ratio is one of the key ratios used to measure underwriting performance. It is derived by adding the loss and expense ratio. A combined ratio below 100% indicates an underwriting profit and one above 100% indicates an underwriting loss. BRIM s combined ratio for 2012 reflects an underwriting loss and is slightly higher than the industry average. Historically, BRIM s primary advantage over the commercial insurance market has been low administrative costs, which are kept at a relatively stable 5 to 10%, as compared to the insurance industry market rate of 29%. The lower administrative costs have enabled BRIM to keep this key financial ratio well below the industry 6 2012 Comprehensive Annual Financial Report average. Decreases in BRIM s claims reserves also have contributed to the lower combined ratios experienced by BRIM prior to But, based on the most recent risk funding study completed, BRIM saw an increase in claims reserves in 2012 when compared to overall reserve decreases seen from 2003 thru The increase in claims reserves for 2012, coupled with the lower premiums billed for 2012, had an unfavorable impact on BRIM s combined ratio for fiscal year 2012, in particular when compared to recent years and the industry average. The BRIM combined ratios are shown in the chart below in blue and the industry is in red. Combined Ratio 120% 100% 80% 60% 40% 20% 0% 112% 112% 108% 89% 68% 65% 65% 61% 72% 50% 49% Industry* *The industry data shown above was obtained from Standard and Poor s Industry Surveys, Insurance: Property / Casualty, September 20, Investment Strategy For several years prior to 2005, BRIM s investment returns had been declining. During this time BRIM was limited, by code, to certain low risk, short-term investments. In anticipation of revisions to be made to the state code that would become effective beginning in fiscal year 2005, BRIM and the West Virginia Investment Management Board (WVIMB) began working, in fiscal year 2004, on a solution to maximize returns. The WVIMB developed a suggested investment strategy with 20% in equities, 65% in fixed income securities and 15% in cash. This arrangement was finalized and approved by BRIM s Board with the actual investment transition not occurring until fiscal year As a result of these changes, BRIM s long-term investments are now managed by the WVIMB based on their recommendations. Also, beginning in 2006, BRIM s excess short-term cash funds have been managed by the West Virginia Board of Treasury Investments (BTI). Therefore, the cash portion of BRIM s investments is maintained in accounts with the BTI that are similar to the low-risk money market funds that were previously maintained by the State Treasurer s Office. The combined investment strategy is similar to those used by commercial insurers. Consequently, beginning in 2005, investment earnings have improved over those of the years prior to The WVIMB also recommended that BRIM reallocate its funds managed by the WVIMB and BRIM s board approved the WVIMB s recommendation. Beginning in early 2009, the WVIMB repositioned one third of the funds previously held in fixed income securities into an approved group of well-established, fixed-income based hedge funds. In fiscal year 2011, BRIM accepted the WVIMB s additional recommendation to further diversify BRIM s holdings with the WVIMB by 7 investing a small percentage in a Treasury Inflation Protection Securities (TIPS) pool as a hedge against inflation. Volatile conditions in the financial markets resulted in significant investment losses for BRIM for the first half of fiscal year However, the first half losses were more than offset by significant improvements in the markets in the second half of fiscal year 2009 and have continued to provide positive returns through fiscal year BRIM On-Line We invite you to visit BRIM s website at The website is designed to inform the public about BRIM and to provide assistance to our insureds. Through the claim department section, insureds can find a claim submission form, instructions for submitting a claim and information on claim status. Our underwriting section contains information on adding exposures to the policy (such as autos or property) and contains annual renewal forms. The loss control division of BRIM maintains a wealth of risk management knowledge where you can view information on safety topics and check out the latest dates for loss control seminars. A variety of frequently asked questions on topics ranging from billing to underwriting can also be found on this site. Audit The financial statements of BRIM are prepared on the accrual basis of accounting in conformity with GAAP. BRIM is required by the Financial Accounting and Reporting Section (FARS) of the Department of Administration and by State Code to have an annual independent audit. The firm of Ernst & Young, LLP was selected to perform the financial statement audit for the fiscal year ended June 30, The report of independent auditors on the basic financial statements is included in the financial section of this report. AWARDS AND ACKNOWLEDGEMENTS Certificate of Achievement for Excellence in Financial Reporting The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to BRIM for its comprehensive annual financial report (CAFR) for the fiscal year ended June 30, This was the seventeenth consecutive year that BRIM has achieved this prestigious award. In order to be awarded a Certificate of Achievement, a government must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program s requirements and we are submitting it to the GFOA to determine its eligibility for another certificate. 8 10 Comprehensive Annual Financial Report 12 Basket Located on Route 3, Gap Mills. This piece is one of the original seven blocks that was chosen to be created and put on display throughout Monroe County. Painted by Joan Menard. Financial Section Ernst & Young LLP 900 United Center 500 Virginia Street East Charleston, West Virginia Tel: (304) Fax: (304) Report of Independent Auditors The Board of Directors West Virginia Board of Risk and Insurance Management We have audited the accompanying basic financial statements of the West Virginia Board of Risk and Insurance Management (BRIM), an enterprise fund of the State of West Virginia, as of and for the year ended June 30, 2012 and 2011, as listed in the table of contents. These financial statements are the responsibility of the BRIM s management. Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Organization s internal control over financial reporting. Ou
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