Safe and Sound

Normally each month I update you on changes in workers’ compensation law, operating environment, MTM news or questions I have recently received from members. An important item, that I should inform you about is how to we manage the money MTM members entrust us with. That ties into a very common question, tell me about MTM’s financial security. MTM is NOT a billion dollar national insurance company. We ARE a mutual insurer owned by 941 Michigan employers. One can argue that there is more stability in these large international companies, but events over the last ten years have shown that large does not necessarily mean stable. Financial stability also factors into how the MTM Board of Directors review our annual members’ dividend. Over the last seven years, the MTM Board of Directors has returned $27 million dollars as owner member dividends. That equates on average to 30% of the annual premium. Dividend payments starts with financial stability. It does not do any good to return monies to member owners only to say that we’ve come up short and need more money to pay claims. So while the dividend part of the member equation is critical, making sure that the financial stability of MTM comes first.

Investments play a critical role in MTM’s financial stability as well as the annual members’ dividend. MTM has invested assets of over $62 million. About half of the investments are put into liability accounts to pay existing and future claims. Subtracting the claims liability accounts from the total leaves about $34 million in the member surplus account. This is a reserve (i.e. like our personal savings account). It is available in case bad stuff happens.

Both the claims reserve account and members’ surplus account are invested. Because we have insurance risk and a serious employee accident can occur at any time (some accidents involve multiple employees), we are very conservative on the investment side. Much more conservative than you or I would personally be. The rationale behind this is that we are taking insurance risk and we do not want to multiply that insurance risk by also having investment risk. Therefore, our investments are held in nearly all bonds. Our bond sectors include 37% for U.S. bonds, 18% in municipal bonds, and 26% is held in corporate bonds. Of course we have minimum credit requirements before we invest in any bond. Insurance rules allow bonds by insurance companies to be held at face value even though the market value can change with interest rates. MTM rarely sells a bond midterm. We have bond maturity dates set at a point when we believe the money will be necessary to pay claims. So we are not an investment day trader. We are a buy and hold until maturity date. I think in my eight years at MTM that there have only been three bonds with unusual circumstances that we have sold prior to the maturity date. We do have about 18% of our investments in what are categorized as equities, but these are bond funds. We do not buy any common stock. Nor do we have any loans.

Our investment income for the year is about $2 million. The benefit of that investment income is that it pays nearly all the bills of operating MTM. That means that if all operation bills are paid, and the company loss ratio is 70%, then the balance of 30% is available as an owner dividend. This is where the February Board meeting comes into play and based on a review of the 12/31 data, member dividends are declared with distribution in March. MTM has no debt and no shareholders other than our 941 Michigan shops.

I hope the above gives you a sense of comfort in that MTM has done everything possible to make sure that we are financially stable and always have the wherewithal to pay claims today and any future claims that come up. As much as I would like to report higher investment yields than we get from bonds, the safety of having the bond yields means that we are not taking any investment risk. Many years ago I remember a company that had a nice underwriting profit for the year only to report to their Board of Directors that the investment loss of the year offset the underwriting gain and, therefore, no dividend was available for its members. It was an awful situation for the members and insurance company management. Every day the MTM staff and Board work to minimize MTM’s enterprise risk management factors.

For anyone that would like more details on our investments or risk management strategies, please call or write me. I am happy to share more details. I hope you are enjoying the summer, until next month. — John.