Kentucky Workers’ Compensation Funding Commission Board of ... March BOD Book.pdf · actuarial...

Kentucky Workers’ Compensation Funding Commission

Board of Directors March 27,2019

9:00 a.m.

#42 Mill Creek Park

Frankfort, Kentucky

AGENDA

Kentucky Workers’ Compensation Funding Commission Board of Directors

March 27, 2019

I. Call to Order — Judy Long, Chairman a) Recording Notice, Angela Callowayb) Confirmation of Legal Noticec) Roll Calld) Introductions

II. Minutesa) Approval of January 23, 2019 Minutesb) Approval of February 12, 2019 Special Meeting Minutes

III. Board Member Oath of Office – Brenda Collins

IV. Executive Director Update – Reuben Jones

V. Coal Workers’ Pneumoconiosis Fund Liability Update – Jon Stewart, KEMI

VI. Financials – Louie Horda) Year-to-Date Budget vs. Actual Expensesb) Year-to-Date Internal Financial Statementsc) Fiscal Year-to-Date Inter-Agency Transfers

VII. Investments – David Rogan, Conninga) Investment Update

VIII. Audit & Collections Update – Lisa King

IX. Executive Sessiona) Penalty Waiversb) Litigation Updatec) Personnel Matters

X. Other Business – Open Session a) Penalty Waiversb) Litigation Updatec) Personnel Mattersd) Audit Program Software Updatee) Board Member Elections

a. Chairb. Vice-Chairc. Secretary-Treasurer

XI. New Business

XII. Adjournment

I. CALL TO ORDERJudy Long, Madam Chair

I. CALL TO ORDERJudy Long, Madam Chair

a) Recording Notice, Angela Callowayb) Confirmation of Legal Noticec) Roll Calld) Introductions

Intentionally Left Blank

II. Minutes II. Minutes

a) Approval of January 23, 2019 Minutesb) Approval of February 12, 2019 Special Meeting Minutes

1

MINUTES OF A MEETING

KENTUCKY WORKERS’ COMPENSATION FUNDING COMMISSION BOARD OF DIRECTORS

January 23, 2019 Opening of Meeting:

1. A regular meeting of the Board of Directors, Kentucky Workers’ Compensation Funding Commission was held on January 23, 2019, in the Commission’s conference room, located at 42 Mill Creek Park, Frankfort, Kentucky. Madam Chair Judy Long called the meeting to order.

2. Ms. Angela Calloway announced the meeting would be recorded in accordance

with Kentucky Revised Statute 61.835.

3. Madam Chair Long verified the press notice and asked for a roll call.

Directors Present:

4. Judy Long, Self–Insured Employers Representative Timothy Densler, Labor Representative David Dickerson, Acting Secretary, Labor Cabinet Ryan Barrow, Designee for Secretary William Landrum, Finance & Administration Cabinet Stephanie Rich, Designee for Secretary Terry Gill, Cabinet for Economic Development

Others Present:

5. Reuben Jones, Executive Director, KWCFC Louie Hord, Director of Fiscal Operations, KWCFC Lisa King, Director of Audit and Collections, KWCFC Olivia Orrender, Audit Review Manager, KWCFC Angela Calloway, Fiscal Services Officer, KWCFC Ryan Robinson, Administrative Services Officer, KWCFC Michael Swansburg, Deputy Secretary/General Counsel, Labor Cabinet Tressa Root, Executive Advisor, Labor Cabinet Charlie Donovan, Special Fund, Department of Workers’ Claims Robert Swisher, Commissioner, Department of Workers’ Claims Robert Milligan, Deputy Commissioner, Department of Workers’ Claims David Rogan, Conning Inc. Jon Stewart, KEMI

Prentice Harvey, Government Strategies Ed O’Daniel, Attorney

2

Approval of Minutes:

6. Mr. Ryan Barrow made a motion to approve the November 28, 2018 Regular

Meeting Minutes. Mr. Tim Densler seconded the motion. Motion carried. Executive Director Update:

7. Mr. Reuben Jones updated the Board on the regulation progress, investment format and 2019 priorities.

8. Mr. Jones stated on December 11, 2018, the Commission appeared before the

Regulation Subcommittee. With no questions, regulation amendments were then referred to the Economic Development and Workforce Interim Joint Committee who did not meet. Regulation changes will be effective February 1, 2019.

9. Mr. Jones stated the Investment Policy Statement has been published and Conning will be reporting to the Board periodically on market trends and forecast for investments to allow a more focused analysis.

10. Mr. Jones updated the board on the 2019 staff priorities, highlighting audit assignments, the audit software program, the streamlining of financial audit, actuarial data collection efforts, and staff training opportunities.

Financial Report: Louie Hord (report on file for referral)

11. Mr. Louie Hord reviewed the year to date budget versus actual expenses for KWCFC, the year to date internal financial statements, and fiscal year to date interagency transfers made by KWCFC for the period ending December 31, 2018.

12. Ms. Stephanie Rich made the motion to accept the financial reports as presented

to the Board. Mr. Timothy Densler seconded the motion. Motion carried.

Investment Report: David Rogan, Conning, Inc. (report on file for referral)

13. Mr. David Rogan presented an update on the quarterly portfolio review, economic and capital market outlook and portfolio reports through December 31, 2018.

14. Acting Secretary David Dickerson made the motion to accept the Investment

Report as presented by Conning. Ms. Stephanie Rich seconded the motion. Motion carried.

Audit & Collections Report: Lisa King (report on file for referral)

15. Ms. Lisa King presented an update on the number of audits ongoing and completed.

3

16. Ms. King reported on Audits in Protest, Final Audit Findings and Self-Insured

Audit Assignment Findings.

17. Mr. Ryan Barrow made the motion to accept the Audit and Collections Report as presented. Acting Secretary David Dickerson seconded the motion. Motion carried.

Executive Session:

18. Madam Chair Long asked for a motion to go into Executive Session under KRS 61.810 (1) (c), (f) and (j) to discuss litigation, personnel, and penalty waivers.

19. Mr. Ryan Barrow made the motion to go into Executive Session. Mr. Timothy

Densler seconded the motion. Motion carried.

Open Session:

20. Acting Secretary David Dickerson made the motion to return to open session. Mr. Timothy Densler seconded the motion. Motion carried.

Other Business: Litigation:

21. Madam Chair Long stated that the Board was aware of the decision from Franklin Circuit Court and the Board is considering additional information and whether or not they wish to move forward with an appeal.

Coal Workers’ Pneumoconiosis Fund Liability Update: Jon Stewart, KEMI

22. Mr. Jon Stewart provided an update on the Coal Workers’ Pneumoconiosis Liability.

23. Madam Chair Long commended Mr. Stewart, KEMI and Judge Swisher on the work they have done. Judge Swisher further commended Judge Roland Case on the job he has done settling cases in a timely manner.

24. Ms. Stephanie Rich made a motion to accept the Coal Workers’ Pneumoconiosis

Fund Liability Report. Mr. Timothy Densler seconded the motion. Motion carried. New Business:

35. No new business.

4

Adjournment:

36. Ms. Stephanie Rich made a motion to adjourn. Mr. Timothy Densler seconded the motion. Motion carried.

________________________________ Chairman of the Board

1

MINUTES OF A MEETING

KENTUCKY WORKERS’ COMPENSATION FUNDING COMMISSION BOARD OF DIRECTORS

February 12, 2019 Opening of Meeting:

1. A Special Meeting of the Board of Directors, Kentucky Workers’ Compensation Funding Commission was held on February 12, 2019, in the Commission’s conference room, located at 42 Mill Creek Park, Frankfort, Kentucky. Madam Chair Judy Long called the meeting to order.

2. Ms. Angela Calloway announced the meeting would be recorded in accordance

with Kentucky Revised Statute 61.835.

3. Madam Chair Long verified the press notice and asked for a roll call.

Directors Present:

4. Judy Long, Self–Insured Employers Representative Timothy Densler, Labor Representative Robert Swisher, Designee for Acting Secretary David Dickerson, Labor Cabinet Ryan Barrow, Designee for Secretary William Landrum, Finance & Administration Cabinet Stephanie Rich, Designee for Secretary Terry Gill, Cabinet for Economic Development

Others Present:

5. Reuben Jones, Executive Director, KWCFC Louie Hord, Director of Fiscal Operations, KWCFC Lisa King, Director of Audit and Collections, KWCFC Olivia Orrender, Audit Review Manager, KWCFC Angela Calloway, Fiscal Services Officer, KWCFC Ryan Robinson, Administrative Services Officer, KWCFC Michael Swansburg, Deputy Secretary/General Counsel, Labor Cabinet

Executive Session:

6. Madam Chair Long asked for a motion to go into Executive Session under KRS 61.810 (1) (c), (f) and (j) to discuss litigation, personnel, and penalty waivers.

7. Mr. Ryan Barrow made the motion to go into Executive Session. Ms. Stephanie

Rich seconded the motion. Motion carried.

2

Open Session:

8. Commissioner Robert Swisher made the motion to return to open session. Mr. Timothy Densler seconded the motion. Motion carried.

Litigation:

9. Mr. Ryan Barrow made a motion to not appeal the Franklin Circuit Court orders relating to the statute of limitations. Mr. Timothy Densler seconded the motion. Motion carried.

10. Ms. Stephanie Rich made a motion to authorize the Executive Director and staff to enter into audit settlement agreement negotiations with A.I.G. for all the audit periods being contested to include the Franklin Circuit Court orders. Mr. Timothy Densler seconded the motion. Motion carried.

11. Commissioner Robert Swisher made a motion to authorize the Executive Director and staff to enter into audit settlement agreement negotiations with Travelers’ for all the protested audit periods to include the Franklin Circuit Court orders. Ms. Stephanie Rich seconded the motion.

Adjournment:

36. Ms. Stephanie Rich made a motion to adjourn. Mr. Timothy Densler seconded the motion. Motion carried.

________________________________ Chairman of the Board

III. Board Member Oath of Office III. Board Member Oath of Office

a) Brenda Collins

IV. Executive Director Update –Reuben Jones

IV. Executive Director Update –Reuben Jones

Executive Director Update

Kentucky Workers’ Compensation Funding CommissionReuben Jones

“People First…Mission Always”

Topics

Audit Support Tool Special Fund AssistanceLitigation UpdateIntern Investments

3/25/2019 4:57:16 PM Official Use Only 2

Audit Support Tool

3 year journey

Contract has been awarded

Cost savings achieved

Work to be done

Customization

Deployment 3/25/2019 4:57:16 PM Official Use Only 3

Special Fund Assistance

SB126

Angela Calloway and Hunter Robinson assisting

Special Fund office

Back Log has been eliminated

Continue to assist in sustaining vital work areas


Litigation Update

Per BOD approval, initial settlement discussions with AIG and Travelers have started.

Intern

Intern scheduled to begin working in the KWCFC office April 1, 2019Duties include:Research paper on workers’ compensation collection on premium/premium received in other statesIncluding research documenting stakeholder concerns

Investment strategies on Workers’ Compensation investments in other states

Scheduled to work with the Funding Commission 30 hours a week through mid May

Investments

Investments going smoothly

Positive trends continue

Summary

Audit Support ToolSpecial Fund assistanceLitigation discussions continuing Intern Investments


V. Coal Workers’ Pneumoconiosis Fund Liability Update- Jon Stewart, KEMI

V. Coal Workers’ Pneumoconiosis Fund Liability Update- Jon Stewart, KEMI

VI. Financials – Louie HordVI. Financials – Louie Hord

a) Year-to-Date Budget vs. Actual Expensesb) Year-to-Date Internal Financial Statementsc) Fiscal Year-to-Date Inter-Agency Transfers

VII. Investments – David Rogan, Conning VII. Investments – David Rogan, Conning

a) Investment Update

www.conning.com | © 2019 Conning, Inc. The names of certain companies, products and product brands, and the logos and images related thereto, are trademarks of their third party owners. They are used herein for illustrative and informational purposes only. Nothing herein implies sponsorship or endorsement of those companies or products by Conning, or an endorsement by such trademark owners of Conning or its products and services.

Portfolio as of 2/28 & Proposed Benchmark Overview

March 27th, 2019

1

Review of Capital Markets as of February 2019

-0.27%

-0.09%

-0.06%

0.17%

0.22%

0.28%

0.41%

0.61%

0.80%

1.24%

1.66%

2.08%

2.25%

2.58%

2.68%

3.02%

3.21%

4.09%

5.19%

14.64%

-2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00%

Treasury

MBS

Aggregate

Government-Related

U.S. Corporate

ABS

CMBS

Municipal (TE)

Emerging Markets

BRIC

High Yield

MSCI Asia ex Japan

S&P Value

EAFE

MSCI ACWI Large Cp

Nikkei

S&P 500

S&P Growth

Russell 2000

China CSI 300

Month-over-Month Nominal Returns - PASTE IN 5.63

Data Sources: ©2019 Bloomberg L.P. / Barclays Live and Content Copyright © Barclays Bank PLC, 2019. Used with permission. Prepared by Conning, Inc.

Index 2/28/19 1/31/19 12/31/18 2/28/18

MTD CHG BPS

QTD CHG BPS

YoY CHG BPS

U.S. Corporate (IG) 121 128 153 96 -7 -32 25U.S. High Yield 379 423 526 336 -44 -147 43Emerging Markets (USD) 280 296 343 221 -16 -63 59MBS Fixed Rate 35 32 35 26 3 0 9CMBS 68 79 86 59 -11 -18 9ABS 37 46 53 45 -9 -16 -8Municipal Bond Index * 32 47 54 33 -15 -22 -1Data Source: ©2019 Bloomberg L.P. Prepared by Conning, Inc.* Baseline applicable corporate tax rate

Economic Overview

The first estimate of U.S. GDP growth for the fourthquarter came in above expectations at 2.6%. This bringsthe 2018 GDP growth rate to 3.1%, relative to the 2017GDP growth rate of 2.5%.

Retail sales in December came in far lower thanexpected, declining 1.2% month over month, with broad-based declines across most retail categories. This marksthe sharpest decline in retail sales since September 2009.

Core PCE, the Fed’s preferred measure of inflation, rose1.9% year over year in December, slightly below theFed’s 2% target.

The U.S. goods trade deficit rose to a record $79.5 billionin December, up from $70.5 billion in November.

At month end, the pricing of federal-funds futures implieda less-than-5% probability of a rate hike in 2019.

Performance Review

Treasury yields moved higher across the curve during themonth, and the yield curve steepened as the 3m10s yieldcurve increased four basis points to 28 basis points.

Nominal returns were positive for all fixed-income assetclasses with the exception of Treasurys and agencyMBS. High-yield corporate and emerging marketsgenerated the strongest returns.

Credit spreads tightened for all asset classes during themonth with the exception of agency MBS. Higher beta,lower quality and shorter duration assets outperformed.

The S&P 500 returned 3.21% in February. Domesticsmall caps outperformed large caps, while growth stocksoutperformed value.

WTI oil prices continue to rise, up 6.4% in February to$57 a barrel.

Bloomberg Barclays Index OAS

Month-over-Month Nominal Returns

2

KYWCFC Portfolio as of February 2019

Sector Book Value Market Value Gain/LossSector

Allcation %Effective Maturity Duration

Book Yield %

Market Yield % Rating

Short Term 2,166,418 2,166,418 ‐ 0.74 0.04 ‐ 0.01 AAA

Treasury 92,984,643 87,161,953 (5,822,690) 29.93 10/22/2027 6.74 2.87 2.69 AA+

Government 32,232,923 32,904,014 671,091 11.30 4/13/2031 9.25 4.20 3.95 Aa3

Emerging Markets 1,423,789 1,501,594 77,805 52.00 10/15/2028 7.49 5.26 4.53 Baa3

Corporate 109,693,712 111,592,812 1,899,100 38.32 11/25/2026 6.34 4.20 3.92 Baa1

Mortgage Backed 44,780,985 45,051,091 270,106 15.47 7/7/2025 3.75 3.62 3.54 AA+

Asset Backed 10,702,661 10,806,282 103,622 3.71 5/4/2022 2.89 3.87 3.37 A+

Fixed Income 293,985,131 291,184,163 (2,800,968) 100.00 4/18/2027 6.22 3.66 3.45 AA‐

3

Benchmark Overview

4

What Makes A Valid Benchmark?

Before we describe a practical solution to our needs, it is useful to recall the essential properties that an investment benchmark should possess. These qualities are easily remembered through the acronym SAMURAI:

Specified in advance: The benchmark is specified prior to the start of the evaluation period.

Appropriate: The benchmark is consistent with the manager’s investment style or area of expertise.

Measurable: The benchmark’s return is readily calculable on a reasonably frequent basis.

Unambiguous: The identities and weights of securities are clearly defined.

Reflective of current investment opinions: The manager has current knowledge of the securities in the benchmark.

Accountable: The manager is aware and accepts accountability for the constituents and performance of the benchmark.

Investable: It is possible to simply hold the benchmark.

5

Benefits of a Benchmark

A good benchmark can allow an investor to understand their investments in terms of the following questions:

•Are we taking too much (or not enough) risk to earn these returns?•Is the Portfolio doing what it’s supposed to do?•Why did we deviate from the benchmark?•Is this type of tracking error normal or is something wrong with this fund or strategy?

Benchmarks can be a useful attribution tool to check performance and risk after the fact, but they should not drive how you invest (unless of course you’re simply investing in the benchmark portfolio — hence no need for benchmarking).

It’s a mistake to let the benchmark dictate how you invest or the types of risks you’re willing to take. You don’t choose a benchmark and then figure out how to invest within that benchmark. You figure out how to invest and then you make sure you have the correct form of performance measurement for your investments.

The thing most investors miss is that their true benchmarks aren’t so easily quantifiable because they’re mainly long-term in nature — basically, are you on track to meet your goals and objectives? This has almost nothing to do with over- or underperformance in terms of beating a market-based benchmark.

The best form of benchmarking can help improve communication and understanding between an investor and their portfolio managers, funds or advisors. Performance measurement doesn’t necessarily provide all of the answers, but it does help identify the right questions investors and advisors should be looking into together.

They can help determine things like the correct time horizon to pay attention to, how much risk an investor is willing and able to take and how different they would like their performance to be from the market indexes over various time frames.

Benchmarks can act as a good starting point for education to show clients what’s contributing to or detracting from portfolio performance. Performance provides the narrative to communicate an advisor or portfolio manager’s ongoing process.

6

Portfolios BenchmarkNumber of Issues 97 10,139Principal Amount 274,888,801 26,001,071,574Market Value 294,498,115 26,604,424,676Price 107.134 101.644Maturity 8.007 8.977Coupon 4.418 3.402Moody's AA3/A1 AA2/AA3S&P AA-/A+ AA-/A+Barclays AA3/A1 AA2/AA3Convexity 0.196 0.381Yield To Worst 3.315 3.216OASD 4.333 6.171OAS 74 64Option Adj Duration 6.188 6.11

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

AAA AA A BAA BA B CAA CA C D NR Other

Market Value Percentage By Quality

Portfolios

(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%Market Value Percentage By Sector

Portfolios

Benchmark Constituent WeightU.S. Corporate, 0 to 20+ yrs, AAA to BAA3 38.0%

U.S. Treasury, 0 to 20+ yrs, AAA to BAA3 20.0%

MBS Fixed Rate, 0 to 20+ yrs, AAA to BAA3 16.0%

U.S. Taxable Municipal ex BAB (NonAgg), 0 to 20+ yrs, AAA to BAA3 11.0%

U.S. Treasury, 0 to 10 yrs, AAA to BAA3 11.0%

Asset Backed, 0 to 5 yrs, AAA to BAA3 4.0%

KYWCFC Portfolio Sectors WeightCorporates 38.5%

Treasurys 18.0%

MBS 15.4%

Governments 11.8%

Treasurys 11.0%

ABS 3.7%

Proposed Benchmark for KYWCFC

7

Portfolio Performance vs Proposed Benchmark Since Inception

KWCFC Audit Program Statistics

Total Audits

June 2013For Audit Yrs 2011-2012

November 2015For Audit Yrs 2013-2014

Insurance Carrier Group Self Insurer

January 2017For Audit Yrs 2015-2016 Total Audits

1089

117

1059

114

1059

114

31827

345

Total Audits Outstanding as of March 2019Assigned

November 2013For Audit Yrs 2011-2012

Insurance Carrier Group Self Insurer

Assigned November 2015

For Audit Yrs 2013-2014

Assigned as ofNovember 2017

For Audit Yrs 2015-2016 Total Outstanding

000

000

403

43

403

43

1


2

Initial ReviewStatus

Returned to AuditorFor Correction Status Total Outstanding

Insurance Carrier 2013Group Self Insurer 2013Insurance Carrier 2015Group Self Insurer 2015Insurance Carrier 2017Group Self Insurer 2017

0000

200

000000

0000

200

Total Audits Issued as of March 2019

Insurance Carrier 2013Group Self Insurer 2013Insurance Carrier 2015Group Self Insurer 2015Insurance Carrier 2017Group Self Insurer 2017

10891059336270

Total Audits In Review as of March 2019


3

Audits Outstanding

38%

Audits in Review19%

Audits Issued31%

Audits Not Yet Assigned

12%

2015‐2016 AUDIT CYCLE PROGRESS


Audits in Protestas of March 2019

2009201120132015

Number of Audits Additional Asmt Refund of Asmt Penalty & Interest Refund to Insured

20237

$286,434.62*$0.00*

$1,722,484.94*$1,662,289.56*$3,671,209.12

($162,654.61)*0.00*

($60,622.95)*($0.00)*

($223,277.56)

$2,358,549.65*$0.00*

$6,233,012.57*$2,637,384.67*$11,228,946.89

($4,096,716.06)*0.00*

($1,822,161.48)*($1,362,971.00)*($7,281,848.54)

*Amounts in protest subject to change

Final Audit Findings*

201320152017

Additional Asmt Refund of Asmt

*Includes Insurance Companies and Self Insurer Groups

Self Insurer Audit Assignment Findings as of March 2019

201520162017

Number of Audits Additional Asmt Refund of Asmt Penalty & Interest

115111104330

$15,060.01$73,770.11$34,143.36

$122,973.48

($35,120.89)($5,961.80)($3,585.07)

($44,667.76)

$19,478.15$23,405.26$11,834.42$54,717.83

($991,830.61)($237,478.08)

($1,471.90)($1,230,780.59)

$450,478.28$851,147.36

$1,352.95$1,302,978.59

4

Penalty & Interest Refund to Insured

as of March 2019

$1,187,899.17$939,635.61

$1,049.31$2,128,584.09

($74,685.76)($142,097.10)

0.00($216,782.86)

IX. Executive SessionIX. Executive Session

a) Litigation Updateb) Personnelc) Penalty Waivers

X. Other Business – Open Session X. Other Business – Open Session

a) Penalty Waiversb) Litigation Updatec) Personnel Mattersd) Audit Program Software Updatee) Board Member Elections

a) Chairb) Vice-Chairc) Secretary-Treasurer

XI. New BusinessXI. New Business

XII. Adjournment XII. Adjournment

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