2002 Annual Report
June, 2003
Dear Member,
The Association was called on to respond to a growing list of bankruptcies and potential insolvencies for former member self-insurers. During 2002, the Association was called upon to investigate and litigate claims arising out of several new insolvencies including but not limited to:
Dominion Yarn
Washington Furniture
P.H. Glatfelter/RFS Ecusta
[In the first six (6) months of 2003, the Association has also been called upon to investigate the West Point Stevens insolvency and to investigate and pay claims arising out of the Wellington Industries insolvency.]
The Association was also involved in litigation regarding four (4) former group self-insurers during 2002:
N.C. Selective Fund
Burger King Franchisees Self-Insurance Fund
Professional Business Owners of America
American Yarn Spinners Self-Insurance Fund
[In the first six (6) months of 2003, the Association has also been called upon to investigate and litigate a claim arising from the former SunHealth Group Self-Insurance Association of North Carolina.]
These new insolvencies bring the total number of insolvencies processed by the Association, since its inception in 1986, to thirty-four (34) (31 individual self-insurers and three (3) group self-insurers.) A complete, updated listing of all pending insolvencies can be found on the Association's website at www.ncsiga.org.
Two (2) substantial self-insurer insolvencies received a great deal of attention from the Association in 2002:
KMart continued its reorganization in bankruptcy and remained a licensed N.C. self-insurer with reported December 31, 2001 claims reserves, supported by an actuary's opinion, of approximately $6.82 million and maintains a $6.8 million surety bond with the North Carolina Department of Insurance ("NCDOI"). However, as KMart prepared to emerge from bankruptcy in April and May, 2003, it attempted to amend its Plan of Reorganization to shift the burden of paying its self-insured workers' compensation claims to its surety bond providers and to the various state self-insurance guaranty associations. The Association joined with other state guaranty associations in the Chicago federal bankruptcy court and successfully opposed KMart's eleventh hour attempt to dump its claims liabilities.
Pillowtex, a former N.C. self-insurer (previously known as Fieldcrest/Cannon), emerged from bankruptcy but continues to experience financial difficulties. In Spring, 2003, Pillowtex announced publicly that it was considering a return to bankruptcy. The Association had previously negotiated an arrangement whereby Pillowtex paid a substantial number of its existing pre-bankruptcy petition claims. A return to bankruptcy would leave the Association with several million dollars in unpaid Pillowtex claims liabilities and only a $500,000 surety bond.
The Association was forced to devote substantial resources during 2002 to defending litigation involving three former group self-insurers (the N.C. Selective Fund ("Selective"); the Burger King Franchisees Self-Insurance Fund ("Burger King"); and, the Professional Business Owners of America ("PBOA")). [Collectively, the litigation resulting from these three former group self-insurers will be referred to as the "LPT Litigation".] Selective, Burger King and PBOA ceased operations during the period 1998-1999 by transferring their existing claims and existing member policies to Reliance through a loss portfolio transfer ("LPT"). All three LPT's were reviewed and approved by the NCDOI and, pursuant to the state statute governing LPT's and the terms of the various LPT documents, should have resulted in a complete assumption of the Selective, Burger King and PBOA claims liabilities and the transformation of the members of the three groups to policyholders of Reliance. The Association maintains that the LPT's and the subsequent insolvency of Reliance result in coverage under the N.C. Insurance Guaranty Act and that the Selective, Burger King and PBOA claims should be paid by the N.C. Insurance Guaranty Association ("NCIGA"). The NCIGA takes a contrary position and asserts that once a self-insured claim, always a self-insured claim, and that the NCIGA has no liability since the Selective, Burger King and PBOA claims are not direct claims against an insurance company. The LPT Litigation is essentially a test case, currently pending before the Industrial Commission but likely to be litigated throughout the appellate courts, to determine whether the NCIGA, the three former self-insurance funds or the Association will be liable for payment of the Selective, Burger King and PBOA claims. The Association was not a willing party to the LPT Litigation but was first added as a party by a Deputy Commissioner, then dismissed from the case by the Deputy Commissioner, only to be summarily reinstated as a defendant by the full Commission without a hearing. It is anticipated that the defense of the LPT Litigation will require substantial attention by the Association for the next two years.
As I reported to you in the 2001 Annual Report, the Board of Directors of the Association continues to be concerned that self-insurer deposits/surety bonds have historically been inadequate to pay the claims liabilities of insolvent member self-insurers. For that reason, the Association sponsored legislation in 2003 that provides new guidelines to be used by the NCDOI in determining the amount of self-insurer deposits/bonds and also gives members the opportunity to post irrevocable letters of credit in lieu of cash or a surety bond. These amendments, and others, are included in Senate Bill 471 which is enclosed for your information and is posted on the Association's website.
Finally, the growing number of recent insolvencies, first reported to the Association in 2001, continued in 2002 and the trend appears to be continuing in the current year, combined with the general inadequacy of member deposits/bonds caused the Guaranty Fund balance to fall below the $5 million statutory minimum as of December 31, 2002. As a result, the Association has authorized an annual assessment of 0.25% of each Member's annual premium equivalent will be invoiced and collected in the near future. Other than the initial assessments to create the Guaranty Fund in the late 1980's and the mandatory assessments in 1996 and 1997 to increase the Guaranty Fund to its current $5 million level, the annual assessment for 2002 marks only the third time that an annual assessment has been authorized in the seventeen (17) year history of the Association. Unfortunately, the magnitude of the contingent claims liabilities currently facing the Association, primarily as the result of terminated self-insurers and terminated group self-insurers, whose deposits are known to be inadequate and cannot be increased, make future annual assessments and post-insolvency assessments likely during the next few years.
I invite you to review the summary of the audited financial information for the years 1998-2002 that follows. If you would like to receive a complete set of the Association's audited financial statements for the period ending December 31, 2002 you may request one by writing to the Association at P.O. Box 12442, Raleigh, NC 27605-2442.
Sincerely,
Stephen P. Gennett
Chairman, Board of Directors
Note: Unaudited 2002 financial data is now available using the following link. Selected Financial Data
2001 Annual Report
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