STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA EMPLOYERS SAFETY ) ASSOCIATION SELF-INSURANCE FUND, )

)

Petitioner, )

)

vs. ) CASE NO. 94-2360

)

DEPARTMENT OF INSURANCE )

AND TREASURER, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal administrative hearing was held in this case on November 28 and 29, 1994 in Tallahassee, Florida, before J. Stephen Menton, a duly designated hearing officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Lorence Jon Bielby

Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. Post Office Drawer 1838 Tallahassee, Florida 32302

For Respondent: S. Marc Herskovitz, Esquire

Department of Insurance Division of Legal Services 612 Larson Building

Tallahassee, Florida 32399-0333 STATEMENT OF THE ISSUES

The issue in this case is whether Petitioner's request to distribute

$781,065.02 to its members should be approved.

PRELIMINARY STATEMENT

On or about March 8, 1994, Petitioner submitted a written letter request (the "Initial Request") to the Department of Labor and Employment Security ("DLES") for authorization to make a dividend disbursement to its members in the amount of $781,065.02. The Initial Request was denied by DLES in a letter dated April 1, 1994 (the "Initial Denial Letter.") The basis for the denial was DLES' determination that there were insufficient funds available to distribute such a dividend pursuant to the rules and statutes in place as of the date of the request. Petitioner requested a formal hearing on the matter pursuant to Section 120.57(1), Florida Statutes, and the case was referred to the Division of Administrative Hearings.

A hearing was originally scheduled in this case for August 25-26, 1994. On August 1, 1994, Respondent moved for a continuance on the grounds that regulatory authority over Petitioner and other group self-insurance funds operating under Section 440.57, Florida Statutes, was transferred to the Department of Insurance ("DOI") as of July 1, 1994 pursuant to Chapter 93-415, Laws of Florida. As a result of this statutory change, group self-insurance funds now operate under a certificate of authority issued pursuant to Section 624.4621, Florida Statutes, which is part of the Insurance Code. Accordingly, DOI was substituted as the Respondent in this matter. The hearing was rescheduled for November 29-30, 1994. At the request of Respondent, the hearing was moved up one day and was ultimately held on November 28-29, 1994.

As discussed in more detail below, Petitioner submitted a second request (the "Second Request") for a dividend disbursement on August 11, 1994 based upon its financial statements and reports submitted in accordance with Section 440.57, Florida Statutes, for the fiscal year ending March 31, 1994. The amount of the disbursement requested in that Second Request was the same as the amount requested in the Initial Request. That Second Request was denied by DOI in a letter dated September 7, 1994 (the "Second Denial Letter"). In the Second Denial Letter, DOI provided Petitioner with the same standard notice of rights that accompanied the DLES' April 1, 1994 denial of Petitioner's Initial Disbursement Request. Petitioner did not submit a separate request for hearing with respect to the Second Denial Letter.

Shortly before the hearing in this case, Petitioner filed a Motion in Limine regarding the admissibility of certain financial data and actuarial data. Specifically, Petitioner sought a ruling that evidence of the assets, liabilities, and surplus for Petitioner up to and including the date of the administrative hearing would be considered in determining whether Petitioner's request for authorization to make a dividend distribution to its members should be approved. As noted above, Petitioner timely submitted a request for an administrative hearing pursuant to Chapter 120 with respect to the Initial Denial Letter, but did not submit a separate request for a hearing with respect to the Second Denial Letter. Respondent contends that only financial data and actuarial data for the Fund as of March 31, 1993 should be considered in this pending proceeding and that any more recent data is irrelevant. Petitioner argues that the issues raised in the Second Denial Letter should be resolved in this proceeding even though no petition or request for hearing was ever filed with respect to the Second Denial Letter issued for the dividend request submitted following the filing of the Fund's reports for the fiscal year ending March 31, 1994. Petitioner points out that neither the Requests nor the Denial Letters referenced a particular fiscal year and that Respondent typically considers all information available to it in determining whether to approve a distribution request. After listening to argument from the parties at the outset of the hearing, ruling on Petitioner's Motion was reserved and Petitioner was allowed to proffer financial information and reports for the Fund subsequent to March 31, 1993. Certain pertinent Findings of Fact are made with respect to that evidence. The legal issues raised by the parties are discussed in the Conclusions of Law below.

A number of pending motions were resolved at the commencement of the hearing. Petitioner's Motion in Limine to disallow certain Department witnesses was denied and Respondent's Motion to Strike the Petitioner's Prehearing Stipulation was denied. In addition, the parties presented argument on a Motion to Relinquish Jurisdiction filed by Respondent on November 22, 1994. That Motion alleged that there were no disputed issues of material fact and, therefore, there was no basis for a hearing under Section 120.57(1), Florida

Statutes. After reviewing the Motion and hearing argument from the parties, it became clear that the decisions to deny the dividend disbursement requests were based on a non-rule interpretation of the applicable statutes. Since Petitioner's substantial interests were affected by Respondent's non-rule interpretation, the undersigned Hearing Officer concluded that Petitioner was entitled to a hearing pursuant to Section 120.57, Florida Statutes, at which Respondent was obligated to explicate its policy. See, MacDonald v. Department of Banking and Finance, 346 So.2d 569 (Fla. 1st DCA 1977) and City of Delray Beach v. Department of Transportation, 456 So.2d 944 (Fla. 1st DCA 1984). Such a hearing was also deemed appropriate because Respondent specifically challenged the expert conclusions upon which Respondent's policy was based. Since disputed issues of material fact were intertwined with legal determinations, a formal hearing was warranted. See, Tuckman v. Florida State University, 489 So.2d 133 (Fla. 1st DCA 1986).

During the hearing, Petitioner presented the testimony of four (4) witnesses: David Sanz; Gene Smith; William Larry Shores, C.P.A., who was accepted as an expert in worker's compensation self-insurance funds and financial reporting for those funds; and Phillip McCollough, C.P.A., who was accepted as an expert in accounting. Petitioner offered eighteen (18) exhibits into evidence, all of which were accepted. Respondent's objections to Petitioner's Exhibits 3,5,6,7, 9-14 and 16-18 were overruled.

Respondent presented the testimony of three (3) witnesses: Edward Buttner, C.P.A., who was accepted as an expert in worker's compensation self-insurance funds; Gene Smith; and Thomas Warring. Respondent offered nine (9) exhibits into evidence, all of which were accepted except Respondent's Exhibit 7 which was withdrawn. Petitioner's objections to Respondent's Exhibits 1, 2, 4, 5, 6,

8 and 9 were overruled.

Petitioner recalled William Larry Shores to testify in rebuttal. In addition, because Thomas Warring was unavailable to be deposed by Petitioner prior to the hearing, Petitioner was permitted to present the cross-examination of that witness, through a late-filed deposition. A copy of that deposition cross-examination has been filed.

A transcript of the proceedings has also been filed. Both parties have submitted proposed findings of fact and conclusions of law. A ruling on each of the parties' proposed findings of fact is included in the Appendix to this Recommended Order.

FINDINGS OF FACT

Based upon the oral and documentary evidence adduced at the Final Hearing and the entire record in this proceeding, the following findings of fact are made:

1. Petitioner, the Florida Employers Safety Association Self-Insurance Fund (the "Fund"), is a workers' compensation group self-insurance fund, which, during all pertinent time periods was subject to Chapter 440, Florida Statutes, and Chapter 38F-5, Florida Administrative Code.

   
   

2. Gulf Atlantic Management Group is the administrator for the Fund.

   
   

3. The Fund began operations on April 1, 1990. At the time of the hearing in this case, the Fund was in its fifth year of operation.

4. Prior to July 1, 1994, the state regulatory authority for workers' compensation self-insurance funds was DLES (State of Florida, Department of Labor and Employment Security). As of July 1, 1994, regulatory authority for workers' compensation self-insurance funds was transferred to DOI (State of Florida, Department of Insurance and Treasurer). For purposes of this Recommended Order, the "Department" shall refer to the regulatory authority responsible for workers' compensation group self-insurance funds in Florida during the pertinent time. As a result of the statutory changes, many DLES employees involved in the regulation of worker's compensation group self- insurance funds were transferred to DOI's, Bureau of Property and Casualty Self-Insurance which currently handles all regulatory matters relating to worker's compensation group self-insurance funds.

   
   

5. Chapter 38F, Florida Administrative Code, was promulgated by the Department pursuant to its regulatory authority over worker's compensation group self-insurance funds as delineated in Chapter 440, Florida Statutes. The Rules require workers' compensation self-insurance funds to submit certain financial and actuarial documents to the Department on a regular basis. Form BSI-26 is a Department approval form that is to be submitted each year with an actuarial report; Form BSI-25 is another Department form that is filed with the year-end financial statements; and Form BSI-24 is a quarterly, non-financial statistical report on a fund's operations.

   
   

6. Before the Department would approve a dividend distribution by a fund for a fiscal year beginning or ending in 1993, the Department required an audited certified financial statement, an annual report of financial condition and a loss reserve review by a qualified actuary to be submitted seven months after the end of a fund's fiscal year.

   
   

7. The Fund's fiscal year runs from April 1 to March 31 of each year. Thus, its year-end reports and statements are due on or before November 1.

   
   

8. At the time of the hearing in this case, Form BSI-25's had been submitted by the Fund to the Department for each fiscal year of the Fund's existence. Financial statements, independent auditor's reports and actuarial reports had also been submitted by the Fund to the Department for each Fund fiscal year. In addition, all quarterly BSI-24's had been filed.

   
   

9. On or about October 29, 1993, the Fund's administrator sent the Department a request for an extension of time to file the required reports for the fiscal year that ended March 31, 1993. This request was denied by the Department in a letter dated November 3, 1993.

   
   

10. Shortly thereafter, when the Department realized it had not received the required reports and information from the Fund within seven months from the end of the Fund's fiscal year, the Department sent a letter dated November 18, 1993 to the Fund requesting the required reports.

    
    

11. On November 19, 1993, the administrator for the Fund forwarded to the Department the audited financial statements and actuarial report for the fiscal year ending March 31, 1993. In those statements and report, the Fund's loss reserves were discounted.

    
    

12. In January 1994, the Department reviewed the required reports submitted by the Fund and determined that the loss reserves reflected on the BSI-25 form for the year ending March 31, 1993 were deficient because they discounted loss reserves contrary to the Department's policy.

13. Gene Smith, the Department's actuary, wrote directly to Mr. Sanz, the administrator of the Fund, and requested the Fund to submit by January 28, 1994 a corrected BSI-25 which did not discount loss reserves.

    
    

14. Petitioner responded to the Department's request with a letter from William Larry Shores, the Fund's Certified Public Accountant, to the Department dated January 21, 1994 which set forth Mr. Shores' opinion as to why the Department should allow Petitioner to discount its loss reserves. The Fund did not submit amended or modified financial documents in accordance with the Department's request. The Fund contends there is no rule or statutory basis for the Department to require the Fund to submit a corrected BSI-25 or a corrected financial statement.

    
    

15. On or about March 8, 1994, the Fund submitted a written letter request to the Department, pursuant to Section 440.57(5), Florida Statutes, and Rule

    38F-5.065(3), Florida Administrative Code, requesting authorization for a distribution in the amount of $781,065.02 from the surplus reflected on the Fund's financial statements and Actuarial Report for the Fiscal Year ending March 31, 1993.

    
    

16. As indicated above, prior to the Fund's March 8, 1994 letter request for a disbursement, the Fund had completed and submitted to the Department all financial and actuarial data and reports required by the Florida Statutes and the Florida Administrative Code, but the Department had questioned whether those reports properly reported loss reserves.

    
    

17. By letter dated April 1, 1994, the Department denied the Fund's March 8, 1994 request for a distribution. The request was denied pursuant to Section 38F-5.065(4), Florida Administrative Code, which was the applicable rule in effect as of March 31, 1993. This Initial Denial Letter stated that the Department had determined that approval of the requested dividend would impair the financial solvency of the Fund.

    
    

18. Prior to denying the Fund's Initial Request, the Department reviewed the BSI-25 forms submitted by the Fund as of March 31, 1993, the Fund's March 31, 1993 financial statement, the Fund's actuarial report for the fiscal year ending March 31, 1993 along with the BSI-26 form, the Fund's June 30, 1993 BSI- 24, and two letters from William Larry Shores, C.P.A. submitted on behalf of the Fund. The first letter was the January 21, 1994 letter discussed in Findings of Fact 14 regarding the discounting of loss reserves. The second letter from Shores addressed excess coverage.

    
    

19. For the fiscal year ending March 31, 1993, the financial statement submitted by the Fund to the Department reflected an aggregate surplus 1/ of

    $1,786,665.00. In this March 31, 1993 financial statement, the Fund's reserves were discounted at a discount rate of 5.5 percent. The 5.5 percent discount rate was determined by the Fund's independent actuary. According to these statements, if the requested dividend was approved and distributed, there would continue to be an excess of assets over liabilities of slightly in excess of

    $1,000,000.00. However, if loss reserves were not discounted, the Fund's total liabilities would exceed total assets for the fiscal year ending March 31, 1993 if the distribution was made.

20. On or about August 11, 1994, the Fund submitted a second written letter request (the "Second Request") to the Department, pursuant to Section 440.57(5), Florida Statutes, and Rule 38F-5.065(3), Florida Administrative Code, requesting authority to make a distribution of excess surplus in the amount of

    $781,065.02.

    
    

21. Prior to the Fund's Second Request for a disbursement, the Department had received and reviewed the Fund's March 31, 1994 BSI-25 Form, the Fund's March 31, 1994 financial statement, the Fund's March 31, 1994 actuarial report, the Fund's BSI-26 form, the Fund's BSI-25 forms, the Fund's BSI-24 form as of June 30, 1994, along with all of the Funds financial documents and reports submitted as of March 31, 1993.

    
    

22. For the fiscal year ending March 31, 1994, the financial statements submitted by the Fund to the Department reflected an aggregate surplus in the amount of $4,163,401.00. In those 1994 year-end financial statements, the Fund's reserves were discounted at a rate of 7 percent. The 7 percent discount rate was determined by the Fund's independent actuary. The Fund's financial statements and reports submitted for the fiscal year ending March 31, 1994, indicated that if the requested dividend was approved and distributed, there would be an excess of assets over liabilities of more than $3,000,000.00.

    
    

23. As noted above, an examination of the financial and actuarial documents submitted by the Fund to the Department confirms that, if the dividend request was approved and disbursed, total assets would not be greater than total liabilities for the fiscal year ending March 31, 1993 unless the loss reserves are discounted.

    
    

24. It is not entirely clear whether the Fund's total assets would have exceeded total liabilities following the requested distribution for the fiscal year ending March 31, 1994 if the loss reserves were not discounted. One of Petitioner's expert witnesses testified that, without the discounting of loss reserves, the Fund's assets would have exceeded liabilities by only $142,000 for the Fund year ending March 31, 1994. This surplus would not accommodate the Fund's request for a dividend disbursement of $781,065.42. Petitioner's other expert witness testified that "if you back out the discounting of the loss reserves at March of '94, total assets are approximately equal to total liabilities."

    
    

25. By letter dated September 7, 1994, the Department denied the Fund's Second Request for a distribution specifically stating that the discounting of loss reserves was not permissible. The Second Denial Letter advised the Fund of its right to a hearing on the matter pursuant to Chapter 120, Florida Statutes. No formal request for hearing was submitted with request to this Second Denial Letter.

    
    

26. The Actuarial Reports and financial statements filed by the Fund for the fiscal years ending March 31, 1993 and 1994 contained certified qualifying language regarding the discounting of loss reserves. For example, the Fund's independent actuary provided as follows in the report for the fiscal year ending March 31, 1994:

    
    

    "the discount rate of 7.0 percent [5.5 percent 2/ for 1993] has been selected

    by [the actuary] for illustrative purposes only. The appropriate use of this discount rate for [the Fund] is not guaranteed by [the actuary].

    Establishing loss reserves on a discounted basis requires that future investment income earned on the loss reserves will need to be added to the reserves to strengthen them rather than be recognized as net income. The ultimate accuracy of discounted reserves depends on the accuracy of the ultimate undiscounted loss estimates, the estimated pay out schedule, and the interest rate assumption used to discount the loss pay out schedule. If the discounted loss estimate is used, the management of [the Fund] should carefully review each of these assumptions to assure that they are in agree- ment with them."

    
    

27. The discounting of loss reserves is based upon the concept that if you can reasonably predict a payoff pattern and rate of return then you can discount whatever the debit is back to the present to ascertain the present value of the future income stream that will be used to fully fund the future losses whenever they come due. In other words, the discount rate is a function of what is expected to be earned over the pay out period of the claims. The rate of discount for loss reserves is usually calculated based upon the investment yields that the company or the entity is able to obtain in its investment portfolio, taking into consideration certain other factors, such as maturity of that investment portfolio. The discount rates used by the Fund in the reports and statements submitted to the Department for the fiscal years ending March 31, 1993 and 1994 were based upon a combination of industry average and the Fund's history.

    
    

28. During the time it was responsible for overseeing worker's compensation self-insurance funds, the DLES Bureau of Worker's Compensation Self-Insurance consistently took the position that the discounting of loss

    reserves on the financial statements and reports submitted to the Department was not acceptable because there was no explicit authority in either the Florida Statutes or the Administrative Code for discounting reserves. DLES informed all self-insurance funds that any matter submitted to it for review and/or approval would be evaluated without reference to or consideration of discounting.

    
    

29. The position that reserve discounting is inappropriate has been maintained by the DOI Bureau of Property and Casualty Self-Insurance. Thus, it has been the consistent position of the regulatory authorities that funds must report total reserves without discounting. Likewise, the evaluation of whether to approve a request to make a dividend disbursement has consistently been based on a determination of whether total assets exceed total liabilities. Under the Department's view, neither total reserves nor total liabilities can be determined when loss reserves are discounted.

    
    

30. Some Florida worker's compensation self-insurance funds have discounted loss reserves in reporting their reserves to the Department. The Department has never approved this practice and has not used discounted reserves in analyzing matters within its regulatory control.

31. The issue of whether loss reserves should be discounted is a question of growing controversy and legitimate debate. Petitioner's experts suggest that discounting of loss reserves should be accepted because such discounting is acceptable under Generally Accepted Accounting Principles and various other accounting sources. Generally Accepted Accounting Principles ("GAAP") are principles which are promulgated by authoritative bodies or generally utilized in the accounting industry for companies that report financial information.

    
    

32. Prior to December 20, 1993, Chapter 38F-5, Florida Administrative Code, provided that financial statements for workers' compensation self- insurance funds should be prepared in accordance with GAAP. In other words, the Department Rules in effect at the time of the filing of the Fund's March 31, 1993 and March 31, 1994 fiscal year-end financial statements required the financial statements to be prepared in accordance with GAAP.

    
    

33. Effective December 20, 1993, Chapter 38F-5, Florida Administrative Code was amended. The amended rule applies to reporting by workers' compensation group self-insurance funds for fiscal years beginning after December, 1993. Thus, the amended Rule 38F-5.059 applies to Petitioner's Fund year beginning April 1, 1994. This Amended Rule effectively implements stable accounting procedures in place of GAAP by incorporating certain guidelines under the National Association of Insurance Commissioners Rules and Regulations, with certain modifications. As amended, Rule 38F-5 clarifies that a discounting of loss reserves is not allowed, but anticipated income from the reserve accounts can be included. 3/

    
    

34. Among the various sources mentioned in support of Petitioner's contention that discounting of loss reserves is acceptable under GAAP are the following: (1) Statement of Financial Accounting Standards Number 60; (2) American Institute of Certified Public Accountants Statement of Position 92-4, Auditing Entities Loss Reserves; (3) Financial Accounting Standards Board Concept Statement Number 5; and (4) an American Institute of Certified Public Accountants guide entitled Audits of Property and Liability Insurance Companies. Other non-authoritative sources were also mentioned. For the most part, these pronouncements simply provide procedure and guidance for how these discounts are to be reported when discounting is being utilized. They do not provide authority for the contention that discounting of loss reserves is always permissible nor do they establish standards for when the discounting of loss reserves should be allowed for regulatory purposes. The more persuasive evidence established that, under GAAP, a discounting of loss reserves is allowed only if it is prescribed by a statute or written rule.

    
    

35. In support of its' position, the Department cites guidelines promulgated by the United States Securities and Exchange Commission ("SEC") regarding the propriety of discounting of reserves. These guidelines are only directly applicable to publicly held companies which are SEC registrants. However, the SEC publication known as Staff Accounting Bulletin 62 (SAB 62) is the only written authoritative literature currently in existence regarding the propriety of discounting reserves. SAB 62 provides that discounting of loss reserves is only appropriate if the state in which the entity is domiciled allows discounting of loss reserves. While the Fund is correct in asserting that SAB 62 is not directly applicable to it since it is not a publicly held company, that publication does have some persuasive value in determining whether GAAP should be viewed as allowing a workers' compensation self-insurance fund to discount loss reserves.

36. The Fund contends that discounting of workers' compensation self- insurance fund loss reserves is permissible under Section 625.091, Florida Statutes. As set forth in the Conclusions of Law below, the Fund's reliance upon this statute is misplaced. The statute only directly applies to insurers and not to self-insurance funds. Section 440.5705, Florida Statutes, should not be read as a directive that all provisions of Section 625.091, Florida Statutes, are applicable to self-insurance funds.

    
    

37. In summary, for all Fund years ending prior to May 31, 1994, neither the Florida Statutes nor Rule 38F-5, Florida Administrative Code, required statutory accounting for the financial statements submitted to the Department by a workers' compensation self-insurance fund. Consequently, there was no specific statutory authority prohibiting the discounting of loss reserves nor was there any authority permitting such discounting.

    
    

38. The evidence indicates that workers' compensation self-insurance funds in some states other than Florida are allowed to discount loss reserves. The standards governing such discounting and the purposes for which it is used are not clear.

    
    

39. Other than the discounting of loss reserves, there is no evidence that the March 31, 1993 and March 31, 1994 financial statements for the Fund were not in accordance with the requirements of the Department, including Rule 38F-5, Florida Administrative Code, and/or that the statements were not completed in accordance with GAAP.

    
    

40. Petitioner's contention that its marketing efforts for participation in the Fund are hindered by the denial of a distribution is irrelevant to a determination of whether the requested distribution should be approved by the Department.

    
    

    CONCLUSIONS OF LAW

    
    

41. The Division of Administrative Hearings has jurisdiction over the subject matter and the parties to this proceeding pursuant to Section 120.57(1), Florida Statutes.

    
    

42. Petitioner has the burden in this case to show entitlement to the relief requested. Florida Department of Transportation v. J.W.C. Co., Inc., 396 So.2d 778 (Fla. 1st DCA 1978).

    
    

43. Petitioner's dividend disbursement requests were made pursuant to Section 440.57, Florida Statutes, which provides in pertinent part as follows:

    
    

    440.57 Pooling Liabilities.-

    * * *

    1. The division shall adopt rules:

       1. Requiring monetary reserves to be maintained by such self-insurers to insure their financial solvency; and

       2. Governing their organization and operation to assure compliance with such requirements.

          * * *

    2. The division shall promulgate rules implementing the reserve requirements in accordance with accepted actuarial techniques.

    * * *

    1. ... Prior to making any dividend or premium refund, the group self-insurer shall

       submit to the division the following information:

       1. An audited certified financial statement.

       2. An annual report of financial condition.

       3. A loss reserve review by a qualified actuary.

    
    

    The required information listed in paragraphs (a)-(c) shall be submitted annually, no later than 7 months after the end of the group self-insurer's fund year. No request for such a dividend or premium refund may be made prior to filing of the required information....

    
    

44. Rule 38F-5.065, Florida Administrative Code, was adopted by the Department to implement Section 440.57. That Rule provides in pertinent part as follows:

    
    

    Rule 38F-5.065(3)

    
    

    A request to the division for authorization to disburse a declared refund shall be made in writing to the Division by the fund admin-

    istrator or trustees. A request for permission to pay a dividend or refund shall not be made prior to the date that the fund has filed its annual audited financial statement as of the end of the most recently completed fiscal year and LES Form BSI-25 or LES Form BSI-25A as of the end of the most recently completed policy year. Such request shall include a current quarter-ending status report and an actuarial report regarding the adequacy of the reserves for all fund years.

    
    

    Rule 38F-5.065(4)

    
    

    Before approving any refund distribution request, the Division shall determine that such refund will not impair the financial solvency of the self- insurer's fund. In any given fund year, the monies allocated to the loss fund shall not be used for any purpose other than paying claims

    and authorized expenses until such time as surplus monies are eligible to be refunded. The intent of these rules is to ensure that sufficient monies are retained so that total assets are greater

    than total liabilities in each fund year.

    
    

45. Pursuant to Section 440.57(2), the Department is authorized to adopt rules "requiring monetary reserves to be maintained by such self-insurers to insure their financial solvency." Thus, the statute grants the Department discretion to determine the reserves necessary to maintain solvency. By adopting Rule 38F-5.065(4), Florida Administrative Code, the Department sought to implement that goal of insuring the financial solvency of the regulated self-

    insurers. It provides that "before approving any refund distribution request, the Division shall determine that such refund will not impair the financial solvency of the self-insurance fund." Neither the statute nor the rule specifically addresses the discounting of loss reserves for either reporting purposes or dividend disbursement purposes.

    
    

46. Petitioner suggests that Section 440.5705, Florida Statutes, allows the Department to apply the provisions of Section 625.091, Florida Statutes, to group self-insurance funds established or operated pursuant to Section 440.57, Florida Statutes. Section 625.091, Florida Statutes, authorizes insurers to discount their workers' compensation and long-term disability reserves at a discount rate of 4 percent. Petitioner further contends that the 4 percent discount rate provided in Section 625.091, Florida Statutes, is a minimum or beginning rate and, since Sections 440.57 and 625.091 make no reference to a maximum rate, the Fund should be permitted to use a higher rate.

    
    

47. Petitioner's contention that Section 625.091, Florida Statutes, is applicable to the disbursement requests in this case is rejected. Section 440.5705, Florida Statutes, does not require the Department to apply any of the aspects of an insurance company's loss reserve reporting requirements to a group self-insurance fund. It simply authorizes the Department to adopt rules to implement the enforcement of those provisions of the Insurance Code that apply to group self-insurance funds. The rules that have been adopted under this authority do not address the discounting of loss reserves and/or the disbursement of dividends. See, Rule 38F-5, Florida Administrative Code.

    
    

48. There is no dispute that the Fund submitted the necessary audited financial statements, annual reports of financial condition and loss reserve reviews by a qualified actuary prior to requesting dividend disbursements following the fiscal years ending March 31, 1993 and March 31, 1994. 4/ There is also no dispute that those financial statements and actuarial reports for the fiscal years ending March 31, 1993 and 1994 discounted loss reserves.

    
    

49. The Fund contends that, in determining whether to authorize the requested disbursement(s), the Department was obligated to accept the financial statements and actuarial reports submitted by the Fund. In this regard, Petitioner claims that the Department had no authority to request that the Fund submit "corrected" reports with non-discounted loss reserves. In other words, the Fund argues that, since the statements and reports it submitted did not contravene any specific GAAP interpretation, the Department was required to analyze the disbursement request(s) based upon the figures contained in the Fund's submittals. This contention ignores the Department's overriding responsibility to protect the solvency of the Fund.

    
    

50. The establishment of a discount rate for loss reserves necessarily involves a number of assumptions about the future operations and claim experience of a fund and the performance of its investment portfolio. There are no statutes or rules in place that set standards for discounting loss reserves. Even if Petitioner's argument that loss reserves can be discounted was upheld, the Department would still be required to exercise it's discretion to evaluate the various methods and rates used by different funds and determine how the fund's solvency would be impaired.

51. The Department has consistently determined that it will not consider discounted loss reserves in evaluating dividend disbursement requests. By choosing not to recognize any discounting, the Department has elected to exercise its discretion at the outset in a manner that is clear and consistent for all funds.

    
    

52. An agency's interpretation and construction of the statutes and rules it is charged to enforce is entitled to great weight and deference unless that construction is clearly erroneous. Falk v. Beard, 614 So.2d 1086 (Fla. 1993);

    P.W. Ventures, Inc. v. Nichols, 533 So.2d 281 (Fla. 1988). It was within the Department's discretion to interpret "total reserves" based on "total assets" versus "total liabilities" without including discounted loss reserves.

    
    

53. The broad authority granted to the Department with respect to reviewing dividend disbursement requests was recognized in Retail Grocers Association of Florida Self-Insurers Fund and RGAF v. Department of Labor and Employment Security, Division of Worker's Compensation, 474 So.2d 379 (Fla. 1st DCA 1985). In that case, the Court upheld the Department of Labor and Employment Security's refusal to allow a disbursement of surplus investment earnings to certain designated classes of persons even though the disbursement would not have impacted the solvency of the fund. In the present case, the Department has determined that to allow the requested dividend disbursement would adversely impact the solvency of the Fund. In this situation, deference to the Department's interpretation is even more compelling.

    
    

54. Discounting loss reserves has only recently become an issue. The absence of specific statutory or rule authority requiring financial documents to utilize non-discounted reserves does not reflect a policy choice to leave the decision of whether and/or how to discount up to a fund and its consultants. Instead, the lack of any statutory or rule guidance is simply a reflection that it was never anticipated a fund would attempt to discount its loss reserves.

    
    

55. Chapter 38F-5, Florida Administrative Code, requires the data and reports filed with the Department to be submitted in accordance with GAAP. GAAP does not specifically authorize loss reserves to be discounted, it only provides the method for reporting if discounting is permitted. The reference to GAAP in the Department's rule was not intended to establish a policy regarding the discounting of loss reserves. Petitioner's attempt to use GAAP as authority for discounting loss reserves misuses GAAP for regulatory rather than reporting purposes and unsurps the Department's role in the regulatory scheme.

    
    

56. Whether to allow reporting is a policy choice that requires careful consideration of the implications of the decision on the Department's statutory goals and should only be made after careful consideration and an explication of the acceptable assumptions and standards. Such a major change in regulatory policy should not be based upon GAAP delineations of reporting procedures. Such procedural guidelines are not authority for regulatory policy.

    
    

57. The Department has consistently disregarded loss reserve discounting in reaching its regulatory decisions. It can not be concluded that this approach is contrary to the legislative intent or GAAP. Moreover, even if discounted loss reserves are used for reporting purposes, the Department is still required to consider the underlying assumptions and the validity of those assumptions in order to properly analyze the effect of a proposed dividend disbursement on the solvency of a Fund.

58. The Department has adequately explicated a justification for its policy of not considering discounted loss reserves in reviewing disbursement requests. The Department's reasoning is consistent with the legislative intent of the statute. In summary, while strong arguments can be made that discounting of loss reserves is appropriate in certain situations, there is no persuasive evidence of any universally acceptable guidelines or standards for discounting by self-insurance funds at the time of the Request submitted by the Fund.

    
    

59. In this case, because of the Fund's lack of history, it has shown a wide variation in its reserves during its years of operation projecting reserves. Consequently, there is a great deal of uncertainty projecting future results for this fund. Under these circumstances, the determination of a surplus for dividend disbursement purposes based almost entirely on the discounting of loss reserves is especially perilous. The evidence did not establish that this Fund has the financial wherewithal to make a dividend disbursement without negatively impacting its solvency.

    
    

60. In view of the Findings of Fact and Conclusions of Law set forth above, it is concluded that discounted loss reserves should not be utilized in analyzing either of the Fund's disbursement requests. As noted in the Preliminary Statement, Petitioner did not file a request for hearing with respect to the Second Denial Letter. Instead, Petitioner has sought to present evidence regarding the fiscal year ending March 31, 1994 in this administrative case which was initiated with respect to the First Denial Letter. However, without discounted loss reserves, it is not clear whether the Fund would have any surplus for the fiscal year ending March 31, 1994 from which it could make a distribution. Under these circumstances, the evidence is insufficient to approve the requested dividend even if the 1994 fiscal year data is considered. Thus, the issues raised by the parties as to whether the Second Disbursement Request can be considered in this proceeding are effectively moot.

    
    

61. The Fund has submitted data up through and including a September 30, 1994 financial statement. However, that financial statement is not audited and no actuary report has been submitted for any period subsequent to March 31, 1994. The applicable statute and rules clearly contemplate that dividend disbursement requests would be reviewed in conjunction with audited year-end financial statements and an actuary report. The additional reports that become due while the audited statements and financial reports are being prepared are only considered to supplement or clarify the status of a fund subsequent to the year end.

RECOMMENDATION

Based upon the foregoing Findings and Facts and Conclusions of Law, it is RECOMMENDED that the Department of Insurance and Treasurer enter a Final

Order denying Petitioner's request for authorization to make a dividend disbursement.

DONE AND RECOMMENDED this 28th day of June, 1995, in Tallahassee, Leon County, Florida.

J. STEPHEN MENTON Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 28th day of June, 1995.

ENDNOTES

1/ In this context, "surplus" means if all assets are converted to cash and the liabilities are all liquidated, there would be surplus which could be returned to the members of the Fund.

2/ The Actuarial Report for 1993 indicates that a discount rate of 4.0 percent was used. However, the testimony at hearing established that a rate of 5.5 percent was actually used.

3/ The Fund's quarterly report dated September 30, 1994 was filed in accordance with the amended Chapter 38F-5 Rule, which is effective for fund years beginning after December, 1993. It appears that this Fund may have had adequate surplus as of September 30, 1994 under the new reporting requirement to make a disbursement. However, no audited financial statements or actuary reports have been filed under the new reporting system since the fiscal year concluded and a disbursement cannot be approved under the new Rule based on the evidence presented.

4/ The Department suggests that the required information was not timely submitted. The Department has not argued that any delay that occurred in submitting the required information resulted in any prejudice to the Department's ability to process or analyze the information. Indeed, the Department has not argued in its proposed recommended order that the alleged delay in submitting the March 31, 1993 year end data is a basis for denying the disbursement request. Accordingly, it is concluded that any delay that occurred is irrelevant.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 94-2360

Rulings on the proposed findings of fact submitted by the Petitioner:

1. Adopted in the introductory portion of the Recommended Order.

2. Adopted in the Statement of the Issues.

3. Adopted in substance in findings of fact 1.

4. Subordinate to findings of fact 4

5. Adopted in substance in findings of fact 2.

6. Adopted in substance in findings of fact 4.

7. Adopted in substance in findings of fact 4.

8. Adopted in substance in findings of fact 3.

9. Adopted in substance in findings of fact 15.

10. Adopted in substance in findings of fact 17.

11. Adopted in substance in findings of fact 20.

12. Adopted in substance in findings of fact 25.

13. Adopted in substance in findings of fact 5.

14. Subordinate to findings of fact 8 and 16.

15. Subordinate to findings of fact 8 and 16.

16. Subordinate to findings of fact 8.

17. Subordinate to findings of fact 8.

18. Adopted in substance in findings of fact 7.

19. Adopted in substance in findings of fact 8.

20. Adopted in substance in findings of fact 8.

21. Adopted in substance in findings of fact 8.

22. Subordinate to findings of fact 40.

23. Adopted in substance in findings of fact 31 and 33.

24. Adopted in substance in findings of fact 18.

25. Adopted in substance in findings of fact 21.

26. Adopted in substance in findings of fact 12, 16 and 21.

27. Adopted in substance in findings of fact 12-14.

28. The first sentence is adopted in substance in findings of fact 13. The second sentence is subordinate to findings of fact 14.

29. Rejected as unnecessary.

30. Rejected as unnecessary.

31. Adopted in substance in findings of fact 28 and 29.

32. Subordinate to findings of fact 17 and 25.

33. Subordinate to findings of fact 19.

34. Subordinate to findings of fact 22.

35. Adopted in substance in findings of fact 21.

36. Adopted in substance in findings of fact 21.

37. Adopted in substance in findings of fact 19.

38. Adopted in substance in findings of fact 22.

39. Adopted in footnote 1.

40. Subordinate to findings of fact 19 and 23.

41. Subordinate to findings of fact 24.

42. Subordinate to footnote 3 and addressed in paragraph 62 of the Conclusions of Law.

43. Subordinate to findings of fact 36 and addressed in paragraph 45 of the Conclusions of Law.

44. Adopted in substance in findings of fact 19.

45. Rejected as argumentative and not supported by the evidence. The testimony of Respondent's expert raises significant questions as to whether this or any discount rate is appropriate for this Fund.

46. Adopted in substance in findings of fact 22.

47. Rejected as argumentative and not supported by the evidence. The testimony of Respondent's expert raises significant questions as to whether this or any discount rate is appropriate for this Fund.

48. Subordinate to findings of fact 16 and 39.

49. Subordinate to findings of fact 16, 25 and 39.

50. Adopted in substance in findings of fact 31.

51. Rejected as not supported by the greater weight of the evidence.

52. Subordinate to findings of fact 30.

53. Rejected as argumentative and a summary of testimony rather than a finding of fact.

54. Subordinate to findings of fact 35.

55. Adopted in substance in findings of fact 32.

56. Adopted in substance in findings of fact 32.

57. Adopted in substance in findings of fact 32.

58. The first two sentences are adopted in findings of fact 33. The last sentence is subordinate to footnote 3.

59. Rejected as a summary of testimony rather than a finding of fact. This subject matter is addressed in findings of fact 31-35.

60. Rejected as unnecessary.

61. Subordinate to findings of fact 35.

62. Rejected as not supported by the greater weight of the evidence.

63. Subordinate to findings of fact 36 and addressed in paragraph 45 of the Conclusions of Law.

64. Adopted in substance in findings of fact 27.

65. Subordinate to findings of fact 30.

66. Subordinate to findings of fact 37.

Rulings on the proposed findings of fact submitted by the Respondent:

1. Adopted in substance in findings of fact 15.

2. Adopted in substance in findings of fact 17.

3. Adopted in substance in findings of fact 6 and 7.

4. Adopted in substance in findings of fact 9.

5. Addressed in findings of fact 10.

6. Adopted in substance in findings of fact 12.

7. Adopted in substance in findings of fact 14.

8. Adopted in substance in findings of fact 20.

9. Adopted in substance in findings of fact 25.

10. Adopted in substance in findings of fact 11, 19, 21 and 22.

11. Adopted in substance in findings of fact 19 and 22.

12. Adopted in substance in findings of fact 27.

13. Adopted in substance in findings of fact 19 and 23.

14. Adopted in substance in findings of fact 24.

15. Adopted in substance in findings of fact 28 and 29.

16. Addressed in findings of fact 31, 34 and 35.

17. No proposal submitted.

18. Rejected as argumentative and a summary of testimony rather than a finding of fact.

COPIES FURNISHED:

Mr. Bill Nelson State Treasurer and

Insurance Commissioner The Capitol, Plaza Level Tallahassee, FL 32399-0300

Dan Sumner

Acting General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, FL 32399-0300

Lorence Jon Bielby Greenberg, Traurig, Hoffman,

Lipoff, Rosen & Quentel, P.A. Post Office Drawer 1838 Tallahassee, FL 32302

S. Marc Herskovitz, Esq. Department of Insurance Division of Legal Services 612 Larson Building Tallahassee, FL 32399-0333

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 94-002360

Orders for Case No: 94-002360