Reserve for pending and unrevealed claims At the end of each year, there are a certain number of claims that are still being processed. In addition, there have been deaths, hospitalizations, etc., for which the Plan is obligated to pay when the claims are received and processed. We compute an estimate of that liability. It is compared to the corresponding reserve at the end of the previous year. Any increase or decrease is chargeable to the Plan's experience during the year. In 1977, the formulas produced an increase in this reserve of $151,100. This directly reflects the increase in the total dollar volume of benefits paid. The following shows the reserve for pending and unrevealed claims in the past two years: Reserve for pending and unrevealed claims as of December 31, 1977 Reserve for pending and unrevealed claims as of December 31, 1976..... Increase in amount of reserve Reserve for scholarships $1,325,100 1,174,000 151,100 A reserve is established to fulfill future payments of scholarships to students as of December 31, 1977: Reserve for scholarships-December 31, 1977 Increase in amount of reserve. Reserve for welfare benefits for pensioners and their dependents $136,300 128,200 8,100 Benefit payments for pensioners and their dependents were bound to increase over a long period of years as the number of persons on the pension rolls increased. The actual cash expenditure in any one year was not an adequate measure of the long-term cost of the program. Accordingly, the Plan has accumulated a reserve to meet the ultimate cost. Each year, we compute the level annual cost of welfare benefits to pensioners and their dependents. From that amount is subtracted the actual welfare benefit expenditure for pensioners and their dependents; the difference is an addition to reserve for future welfare benefits to pensioners and their dependents. Also, this reserve has to be credited with interest since such an interest accrual entered into the calculation of the level annual cost. The following is the accounting for 1977: Annual level cost of welfare benefits for pensioners and their dependents..... Interest accrual required for year. Total $202,500 117,600 320,100 Less: Welfare benefits paid for pensioners and their dependents........ 452,800 Total 1977 reduction in reserve for welfare benefits for pension- (132,700) Extended death benefit reserve A seaman covered by the Welfare Plan who ceases to be actively employed because of total and permanent disability is entitled to a continuation of a death benefit in the amount of $5,000 for one year following the termination of his welfare eligibility and thereafter in an amount which is reduced by $200 a month for each succeeding month until the amount is reduced to $1,500. To meet that obligation, a reserve is established. There were 186 persons on extended coverage as of December 31, 1977 compared to 182 the previous December 31. The accounting for this reserve is as follows: Extended death benefit reserve-December 31, 1977 Decrease in the amount of the reserve.. Contingency reserve $363,200 385,200 (22,000) Since the welfare benefits, other than dental, are not insured, the Plan should have available a reserve to meet a possible abnormal level of benefit payments in a particular year. The size of that reserve is affected by the level of claim payments. The accounting for that reserve is as follows: Contingency reserve as of December 31, 1977.. Increase in the amount of the reserve... Summary $2,241,200 2,071,600 169,600 Each of these changes in reserves affects the Plan's 1977 experience. The result of the total experience in this area was an increase of $174,100 in these assigned reserves. The balance not committed to any of the reserves or other liabilities is $680,909 and this is about 9 percent of the cost of the Welfare Plan in 1977. The comparable unassigned fund balance as of December 31, 1976 was $2,938,409 and at that time it was the equivalent of about 39 percent of 1976 Welfare Plan cost. It can be seen therefore that the fund's unassigned reserves had been substantially depleted by the end of 1977. You will see later (see table 9) that the projected operating results in 1978 will reduce the unassigned reserves to under $100,000. However, you will also see (table 10) that the additional contributions called for by the new Memorandum of Agreement, effective June 16, 1978, will produce operating additions to reserves. E. FUND ASSETS AND RESERVES Table 6 is a summary of the fund's assets, reserves, liabilities and unassigned funds. Total assets decreased $1,906,200 (21 percent), while the total assigned reserves and liabilities increased $351,300 (6 percent). As a result, the unassigned funds of $680,900 held at the end of 1977 were $2,257,500 (77 percent) less than those held at the end of 1976. The unassigned reserves at the end of 1977 are the equivalent of 8 percent of the projected cost of the Plan in 1978. At the end of 1976, the unassigned reserves then were 38 percent of the projected expenses for 1977. Thus it can be seen that the decrease in the unassigned reserves has resulted in a decrease in the period of time for which these funds would be available to meet fund expenses. In point of fact, the audit report submitted by Kipnis and Karchmer indicates that at December 31, 1977 there was a net deficiency in net assets of $3,499,036 (Exhibit "A" of the audit report). This can be reconciled to our plus total of unassigned assets of $680,909 by the fact that the audit report sets up a reserve of $4,179,945 for "Estimated liability for future benefits based on Participants' accumulated eligibility" (Schedule "3" of the audit). Employer contributions receivable. 470,749 Due from related NMU Benefit Plan: For administrative expense.... 106,949 Prepaid expenses.................... 58,200 Deposits and sundry receivables. 30,062 Furniture, fixtures and equipment and leasehold improvements (at 360,778 347,075 Reserve for welfare benefits for pensioners and their dependents...... 2,344,600 Reserve for future existing scholarships.. 136,300 2,241,200 مهم Table 7 is a summary of the experience accounting submitted by the Equitable Life Insurance Company for the second policy year ended December 31, 1977. In that table you will see that the fund earned a dividend of $337,707 and that this was 53.1 percent of premium (the fund actually received $347,075 since interest of $9,368 was added to the earned dividend). This resulted from the fact that the incurred claims experience in that policy year was very favorable-39.5 percent of premium and that the insurance company retention was 7.4 percent of earned premium for combined total charges of 46.9 percent of earned premium. In table 4 you will see that dental claims were $352,843 and that this is a much larger number than the claims shown in table 7. Table 4 shows paid claims and table 7 shows incurred claims. Essentially incurred claims are paid claims plus the necessary reserves for claims pending and unrevealed at the end of a contract year. At the end of the first contract year, Equitable had established such a reserve which then amounted to about 27 percent of premium. This was based on a standard formula since there was no prior "run-out" experience for this case. At the end of the second year, the reserve is now based on the actual run-out of claims and the run-out indicated that the first year reserve should be reduced by $101,282. Accordingly, that number was subtracted from paid claims to produce the incurred claims. The Equitable retention of 7.4 percent of premium was somewhat higher as a percentage of earned premium than the 7.2 percent in the first year. But the dollar amount of $46,949 was much lower than the $59,753 in the first year. All of this is consistent with the Equitable's projection when it bid on this business and with the actual development of earned premiums and incurred claims in the second policy year. As a result of the favorable experience, the premium rates charged by Equitable in the year beginning January 1, 1978 have been reduced by a further 20 percent. Effective June 16, 1978, the dental allowances were substantially improved and as a result the January 1 premium rates were increased about 68 percent. TABLE 7.-Equitable Life Assurance Society Experience for Year Ended December Premium earned (100 percent)..... Incurred claims (39.5 percent)... 31, 1977 Dividend earned1 (53.1 percent) Total return to the Fund (92.6 percent).......... Formula retention (7.4 percent)................... $636,217 251,561 337,707 589,268 46,949 1 Actual paid dividend was $347,075 since interest amounting to $9,368 was added. G. INCOME AND EXPENSE PROJECTIONS FOR 1978 Table 8 is a projection of cash benefit payments for 1978 for the various categories of persons covered by the Plan. These estimated payments are primarily based on the 1977 experience. It appears that the number of seamen covered for full benefits will be slightly less than in 1977, but that the number of seamen covered for partial benefits will be higher. Accordingly, we have assumed that in 1978 there will be 9,500 seamen eligible for full benefits and 400 eligible for partial benefits. On the other hand, the number of pensioners should continue to slowly decline and in 1978 we are assuming an average of 13,500 pensioners eligible for benefits. On these bases, you will see that in table 8 the total annual dollar payment is projected for each category of benefit. Overall, table 8 projects aggregate annual benefits of $5,810,700. Table 9 is a projection of income and expense for 1978 (all figures in this table are given in thousands of dollars). The projection of employer contributions in table 9 is a function of the number of man-days for which contributions will be made, the contribution rates applicable and the proportion of contributions paid by the various segments of the industry. In 1978, we are projecting that contributions will be paid for 2.1 million man-days. The following table shows the contribution rates that apply in 1978: The second column, of course, represents the increase of $1.60 per man-day effective June 1, 1978. We project that of the total man-days of contributions, 52.0 percent will be paid by tanker and container employers, 45.5 percent by dry cargo and 2.5 percent by diesel tanker. On this basis, the projected composite average rate for 1978 is $3.327 per man-day. This produces employer contributions of $6,986,700. The investment income in table 9 assumes average invested assets of about $5,70,000 and a continuation of the 7.82 percent yield which developed in 1977. The benefit expenses in table 9 are based upon table 8. (The medical department and optometric unit expenses assume a continuation of last year's experience.) The administration and professional expenses are projected at the 1977 levels. As you can see in table 9, the result is a projected operating deficit of 28.3 cents per man-day and this is $594,000. So that the effect of the increase in contribution rates can be seen, we have prepared table 10 which shows a budget for the fund as of July 1, 1978. This differs from table 9 in two significant respects. Employer contributions reflect the full $1.60 per man-day increase in the contribution rate which became effective June 16, 1978. And the cash benefits includes the higher dental premiums reflecting the dental benefit improvement effective June 16, 1978. In this table 10 you can see that an operating surplus of 37.8 cents per man-day is projected and that this is $794,000 on an annualized basis. |