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Commonwealth of Pennsylvania - Department of Labor And Industry - State Workers’ Insurance Fund -

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37 pages
COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND AUDIT REPORT FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND SCRANTON, PENNSYLVANIA AUDIT REPORT FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007 DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND DECEMBER 31, 2008 and 2007 TABLE OF CONTENTS Background ................................................................................................................................. 1 Independent Auditor’s Report .................................................................................................... 3 Management's Discussion and Analysis ................................................................................... 5 Statement of Admitted Assets, Liabilities and Surplus .............................................................. 7 Statement of Operations and Changes in Surplus .................................................................... 8 Statement of Cash Flows ............................................................................................................ 9 Notes to Financial Statements ................................................................................................. 10 Report on Internal Control Over ...
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COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND  AUDIT REPORT  FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
      
    
    
 
COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND SCRANTON, PENNSYLVANIA
AUDIT REPORT FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
  
DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND DECEMBER 31, 2008 and 2007
 
 
TABLE OF CONTENTS  
 Background................................................................................................................................. 1  Independent Auditor’s Report.................................................................................................... 3  Management's Discussion and Analysis ................................................................................... 5  Statement of Admitted Assets, Liabilities and Surplus.............................................................. 7  Statement of Operations and Changes in Surplus .................................................................... 8  Statement of Cash Flows ............................................................................................................ 9  Notes to Financial Statements ................................................................................................. 10  Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards.............................................................................................. 23  Finding No. 1 – Noncompliance With Statutory Limits For Equity Investments ................. 25  Finding No. 2 – Control Deficiency Over Financial Reporting of SWIF Premium Revenues ................................................................................................................................... 28  Distribution List ........................................................................................................................ 31       
      
              
                  
 
DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND DECEMBER 31, 2008 and 2007
 
BACKGROUND
  The State Workers’ Insurance Fund (SWIF) is a self-sustaining fund operating within the Department of Labor and Industry for the purpose of providing worker's compensation insurance to employers, including those refused policies by private insurance firms. SWIF is subject to underwriting rules, classifications and rates promulgated by rating bureaus authorized by the State Insurance Commissioner. A board consisting of the Secretary of Labor and Industry, the State Treasurer, and the Insurance Commissioner oversees operations of the fund.   
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Independent Auditor's Report
             The Honorable Edward G. Rendell Governor Commonwealth of Pennsylvania Harrisburg, PA 17120   We have audited the accompanying statement of admitted assets, liabilities and surplus-statutory basis of the State Workers' Insurance Fund (SWIF) as of December 31, 2008 and December 31, 2007, and the related statements of operations and changes in surplus-statutory basis and cash flows-statutory basis for the years then ended. These financial statements are the responsibility of SWIF's management. Our responsibility is to express an opinion on these financial statements based on our audit.   We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued  Thoseby the Comptroller General of the United States. standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.   As discussed in Note E, the insurance loss liability of SWIF is based on actuarial analysis of historical experience adjusted to estimate the impact of Acts 44 and 57 and changes in claims management practices adopted by SWIF management. Because of the length of time required for the actual insurance loss liability to be determined and the uncertainty regarding whether the adjusted data will be supported by future claim payments, the actual liability may vary significantly from the estimated amount provided for in the statement of admitted assets, liabilities and surplus.  
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    As described in Note A, these financial statements were prepared in accordance with statutory accounting practices as prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania, which practices differ from accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between these regulatory accounting practices and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material.   In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of SWIF as of December 31, 2008 and December 31, 2007, or changes in financial position or cash flows thereof for the years then ended.   In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, and surplus of SWIF as of December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in Note A.  SWIF Management’s Discussion and Analysis on page 5 is not a required part of the statutory financial statements, but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.  In accordance withGovernment Auditing Standardshave also issued our report dated, we January 22, 2010, on our consideration of SWIF’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance withGovernment Auditing Standards should be read in conjunction with this report in considering the results of our and audit.   This report is intended solely for the information and use of the board of directors and management of SWIF, others within the entity, and for filing with the Insurance Department of Pennsylvania and is not intended to be and should not be used by anyone other than these specified parties.  
January 22, 2010
    JACK WAGNER Auditor General  
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DEPARTMENT OF LABOR AND INDUSTRY STATE WORKERS’ INSURANCE FUND DECEMBER 31, 2008 and 2007  SWIF MANAGEMENT’S DISCUSSION AND ANALYSIS  Assets and Liabilities  The State Workers’ Insurance Fund (SWIF) disclosed net admitted assets of $1.731 billion as of December 31, 2008. This was a decrease of $159 million or 8.4% from 2007. Cash and invested assets dropped from $1.782 billion in 2007 to $1.644 billion or a $138 million decrease. The value of the bond portfolio increased $43 million or 3.1% while short-term investments decreased $10.9 million.  Total unpaid losses decreased as of year-end 2008 to $1.409 billion, from $1.444 billion, a decrease of $35 million or 2.5%. This is in contrast to the 11.2% increase in unpaid losses from the prior year, due to continued claim closure rates and fewer new claims caused by lower business activity. SWIF’s total liabilities decreased to $1.762 billion, a decrease of $71 million or 3.9% over last year.  Surplus  Surplus as regards policyholders declined to ($31) million, a decrease of $87.2 million or 156.4% for 2008 as compared to a $120 million decrease or 68.3% last year. SWIF’s net loss before other changes in surplus for 2008 was $13 million versus a net loss in 2007 of $111.2 million. The fund had a change in unrealized capital loss of $73 million from a decrease in the market value of SWIF’s portfolio. SWIF also had a $1.0 million increase in non-admitted assets, resulting in a further reduction in surplus.  Operational Results  SWIF recorded a net loss before other changes in surplus of $13 million for 2008. This loss was a result of a net underwriting loss of $70.5 million caused by a decrease in losses incurred from $487.6 million for 2007 to losses incurred of $313.1 for 2008, a decrease of $174.5 million or 35.8%. In addition, premiums earned decreased to $295.3 million from $384.2 million or 23.1% from the prior year.  Net investment income earned (excluding realized capital gains) decreased from $77 million in 2007 to $74 million in 2008, and SWIF had realized capital gains of $0.9 million for 2008 and $29 million for 2007. The 96.8% decline in realized gains is the result of the global decline in equity markets in the 2nd adjustment expenses incurred decreased $52.2 Loss of 2008. half million or 66.7% from $78.3 million in 2007 to $26.1 million. The decrease was due in a large part to a $20 million decrease in salaries and employee relations, a $19 million decrease in claim adjustment services, and a $10 million decrease in equipment from 2007 to 2008 per the Annual Statement.
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