Financial Statements TEAM TRANSPORTATION WORKERS’ …...NET CASH PROVIDED BY INVESTING ACTIVITIES...

Financial Statements

TEAM TRANSPORTATION

WORKERS’ COMP TRUST

December 31, 2012

Financial Statements

TEAM TRANSPORTATION WORKERS’ COMP TRUST

December 31, 2012

Independent Auditor’s Report ........................................................................................................ 1

Balance Sheets ............................................................................................................................... 3

Statements of Operations ............................................................................................................... 4

Statements of Comprehensive Income (Loss) ............................................................................... 5

Statements of Changes in Members’ Deficit ................................................................................. 6

Statements of Cash Flows .............................................................................................................. 7

Notes to Financial Statements ........................................................................................................ 9

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Firley, Moran, Freer & Eassa, CPA, P.C.

5010 Campuswood Drive ∙ East Syracuse, NY 13057

p: 315.472.7045 f: 315.472.7053 www.fmfecpa.com

INDEPENDENT AUDITOR’S REPORT

New York State Workers’ Compensation Board

Team Transportation Workers’ Comp Trust

Albany, New York

Report on the Financial Statements We have audited the accompanying financial statements of Team Transportation Workers’ Comp Trust

(the “Trust”), which comprise the balance sheets as of December 31, 2012 and 2011, and the related

statements of operations, comprehensive income (loss), changes in members’ deficit and cash flows for

the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements Management, the New York State Workers’ Compensation Board (the “Board”) and the Trust’s

administrator, are responsible for the preparation and fair presentation of these financial statements in

accordance with accounting principles generally accepted in the United States of America; this includes

the design, implementation, and maintenance of internal control relevant to the preparation and fair

presentation of financial statements that are free from material misstatement, whether due to fraud or

error.

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. Except as

explained in the Basis for Disclaimer of Opinion paragraph, we conducted our audits in accordance with

auditing standards generally accepted in the United States of America. Those 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in

the financial statements. The procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation

and fair presentation of the financial statements in order to design audit procedures that are appropriate in

the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s

internal control. Accordingly, we express no such opinion. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of significant accounting estimates

made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for

our audit opinion on the balance sheets as of December 31, 2012 and 2011, and the related statements of

operations, comprehensive income, changes in members’ deficit, and cash flows for the year ended

December 31, 2012.

An Independently Owned Member, McGladrey Alliance

McGladrey Alliance is a premier affiliation of independent accounting and consulting firms. McGladrey Alliance member firms maintain their name, autonomy and independence and are responsible for their own client fee arrangements, delivery of services and maintenance of client relationships.

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Basis for Disclaimer of Opinion (for the Year Ended December 31, 2011) The Trust’s current management was not responsible for maintaining accounting records during 2011;

adequate documentation from the prior administrator did not exist to perform audit procedures necessary

to document and evaluate internal controls to assure the proper recording of transactions during 2011,

resulting in substantial adjustments to the accounts. Adequate evidential matter in support of transactions

recorded by the prior administrator was not available in many cases. There have been significant changes

in employees and key management personnel since 2011, creating a lack of continuity in the accounting

system. Further, present management was unable to furnish us with representations of facts and

circumstances regarding certain transactions arising during 2011, as they were not responsible for the

operation of the Trust during that year.

Disclaimer of Opinion (for the Year Ended December 31, 2011) Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraph, we

have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion

on the results of operations and cash flows for the year ended December 31, 2011. Accordingly, we do

not express an opinion on the results of operations and cash flows for the year ended December 31, 2011.

Opinion In our opinion, the balance sheets of Team Transportation Workers’ Comp Trust as of December 31, 2012

and 2011, and the statements of operations, comprehensive income, changes in members’ deficit, and

cash flows for the year ended December 31, 2012 present fairly, in all material respects, the financial

position of Team Transportation Industry Workers’ Comp Trust as of December 31, 2012 and 2011, and

the results of its operations and its cash flows for the year ended December 31, 2012 in accordance with

accounting principles generally accepted in the United States of America.

Emphasis-of-Matter As discussed in Note G to the financial statements, uncertainty exists regarding the ultimate timing and

realization of reinsurance recoverable balances of approximately $3,480,000 recorded in the Trust’s

balance sheets at December 31, 2012 and 2011, due from Reliance Insurance Company (in Liquidation),

an insolvent reinsurer placed in liquidation by order of the Commonwealth Court of Pennsylvania. Our

opinion is not modified with respect to this matter.

sign East Syracuse, New York

November 5, 2013

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BALANCE SHEETS


December 31,

2012 2011

ASSETS

Cash and cash equivalents $ -0- $ 340,877

Balances due from the NYS Workers’ Compensation Board 469,926 -0-

Investments--available-for-sale -0- 2,186,764

Contributions and assessments receivable, net 171,335 4,309,188

Reinsurance receivable 206,852 167,518

Reinsurance recoverable 16,778,223 19,517,245

Other receivables -0- 791,941

Security deposit -0- 479,325

Accrued investment income -0- 12,422

Deferred income taxes 13,140,000 13,950,000

TOTAL ASSETS $ 30,766,336 $ 41,755,280

LIABILITIES AND MEMBERS’ DEFICIT

LIABILITIES

Unpaid losses and loss adjustment expenses:

Case-basis reserves $ 28,609,257 $ 8,910,779

Unallocated loss adjustment expenses 2,400,000 3,700,000

Incurred but not reported claims 16,628,882 45,198,476

TOTAL UNPAID LOSSES AND LOSS

ADJUSTMENT EXPENSES, NET 47,638,139

57,809,255

Accounts payable and accrued expenses 223,106 304,275

Due to NYS Workers’ Compensation Board

assessment account funds 770,540

-0-

NYS Workers’ Compensation Board

assessments payable--current 267,255

6,738

Accrued NYS Workers’ Compensation Board assessments 2,352,383 5,465,035

TOTAL LIABILITIES 51,251,423 63,585,303

MEMBERS’ DEFICIT (20,485,087) (21,830,023)

$ 30,766,336 $ 41,755,280

See notes to financial statements.

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STATEMENTS OF OPERATIONS


Year ended

December 31,

2012 2011

Revenues:

Income from NYS Workers’ Compensation Board $ 472,297 $ -0-

Member premiums and assessments -0- 4,025,447

Investment income 24,907 197,101

Realized gain on sales of investments--available-for-sale 144,781 147,356

Surety bond proceeds, net 175,675 -0-

TOTAL REVENUES 817,660 4,369,904

Expenses (offsets to expenses):

Claims (3,506,601) 29,742,688

NYS Workers’ Compensation Board assessments (200,781) 4,861,344

Excess insurance -0- 37,443

Professional and administrative fees 728,765 346,347

Uncollected contributions and assessments 4,104,647 -0-

Other 30,653 84,228

TOTAL EXPENSES 1,156,683 35,072,050

Loss before income taxes and cumulative

effect of change in accounting estimate (339,023)

(30,702,146)

Income resulting from the cumulative effect of

change in accounting estimate of NYS

assessment for inactive trusts 2,651,354

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INCOME (LOSS) BEFORE INCOME TAXES 2,312,331 (30,702,146)

Deferred income tax provision (benefit) 810,000 (12,140,000)

NET INCOME (LOSS) $ 1,502,331 $ (18,562,146)


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STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


Year ended

December 31,

2012 2011

Net income (loss) $ 1,502,331 $ (18,562,146)

Other comprehensive loss:

Unrealized holding (losses) gains on available for sale

securities arising during the period, net (12,614)

45,149

Reclassification adjustment for gains

included in operations (144,781)

(147,356)

(157,395) (102,207)

COMPREHENSIVE INCOME (LOSS) $ 1,344,936 $ (18,664,353)


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STATEMENTS OF CHANGES IN MEMBERS’ DEFICIT


Members’

deficit

Accumulated

other

comprehensive

income (loss)

Total

members’

deficit

Balances at December 31, 2010 $ (3,425,272) $ 259,602 $ (3,165,670)

Net loss (18,562,146) (18,562,146)

Other comprehensive loss (102,207) (102,207)

BALANCES AT DECEMBER 31, 2011 (21,987,418) 157,395 (21,830,023)

Net income 1,502,331 1,502,331

Other comprehensive loss (157,395) (157,395)

BALANCES AT DECEMBER 31, 2012 $ (20,485,087) $ -0- $ (20,485,087)


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STATEMENTS OF CASH FLOWS


Year ended

December 31,

2012 2011

CASH FLOWS USED IN OPERATING ACTIVITIES

Net income (loss) $ 1,502,331 $ (18,562,146)

Adjustments to reconcile net income (loss) to net cash

used in operating activities:

Realized gain on investments (144,781) (147,356)

Amortization (accretion) of bond premium, net 2,087 (67,790)

Uncollected contributions and assessments 4,104,647 -0-

Deferred income tax provision (benefit) 810,000 (12,140,000)

(Increase) decrease in assets:

Balances due from NYS Workers’ Compensation Board (469,926) -0-

Contributions and assessments receivable 33,206 (3,721,909)

Reinsurance receivable (39,334) (167,518)

Reinsurance recoverable 2,739,022 (18,492,023)

Other receivables 791,941 (791,941)

Security deposit 479,325 7,500

Accrued investment income 12,422 29,577

Increase (decrease) in liabilities:

Unpaid losses and loss adjustment expenses, net (10,171,116) 44,841,227

Due to NYS Workers’ Compensation Board

assessment account funds 770,540 -0-

Accounts payable and accrued expenses (81,169) 115,522

Accrued NYS Workers’ Compensation Board

assessments (2,852,135) 4,786,524

Unearned member premium contributions -0- (24,907)

NET CASH USED IN OPERATING ACTIVITIES (2,512,940) (4,335,240)

CASH FLOWS FROM INVESTING ACTIVITIES

Investments--available-for-sale:

Purchases (315,780) (2,317,882)

Proceeds from sales and maturities 2,487,843 6,370,047

NET CASH PROVIDED BY INVESTING ACTIVITIES 2,172,063 4,052,165

NET DECREASE IN CASH AND CASH EQUIVALENTS (340,877) (283,075)

Cash and cash equivalents at beginning of year 340,877 623,952

CASH AND CASH EQUIVALENTS AT END OF YEAR $ -0- $ 340,877

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STATEMENTS OF CASH FLOWS--Continued


Year ended

December 31,

2012 2011

SUPPLEMENTAL DISCLOSURE OF CASH

FLOW INFORMATION

Non-cash operating activities:

Activity in NYS Workers’ Compensation Board owned

accounts representing receipts and disbursements

made on the Trust’s behalf:

Collection of contributions and assessments $ 587,967 $ -0-

Interest income received $ 856 $ -0-

Claims paid, net of recoveries $ (2,342,611) $ -0-

Professional, administrative and other loss

adjustment expenses paid $ (926,474) $ -0-

Income taxes paid $ 66,271 $ -0-


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NOTES TO FINANCIAL STATEMENTS


December 31, 2012 and 2011

NOTE A--SIGNIFICANT ACCOUNTING POLICIES

Organization: The Team Transportation Workers’ Comp Trust (the “Trust”) is a group self-

insurance trust that provided Workers’ Compensation coverage in the State of New York to

employers involved in the transportation industry. Contributions paid by members are used to

pay covered losses, claims administration and costs associated with the management of the

group, such as loss control, legal, accounting, actuarial, and excess insurance. Any excess of

contributions over expenses are returned to the Trust members as dividends on a pro rata share

basis. The Trust began providing coverage to its members in October 1995.

The Trust terminated in force policies effective December 31, 2010; however, the Trust is

responsible for paying all claims incurred prior to 12:01 a.m. January 1, 2011, which will likely

take several years. Effective February 1, 2012, as a result of the deterioration of the Trust’s

liquid assets to claims reserve ratio, the New York State Workers’ Compensation Board (the

“Board”) took possession of the Trust and began to authorize payments of claims on behalf of

the Trust. The Board has contracted a third party administrator (the “Trust Administrator”) to

carry out the day to day operations of the Trust. As of December 31, 2012, the Trust’s liabilities

are greater than its assets. The Board is currently in the process of seeking deficit contributions

from members of the Trust, since they are jointly and severally liable. In the event the Trust's

assets are inadequate to fund future operations, the Board is required to fund future remaining

claims and related obligations of the Trust. The Board will be reimbursed for the funding

provided to the Trust through collections on the deficit assessment billing issued to members by

the Board.

Significant Accounting Policies: The Trust follows the accounting standards set by the Financial

Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally

accepted in the United States of America (“GAAP”) that are followed to ensure consistent

reporting of the financial condition, results of operations and cash flows of the Trust. References

to GAAP issued by the FASB in these notes to financial statements are to the FASB Accounting

Standards Codification (“FASB ASC”).

Use of Estimates: Management uses estimates and assumptions in preparing the financial

statements in accordance with GAAP. Those estimates and assumptions affect the reported

amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the

reported revenues and expenses. Actual results could vary from the estimates that were used.

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NOTES TO FINANCIAL STATEMENTS--Continued



NOTE A--SIGNIFICANT ACCOUNTING POLICIES--Continued

Cash and Cash Equivalents: For the purposes of the statements of cash flows, the Trust

considers all money market funds to be cash equivalents. During 2012 cash and cash equivalents

were transferred into accounts maintained and held by the Board on behalf of the Trust.

Balances Due From the NYS Workers’ Compensation Board: Balances due from the Board

represent amounts maintained and held by the Board on behalf of the Trust, in a bank account

owned by the Board. Subsequent to the Board taking possession of the Trust, cash and

investment accounts owned by the Trust were liquidated and transferred to accounts owned and

controlled by the Board on the Trust’s behalf. Portions of the Trust’s cash receipts and cash

disbursements are received or paid by the Board out of this account.

Recognition of Income from NYS Workers’ Compensation Board: Funds received from deficit

assessment billings are collected and maintained in cash accounts owned by the Board and are

not included in the financial statements. The Trust recognizes revenue on funds received from

deficit assessment billings once the Board makes them available to pay obligations of the Trust.

Investments--Available for Sale: The Trust is required to categorize each investment as either

held-to-maturity, available-for-sale, or trading. At December 31, 2011, the Trust did not

maintain an investment held-to-maturity or trading portfolio. Securities not classified as held-to-

maturity or trading are classified as available-for-sale and recorded at fair value, with unrealized

gains and losses excluded from earnings and reported in other comprehensive income/loss.

Purchase premiums and discounts are recognized in interest income using the effective interest

method over the terms of the securities. Declines in the fair value of available-for-sale securities

below their cost that are deemed to be other than temporary are reflected in earnings as realized

losses. In estimating other-than-temporary impairment losses, management considers (1) the

length of time and the extent to which the fair value has been less than cost, (2) the financial

condition and near-term prospects of the issuer, (3) the current liquidity and volatility of the

market for each of the individual security categories, (4) the projected cash flows from the

specific security type, (5) the financial guarantee and financial rating of the issuer, and (6) the

intent and ability of the Trust to retain its investment in the issuer for a period of time sufficient

to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are

recorded on the trade date and are determined using the specific identification method. The

Trust’s investment portfolio was liquidated in 2012.

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Fair Value of Investments: FASB ASC Topic 820, “Fair Value Measurements and Disclosures”,

requires fair value measurements of the Trust’s assets and liabilities. Fair value is an estimate of

the price the Trust would receive upon selling a financial instrument in a timely transaction to an

independent buyer or the most advantageous market of the financial instrument. FASB ASC

Topic 820 established a three tier hierarchy to maximize the use of observable market data and

minimize the use of unobservable inputs and to establish classification of fair value

measurements for disclosure purposes. Various inputs are used in determining the value of the

financial instruments as noted below:

Level 1 - quoted prices in active markets for identical investments.

Level 2 - quoted prices in active markets for similar investments, or quoted prices for

identical or similar investments in markets that are not active, or inputs other than

quoted prices that are observable for the investment.

Level 3 - significant valuation assumptions not readily observable in a market.

The Trust determines the fair value of its investment portfolio based on quoted market values

where available or on estimates using present values or other valuation techniques. Those

techniques are significantly affected by the assumptions used, including the discount rate and

estimates of future cash flows. In that regard, the derived fair value estimates cannot be

substantiated by comparison to independent markets and, in many cases, could not be realized in

immediate settlement of the instrument.

The fair value of Common Stocks were determined using Level 1 inputs as defined above and

were recorded on a recurring basis. Level 1 also included U.S. Government agency, and U.S.

Treasury securities which were traded by dealers or brokers in active markets.

The fair value of mortgage backed securities were determined using Level 2 inputs as defined

above and were on a recurring basis.

The Trust’s investment portfolio was liquidated in 2012.

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Contributions and Assessments Receivable: The Trust is currently in run-off status and

payments for future claims and administrative expenses will be funded from member payments

to the Board or its administrator. Contributions and assessment receivables represent amounts

that were outstanding prior to the Board taking possession of the Trust. Uncollected

contributions and assessments of $4,104,647 in the 2012 statement of operations primarily

represent the balance of contributions and assessments that remained unpaid at the time of the

Board’s February 2012 possession of the Trust. The Trust wrote-off or reserved these balances

as the receivables will effectively be re-billed under the Board’s deficit assessment billing. Any

amounts collected will be accounted for within the Board owned accounts as described herein.

Contributions and assessments receivable are written off when they are determined to be

uncollectible. The allowance for doubtful accounts is estimated based on the Board’s ability to

enforce and pursue collection. The allowance for doubtful accounts approximated $540,000 and

$-0- at December 31, 2012 and 2011, respectively.

Unpaid Losses and Loss Adjustment Expenses and Reinsurance Recoverable: Liabilities for

unpaid losses and loss adjustment expenses are estimates of ultimate future payments to be made

to settle all claims for reported losses and estimates of incurred but not reported losses based on

past experience. Estimates of liability for claims are established on an undiscounted basis of

expected ultimate payment amounts (see Note D). Management believes that the liability for

unpaid losses and loss adjustment expenses is adequate to cover the ultimate cost of claims

incurred; however, such estimates may be more or less than the amount ultimately paid when the

claims are settled. Changes in the estimated liability are reflected in expenses as the estimates

are revised. It is at least reasonably possible that the Trust’s recorded estimates will change

within the near term.

Litigation costs with respect to claims arising from insurance coverage, as well as expenses

related to processing of unprocessed claims are considered in establishing the estimated liability

for unpaid losses and loss adjustment expenses. Amounts recoverable from reinsurers are

estimated in a manner consistent with the claim liability associated with the reinsured business.

The recoverability of these assets depends on the reinsurers’ ability to perform under the

reinsurance agreements. Management utilizes an actuarial service in its calculation of this

estimated liability and the related reinsurance recoverable.

Due to NYS Workers’ Compensation Board Assessment Account Funds: Group and individual

self-insurers pay assessments to the Board assessment account funds. Through December 31,

2012, the Trust received advances from these assessment account funds. These amounts will be

paid back from future revenue received from the Board.

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Accrued NYS Workers’ Compensation Board Assessment: The Trust has an accrued assessment

liability which reflects an estimate of the ultimate cost expected to be paid by the Trust for all of

the Board’s legally mandated assessments. As of December 31, 2012 and 2011, the Board has

calculated this accrued assessment on the basis of approximately 5.2% and 10.1%, respectively,

of the estimated reserve for losses and allocated loss adjustment expenses, plus an additional

amount calculated by the Board. In September 2012, the Board decreased the surcharge rate on

an assumption of liability policy (“ALP”) from 10.1% to 5.2% which resulted in a change to this

estimate. It is at least reasonably possible that the Trust’s estimated liability for these

assessments will change within the near term. See Note E for calculation of the accrued

assessment.

Income Taxes: The Trust is taxed as a mutual property and casualty insurance company for

federal income tax purposes and as a C corporation for state income tax purposes. Deferred

taxes are provided on a liability method whereby deferred tax assets are recognized for

deductible temporary differences, operating loss and tax credit carryforwards and deferred tax

liabilities are recognized for taxable temporary differences. Temporary differences are the

differences between the reported amounts of assets and liabilities and their tax bases. Deferred

tax assets are reduced by a valuation allowance when, in the opinion of management, it is more

likely than not that some portion or all of the deferred tax assets will not be realized. Deferred

tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date

of enactment.

The Trust follows FASB ASC Topic 740-10 which addresses accounting for uncertainty in

income taxes and prescribes a recognition threshold and measurement attribute for financial

statement recognition and measurement of a tax position taken or expected to be taken in a tax

return and also provides guidance on various related matters such as derecognition, interest and

penalties, and disclosure. The Trust recognizes accrued interest and penalties related to

unrecognized tax benefits as a component of income tax expense. There was no impact to the

accompanying financial statements attributable to the uncertainties in income taxes portion of

FASB ASC Topic 740-10.

Events Occurring After Report Date: The Trust has evaluated events and transactions that

occurred between December 31, 2012 and November 5, 2013, which is the date the financial

statements were available to be issued, for possible disclosure and recognition in the financial

statements. There were no such events or transactions identified by the Trust.

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Reclassification: At December 31, 2011, the reinsurance recoverable had been classified as an

offset to liabilities in the balance sheet. This classification was consistent with certain statutory

accounting practices used in the insurance industry. However, this classification was not in

accordance with GAAP, which requires the classification of reinsurance recoverable as an

asset. In order to conform to the 2012 presentation, the $19,517,245 reinsurance recoverable at

December 31, 2011 has been reclassified as an asset. This 2011 reclassification of the

reinsurance recoverable increased total assets and total liabilities as previously reported at

December 31, 2011 by $19,517,245, with no effect on members’ deficit or net loss.

NOTE B--REINSURANCE

The Trust purchased excess liability insurance (reinsurance) as required by the State of New

York to meet statutory requirements for Workers’ Compensation. These reinsurance policies do

not relieve the Trust from its obligation to policyholders. The insurance coverage is for excess

of the retention as follows:

Specific retention: $ 300,000 for October 15, 1995 to December 31, 2001

350,000 for January 1, 2002 to December 31, 2002



Aggregate

retention:

$ 4,981,180 for October 1, 1995 to December 31, 1997 with a $2,000,000 limit

4,366,316 for January 1, 1998 to December 31, 1998 with a $2,000,000 limit









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NOTE B--REINSURANCE--Continued

At December 31, 2012 and 2011, reinsurance recoverable amounted to $16,778,223 and

$19,517,245, respectively. The reinsurance receivable and recoverable are due from three

reinsurance companies under specific excess and aggregate policies. Estimated recoveries for

claims incurred but not reported (“IBNR”) approximated $3,950,000 at December 31, 2012, per

the independent actuarial report.

Failure of the reinsurers to honor their obligations could result in losses to the Trust. The Trust

evaluates the financial condition of its reinsurers to minimize its exposure to significant losses

from reinsurer insolvency. At December 31, 2012 at 2011 there are no losses recorded or

anticipated due to failure of the reinsurers to honor their obligations, with the exception of the

matter disclosed in Note G.

NOTE C--INVESTMENTS

During 2012, the Board liquidated all of the Trust’s investments--available-for-sale and

transferred the proceeds into accounts maintained and held by the Board. These funds were set

aside to pay future obligations of the Trust. The amortized cost and fair value of investments--

available for sale at December 31, 2011 is summarized as follows:

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair

Value

December 31, 2011

U.S. treasury and agency bonds $ 1,496,596 $ 134,937 $ 5 $ 1,631,528

Mortgage backed securities 343,645 9,975 210 353,410

Common stock 189,128 26,212 13,514 201,826

$ 2,029,369 $ 171,124 $ 13,729 $ 2,186,764

-16-




NOTE D--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the reserve for unpaid losses and loss adjustment expenses is summarized as follows:

2012 2011

Reserve balance at beginning of year $ 57,809,255 $ 12,968,028

Losses to be covered under reinsurance (19,517,245) (1,025,222)

Net reserve balance at beginning of year 38,292,010 11,942,806

Incurred claims (improvement) expense (3,506,601) 29,742,688

Paid (3,925,493) (3,393,484)

Net reserve balance at end of year 30,859,916 38,292,010

Losses to be covered under reinsurance 16,778,223 19,517,245

Reserve balance at end of year $ 47,638,139 $ 57,809,255

Reserve reconciliation:


Unallocated loss adjustment expenses 2,400,000 3,700,000


Reserve balance at end of year $ 47,638,139 $ 57,809,255

Claims (improvement) expense reconciliation:

Incurred claims (improvement) expense $ (2,206,601) $ 26,732,313

(Decrease) increase in ULAE reserve (1,300,000) 3,010,375

Claims (improvement) expense $ (3,506,601) $ 29,742,688

At December 31, 2012 and 2011 the liability for unpaid losses and loss adjustment expenses,

including incurred but not reported claims, has been actuarially determined on an undiscounted

basis. Management selected this liability from the high end of a range of actuarially estimated

outcomes. As a result of changes in estimates of insured events in prior periods, the loss and loss

adjustment expenses decreased by $3,506,601 and increased by $29,742,688 in the years ended

December 31, 2012 and 2011, respectively.

-17-




NOTE E--ACCRUED WORKERS’ COMPENSATION ASSESSMENT AND

CHANGE IN ACCOUNTING ESTIMATE

2012 2011

Unpaid losses and loss adjustment expenses:



45,238,139 54,109,255

NYS assessment rate 5.2% 10.1%

2,352,383 5,465,035

Board calculated portion of assessment payable--current 267,255 6,738

Total accrued Workers’ Compensation Board assessments $ 2,619,638 $ 5,471,773

This liability is comprised of two components in the December 31, 2012 and 2011 balance

sheets: NYS Workers’ Compensation Board assessments payable--current (liability related to

activity subsequent to 2010 assessment cycle--April 1, 2010 - March 31, 2011) and Accrued

Workers’ Compensation Board assessments.

In September 2012, the Board reduced the surcharge imposed on an ALP from 10.1% to 5.2%,

which reduced the estimate of unpaid Board assessments due from insolvent and inactive trusts.

The cumulative effect of this charge in prior years was an increase in 2012 income of $2,651,354

and a $1,620,212 increase to net income after tax.

NOTE F--INCOME TAXES

The income tax provision (benefit) differs from the amount of income tax determined by

applying the U.S. federal income tax rate of 34% to the pretax income (loss) for the years ended

December 31, 2012 and 2011 primarily due to state taxes.

The deferred tax asset consists of the following components as of December 31, 2012 and 2011:

2012 2011

Unpaid losses and loss adjustment expenses, net $ 2,700,000 $ 3,605,000

Accrued NYS assessment 160,000 375,000

Capital loss carryforward -0- 20,000

Net operating loss carryforwards (expiring in 2029 to 2031) 9,770,000 9,950,000

Allowance for doubtful accounts 510,000 -0-

$ 13,140,000 $ 13,950,000

-18-




NOTE F--INCOME TAXES--Continued

Although the Trust has ceased writing policies and is in run-off status management has

concluded that the deferred income tax asset is ultimately realizable based on their estimation of

the Trust’s ability to generate future taxable income within the carryforward periods for the net

operating losses from assessments on, and collection of contributions from, former members of

the Trust.

The current provision for federal and state income taxes, otherwise payable for the year ended

December 31, 2012, was reduced by the utilization of net operating loss carryforwards at an after

tax benefit of approximately $240,000. The statute of limitations for potential federal and state

tax audits has expired for years ended December 31, 2008 and prior.

NOTE G--UNCERTAINTY WITH REINSURER

Reliance Insurance Company: The Trust purchased excess liability insurance (reinsurance) from

Reliance Insurance Company (“Reliance”) to reinsure against specific claims in excess of

$300,000 that may be incurred from October 1, 1996 to December 31, 2000. At December 31,

2012, approximately $3,480,000 is estimated to be due from Reliance and is included in the

Trust’s balance sheet under the caption “Reinsurance recoverable”. In addition, approximately

$140,000 due from Reliance is included in the balance sheet under the caption “Reinsurance

receivable”.

Reliance was placed into rehabilitation by order of the Commonwealth Court of Pennsylvania

(“the Court”) on May 29, 2001. On October 3, 2001, Reliance was declared insolvent by order

(“the Order”) of the Court. The Order appointed the Insurance Commissioner of Pennsylvania as

Liquidator of the Company (“the Liquidator”). Representatives of the Liquidator oversee the

daily operations of Reliance. The entity is now known as Reliance Insurance Company (in

Liquidation) (“Reliance”) or (“the Estate”). The principal activities since the date of liquidation

consist of the collection and marshalling of assets and determination of claims. All creditor

claims submitted to Reliance must be evaluated through the Proof of Claim process to determine

and assign the proper class priority and dollar value. The largest class of creditors represents

claims for losses under policies issued prior to liquidation. Ultimately, the net assets of the

Estate are expected to be distributed to creditors. Currently Reliance is statutorily insolvent.

-19-




NOTE G--UNCERTAINTY WITH REINSURER--Continued

Reliance Insurance Company--Continued: The Liquidator has yet to determine if it will honor

the Trust’s agreements with Reliance. The Board asserts that the agreements between the Trust

and Reliance will be honored by the Liquidator as excess insurance policies, as the Board has

successfully argued this position for other trusts under its control. In addition, although the

Liquidator acknowledges that they have been informed by the Trust of claims that are currently

reserved and estimated to exceed Reliance’s retention points, they have not yet evaluated those

claims for acceptance and will not do so until the payments on these claims reach the retention

points, which is not expected to occur in the near term.

Due to the uncertainty that exists as a result of the matter disclosed in the preceding paragraphs,

the ultimate timing and realization of the $140,000 receivable balance and the estimated

$3,480,000 recoverable balance due from Reliance cannot presently be determined.

Accordingly, no provision for any losses that may result has been made in the financial

statements. Nevertheless, due to the uncertainty with the realization of this reinsurance

receivable and recoverable, it is at least reasonably possible that management’s view of the

outcome will change in the near term.

NOTE H--COMMITMENTS AND CONTINGENCIES

The Trust provided employer liability coverage to its members as required by the Board. The

Trust has one open employer liability claim with incurred loss of approximately $330,000,

including $300,000 of case reserves as of December 31, 2012 and 2011. Management of the

Trust has represented that they are not aware of any other asserted or pending claims against any

members of the Trust under this coverage.

The Trust had posted a $675,675 surety bond in order to meet a portion of the Board’s statutory

deposit requirement. This surety bond was collateralized by a $500,000 letter of credit from

Bank of America. The letter of credit was collateralized by investments held in one of the

Trust’s investment accounts. During 2012, the Board exercised its rights under the surety bond

and collected $675,675, which was immediately made available to the Trust. As a result, the

Trust incurred a $500,000 loss of the investment collateral, resulting in net surety bond proceeds

of $175,675.

At December 31, 2011, the Trust had a security deposit of $479,325 posted with the Board. In

2012 the Board took possession of the security deposit and transferred the funds into accounts

maintained and held by the Board. These funds were set aside to pay future obligations to the

Trust.

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