Fayette County

State insurance group will return $31 million to policyholders

The state's workers' compensation company bowed to political pressure Thursday and voted to return some of its surplus to policyholders.

However, board members of the Kentucky Employers' Mutual Insurance group decided to return less in dividends than lawmakers wanted: They will return 20 percent of a $154 million surplus — or $30.8 million — to policyholders, not the 40 percent one lawmaker stipulated. Officials said they hope to issue the checks by July 1.

After a three-hour discussion, the board determined that 20 percent was the most prudent way to retain KEMI's high financial rating while also acceding to officials' requests.

"I think it does return money to businesses, as the governor and the legislature wants us to do, and that's very important to us," said David Snowden, chairman of the board. "I'm sorry we can't return more, but our fiduciary responsibility is to make sure we don't damage a good organization."

The vote was 8-1. Businessman Mike Templeman, a board member who is running for Congress against incumbent Rep. Ben Chandler, said he thinks KEMI could afford to give more.

"I think 40 percent is the right number," he said. "I think it's an extraordinary time, and businesses need this. This company was highly rated when we had $45 million in reserves, and now we have $154 million."

The move came in response to several weeks of political pressure from Frankfort.

Last month, Gov. Steve Beshear sent a letter urging the group to give out dividends; he was followed by Sen. Robert Stivers, R-Manchester, who filed a bill that would require the group to hand back 40 percent of its surplus.

"I think they should be doing well financially, but they should not be doing so well financially that they have this type of asset," Stivers told the Herald-Leader at the time.

On Thursday, Stivers said he didn't know how the KEMI action would affect his bill, which was approved by the Senate but has not been heard in the House.

"Conceptually, it proves that I was right," Stivers said.

Beshear said he appreciated the KEMI board's vote.

"KEMI's choice to return some of those dollars to these Kentucky businesses is not only good business practice; it's an investment in Kentucky companies and jobs," he said in a statement.

The dividends would be paid out to about 73,000 policyholders that have been in KEMI from 1995 to 2008. The payments would be based on premiums paid over time.

For example, a small business that has paid about $6,700 during that time would receive $147. A large business that had paid $2.2. million in premiums would get $48,714.

KEMI was created by the General Assembly in 1994 because the market for workers' compensation had collapsed, and small businesses — particularly high-risk ones such as coal companies — could not find workers' compensation insurance.

It currently has about 22,000 policyholders.

The agency is financially strong, with a $357 million cushion required to pay current and future claims in addition to the $154 million surplus. KEMI also has an investment portfolio worth $600 million.

The company has an A- rating from A.M. Best. If the surplus dropped to less than $42 million, the company would be considered in trouble, officials said.

The group's governing board is appointed by Kentucky's governor and includes non-voting representatives from the attorney general's and state auditor's offices. Other members include the secretaries of the labor, personnel and finance cabinets.

Roger Fries, KEMI's chief executive officer, says the group has lowered its premiums for the past three years, saving customers as much as $30 million.

The agency, headquartered in downtown Lexington, employs about 200. Some, such as Stivers, have criticized the private market salaries given to KEMI's top executives. Fries made a gross salary of $375,883 in 2009, according to KEMI documents. He also gets the use of a leased Lincoln MKS four-door sedan.

Stivers also has questioned whether KEMI, which can't refuse high-risk business, needs to advertise so extensively.

The dividend plan now goes to the state Department of Insurance for review. Commissioner Sharon Clark has said she supports KEMI's giving dividends as long as it doesn't hurt its financial standing.