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HomeMy WebLinkAboutBig Independent Cities Excess Pool (BICEP) - Financial State o, Council/Agency Meeting Held: Deferred/Continued to: proved ❑ Conditionally Approved ❑ Denied City Clerk's Signatife Council Meeting Date: March 18, 1996 Department ID Number: CK 96-028 CITY OF HUNTINGTON BEACH REQUEST FOR COUNCIL ACTION SUBMITTED TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS SUBMITTED BY: CONNIE BROCKWAY, CITY CLERK PREPARED BY: CONNIE BROCKWAY, CITY CLERK Ct SUBJECT: Big Independent Cities Excess Pool (BICEP) Financial Statements & Independent Auditor's Report Statement of Issue,Funding Source,Recommended Action,Alternative Action(s),Analysis,Environmental Status,Attachments) Statement of Issue: The BICEP Joint Powers Agreement between the BICEP member cities requires the Big Independent Cities Excess Pool (BICEP) Financial Statements and Supplementary Information With Independent Auditors Report to be filed as a public record, with each of the BICEP member cities. The report includes Independent Auditors Report, Balance Sheets, Statements of Revenue and Expenses, and changes in Fund Balances, Statements of Cash Flows, Notes to Financial Statements, and Claims Development Information From Inception to June 30, 1995. Funding Source: Not Applicable Recommended Action: Motion: Receive and File the Big Independent Cities Excess Pool Financial Statements and Supplementary information With Independent Auditor's Report for the year ended June 30, 1995 and June 30 1994. Alternative Action(s): If Council has questions regarding this report the Council may wish to defer Receiving and Filing to a future meeting. :s BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Operations Big Independent Cities Excess Pool (BICEP) was created effective September 23, 1988, by a joint powers agreement among five cities organized and operating under the laws of the State of California. BICEP is organized pursuant to the provisions of the California Government Code for the purpose of providing joint insurance coverage and related risk-management services for member cities. The extension of joint insurance coverage to member cities began October 1, 1988. BICEP'S liability program offers a combination of pooled and commercially purchased public auto and general liability coverages, plus errors and omissions coverage, for losses in excess of the member cities' specified self-insurance retention levels of one million dollars. Individual and aggregate claims in excess Of specified levels are covered by excess insurance policies purchased from commercial insurance carriers which, combined with the program's self-funded layers, offer a total of $25 million in coverage limits. Additionally, through its broker Rollins, Hudig, Hall, it enables its members to purchase property and worker's compensation insurance as a group. BICEP is a nonprofit California public agency; thus, it is tax-exempt. It is also considered a "Special District" by the Office of the State Controller, Division of Local Government Fiscal Affairs, for the purpose of filing an Annual Report of Financial Transactions of Special Districts., Basis of Accounting The accounting records of BICEP are maintained on the accrual basis of accounting. Bond Issuance Costs Bond issuance costs are amortized over the life of the bond issue using the straight line method. Cash and Cash Equivalents BICEP considers money market funds and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash represents funds held in trust for payment of bond principal and interest, future debt service, and claims payment. 5 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) : Rebatable Arbitrage Earnings Rebatable arbitrage earnings represents the excess of the amount earned on all cash equivalents and investments over the amount which would have been earned if such cash equivalents and investments were invested at a rate equal to the bond yield for activity through January 1, 1995. This excess is subject to change due to bond and investment activity occurring after January 1, 1995. The interim calculation previously referred to indicates that there would be no arbitrage payable. Deposit Premium Revenue Premiums are recognized as earned over the periods covered by the policies. Under the terms of the Liability Risk Coverage Agreement, between BICEP and its member cities, premium adjustments resulting in additional premium assessments or refunds were to commence in February 1992, covering the experience of BICEP from inception. Estimates of such adjustments are recorded in the financial statements annually as estimated future premium adjustments. Premium adjustments are subject to change as the ultimate cost of claims becomes known, investment income and expenses are realized, and BICEP's costs are allocated to each Policy Year. Unpaid Losses and Loss Adiustment Expenses Estimated unpaid losses and loss adjustment expenses include an amount for losses incurred but not reported. These estimates have been discounted to their present value. Liabilities are based on the estimated ultimate cost of settling the claims, including the effects of inflation and other societal and economic factors. The previously noted claims and ultimate recoveries will be deducted from the gross amount of unpaid losses. Claims which have been incurred but not reported to the claims administrator at June 30, 1995 have been estimated through an independent actuarial analysis based on loss development experience of BICEP and the member cities and available industry loss development data. BICEP's recognition of losses incurred but not reported is in conformity with Government Accounting Standards Board (GASB10) , Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. 2. CASH AND INVESTMENTS Under provisions .of the California Government Code (Code), BICEP is authorized to invest in: • A variety of federal and state treasury obligations (including local California agencies) 6 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 2. CASH AND INVESTMENTS (continued) : • Obligations or other instruments of or issued by a federal agency or government sponsored enterprise • Bankers' acceptances which are eligible for purchase by the federal reserve system (subject to certain limitations) • Prime quality commercial paper (subject to certain limitations) • Negotiable certificates of deposit issued by nationally or state chartered banks, savings and loan associates and credit unions • Repurchase agreements or reverse repurchase agreements of any securities authorized by the Code Cash and Cash Equivalents, Unrestricted At June 30, 1995, the net carrying amount and deposit balance was $11,381 of which $8,600 was invested in the Local Agency Investment Fund, an investment pool maintained by the State Treasurer. Restricted Cash Equivalents and Investments BICEP invests only in investments that are insured or registered, or for which the securities are held by BICEP or its agent in BICEP's name. Investments held by the Trustee at June 30, 1995, consist of: Certificates of deposit (converted after June 30, 1995)$13,505,500 Repurchase agreements 3,762,285 Cash 8 $17,267,788 Subsequent to June 30, 1995 due to a downgrading of its Guaranteed Investment Contract, "G.I.C. ", with Mitsui Trust and Banking Company by the bond rating agencies, BICEP terminated the "GIC", holding the proceeds in repurchase instruments pending a decision to reinvest. Because current bond rates are lower than those of the existing outstanding issue, part of the proceeds may be used in refunding of present bonds outstanding and of issuing new bonds. See Note 8. 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES: The following represents changes in the unpaid losses and loss adjustment expenses for BICEP for the years ended June 30: 7 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (continued) : 1995 1994 Unpaid losses and loss adjustment expenses at beginning of year $5,361,640 $3,256,349 Provisions for insured events of the current year 84,541 2,581,971 Payments of claims reported ( 62,071) (476,680) Decrease in funding levels for previous policy years. (1,253,139) -- Total unpaid losses and loss adjustment expenses at end of year ,130.971 �5.361.640 4. BONDS PAYABLE: In January 1989, BICEP issued Revenue Bonds Series 1988A for the purpose of acquiring working capital and to finance under writing expenses. Interest on the bonds is payable semi-annually at rates ranging from 6.5% to 8.25%. Principal maturities range from $360.,000 to $710,000 and are due annually on March 1, from 1991 through 2000. Term bonds aggregating $9,775,000 mature in 2009 and are subject to mandatory sinking fund redemption on March 1 in each year, on or after March 1, 2001 by lot, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. See Note 8, re possible redemption. The bonds are collateralized by BICEP's right to receive and collect all premium payments and prepayments. Each member city is obligated to pay all premiums as assessed, until the earlier of termination of the bond term or prepayment of the bond obligation. Payments required on the bonds during the nett five years ar as follows: Year ending June 30 Principal Interest Total 1996 520,000 1,057,247 1,577,247 1997 560,000 1,010,208 1,570,208 1998 620,000 960,528 1,586,528 1999 670,000 917,548 1,587,548 2000 710,000 863,938 1,573,938 The bonds maturing on or after March 1, 1997 are subject to optional redemption in whole or in part prior to maturity on any payment date on or after March 1, 1996, at the redemption prices, expressed as percentages of the principal amount of such Series 1988A Bonds to be redeemed, set forth in the following table, together with accrued interest to the redemption date: 8 BIG INDEPENDENT CITIES EXCESS POOL NOTES To FINANCIAL STATEMENTS continued 4. . BONDS PAYABLE (continued) : Redemption Date Redemption Price March 1, 1996 and. September 1, 1996 103% March 1, 1997 and September 1, 1997 102% March 1, 1998 and September 1, 1998 101% March 1, 1999 and thereafter 100% 5. REINSURANCE: Historically BICEP has reinsured its risks under excess , of loss reinsurance agreements for the purpose of limiting its maximum exposure on any one loss or group of losses. BICEP is contingently liable for losses and loss adjustment expenses related to ceded business to the extent that its reinsurer is unable to fulfill its commitments. Management believes that its reinsurer is and will continue to be able to satisfy its obligations under the reinsurance agreement for years through June 30, 1995. During the year ended June 30, 1995 because of substantial reductions in rates BICEP placed all of its liability coverages with private insurance carriers. This includes the $1 million to $2 million layer which was previously retained. BICEP's liabilities for unpaid losses and loss adjustment expenses as of June 30, 1995, have been estimated net of amounts that would be recoverable from the reinsurer. For the year ended June 30, 1995 BICEP has no direct liability having placed all of its coverages with outside carriers. 6. RELATED-PARTY TRANSACTIONS: Rollins Hudig Hall serves as BICEP's insurance broker and brokered $1,676,802 in insurance agreements during the period ended June 30, 1995. 7 UNCERTAINTY RELATED TO A CLAIM INVOLVING A MEMBER CITY. A claim is presently being litigated involving due process on a condemnation action whose costs have already exceeded that city's self- insured retention and which BICEP, in the opinion of counsel, may not have provided coverage due to the alleged willful nature of the alleged damages inflicted. The reinsurer has denied coverage. BICEP has continued to pay for the cost of defense in excess of the self-insured retention but has reserved its rights and is actively pursuing a course of attempting to obtain a settlement before the matter reaches the courts. There are several matters in contention, the nature of the acts by the member city, whether BICEP is liable for its level of coverage, that of the excess carrier or at all, and whether or not the excess carrier has liability. 9 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 8 SUBSEQUENT EVENT In November of 1995 based upon careful study by management, representatives of the participating cities and outside experts, BICEP decided to refund the existing bonds outstanding and to proceed with the issuance of new bonds.. All indications are that there will be substantial cash savings realized from the transactions. The transaction is expected to close on February. 6, 1996. 10 ki-QUEST FOR COUNCIL ACTT MEETING DATE: March 18, 1996 DEPARTMENT ID NUMBER: CK 96-028 Analysis: The BICEP agreement between Cities requires the aforementioned report to be filed as a public record. In order for the City Clerk to make a report, audit or any other material, a public record in the City Clerk's Office, it must have first been seen, reviewed and accepted by the City Council sitting as a legislative body. The material then becomes a part of the official Council minutes and official files of which the Council and public are aware and able to access as a public record Environmental Status: Not Applicable Attachment(s): City Clerk's Page Number __ 1. Communication from Gregory Spiker, ARM Ken Spiker and Associates, inc. BICEP General Manager 2. BICEP Report &Audit and Attachments 96-028JP.DOC -2- 02/29/96 8:53 AM 1� A06BIG INDEPENDENT CITIES EXCESS POOL JOINT POWERS AUTHORITY c/o General Manager, Ken Spiker And Associates, Inc. 14156 Magnolia Blvd., Suite 103 Sherman Oaks, California 91423 (818) 788-0406 FAX No. (818) 784-1187 February 19, 1996 Ms. Connie Brockway, City Clerk City of Huntington Beach 2000 Main Street o� Huntington Beach, California 92648 Dear Ms. Brockway: Enclosed please find a copy of the June 30, 1995, Big Independent Cities Excess Pool (BICEP) Financial Statements and Supplementary Information With Independent Auditor's Report for the years ended June 30, 1995, and 1994. The BICEP Joint Powers Agreement requires the report to be filed as a public record with each of the BICEP Member Cities. Please place the report in the appropriate file in your office. Thank you for your cooperation. Sincerely, Gregory J. Spiker, ARM Ken Spiker And Associates, Inc. BICEP General Manager GJS:sl Enclosure r .z -i i BIG INDEPENDENT CITIES EXCESS POOL FINANCIAL STATEMENTS AND SUPPr.pN'' TARY INFORMATION WITH INDEPENDENT AUDITOR'S REPORT JUNE 30, 1995 and June 30, 1994 BIG INDEPENDENT CITIES EXCESS POOL Table of Contents Page Financial Statements: Independent Auditor's Report 1 Balance Sheets, June 30, 1995 and June 30, 1994 2 Statements of Revenue, Expenses and Changes in Fund Balances for the years ended June 30, 1995 and June 30, 1994 3 Statements of Cash Flows for the years ended June 30, 1995 and June 30, 1994 4 Notes to Financial Statements 5-9 Supplementary Information Claims Development Information From Inception to June 30, 1995. 11 EMV.,\►:DS, Eic1-it-_I_ & BERANEK CE1`m7ii?i)1'I MA A0_0O \'T.;\TS _ INDEPENDENT AUDITOR'S REPORT The Board of Directors Big Independent Cities Excess Pool We have audited the accompanying balance sheets of the Big Independent Cities Excess Pool (BICEP) at June 30, 1995, and 1994 and the related statements of revenue, expenses and changes in fund balance and cash flows for the years then ended. These financial statements are the responsibility of BICEP's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audits provide a reasonable basis for our opinion. In our opinion, the 1995 and 1994 financial statements referred to above present fairly, in all material respects, the financial position of the Big Independent Cities Excess Pool at June 30, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Note 7 to the financial statements discusses an issue that involves uncertainties not presently resolved. BICEP has eight years of historical data for use in its estimates of incurred but not reported Claims and the corresponding premium adjustments. Although BICEP considers its experience and industry data in determining such amounts, assertions and projections as to future events are necessary and ultimate losses may be higher or lower than amounts projected. A claim involving a member city whose cost has exceeded that city's self-insured retention is being defended by BICEP and its attorneys but BICEP has stated that it is reserving its right to deny coverage. The excess carrier has categorically denied coverage. The matter is currently under discussion by the various parties and its outcome cannot be predicted. The comparative schedule of Claim Development,. on page J-1 is not a..rPgv i red part of the basic financial statements but is supplementary information required by the Gcver=ertal Accounting Standards Board. We have applied certain 1i.Tited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it. E"J ► &4*tm� Pasadena, California Edwards, Eichel & Beranek November 27, 1995 Certified Public Accountants November 29, 1995 as to Note 8 150 S.Los Rnm.s A%f; ; St.m-_=du() P:.SADENA.Cr,IJF: *-XIA 91101_24 7 18/796--1",0 F,-% R 1 X/7U6-7 0=1 BIG INDEPENDENT CITIES EXCESS POOL BALANCE SHEET June 30, 1995 and June 30, 1994 ASSETS 1995 1994 Cash and cash equivalents, unrestricted $ 11,381 $ 30,653 Restricted cash equivalents 3,762,286 3,587,934 Total cash and cash equivalents (Note 2) 3,773,667 3,618,587 Investments (at cost, which approximates market value) (Note 2) 13,505,500 13,505,500 Accounts receivable -- 26,141 Accrued interest receivable 156,750 150,736 Estimated future premium adjustments -- 1,231,442 Bond issuance costs, net 530,339 569,524 Total assets $17,966,256 $19,101,930 LIABILITIES AND FUND BALANCE Liabilities: Accounts payable $ 9,970 $ 37,919 Unpaid losses and loss adjustment expenses (Note 3) 4,130,971 5,361,640 Bonds payable (Note4) 12,855,000 13,340,000 Accrued interest payable 350,084 362,371 Estimated future premium adjustments 620,231 -- Total liabilities 17,966,256 19,101,930 Fund balance Total liabilities and fund balance S 17.466.256 C19,101a930 The accompanying notes are an integral part of these financial statements. 2 BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF REVENUE, EXPENSES AND CHANGES IN FUND BALANCE Years ended June 30, 1995 and June 30, 1994 1995 1994 Revenue: Deposit premiums earned $ 2,511,981 $ 2,463,458 Estimated future premium adjustments (797,277) 713.878 1,714,704 3.177.33E Expenses: Net increase in actuarially determined unpaid losses and loss adjustment expenses 84,541 1,798,585 Purchased reinsurance 1,676,802 1,159,394 General and administrative expenses 184,520 149,213 Refunds of premiums -- 195,524 1,945,863 3.302.71E Excess (deficiency) of revenue over expenses, before net investment income (911 ,159)) (125,380) Net investment income: Investment income 1,305,980 1,234,687 Interest expense _(1,074,821) (1.109.307) 211.159 125.380 Excess of revenue over expenses -- -- Fund .balance, at beginning of year -- -- Fund balance, at end of year -- These accompanying notes are an integral part of these financial statements. 3 BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF CASH FLOWS Years ended June 30, 1995 and June 30, 1994 1995 1994 Cash flows from operating activities: Excess (deficiency) of revenue over expenses before net investment income $ (231,159) $ (125,380) Adjustment to reconcile excess (deficiency) of revenue over expenses before net investment income to net cash provided by operations: Amortization of bond issuance costs 39,185 39,185 Increase (decrease) in accounts payable (27,949) (65,209) Increase (decrease) in unpaid losses and loss adjustment expenses (1,230,669) 2,105,291 premium Accounts receivable(increase) 26,141 (26,141) (Increase) decrease in estimated future premium adjustments 1,851,671 (1,553.8001 Net cash provided by operating activities 427.222 373,946 Cash flows from investing activities: Interest received 1,299,966 1,229,948 Net cash provided by investing activities 1,299,966 1,229,948 Cash flows from noncapital financing activities: Bond principal payments (485,000) (450,000) Interest paid ft .087,10821 (�,120,4081 Net cash used in noncapital financing activities (i,57 ,1081 (1,570.4081 Net increase in cash and , cash equivalents 155,080 33,486 Cash and cash equivalents at beginning of year 3.618.587 3,585,101__ Cash and cash equivalents at end of year S 3,773,667 3,618,587 The accompanying notes are an integral part of these financial statements. 4 BIG INDEPENDENT CITIES EXCESS POOL CLAIMS DEVELOPMENT INFORMATION Cumulative from inception through June 30, 1995 Policy Year Ended June 30 1989 1990 1991 1992 1. Net deposit premium revenue earned and investment income $ 799,203 $2,341,824 $2,216,499 $2,125,932 2. Other costs 338,203 1,619,824 1,359,499 1,322,932 3. Estimated incurred claims *and expenses, ,end of policy year 543y000 778,000 857,000 803,000 4. Paid claims (cumula- tive) as of: End of policy year -- -- --One year later -- -- $ 4,736 $3,845 Two years later -- $3,640 $114,925 -- Three years later -- $28,381 $577,599 3,887 Four years later -- $33,256 636,139 Five years later -- -- Six years later S. Re-estimated incurred claims and expenses; End of policy year 543,000 778,000 857,000 803,000 One year later 496,000 722,000 807,806 767,049 Two years later 461,000 657,391 1,004,736 10,000 Three years later 435,842 651,497 3,004,736 240,316 Four years later 352,937 33,256 3,434,720 Five years later 250,000 45,187 Six years later 24,895 6. Increase (decrease) in estimated incurred claims and expenses from end of policy year $(518,105) $(732,813) $2,577,720 $(562,684) The table above illustrates how BICEP's earned revenues and investment income compare to related costs of loss and other expenses assumed by BICEP as of the end of each policy year. The rows of the table are defined as follows: 1. This line shows the total of each fiscal year's earned deposit premiums and investment income, net amounts earned for purchased reinsurance. 2. This line shows each fiscal year's other operating costs including overhead and claims expense not allocable to individual claims. 3. This line shows the estimated incurred losses and allocated loss adjustment expenses as originally reported at the end of the first year in which the event that triggered coverage under the. contract occurred (both paid and accrued) net of loss assumed by excess or reinsurers. 4. This line shows the cumulative amounts paid as of the end of successive years for each policy year. 5. This section of rows shows how each policy year's incurred claims and expenses increased or decreased as of the end of successive years. This annual re-estimation results from. new information received on known claims, re-evaluation of existing information on known claims, as well as emergence of new claims not previously known. 6. This line compared the latest re-estimated incurred claims and expenses amount to the amount originally established (line 3) and shows whether this latest estimate of claims and expenses costs are greater or less than originally thought. As data for individual policy years mature, the correlation between original estimates and re-estimated accounts is commonly used to evaluate this accuracy of incurred claims and expenses currently recognized in less mature policy years. 12 Policy Year Ended June 30 1993 1994 1995 $2,317,408 $2,513,490 $1,941,159 1,705,829 1,717,915 1,715,043 886,906 1,035,407 -- 3,488 886,906 1,035,407 -- 10,000 767,244 711,287 ($175,619) ($268,153) $ -- 1 .Q o - ��..r,✓ �0 /7ZP J 7C. �•fk /24� BIG INDEPENDENT CITIES EXCESS POOL TOINT OWERS AUTHORITY c/o General Manager, Ken Spiker And Associates, Inc. 14156 Magnolia Blvd., Suite 103 Sherman Oaks, California 91423 (818) 788-0406 FAX No. (818) 784-1187 M E M O R A N D U M Date: June 5, 1995 To: --Members of the Liability Underwriting and Claims Committee .From: Gregory J. Spiker, ARM, General Manager Subject: LIABILITY UNDERWRITING AND CLAIMS COMMITTEE MEETING There .will be a meeting of the Liability Underwriting and Claims Committee at 3 :00 p.m. on Monday, June 12, 1995, in the 4th Floor Conference Room, Santa Ana City Hall, located at 20 Civic Center Plaza, Santa Ana, California (see map attached) . The Agenda for the .meeting is as follows: I . Discussion of BICEP 1995-96 Insurance Renewal Options . II . Committee Comments. III . Comments From The Public. IV. Adjournment . The members of the Committee are as follows : Jeff Stevens, Chairman Santa Ana Tom Cain San Bernardino Delaina Finch Oxnard _, r• Karen Foster Huntington Beach -1- cA cc : Board of Directors, Alternates and City Clerks NOTICE TO CITY CLERKS: Please post this meeting notice (Agenda) •fir ��� =f` t'. _ WA JUN _'y: ki% F �'yi t ray, City Clerk Eton Beach eet :ach, California 92648 I 11111Hi 1,I;IIHIIII;1M;I;111111fitIiIIdilii1 F • a BIG INDEPENDENT CITIES EXCESS POOL JOINT POWERS AUTHORITY C/o General Manager, Ken Spiker And Associates, Inc. 14156 Magnolia Blvd., Suite 103 Sherman Oaks, California 91423 (818) 788-0406 FAX No. (818) 784-1187 May 12, 1995 a c � z z t.J'7 (n In ocD=Fm Cn rnUT< m r R 7 v Ms. Connie Brockway, City Clerk City of Huntington Beach `o 2000 Main Street Huntington Beach, California 92648 Dear Ms. Brockway: Enclosed please find a copy of the June 30, 1994, Big Independent Cities Excess Pool (BICEP) Financial Statement. The BICEP Joint Powers Agreement requires the report to be filed as a public record with each of the BICEP Member Cities. Please place the report in the appropriate file in your office. Thank you for your cooperation. Sincerely, Gregory J. Spiker, ARM Ken Spiker And Associates, Inc. BICEP General Manager GJS:sI Enclosure a BIG INDEPENDENT CITIES EXCESS POOL . � FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION WITH INDEPENDENT AUDITOR'S REPORT JUNE 30, 1994 and June 30, 1993 j BIG INDEPENDENT CITIES EXCESS POOL i Table of Contents Paae Financial Statements: Independent Auditor's Report 1 = Balance Sheets, June 30, 1994 and June 30, 1993 2 A Statements of Revenue, Expenses and Changes in Fund Balances for the years ended June 30, 1994 and June 30, 1993 3 i Statements of Cash Flows for the years ended June 30, 1994 and June 30, 1993 4 Notes to Financial Statements 5-9 Supplementary Information Claims Development Information From Inception to June 30, 1994. 10 EMARDS. Dai 1_ & BERANFK CFKrIl pa)PI M-ic Acroi -vrA\ll INDEPENDENT AUDITOR'S REPORT The Board of Directors Big Independent Cities Excess Pool We have audited the accompanying balance sheets of the Big Independent Cities Excess Pool (BICEP) at June 30, 1994, and 1993 and the related statements of revenue, expenses and changes in fund balance and cash flows for the years then ended. These financial statements are the responsibility of BICEP's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audits provide a reasonable basis for our opinion. In our opinion, the 1994 and 1993 financial statements referred to above present fairly, in all material respects, the financial position of the Big Independent Cities Excess Pool at June 30, 1994 and 1993, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Note 1 and Note 7 to the financial statements discuss two issues that involve uncertainties not presently resolved. BICEP has seven years of historical data for use in its estimates of incurred but not reported claims and the corresponding premium adjustments. Although BICEP considers its experience and industry data in determining such amounts, assertions and projections as to future events are necessary and ultimate losses may be higher or lower than amounts projected. A claim involving a member city whose cost has exceeded that city's self-insured retention is being defended by BICEP and its attorneys but BICEP has stated that it is reserving its right to deny coverage. The excess carrier has categorically denied coverage. The matter is currently under discussion by the various parties and its outcome cannot be predicted. The comparative schedule of Claim Development, on page 11 is not a required part of the basic 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 supplementary information. However, we did not audit the information and express no opinion on it. AA Pasadena, California Edwards, Eichel & Beranek February 20, 1995 Certified Public Accountants 1 4�0 S. Los RUBLES.-V FM F St rre#4 PANAI NA.CAI IPVR<I l 91 101-'l?7 FAN 818/796-7U'4 BIG INDEPENDENT CITIES EXCESS POOL BALANCE SHEET June 30, 1994 and June 30, 1993 ASSETS 1994 1993 Cash and cash equivalents, unrestricted $ 30,653 $ 56,772 Restricted cash equivalents 3,587,934 3.528,329 1 i Total cash and cash equivalents 3,618,587 3,585,101 Investments (at cost, which approximates market value) 13,505,500 13,505,500 Accounts receivable 26,141 -- Accrued interest receivable 150,736 145,997 Estimated future premium adjustments 1,231,442 -- a a Bond issuance costs, net 564,524 608.709 Total assets S19.1 J'-93 $17.845.307 LIABILITIES AND FUND BALANCE Liabilities: Accounts payable $" 37,919 $ 103,129 Unpaid losses and loss adjustment expenses 5,361,640 3,256,349 Bonds payable 13,340,000 13,790,000 Accrued interest payable 362,371 373,471 Estimated future premium adjustments -- 322,358 ! Total liabilities 19,101,930 17,845,307_ Fund balance - -- Total liabilities and fund balance Si9.101 .9M S17.845.307 The accompanying notes are an integral part of these financial statements. 2 S BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF REVENUE, EXPENSES AND CHANGES IN FUND BALANCE Years ended June 30, 1994 and June 30, 1993 1994 1993 Revenue: Deposit premiums earned $ 2,463,458 $ 2,469,308 Estimated future premium adjustments 713,878 40,857 3,177,336 _ 2 510,165 Expenses: Net increase in actuarially determined unpaid losses and loss adjustment expenses 1,798,585 700,110 Purchased reinsurance 1,159,394 1,550,754 General and administrative expenses 149,213 129,331 Refunds of premiums 195,524 172,384 3,302,716 2,552,579 Excess (deficiency) of revenue over expenses, before net investment income (12 S.3801 (47-41AJ. Net investment income: Investment income 1,234,687 1,222,406 Interest expense (I.109.3 3-)L (1,179.9921 129-380 42,414 Excess of revenue over expenses -- Fund balance, at beginning of year -- Fund balance, at end of year S -- S - These accompanying notes are an integral part of these financial statements. 3 j t BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF CASH FLOWS Years ended June 30, 1994 and June 30, 1993 1994 1993 Cash flows from operating activities: Excess (deficiency) of revenue over expenses before net investment income $ (125,380) $ (42,414) Adjustment to reconcile excess (deficiency) of revenue over expenses before net investment income to net cash provided by ? operations: Amortization of bond issuance costs 39,185 39,185 Increase (decrease) in accounts payable (65,209) 76,062 Increase in unpaid losses and loss adjustment expenses 2,105,291 552,310 premium Accounts receivable(increse) (26,141) -- Increase in estimated future premium adjustments (1,553,8001 (31.798) Net cash provided by operating ? activities 373,946 992.345 Cash flows from investing activities: Interest received 1,229,948 1,225,698 Net cash provided by investing activities 1,229,948 1.225.698 Cash flows from noncapital financing activities: Bond principal payments (450,000) (425,000) Interest paid (1 ,120,408) (1,190,1921 Net cash used in noncapital financing activities _(1 .570,408} (1,615,1921 Net increase in cash and i cash equivalents 33,486 203,851 Cash and cash equivalents at beginning of year 3,585,101 3,382,250 Cash and cash equivalents at end of year S 3,618,587 S 3,585,101 The accompanying notes are an integral part of these financial statements. 4 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Ora anization _and Operations Big Independent 'Cities Excess Pool (BICEP) was created effective September 23, 1988, by a joint powers agreement among five cities organized and operating under the laws of the State of California. BICEP is organized pursuant to the provisions of the California Government Code for the purpose of providing joint insurance coverage and related risk-management services for member cities. The extension of joint insurance coverage to member cities began October 1, 1988. BICEP's liability program offers a combination of pooled and commercially purchased public auto and general liability coverages, plus errors and omissions coverage, for losses in excess of the member cities' specified self-insurance retention levels of one million dollars. Individual and aggregate claims in excess of specified levels are covered by excess i insurance policies purchased from commercial insurance carriers which, ' combined with the program's self-funded layers, offer a total of $25 million in coverage limits. Additionally, through its broker Rollins, Hudig, Hall, it enables its members to purchase property and worker's compensation insurance as a group. BICEP is a nonprofit California public agency; thus, it is tax-exempt. It is also considered a "Special District" by the Office of the State Controller, Division of Local Government Fiscal Affairs, for the purpose of filing an Annual Report of Financial Transactions of Special Districts. Basis of Accounting The accounting records of BICEP are maintained on the accrual basis of accounting. Reclassifications Certain reclassifications were made to Deposit Premiums Earned and Purchased Reinsurance previously reported for the year ending June 30, 1993 on the Statement of Revenues, Expenses and Changes in Fund Balances. The reclassifications were made to improve comparison with similar items reported for the year ended June 30, 1994. Bond Issuance Costs Bond issuance costs are amortized over the life of the bond issue using the straight line method. Cash and Cash Equivalents BICEP considers money market funds and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash represents funds held in trust for payment of bond principal and interest, future debt service, and claims payment. 5 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) : Rebatable Arbitrage Earnings Rebatable arbitrage earnings represents the excess of the amount earned on all cash equivalents and investments over the amount which would have been earned if such cash equivalents and investments were invested at a rate equal to the bond yield for activity through February 1, 1993. This excess is. subject to change due to bond and investment activity occurring after February 1, 1993. The interim calculation previously referred to indicates that there would be no arbitrage payable. Deposit Premium Revenue 3 Premiums are recognized as earned over the periods covered by the . policies. Under the terms of the Liability Risk Coverage Agreement, between BICEP and its member cities, premium adjustments resulting in additional premium assessments, or refunds will commence in February 1992, covering the experience of BICEP from inception. Estimates of such adjustments are recorded in the financial statements annually as estimated future premium adjustments. Premium adjustments are subject to change as the ultimate cost of claims becomes known, investment income and expenses are realized, and BICEP's costs are allocated to each Policy Year. Unpaid Losses and Loss Adiustment Expenses Estimated unpaid losses and loss adjustment expenses include an amount for losses incurred but not reported. These estimates have been discounted to their present value. Liabilities are based on the estimated ultimate cost of settling the claims, including the effects of inflation and other societal and economic factors. The previously noted claims and ultimate recoveries will be deducted from the gross amount of unpaid losses. Claims which have been incurred but not reported to the claims j administrator at June 30, 1994 have been estimated through an independent actuarial analysis based on loss development experience of BICEP and the member cities and available industry loss development data. BICEP's recognition of losses incurred but not reported is in conformity with Government ,Accounting Standards Board (GASB10), Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. 2. CASH AND INVESTMENTS Under provisions of the California Government Code (Code) , BICEP is authorized to invest in: • A variety of federal and state treasury obligations (including local California agencies) 6 i :I BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 2. CASH AND INVESTMENTS (continued) : • Obligations or other instruments of or issued by a federal agency or government sponsored enterprise • Bankers' acceptances which are eligible for purchase by the federal reserve system (subject to certain limitations) • Prime quality commercial paper (subject to certain limitations) • Negotiable certificates of deposit issued by nationally or state chartered banks, savings and loan associates and credit unions ..1 • Repurchase agreements or reverse repurchase agreements of any securities authorized by the Code Cash and Cash Equivalents, Unrestricted At June 30, 1994, the net carrying amount and deposit balance was $30,363 of which $22,986 was invested in the Local Agency Investment Fund, an investment pool maintained by the State Treasurer. Restricted Cash Equivalents and Investments BICEP invests only in investments that are insured or registered, or for which the securities are held by BICEP or its agent in BICEP's name. Investments held by the Trustee at June 30, 1994, consist of: Certificates of deposit $13,505,500 Repurchase agreements 3,587,926 - Cash a S17,093,434 BICEP has an investment agreement with the Mitsui Trust and Banking Company for the certificates of deposit. The agreement restricts withdrawals except for that provided in the Trust Indenture, for purposes of debt service claims payment. Terms of the agreement provide for a fixed rate of interest at 8.15 percent payable semi-annually, with an expiration date of March 1, 1999. The monies held by the Bank represent an absolute and unconditional obligation of the Bank. 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES: The following represents changes in the unpaid losses and loss adjustment expenses for BICEP for the years ended June 30: 7 j ;i BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (continued) : 1994 1993 Unpaid losses and loss adjustment expenses at beginning of year $3,256,349 $2,704,039 i Provisions for insured events of the current year 2,581,971 886,906 Payments of claims reported (476,680) (139,567) i Decrease in funding levels for ;} previous policy years. -- (195,029) Total unpaid losses and loss adjustment expenses at end of year S5.361.640 $1,796,349 4. BONDS PAYABLE: In January 1989, BICEP issued Revenue Bonds Series 1988A for the purpose of acquiring working capital and to-finance under-writing expenses. Interest on the bonds is payable semi-annually at rates ranging from 6.5% ' to 8.25%. Principal maturities range from $360,000 to $710,000 and are due annually on March 1, from 1991 through 2000. Term bonds aggregating $9,775,000 mature in 2009 and are subject to mandatory sinking fund redemption on March 1 in each year, on or after March 1, 2001 by lot, at a .redemption price equal to the principal amount thereof to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. The bonds are collateralized by BICEP's right to receive and collect all premium payments and prepayments. Each member city is obligated to pay all premiums as assessed, until the earlier of termination of the bond i term or prepayment of the bond obligation. Payments required on the bonds ' during the next five years ar as follows: Year ending i June 30 Principal Interest Total 1995 485,000 1,087,108 1,572,108 1996 520,000 1,057,247 1,577,247 1997 560-,000 1,010,208 1,570,208 1998 620,000 966,528 1,586,528 1999 670,000 917,548 1,587,548 The bonds maturing on or after March 1, 1997 are subject to optional redemption in whole or in part prior to maturity on any payment date on or after March 1, 1996, at the redemption prices, expressed as percentages of the principal amount of such Series 1988A Bonds to be redeemed, set forth in the following table, together with accrued interest to the redemption date: 8 i BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS continued 4. BONDS PAYABLE (continued) : Redemption Date Redemption Price March 1, 1996 and September 1, 1996 103% March 1, 1997 and September 1, 1997 102% March 1, 1998 and September 1, 1998 101% March 1, 1999 and thereafter 100% 5. REINSURANCE: BICEP reinsures its risks under excess of loss reinsurance agreements for the purpose of limiting its maximum exposure on any one loss or group of losses. BICEP is contingently liable for losses and lose adjustment expenses related to ceded business to the extent that its reinsurer is unable to fulfill its commitments. Management believes that its reinsurer is and will continue to be able to satisfy its obligations under the reinsurance agreement. i BICEP's liabilities for unpaid losses and loss adjustment expenses as of June 30, 1994 and 1993, have been estimated net of amounts that would be recoverable from the reinsurer. 6. RELATED-PARTY TRANSACTIONS: Rollins Hudig Hall serves as BICEP's insurance broker and brokered $1,158,394 in reinsurance agreements during the period ended June 30, 1994. 7 UNCERTAINTY RELATED TO A CLAIM INVOLVING A MEMBER CITY. A claim is presently being litigated involving due process on a condemnation action whose costs have already exceeded that city's self- insured retention and which BICEP., in the opinion of counsel, may not have provided coverage due to the alleged willful nature of the alleged damages inflicted. The reinsurer has denied coverage. BICEP has continued to pay for the cost of defense in excess of the self-insured retention but has reserved its rights and is actively pursuing a course of attempting to obtain a settlement before the matter reaches the courts. There are several matters in contention, the nature of the acts by the member city, whether BICEP is liable for its level of coverage, that of the excess carrier or at all, and whether or not the excess carrier has liability. 9 r� 1 i.' i SUPPLEMENTAL INFORMATION i i Y 7 Policy Year Ended June 30 1993 1994 $2,317,408 $2,513,490 1,705,829 1,717,915 886,906 2,581,971 886,906 2,581,971 10,000 -- (876,906) -- BIG INDEPENDENT CITIES EXCESS POOL JOINT POWERS AUTHORITY • c/o General Manager, Ken Spiker And Associates, Inc. 14156 Magnolia Blvd., Suite 103 Sherman Oaks, California 91423 (818) 788-0406 FAX No,,,(81$) 784-1187 February 22 , 1994 G5 Ms . Connie Brockway, City Clerk City of Huntington Beach 2000 Main Street Huntington Beach, California 92648 Dear Ms . Brockway: Enclosed please find a copy of the June 30, 1993 Big Independent Cities Excess Pool (BICEP) Financial Statements and Supplementary Information With Independent Auditor' s Report for the years ended June 30, 1993 and 1921 . The BICEP Joint Powers Agreemen requires the report to be filed as a public record with each of the BICEP Member Cities . Please place the report in the appropriate file in your office . Thank you for your cooperation. Sincerely, Gregory J. Spiker, ARM General Manager GJS : sl Enclosure BIG INDEPENDENT CITIES EXCESS POOL FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION WITH INDEPENDENT AUDITOR'S REPORT JUNE 30, 1993 and June 30, 1992 BIG INDEPENDENT CITIES EXCESS POOL Table of Contents Pave Financial Statements: Independent Auditor's Report 1 Balance Sheets, June 30, 1993 and June 30, 1992 2 Statements of Revenue, Expenses and Changes in Fund Balances for the years ended June 30, 1993 and June 30, 1992 3 Statements of Cash Flows for the years ended June 30, 1993 and June 30, 1992 4 . Notes to Financial Statements 5-9 Supplementary Information 10 EMARDS, EICHEL & BERANEK CER IRED PFBUC ACCn:xr:,NIs INDEPENDENT AUDITOR'S REPORT The Board of Directors Big Independent Cities Excess Pool We have audited the accompanying balance sheets of the Big Independent Cities Excess Pool (BICEP) at June 30, 1993, and 1992 and the related statements of revenue, expenses and changes .in fund balance and cash flows for the years then ended. These financial statements are the responsibility of BICEP's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audits provide a reasonable basis for our opinion. In our opinion, the 1993 and 1992 financial statements referred to above present fairly, in all material respects, the financial position of the Big Independent Cities Excess Pool at June 30, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Note 1 and Note 7 to the financial statements discuss two issues that involve uncertainties not presently resolved. BICEP has limited historical data for use in its estimates of incurred but not reported claims and the corresponding premium adjustments. Although BICEP considers its experience and industry data in determining such amounts, assertions and projections as to future events are necessary and ultimate losses may differ significantly from amounts projected. A claim involving a member city whose cost has exceeded that city's self-insured retention is being defended by BICEP and its attorneys but BICEP has stated that it is reserving its right to deny coverage. The excess carrier has categorically denied coverage. The matter is currently under discussion by the various parties and its outcome cannot be predicted. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information is presented for purposes of additional analysis and is not a required part of the basic financial statements of the Big Independent Cities Excess Pool. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. Pasadena, California Edwards, Eichel & Beranek December 16, 1993 Certified Public Accountants 1 I i0 S.Los Roai_es A\ENUE SUITE#450 PASADENA.CALIFO RM-\91 101-'_417 818/796-49.0 • 714/549-5955 FAX 81 S/796-7024 BIG INDEPENDENT CITIES EXCESS POOL BALANCE SHEET June 30, 1993 and June 30, 1992 ASSETS 1993 1992 Cash and cash equivalents, unrestricted $ 56,772 $ 67,983 Restricted cash equivalents 3,528,329 3,313,267 Total cash and cash equivalents 3,585,101 3,381,250 Investments (at cost, which approximates market value) 13,505,500 13,505,500 Accrued interest receivable 145,997 149,289 Bond issuance costs, net 608,709 647,894 Total assets $17,845,307 517.683.933 LIABILITIES AND FUND BALANCE Liabilities: Accounts payable $ 103,129 $ 27,067 Unpaid losses and loss adjustment expenses 3,256,349 2,704,039 Bonds payable 13,790,000 14,215,000 Accrued interest payable 373,471 383,671 Estimated future premium adjustments 322.358 354,156 Total liabilities 17,845,307 17,683,933 Fund balance Total liabilities and fund balance 517.845.307 Si7.683.93-1 The accompanying notes are an integral part of these financial statements. 2 BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF REVENUE, EXPENSES AND CHANGES IN FUND BALANCE Years ended June 30, 1993 and June 30, 1992 1993 1992 Revenue': Deposit premiums earned $ 2,885,434 $ 3,020,788 Estimated future premium adjustments 40.857 "-(69.171) 2,926,791 _2,951.617 Expenses: Net increase in actuarially determined unpaid losses and loss adjustment expenses 700,110 664,039 Purchased reinsurance 1,966,880 2,197,101 General and administrative expenses 129,331 162,786 Refunds of premiums 172.384 - 2,968,705 3,023.926 _. Excess (deficiency) of revenue over expenses, before net investment income (42.4141 (72,302.). Net investment income: Investment income 1,222,406 1,280,701 Interest expense (1,179,992) (1 .208,3g21 42.414 72.309 Excess of revenue over expenses -- -- Fund balance, at beginning of year -- -- Fund balance, at end of year -- These accompanying notes are an integral part of these financial statements. 3 BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF CASH FLOWS Years ended June 30, 1993 and June 30, 1992 1993 1992 Cash flows from operating activities: F Excess (deficiency) of revenue over expenses before net :r- investment income $ (42,414) $ (72,309) Adjustment to reconcile excess (deficiency) of revenue over expenses before net investment income to net cash provided by ,,operations: Amortization of bond issuance costs 39,185 39,185 Increase (decrease) in accounts payable 76,062 (2,532) Increase in unpaid losses and loss adjustment expenses 552,310 664,039 premium (Decrease) increase in rebatable arbitrage earnings -- (10261) Increase (decrease) in estimated future premium adjustments (31,798) 69.172 Net cash provided by operating activities 593,,345 687,294 Cash flows from investing activities: Receipts from sale of investments (payments from purchase of invest- ments) , net - 16,206 Interest received 1,225,698 1,284,911 Net cash provided by investing activities 1.225698 1,301,119 Cash flows from noncapital financing activities: Bond principal payments (425,000) (390,000) Interest paid (1,190,1921 (1,217.4931 Net cash used in noncapital financing activities (1,615,192) (1,607,493) Net increase in cash and cash equivalents 203,851 380,920 Cash and cash equivalents at beginning of year 3,381,250 3,000,930 Cash and cash equivalents at end of year S 3.585.101 S 3.381 .250 The accompanying notes are an integral part of these financial statements. 4 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Operations Big Independent Cities Excess Pool (BICEP) was created effective September 23, 1988, by a joint powers agreement among five cities organized and operating under the laws of the State of California. BICEP is organized pursuant to the provisions of the California Government Code for the purpose of providing joint insurance coverage and related risk-management services for member cities. The extension of joint insurance coverage to member cities began October 1, 1988. BICEP's liability program offers a combination of pooled and commercially purchased public auto and general liability coverages; plus errors and omissions coverage, for losses in excess of the member cities' specified self-insurance retention levels- of one million dollars. Individual and aggregate claims in excess of specified levels are covered by excess insurance policies purchased from commercial insurance carriers which, combined with the program's self-funded layers, offer a total of $25 million in coverage limits. BICEP is a nonprofit California public agency.; thus, it is tax-exempt. It is also considered a "Special District" by the Office of the State Controller, Division of Local Government Fiscal Affairs, for the purpose of filing an Annual Report of Financial Transactions of Special Districts. Basis of Accounting The accounting records of BICEP are maintained on the accrual basis of accounting. v: Bond Issuance Costs Bond issuance costs are amortized over the life of the bond issue using the straight line method. Cash and Cash Equivalents BICEP considers money market funds and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash represents funds held in trust for payment of bond principal and interest, future debt service, and claims payment. Rebatable Arbitrage Earnings Rebatable arbitrage earnings represents the excess of the amount earned on all cash equivalents and investments over the amount which would have been earned if such cash equivalents and investments were invested at a rate equal to .the bond yield for activity through February 1, 1993. This excess is subject to change due to bond and investment activity occurring after February 1, 1993. The actual amount due to the Internal Revenue Service will be payable no later than April 1, 1994. The interim calculation previously referred to indicates that there would be no arbitrage payable. 5 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS Continued r 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) : Deposit Premium Revenue Premiums are recognized as earned over the periods covered by the policies. Under the terms of the Liability Risk Coverage Agreement, between BICEP and its member cities, premium adjustments resulting in additional premium assessments or refunds will commence in February 1992, covering the experience of BICEP from inception. Estimates of such adjustments are recorded in the financial statements annually as estimated future premium adjustments. Premium adjustments are subject to change as the ultimate cost of claims becomes known, investment income and expenses are realized, and BICEP's costs are allocated to each Policy Year. Unpaid Losses and Loss Adjustment Expenses Estimated unpaid losses and loss adjustment expenses include an amount for losses incurred but not reported. These estimates have not been discounted to their present value. Prior to June 30, 1992, BICEP had not paid for any claims or loss adjustment expenses. Amounts paid in the year ended June 30, 1992 amounted to $139,567, with one major claim unresolved. Liabilities are based , on the estimated ultimate cost of settling the claims, including the effects of inflation and other societal and economic factors. The previously noted claims and ultimate recoveries will be deducted from the gross amount of unpaid losses. Claims which have been incurred but not reported to the claims administrator at June 30, 1993 have been estimated through an independent actuarial analysis based on loss development experience of BICEP and the member cities and available industry loss development data. However, since only limited historical data is available, and since assumptions and projections as to future events are necessary, ultimate losses may differ significantly from this estimate. BICEP's recognition of losses incurred but not reported is in conformity with .Government Accounting Standards Board (GASB10) , Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. 2. CASH AND INVESTMENTS: Under provisions of the California Government Code (Code) , BICEP is authorized to invest in: • A variety of federal and state treasury obligations (including local California agencies) 6 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS Continued 2. CASH AND INVESTMENTS (continued) : • Obligations or other instruments of or issued by a federal agency or government sponsored enterprise • Bankers' acceptances which are eligible for purchase by the federal reserve system (subject to certain limitations) • Prime quality commercial paper (subject to certain limitations) • Negotiable certificates of deposit issued by nationally or state chartered banks, savings and loan associates and credit unions • Repurchase agreements or reverse repurchase agreements of any = securities authorized by the Code Cash and Cash Equivalents, Unrestricted At June 30, 1993, the net carrying amount and deposit balance was $56,772 of which $56,688 was invested in the Local Agency Investment Fund, an investment pool maintained by the State Treasurer. Restricted Cash Equivalents and Investments BICEP "invests only in investments that are insured or registered, or for which ,the securities are held by BICEP or its agent in BICEP's name. Investments held by the Trustee at June 30, 1993, consist of: -Certificates of deposit $13,505,500 -Repurchase agreements 2,978,006 Cash 8 E16.483.51 BICEP has an investment agreement with the Mitsui Trust and Banking Company for the certificates of deposit. The agreement restricts withdrawals except for that provided in the Trust Indenture, for purposes .of •debt service claims payment. Terms of the agreement provide for a fixed rate of interest at 8.15 percent payable semi-annually, with an expiration date of March 1, 1999. The monies held by the Bank represent an absolute and unconditional obligation of the Bank. 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES: The following represents changes in the unpaid losses and loss adjustment expenses for BICEP for the years ended June 30: 7 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS Continued 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (continued) : 1993 1992 Unpaid losses and loss adjustment expenses at beginning of year $2,704,039 $2,040,000 Provisions for insured events of the current year 886,906 803,000 Payments of claims reported (139,567) -- Decrease in funding levels for previous policy years. (195,029) (138,961) Total unpaid losses and loss adjustment expenses at end of year $3,256.349 $2,704,039 4. BONDS PAYABLE: In January 1989, BICEP issued Revenue Bonds Series 1988A for the purpose of acquiring working capital and to finance under-writing expenses. Interest on the bonds is payable semi-annually at rates ranging from 6.5% to 8.25%. Principal maturities range from $360,000 to $710,000 and are due annually on March 1, from 1991 through 2000. Term bonds aggregating $9,775,000 mature in 2009 and are subject to mandatory sinking fund redemption on March 1 in.each year, on or after March 1, 2001 by lot, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. The bonds are collateralized by BICEP's right to receive and collect all premium payments and prepayments. Each member city is obligated to pay all premiums as assessed, until the earlier of termination of the bond term or prepayment of the bond obligation. Payments required on the bonds during the next five years ar as follows: Year ending June 30 Principal Interest Total 1994 450,000 1,120,408 1,570,408 1995 485,000 1,087,108 1,572,108 1996 520,000 1,057,247 1,577,247 1997 560,000 1,010,208 1,570,208 1998 620,000 966,528 1,586,528 The bonds maturing on or after March 1, 1997 are subject to optional redemption in whole or in part prior to maturity on any payment date on or after March 1, 1996, at the redemption prices, expressed as percentages of the principal amount of such Series 1988A Bonds to be redeemed, set forth in the following table, together with accrued interest to the redemption date: 8 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS Continued 4. BONDS PAYABLE (continued) : Redemption Date Redemption Price March 1, 1996 and September 1, 1996 103% March 1, 1997 and September 1, 1997 102% March 1, 1998 and September 1, 1998 101% March 1, 1999 and thereafter 100% 5. REINSURANCE: BICEP reinsures its risks under excess of loss reinsurance agreements for the purpose of limiting its maximum exposure on .any one loss or group of losses. BICEP is contingently liable for losses and loss adjustment expenses related to ceded business to the extent that its reinsurer is unable to fulfill its commitments. Management believes'that. its reinsures is and will continue to be able to satisfy its obligations under the reinsurance agreement. BICEP's liabilities for unpaid losses and loss adjustment expenses as of June 30, 1993 and 1992, have been estimated net of amounts that would be recoverable from the reinsurer. 6. RELATED-PARTY TRANSACTIONS: Rollins Hudig Hall, formerly Frank B. Hall, serve as BICEP's insurance broker and brokered $1,550,754 in reinsurance agreements during the period ended June 30, 1993. 7 Uncertainty Related to a claim involving a member city. A claim is presently being litigated involving due process on a condemnation action whose costs have already exceeded that city's self- insured retention and which BICEP, in the opinion of counsel, may not have provided coverage due to the willful nature of the alleged damages inflicted. The reinsurer has denied coverage. BICEP has continued to pay for the cost of defense in excess of the self-insured retention but has reserved its rights and is actively pursuing a course of attempting to obtain a settlement before the matter reaches the courts. There are several matters in contention, the nature of acts by the member city, whether BICEP is liable for its level of coverage, that of the excess carrier or at all, and whether or not the excess carrier has liability. 9 SUPPLEMENTARY INFORMATION SIG INDEPENDENT CITIES EXCESS POOL CLAIMS DEVELOPMENT INFORMATION cumulative from inception through June 30, 1993 Policy Year Ended June 30 1989 1990 1991 1992 1993 1. Net deposit premium revenue earned and investment income $ 799,203 $2,341,824 $2,216,499 $2,134,993 $2,317,408 2. Other costs 338,203 1,619,824 1,359,499 1,322,932 1,705,829 3. Estimated incurred claims and expenses, end of policy year 543,000 778,000 857,000 803,000 886,906 4. Paid claims (cumula- tive) as of: End of policy year -- -- -- --One year later -- -- 4,736 --Two years later -- 3,640 114,925 -- -- Three years later -- 28,381 -- -- -- Four years later -- -- -- -- -- 5. Re-estimated incurred claims and expenses; End of policy year 543,000 778,000 857,000 803,000 886,906 One year later 496,000 722,000 807,806 767,049 Two years later 461,000 657,391 1,004,736 -- -- Three years later 435,842 691,497 -- -- -- Four years later 352,937 -- -- -- -- 6. Increase (decrease) in estimated incurred claims and expenses from end of policy year $(190,063) $ (86,508) $ 147,736 $ (35,951)The table above illustrates how BICEP's earned revenues and investment income compare to related costs of loss and other expenses assumed by BICEP as of the end of each policy year. The rows of the table are defined as follows: 1. This line shows the total of each fiscal year's earned deposit premiums and investment income, net amounts earned for purchased reinsurance. 2. This line shows each fiscal year's other operating costs including overhead and claims expense not allocable to individual claims. 3. This line shows the estimated incurred losses and allocated loss adjustment expenses as originally reported at the end of the first year in which the event that triggered coverage under the contract occurred (both paid and accrued) net of loss assumed by excess or reinsurers. 4. This line shows the cumulative amounts paid as of the end of successive years for each policy year. 5. This section of rows shows how each policy year's incurred claims and expenses increased or decreased as of the end of successive years. This annual re-estimation results from new information received on known claims, re-evaluation of existing information on known claims, as well as emergence of new claims not previously known. 6. This line compared the latest re-estimated incurred claims and expenses amount to the amount originally established (line 3) and shows whether this latest estimate of claims and expenses costs are greater or less than originally thought. As data for individual policy years mature, the correlation between original estimates and re-estimated accounts is commonly used to evaluate this accuracy of incurred claims and expenses currently recognized in less mature policy years. 10 BIG INDEPENDENT CITIES EXCESS POOL JOINT POWERS AUTHORITY c/o General Manager, Ken Spiker And Associates, Inc. 14156 Magnolia Blvd., Suite 103 Sherman Oaks, California 91423 • (818) 788-0406 • FAX No. (818) 784-1187 April 29, 1993 Ms. Connie Brockway, City Clerk City of Huntington Beach 2000 Main Street Huntington Beach, California 92648 Dear Ms. Brockway: Enclosed please find a copy of the June 30, 1992 Big Independent Cities Excess Pool (BICEP) Financial Statements and Supplementary Information With Independent Auditor' s Report for the years ended June 30, 1992 and 1991. The BICEP Joint Powers Agreement requires the report to be filed as a public record with each of the BICEP Member Cities. Please place the report in the appropriate file in your office. Thank you for your cooperation. Sincerely, N� Gordon R. Davis, ARM General Manager GRD: sl Enclosure BIG INDEPENDENT CITIES EXCESS POOL FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION WITH INDEPENDENT AUDITOR'S REPORT JUKE 30, 1992 and June 30, 1991 BIG INDEPENDENT CITIES EXCESS POOL Table of Conteuts Paae Financial Statements: Independent Auditor's Report 1 Balance Sheets, June 30, 1992 and June 30, 1991 2 Statements of Revenue, Expenses and Changes in Fund Balances for the years ended June 30, 1992 and June 30, 1991 3 Statements of Cash Flows for the years ended June 30, 1992 and June 30, 1991 4 Notes to Financial Statements 5-9 Supplemental Information 10 EDWARDS. EICHEL & BER.- NFK CER FIFIEn 1't_iii.iC At cut x r ',1 INDEPENDENT AUDITOR'S REPORT The Board of Directors Big Independent Cities Excess Pool We have audited the accompanying balance sheets of the Big Independent Cities Excess Pool (BICEP) at June 30, 1992, and the related statements of revenue, expenses and changes in fund balance and cash flows for the year then ended. These financial statements are the responsibility of BICEP'S management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of BICEP as of June 30, 1991 were audited by .other auditors whose report dated October 24, 1991 expressed an unqualified opinion. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audits provide a reasonable basis for our opinion. In our opinion, the 1992 financial statements referred to above present fairly, in all material respects, the financial position of the Big Independent Cities Excess Pool at June 30, 1992, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, BICEP has limited historical data for use in its estimates of incurred but not reported claims and the corresponding premium adjustments. Although BICEP considers its experience and industry data in determining such amounts, assumptions and projections as to future events are necessary and ultimate losses may differ significantly from amounts projected. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental information is presented for purposes of additional analysis and is not a required part of the basic financial statements of the Big Independent Cities Excess Pool. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. &kAud4l E4s1,- &a.ewJ— Pasadena, California Edwards, Eichel & Beranek February 26, 1993 Certified Public Accountants 1 1;n S. Los BIG INDEPENDENT CITIES EXCESS POOL BALANCE SHEET June 30, 1992 and June 30, 1991 ASSETS 1992 1991 Cash and cash equivalents, unrestricted $ 67,983 $ 79,818 Restricted cash equivalents 3,313,267 2,920,512 Total cash and cash equivalents 3,381,250 3,000,330 Investments (at cost, which approximates market value) 13,505,500 13,521,706 Accrued interest receivable 149,289 153,501 Bond issuance costs, net 647,894 687,079 Total assets $17,683.933 $$17,362,616 LIABILITIES AND FUND BALANCE Liabilities: Accounts payable $ 27,067 $ 29,599 Unpaid losses and loss adjustment expenses 2,704,039 21040,000 Bonds payable 14,215,000 14,605,000 Accrued interest payable 383,671 392,772 Rebatable arbitrage earnings ' -- 10,261 Estimated future premium adjustments 354,156 284,984 Total liabilities 17,693,938 17,362,616 Fund balance -- Total liabilities and fund balance $17,683,933 S17,362.616 The accompanying notes are an integral part of these financial statements. 2 BIG INDEPENDENT CITIES EXCESS POOL STATMWHTS OF REVENUE, EXPENSES AND CHANGES IN FUND BALANCE for the year ended June 30, 1992 and June 30, 1991 1992 1991 Revenue: Deposit premiums earned $ 3,020,788 $ 2,989,293 Estimated future premium adjustments (69,171) (282,6441 2,951,617 2,706,649 Expenses: Net increase in actuarially determined unpaid losses and loss adjustment expenses 664,039 766,000 Purchased reinsurance 2,197,101 1,906,333 General and administrative expenses 162,786 164,992_ 3.023.926 2,837,395 Excess (deficiency) of revenue -over expenses, before net investment income (72J U 1 (130.6761 Net investment income: Investment income 1,280,701 1,325,183 Interest expense (1,208,392) _(1,194,5071 72.309 130,676 Excess of revenue over expenses -- -- Fund balance, at beginning of year -- -- Fund balance, at end of year -- These accompanying notes are an integral part of these financial statements. 3 BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF CASR FLOWS Years ended June 30, 1992 and June 30, 1991 1992 1991 Cash flows from operating activities: Excess (deficiency) of revenue over expenses before net investment income $ (72,309) $ (130,676) Adjustment to reconcile excess (deficiency) of revenue over expenses before net investment income to net cash provided by operations: Amortization of bond issuance costs 39,185 39,185 Increase (decrease) in accounts payable (2,532) 22,173 Increase in unpaid losses and loss adjustment expenses 664,039 766,000 Decrease in unearned premium -- -- (Decrease) increase in rebatable arbitrage earnings (10,261) (5,375) Increase (decrease) in estimated future premium adjustments 69,172 282F644 Net cash provided by operating activities 687.294 973.951 Cash :.flows from investing activities: Receipts from sale of investments (payments from purchase of invest- ments) , net 16,206 (16,206) Interest received 1,284.913 1 .326.363 Net cash provided by investing activities 1i301 .119 1 ,310,197 Cash flows from noncapital financing activities: Bond principal payments (390,000) (360,000) Interest paid (?.212._4g_31 _ (1.202.6061 Net cash used in noncapital financing activities _(1,607,493) (1,562.6061 Net increase in cash and cash equivalents 380,920 721,502 Cash and cash equivalents at beginning of year 1,000,310 2.278.828 Cash and cash equivalents at end of year S 3,381,250 S 3,000.330 The accompanying notes are an integral part of these financial statements. 4 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Operations Big Independent Cities Excess Pool (BICEP) was created effective September 23, 1988, by a joint powers agreement among five cities organized and operating under the laws of the State of California. BICEP is organized pursuant to the provisions of the California Government Code for the purpose of providing joint insurance coverage and related risk-management services for member cities. The extension of joint insurance coverage to member cities began October 1, 1988. BICEP's liability program offers a combination of pooled and commercially purchased public auto and general liability coverages, plus errors and omissions coverage, for losses in excess of the member cities' specified self-insurance retention levels of one million dollars. Individual and aggregate claims in excess of specified levels are covered by excess insurance policies purchased from commercial insurance carriers which, combined with the program's self-funded layers, offer a total of $25 million in coverage limits. BICEP is a nonprofit California public agency; thus, it is tax-exempt. It is also considered a "Special District" by the Office of the State Controller, Division of Local Government Fiscal Affairs, for the purpose of filing an Annual Report of Financial Transactions of Special Districts. Basis of Accounting The accounting records of BICEP are maintained on the accrual basis of accounting. Bond Issuance Costs Bond issuance costs are amortized over the life of the bond issue using the straight line method. Cash and Cash Equivalents BICEP considers money market funds and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Restricted Cash Restricted cash represents funds held in trust for payment of bond principal and interest, future debt service, and claims payment. Rebatable Arbitrage Earnings Rebatable arbitrage earnings represents the excess of the amount earned on all cash equivalents and investments over the amount which would have been earned if such cash equivalents and investments were invested at a rate equal to the bond yield for activity through February 1, 1992. This excess is subject to change due to bond and investment activity occurring after February 1, 1992. The actual amount due to the Internal Revenue Service will be payable no later than April 1, 1994. The interim calculation previously referred to indicates that there would be no arbitrage payable.- 5 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEUMS Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) : Deposit Premium Revenue Premiums are recognized as earned over the periods covered by the policies. Under the terms of the Liability Risk Coverage Agreement, between BICEP and its member cities, premium adjustments resulting in additional premium assessments or refunds will commence in February 1992, covering the experience of BICEP from inception. Estimates of such adjustments are recorded in the financial statements annually as estimated future premium adjustments. Premium adjustments are subject to change as the ultimate cost of claims becomes known, investment income and expenses are realized, and BICEP's costs are allocated to each Policy Year. Unpaid Losses and Loss Adiustment Expenses Estimated unpaid losses and loss adjustment expenses include an amount for losses incurred but not reported. These estimates have not been discounted to their present value. At June 30, -1991 and 1990, BICEP had not paid any losses or loss adjustment expenses. Subsequent to June 30, 1992, two claims were submitted involving different member cities, which might penetrate their self-insured retentions. Liabilities are based on the estimated ultimate cost of settling the claims, including the effects of inflation and other societal and economic factors. The previously noted claims and ultimate recoveries will be deducted form the gross amount of unpaid losses. Claims which have been incurred but not reported to the claims administrator at June 30, 1992 have been estimated through an independent actuarial analysis based on loss development experience of BICEP and the member cities and available industry loss development data. However, since only limited historical data is available, and since assumptions and projections as to future events are necessary, ultimate losses may differ significantly from this estimate. BICEP's recognition of losses incurred but not reported is in conformity with Government Accounting Standards Board (GASB10) , Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. 2. ' CASH AND INVESTMENTS: Under provisions of the California Government Code (Code) , BICEP is authorized to invest in: • A variety of federal and state treasury obligations (including local California agencies) 6 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATE4ENTS Continued 2. CASH AND INVESTMENTS (continued) : • Obligations or other instruments of or issued by a federal agency or government sponsored enterprise • Bankers' acceptances which are eligible for purchase by the federal reserve system (subject to certain limitations) • Prime quality commercial paper (subject to certain limitations) • Negotiable certificates of deposit issued by nationally or state chartered banks, savings and loan associates and credit unions • Repurchase agreements or reverse repurchase agreements of any securities authorized by the Code Cash and Cash Equivalents, Unrestricted At June 30, 1992, the net carrying amount and deposit balance was $69,783 of which $62,267 was invested in the Local Agency Investment Fund, an investment pool maintained by the State Treasurer. Restricted Cash Equivalents and Investments BICEP invest only in investments that are insured or registered, or for which the securities are held by BICEP or its agent in BICEP's name. Investments held by the Trustee at June 30, 1992, consist of: Certificates of deposit $13,505,500 Repurchase agreements 3,313,261 Cash 6. S13.818.767 BICEP has an investment agreement with the. Mitsui Trust and Banking Company for the Certificates of deposit. The agreement restricts withdrawals except for that provided in the Trust Indenture, for purposes of debt service claims payment. Terms of the agreement provide for a fixed rate of interest at 8.15 percent payable semi-annually, with an expiration date of March 1, 1999. The monies held by the Bank represent an absolute and unconditional obligation of the Bank. 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES: The following represents changes in the unpaid losses and loss adjustment expenses for BICEP for the years ended June 30: 7 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS Continued 3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (continued) : 1992 1991 Unpaid losses and loss adjustment expenses at beginning of year $2,040,000 $1,274,000 Provisions for insured events of the current year 803,000 857,000 Decrease in funding levels for previous policy years TIR-961) (S1,o�o1 Total unpaid.losses and loss adjustment expenses at end of year $2,704.039 $2,040,000 4. BONDS PAYABLE: In January 1989, BICEP issued Revenue Bonds Series 1988A for the purpose of -acquiring working capital and to finance under-writing expenses. Interest on the bonds is payable semi-annually at rates ranging from 6.5% to 8.2S%. Principal maturities range from $360,000 to $710,000 and are due annually on March 1, from 1991 through 2000. Term bonds aggregating $9,775,000 mature in 2009 and are subject to mandatory sinking fund redemption on March 1 in each year, on or after March 1, 2001 by lot, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. The bonds are collateralized by BICEP's right to receive and collect all premium payments and prepayments. Each member city is obligated to pay all premiums as assessed, until the earlier of termination of the bond term or prepayment of the bond obligation. Payments required on the bonds during the next five years ar as follows: Year ending June 30 Principal Interest Total 1993 425,000 1,151,007 1,576,007 1994 450,000 1,120,408 1,570,408 1995 485,000 1,087,108 1,572,108 1996 520,000 1,057,247 1,570,247 1997 560,000 1,010,208 1,570,208 The bonds maturing on or after March 1, 1997 are subject to optional redemption in whole or in part prior to maturity on any payment date on or after March 1, 1996, at the redemption prices, expressed as percentages of the principal amount of such Series 1988A Bonds to be redeemed, set forth in the following table, together with accrued interest to the redemption date: 8 BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATE14ENTS Continued 4. BONDS PAYABLE (continued) : Redemption Date Redemption Price March 1, 1996 and September 1, 1996 103% March 1, 1997 and September 1, 1997 102% March 1, 1998 and September 1, 1998 101% March 1, 1999 and thereafter 100% S. REINSURANCE: BICEP reinsures some its risks under excess of loss reinsurance agreements for the purpose of limiting its maximum exposure on any one loss or group of losses. BICEP is contingently liable for losses and loss adjustment expenses related to ceded business to the extent that its reinsurer is unable to fulfill its commitments. Management believes that its reinsurer is and will continue to be able to satisfy its obligations under the reinsurance agreement. BICEP's liabilities for unpaid losses and loss adjustment expenses as of June 30, 1992 and 1991, have been estimated net of amounts that would be recoverable from the reinsurer. 6. RELATED-PARTY TRANSACTIONS: Rollins Hudig Hall, formerly Frank B. Hall, serve as BICEP's insurance broker and brokered $2,197,101 in reinsurance agreements during the period ended June 30, 1992. 9 SUPPLEMENTAL INFORMATION BIG INDEPENDENT CITIES EXCESS POOL CLAIMS DEVELOPMENT INFORMATION cumulative from inception through June 30, 1992 Policy Year Ended June 30 1989 1990 1991 1992 1. Net deposit premium revenue earned and investment income $799,203 $2,341,824 $2,216,499 $2,134,993 2. Other costs 338,203 1,619,824 1,359,499 133,993 3. Estimated incurred claims and expenses, end of policy year 543,000 778,000 857,000 803,000 4. Paid claims (cumula- tive) as of: End of policy year -- -- --One year later -- -- --Two years later -- -- -- -- Three years later -- -- --S. Re-estimated incurred claims and expenses; End of policy year 543,000 778,000 857,000 803,000 One year later 496,000 722,000 807,806 Two years later 461,000 657,391 -- -- Three years later 435,842 -- -- -- 6.. Decrease in estimated incurred claims and expenses from end of policy year 107,158 120,609 49,149 The table above illustrates how BICEP's earned revenues and investment income compare to related costs of loss and other expenses assumed by BICEP as of the end of each policy year. The rows of the table are defined as follows: 1. This line shows the total of each fiscal year's earned deposit premiums and investment income, net amounts earned for purchased reinsurance. 2. This line shows each fiscal year's other operating costs including overhead and claims expense not allocable to individual claims. 3. This line shows the estimated incurred losses and allocated loss adjustment expenses as originally reported at the end of the first year in which the event that triggered coverage under the contract occurred (both paid and accrued) net of loss assumed by excess or reinsurers. 4. This line shows the cumulative amounts paid as of the end of successive years for each policy year. 5. This section of rows shows how each policy year's incurred claims and expenses increased or decreased as of the end of successive years. This annual re-estimation results from new information received on known claims, re-evaluation of existing information on known claims, as well as emergence of new claims not previously known. 6. This line compared the latest re-estimated incurred claims and expenses amount to the amount originally established (line 3) and shows whether this latest estimate of claims and expenses costs are greater or less than originally thought. As data for individual policy years mature, the correlation between original estimates and re-estimated accounts is commonly used to evaluate this accuracy of incurred claims and expenses currently recognized in less mature policy years. 10 BIG INDEPENDENT CITIES EXCESS POOL JOINT POWERS AUTHORITY c/o Citv of Santa Ana 20 Civic Center Plaza M-28 Santa Ana, CA 92701 (714)647-5470 February 19, 1992 Ms. Connie Brockway, City Clerk City of Huntington Beach 2000 Main Street Huntington Beach, California 92648 Dear Ms. Brockway: Enclosed please find a copy of the June 30, 1991 Big Independent Cities Excess Pool (BICEP) Report on Audits of Financial Statements and Supplemental Information for the years ended June 30, 1991 and 1990. The BICEP Joint Powers Agreement requires the report to be filed as a public record with each of the BICEP Member Cities. Please place the report in the appropriate file in your office. Thank you for your cooperation. Sincerely, Gordon R. Davis, ARM General Manager GRD: sl Enclosure m A r BIG INDEPENDENT CITIES EXCESS POOL 1, r REPORT ON AUDITS OF FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION for the years ended June 30, 1991 and 1990 1 i i no LYo ��O i BIG INDEPENDENT CITIES EXCESS POOL Table of Contents r Page Financial Statements: Report of Independent Accountants . . . . . . . . . . . . 1 Balance Sheets, June 30, 1991 and 1990 . . . . . . . . . 2 r Statements of Revenue, Expenses and Changes in Fund Balance for the years ended June 30, 1991 and 1990 . . . . . . . . . . . 3 Statements of Cash Flows for the years ended June 30, 1991 and 1990 . . . . . . . . . . 4 Notes to Financial Statements . . . . . . . . . . . . . . 5-10 Supplemental Information: Report of Independent Accountants . . . . . . . . . . . . it Supplemental Information . . . . . . . . . . . . . . . . 12 Coopers certified public accountants 555 Capitol Mall in principal areas of the world Sacramento,California 95814 Urand telephone(916)441-4334 facsimile(916)444-8988 Report of Independent Accountants The Board of Directors Big Independent Cities Excess Pool Santa Ana, California • We have audited the accompanying balance sheets of the Big Indepen- dent Cities Excess Pool (BICEP) at June 30, 1991 and 1990, and the related statements of revenue, expenses and changes in fund balance and cash flows for the years then ended. These financial state- ments are the responsibility of BICEP's management. Our respon- sibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards and the minimum audit requirements for • California Special Districts, issued by the Office of the State Controller. Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present . fairly, in all material respects, the financial position of the Big Independent Cities Excess Pool at June 30, 1991 and 1990, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, BICEP has limited historical data for use in its estimates of incurred but not reported claims and the corresponding premium adjustments. Although BICEP considers its experience and industry data in determining such amounts, assumptions and projections as to future events are necessary and ultimate losses may differ significantly from amounts projected. 11� Sacramento, California October 24, 1991 r r BIG INDEPENDENT CITIES EXCESS POOL BALANCE SHEETS June 30, 1991 and 1990 ASSETS 1991 1990 Cash $ 79,818 $ 90,286 Restricted cash equivalents 2 ,920, 512 2 , 188, 542 Total cash and cash equivalents 3,000,330 2,278,828 Investments (at cost, which approximates market value) 13,521,706 13,505,500 Accrued interest receivable 153,501 154, 681 Bond issuance costs, net 687, 079 726,264 $17 , 362 , 616 $16, 665,273 LIABILITIES AND FUND BALANCE Liabilities: Accounts payable $ 29,599 $ 7,426 Unpaid losses and loss adjustment expenses 2,040, 000 1,274, 000 Bonds payable 14, 605, 000 14,965, 0.00 Accrued interest payable 392,772 400,871 Rebatable arbitrage earnings 10,261 15, 636 1 Estimated future premium adjustments 284 ,984 2 , 340 Total liabilities 17, 362 , 616 16,665,273 Fund balance -- - $17, 362 , 616 $16, 665,273 The accompanying notes are an integral part of these financial statements. -2- BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF REVENUE, EXPENSES AND CHANGES IN FUND BALANCE for the years ended June 30, 1991 and 1990 • 1991, 1990 Revenue: Deposit premiums earned $ 2,989,293 $ 2, 372, 117 Estimated future premium adjustments (282 ,644) 315, 634 2 ,706, 649 2 , 687 ,751 • Expenses: Net increase in actuarially determined unpaid losses and loss adjustment expenses 766, 000 731, 000 Purchased reinsurance 1,906, 333 1, 617,495 General and administrative expenses 164 ,992 128 , 030 2 ,837 , 325 2 ,476,525 Excess (deficiency) of revenue over expenses, before net investment income (130, 676) 211,226 Net investment income: Investment income 1, 325, 183 1, 280, 568 Interest expense (1, 194 , 507) (1,491,794) 130, 676 (211,226) Excess of revenue over expenses -- -- Fund balance, at beginning of year -- -- Fund balance, at end of year $ -- $ -- The accompanying notes are an integral part of these financial statements. -3- BIG INDEPENDENT CITIES EXCESS POOL STATEMENTS OF CASH FLOWS for the years ended June 30, 1991 and 1990 1991 1990 Cash flows from operating activities: Excess (deficiency) of revenue over expenses before net investment income $ (130, 676) $ 211,226 Adjustments to reconcile excess (deficiency) of revenue over expenses before net investment income to net cash provided by operations: Decrease in prepaid insurance -- 404, 000 Amortization of bond issuance costs 39, 185 39, 185 Increase in accounts payable 22, 173 7,426 Increase in unpaid losses and loss adjustment expenses 766,000 731,000 Decrease in unearned premium -- (375,742) (Decrease) increase in rebatable �. arbitrage earnings (5,375) 15, 636 Increase (decrease) in estimated future premium adjustments 282 , 644 (315, 634) Net cash provided by operating activities 973 ,951 717 , 097 Cash flows from investing activities: Payments for purchases of invest- ments, net (16,206) (500) Interest received 1, 326, 363 1, 306, 184 Net cash provided by investing activities 1, 310, 157 1,305, 684 Cash flows from noncapital financing activities: Bond principal payments (360,000) (90, 000) Interest paid (1,202 ,606) (1, 510,572) Net cash used in noncapital financing activities (1,562 ,606) (1, 600,572) Net increase in cash and cash equivalents 721,502 422,209 Cash and cash equivalents at beginning of year 2 ,278,828 1,856, 619 Cash and cash equivalents at end of year $ 3 , 000, 330 $ 2 ,278 ,828 The accompanying notes are an integral part of these financial statements. -4- BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Organization and Operations Big Independent Cities Excess Pool (BICEP) was created effective September 23, 1988, by a joint powers agreement among five cities organized and operating under the laws of the State of California. BICEP is organized pursuant to the provisions of the California Government Code for the purpose of providing joint insurance coverage and related risk-management services for member cities. The extension of joint insurance coverage to member cities began October 1, 1988. BICEP's liability program offers a combination of pooled and commercially purchased public auto and general liability coverages, plus errors and omissions coverage, for losses in excess of the member cities' specified self-insurance retention levels of one million dollars. Individual and aggregate claims in excess of specified levels are covered by excess insurance policies purchased from commercial insurance carriers which, combined with the program's self-funded layers, offer a total of $25 million in coverage limits. BICEP is a nonprofit California public agency; thus, it is tax- exempt. It is also considered a "Special District" by the Office of the State Controller, Division of Local Government Fiscal Affairs, for the purpose of filing an Annual Report of Financial Transactions of Special Districts. Basis of Accounting The accounting records of BICEP are maintained on the accrual basis of accounting. Bond Issuance Costs Bond issuance costs are amortized over the life of the bond issue using the straight line method. Cash and Cash Equivalents BICEP considers money market funds and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. -5- BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS, Continued • 1. Summary of Significant Accounting Policies, continued: Restricted Cash Restricted cash represents funds held in trust for payment of bond principal and interest, future debt service, and claims payment. Rebatable Arbitrage Earnings Rebatable arbitrage earnings represent the excess of the amount earned on all cash equivalents and investments over the amount which would have been earned if such cash equivalents and investments were invested at a rate equal to the bond yield for activity through February 1, 1991. This excess is subject to change due to bond and investment activity occurring after February 1, 1991. The actual amount due to the Internal Revenue Service will be payable no later than November 1, 1993 . Deposit Premium Revenue Premiums are recognized as earned over the periods covered by the policies. Under the terms of the Liability Risk Coverage Agreement, between BICEP and its member cities, premium adjustments resulting in additional premium assessments or refunds will commence in February 1992, covering the experience of BICEP from inception. Estimates of such adjustments are recorded in the financial statements annually as estimated future premium adjustments. Premium adjustments are subject to change as the ultimate cost of claims becomes known, investment income and expenses are realized, and BICEP's costs are allocated to each Policy Year. Unpaid Losses and Loss Adjustment Expenses Estimated unpaid losses and loss adjustment expenses include an amount for losses incurred but not reported. These estimates have not been discounted to their present value. At June 30, 1991 and 1990, BICEP had not paid any losses or loss adjustment expenses nor had it established case reserves as no claims had been reported. Liabilities are based on the estimated ultimate cost of settling the claims, including the effects of inflation and other societal and economic factors. -6- BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS, Continued 1. Summary of Significant Accounting Policies, continued: Claims which have been incurred but not reported to the claims administrator at June 30, 1991 and 1990, have been estimated through an independent actuarial analysis based on loss development experience of BICEP and the member cities and • available industry loss development data. However, since only limited historical data is available, and since assumptions and projections as to future events are necessary, ultimate losses may differ significantly from this estimate. Governmental Accounting Standards Board • Effective with the year ended June 30, 1991, BICEP adopted the financial reporting requirements of GASB 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues. The adoption of this pronouncement caused the liability for • unpaid losses and loss adjustment expenses and estimated future premium adjustments previously reported as "reserves for future claims and estimated premium adjustment" to be reported separately on the balance sheet. Additionally, the net change in actuarially determined unpaid losses and loss adjustment expenses and estimated future premium adjustments previously • reported as "net addition to reserve for future claims and estimated premium adjustment" are reported separately on the statement of revenue, expenses and changes in fund balance. The adoption also resulted in certain other additional reclassifications and disclosures. However, the adoption had no impact on the financial position as reported for the year • ended June 30, 1990. 2 . Cash and Investments: under provisions of the California Government Code (Code) , BICEP is authorized to invest in: • • A variety of federal and state treasury obligations (including local California agencies) • Obligations or other instruments of or issued by a federal agency or government sponsored enterprise • Bankers' acceptances which are eligible for purchase by the federal reserve system (subject to certain limita- tions) • Prime quality commercial paper (subject to certain limitations) • Negotiable certificates of deposit issued by nationally or state chartered banks, savings and loan associations and credit unions • Repurchase agreements or reverse repurchase agreements of any securities authorized by the Code -7- BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS, Continued 2. Cash and Investments, continued: Deposits - At June 30, 1991, the net carrying amount and deposit balance were $79,818 of which $75, 000 is invested in the Local Agency Investment Fund, an investment pool maintained by the State Treasurer. Restricted Cash Equivalents and Investments - BICEP invests only in investments that are insured or registered, or for which the securities are held by BICEP or its agent in BICEP's name. Investments held by the Trustee at June 30, 1991, consist of: Certificates of deposit $13,505,500 Repurchase agreements 2,931, 195 Federal treasury obligations 5, 523 $16,442 . 218 BICEP has an investment agreement with the Mitsui Trust and Banking Company for the certificates of deposit. The agreement restricts withdrawals except for that provided in the Trust Indenture, for purposes of debt service or claims payment. Terms of the agreement provide for a fixed rate of interest at 8. 15 percent payable semi-annually, with an expiration date of March 1, 1999. The monies held by the Bank represent an absolute and unconditional obligation of the Bank. 3 . Unpaid Losses and Loss Adjustment Expenses: The following represents changes in the unpaid losses and loss adjustment expenses for BICEP for the years ended June 30: . 1991 1990 Unpaid losses and loss adjustment expenses at beginning of year $1,274, 000 $ 543, 000 Provision for insured events of the current year 857, 000 778, 000 Decrease in funding levels for previous policy years (91, 000) (47 , 000) Total unpaid losses and loss adjustment expenses at end of year $2 , 040, 000 $1, 274 , 000 -8- BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS, Continued 4 . Bonds Payable• In January 1989, BICEP issued Revenue Bonds Series 1988A for the purpose of acquiring working capital and to finance under- writing expenses. Interest on the bonds is payable semi-annually at rates ranging from 6.5% to 8.25%. Principal maturities range from $360,000 to $710,000 and are due annually on March 1, from 1991 through 2000. Term bonds aggregating $9,775,000 mature in 2009 and are subject to mandatory sinking fund redemption on March 1 in each year, on or after March 1, 2001 by lot, at a redemption price equal to the principal amount thereof to be redeemed, together with accrued interest thereon to the date fixed for redemption, without premium. The bonds are collateralized by BICEP's right to receive and collect all premium payments and prepayments. Each member city is obligated to pay all premiums as assessed, until the earlier of termination of the bond term or prepayment of the bond obligation. Payments required on the bonds during the next five years are as follows: Year ending June 30 Principal Interest Total 1992 390, 000 $1, 178, 308 $1,568, 308 1993 425, 000 1, 151,007 1, 576, 007 1994 450, 000 1, 120,408 1,570,408 1995 485,000 1, 087, 108 1,572, 108 1996 520,000 1, 057,247 1,570,247 The bonds maturing on or after March 1, 1997 are subject to optional redemption in whole or in part prior to maturity on any payment date on or after March 1, 1996, at the redemption prices, expressed as percentages of the principal amount of such Series 1988A Bonds to be redeemed, set forth in the following table, together with accrued interest to the redemption date: Redemption Date Redemption Price March 1, 1996 and September 1, 1996 103% March 1, 1997 and September 1, 1997 102% March 1, 1998 and September 1, 1998 101% March 1, 1999 and thereafter 100% -9- BIG INDEPENDENT CITIES EXCESS POOL NOTES TO FINANCIAL STATEMENTS, Continued • 5. Reinsurance• BICEP reinsures some of its risks under excess of loss rein- surance agreements for the purpose of limiting its maximum exposure on any one loss or group of losses. BICEP is contingently liable for losses and loss adjustment expenses related to ceded business to the extent that its reinsurer is unable to fulfill its commitments.. Management believes that its reinsurer is and will continue to be able to satisfy its obligations under the reinsurance agreement. • BICEP' s liabilities for unpaid losses and loss adjustment expenses as of June 30, 1991 and 1990, have been estimated net of amounts that would be recoverable from the reinsurer. • 6. Related-Party Transactions: Frank B. Hall served as BICEP's program administrator through April 1991 and brokered $1,906, 333 and $1,213 ,495 in rein- surance agreements during the periods ended June 30, 1991 and 1990, respectively. • • -10- SUPPLEMENTAL INFORMATION Coopers certified public accountants 555 Capitol Mall in principal areas of the world Sacramento,California 95814 Ryrand telephone(916)441-4334 facsimile(916)444-8988 REPORT OF INDEPENDENT ACCOUNTANTS ON SUPPLEMENTAL INFORMATION Our audits were made primarily for the purpose of expressing an opinion on the basic financial statements taken as a whole for the years ended June 30, 1991 and 1990, as shown in our report on page 1. The supplemental information (pages 12 and 13) is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such supplemental information for the years ended June 30, 1991 and 1990, has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ceaqm Sacramento, California October 24, 1991 1 -11- BIG INDEPENDENT CITIES EXCESS POOL CLAIMS DEVELOPMENT INFORMATION cumulative from inception through June 30, 1991 • Policy Year Ended June 30, 1989 1990 1991 1. Net deposit premium revenue earned and investment income $799,203 $2, 341,824 $2,216,499 2 . Other costs 338,203 1,619,824 1, 359,499 3 . Estimated incurred claims and expenses, end of policy year 543,000 778, 000 857, 000 4 . Paid claims (cumula- tive) as of: End of policy year -- --One year later -- --Two years later -- -- -- 5. Re-estimated incurred claims and expenses: End of policy year 543,000 778, 000 857, 000 One year later 496, 000 722, 000 Two years later 461,000 -- -- 6. Decrease in estimated incurred claims and expenses from end of policy year 82, 000 56,000 The table above illustrates how BICEP's earned revenues and investment income compare to related costs of loss and other expenses assumed by BICEP as of the end of each policy year. The rows of the table are defined as follows: 1. This line shows the total of each fiscal year's earned deposit premiums and investment income, net of amounts earned for purchased reinsurance. 2. This line shows each fiscal year's other operating costs including overhead and claims expense not allocable to individual claims. 3 . This line shows the estimated incurred losses and allocated loss adjustment expenses as originally reported at the end of the first year in which the event that triggered coverage under the contract occurred (both paid and accrued) net of loss assumed by excess or reinsurers. 4 . This line shows the cumulative amounts paid as of the end of successive years for each policy year. 5. This section of rows shows how each policy year's incurred claims -12- r BIG INDEPENDENT CITIES EXCESS POOL CLAIMS DEVELOPMENT INFORMATION, Continued cumulative from inception through June 30, 1991 and expenses increased or decreased as of the end of successive years. This annual re-estimation results from new information received on known claims, re-evaluation of existing information on known claims, as well as emergence of new claims not previously known. 6. This line compares the latest re-estimated incurred claims and expenses amount to the amount originally established (line 3) and shows whether this latest estimate of claims and expenses costs are greater or less than originally thought. As data for individual policy years mature, the correlation between original estimates and re-estimated accounts is commonly used to evaluate this accuracy of incurred claims and expenses currently recognized in less mature policy years. -13-