Saturday, May 23, 2009

Another reason to have more investment people on a teachers insurance fund board? I think so!

From John Curry, May 23, 2009
"The Indiana State Teachers Association, the state’s union of public school teachers, tapped educators for all the positions on the trust’s board—seven current or former teachers, a superintendent and an elementary school nurse. "
ISTA trust lacked expertise
Led by educators instead of investment specialists, state teachers fund fell into $67M hole
J.K. Wall - jwall@ibj.com
IBJ staff
Click on images to enlarge.
The people overseeing the ISTA Insurance Trust had no background in investments or insurance, likely leaving them ill-equipped to grasp the ever-larger amounts of complicated investments the trust was buying.
The Indiana State Teachers Association, the state’s union of public school teachers, tapped educators for all the positions on the trust’s board—seven current or former teachers, a superintendent and an elementary school nurse.
But by the time insurance consultants combed through the trust’s records this spring, 88 percent of its $19 million in assets were stakes in privateequity investments and hedge funds—high-risk investments not easily sold or understood.
The value of the trust’s assets plunged 55 percent in the last 20 months, leaving it $67 million short of its liabilities, according to the Indiana Department of Insurance. The ISTA asked its parent organization, the National Education Association, to assume temporary control of the state-level operations—though not of its local affiliates.
Even before the big investment losses, the trust had been running at a deficit at least three years, according to information filed with state and federal regulators.
The trust, which launched in 1986, provided health insurance to about 7,000 school employees around the state and long-term-disability coverage to nearly 30,000 others.
The ISTA Insurance Trust is by no means the only insurance entity to suffer huge losses in the last year. Life and health insurers around the country were hammered last fall as the meltdown on Wall Street sent the values of their assets into a nosedive.
But the lack of investment expertise on its board left the ISTA trust especially vulnerable to the volatile markets and the rapid-fire trades of the trust’s broker, Morgan Stanley’s David Karandos. During a nine-month stretch last year, Karandos made 4,000 trades involving the ISTA trust’s investments.
“You had people [on the board] that had no idea about investments or risk,” said Marty Wood, vice president of the Insurance Institute of Indiana, a trade group of insurance companies.
Insurance companies seek to turn profits by earning more money in premiums and investment returns than they pay out in claims and administrative costs. Most insurance companies include board members with investing experience because of the complexity of their investment decisions.
Karandos and former ISTA Executive Director Warren Williams made all investment decisions for the trust, according to a report by Indianapolis-based Noble Consulting Services, which examined the trust at the request of the Indiana Department of Insurance.
It’s not clear how much information Williams shared with his fellow trustees. He stepped down this month.
ISTA Deputy Executive Director Dan Clark said he did not know how much investment information was shared with the other trustees.
“It would have taken an extraordinary amount of independence to overcome the advice that they were given,” he said.
However, he added that even highly sophisticated boards have done nothing to stop the monumental collapses of such for-profit companies as American International Group, Enron Corp. and others.
“Corporate governance in general may appear not to have as stringent qualification guidelines as it ought to,” Clark said.
Phone calls to the trustees were not returned. Indianapolis attorney Mark Maddox is representing the trustees, who have received subpoenas as part of investigations into the ISTA Insurance Trust being conducted by the FBI and the Indiana Secretary of State’s Office.
The ISTA Insurance Trust had bled $5 million in cash from August 2005 to August 2007, according to the most recent records filed by the trust with the U.S. Department of Labor. The trust has yet to file a 2008 report.
Clark admitted those results didn’t look good. He said, “That’s partly why the NEA is in here.” The NEA, he said, will bring in actuaries, accountants and attorneys to review all aspects of the trust.
ISTA had agreed to shift all its health insurance business to Minnesota-based UnitedHealthcare, but that decision is now on hold.
The deficits of the trust point up a common problem with insurance trusts or pools, according to Wood of the insurance institute. For example, in 2006, the state Legislature gave public school corporations the right to form their own self-funded pools to buy property and casualty insurance.
“The sales pitch that they do is, ‘We can save them money.’ And they show it that first year,” Wood said. “But insurance is about down the road.”
The ISTA marketed the insurance trust as a low-cost plan. In an April 28 memo to school corporations, ISTA attorney Richard Darko touted the ISTA Insurance Trust as offering one of the “least expensive” long-term-disability policies in the country.
Asked whether the ISTA Insurance Trust should have raised premium levels earlier, Clark said, “They employed actuaries to do that. And the actuaries recommended the premiums rates, and I think all of that is under review.”
ISTA was able to keep premiums low as long as its investments were producing good returns. However, in recent years, the trust’s operating deficits had been eating away at its reserves—even before the Wall Street meltdown.
But what alarmed Indiana Insurance Commissioner Jim Atterholt was that the ISTA was sticking to its “least expensive” ways even once the Insurance Department informed the trust it had a $67 million shortfall.
“That is just a recipe for disaster,” Atterholt said.
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From Tom Curtis, May 23, 2009
Subject: 052309 ISTA Trust Lacked Expertise
"The Indiana State Teachers Association, the state’s union of public school teachers, tapped educators for all the positions on the trust’s board—seven current or former teachers, a superintendent and an elementary school nurse. "
Exactly the point I have made for many years! Our Ohio board is overstocked with well meaning, but unqualified people; seats bought and paid for by the 2 Ohio unions! Most are only qualified in their own minds (Connie, Jeff, Mary Ann, Mark & Tim). The reality is, they are all educators, not business and finance people. Let's get real and start electing qualified people!
Tom Curtis
Larry KehresMount Union Collge
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