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the rate increase. A string of storm, fire and other losses pushed loss rates up in the '05 underwriting year and the early projection is that '06 will be similar or worse. The other major factor impacting this year's property rates is an increase in LMCIT's reinsurance premiums. Because of the high reinsurance limits we need to purchase in order to cover possible catastrophic losses (e.g. the tornado that moves through several cities), reinsurance costs are a large cost component in our property program, representing about 35% of property premium costs. Our reinsurance costs have gone up this year in part due to our loss history and also as a result of coverage changes we've implemented. Workcomp Although we were able to keep overall work comp rates flat for 2007, rising medical costs continue to be a major concern. Medical costs for work comp injuries are projected to continue increasing at a rate of about 9% a year. Medical costs now make up over half of work comp loss costs - about as much as indemnity benefits, Special Compensation Fund assessments, and defense costs combined. Our work comp indemnity costs have been generally stable and less than projections. While this is good and helps offset the increase in medical costs, we also need to keep an eye on injury frequency. Hopefully cities can continue reducing the numbers of employee injuries; that's really the best tool we have to control future premium costs. Investment income remains a very important element in the LMCIT work comp program, though not quite as significant as it was a few years ago. Investment income now produces about a quarter of the program's total revenue; a few years ago, it was over a third. Nevertheless, investment income is still very important. Premiums alone would not quite cover projected losses, let alone administrative and reinsurance costs. How was the dividend amount determined? Most LMCIT members are very familiar with LMCIT's approach to rate-setting. Briefly, the premium rates incorporate a safety margin. Premiums plus investment income are designed to produce enough revenue to cover losses and expenses even if losses turn out to be greater than projections. Iflosses turn out to be at projections, that margin isn't needed to pay for losses and is available either to be returned to members as a dividend or used to strengthen LMCIT's fund balance. If losses turn out to be lower than projections, that additional savings also becomes available to be returned to members. It can take several years until claims are finally settled and we know for sure what the actual loss costs were for any given underwriting year. For this reason, we have to work with estimates, which are continually revised and updated. The program's results and the amount of dividend we can return in anyone year therefore don't just depend on what happened during that year; the year's financial results are also affected by changes in our estimates of what prior year losses will ultimately cost. 4