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Hawaii's Most Profitable Companies 2012

First Hawaiian Bank is Hawaii's most profitable company and Bank of Hawaii is No. 2, both for the second year in a row

(page 4 of 6)

Weak Economy

Interestingly, universities such as Chaminade have partly benefited from grim employment numbers. Bro. Bernard Ploeger, president of the university, points out that enrollment has increased in all of the school’s programs. “I think the weak economy has made people think, ‘This is a time to get further credentials,’ ” he says.

In addition to more evening and online admissions, the school has seen record enrollment for its graduate programs. It has also created a new, 75-student nursing program. Perhaps most important, the school has managed to retain more of its students year over year.

“During our first 10 years, we’ve been at about 65 percent first- to second-year retention,” says Ploeger. “For the past two years, that number has moved up to about 75 percent. With something like 800 students that are candidates for moving up, that can be an extra 80 students a year. That’s equivalent to creating another nursing program.”

The University of Hawaii system raised tuition and fees by nearly 7 percent from 2010 to 2011, yet enrollment also grew, probably because of the weak economy. Unfortunately, even with the increases, tuition doesn’t cover all of UH’s expenses. In fiscal 2011, the state appropriated more than $359 million for UH operations and still needed to transfer another $164 million to address the university’s shortfall.

Of course, for educational institutions, the flip side to increased enrollment is the growing cost of financial aid. That’s because fewer families can afford full tuition. Even some of Hawaii’s wealthiest private schools feel the pinch. At Iolani School, the average financial aid package now covers about half the tuition. “Relative to our budget,” says outgoing headmaster Val Iwashita, “financial aid went from 8 percent to over 20 percent in the last five years.”

Iwashita notes that Iolani is lucky to have a large endowment that allows the school to offer so much financial aid. One of the few bright spots in the economy has been last year’s rebound in the stock market, which benefited the endowments of schools like Punahou, Iolani and Kamehameha.

These schools also benefit from a conservative approach to spending. Punahou, for example, won’t take on long-term debt. Its rules also limit spending to 4.5 percent of the endowment averaged over the previous five years. School president James Scott points out that this levels out the effects of swings in the economy. “So, when our endowment went down about 20 percent in 2008, it wasn’t a dramatic hit on our operating budget.”

Percentage Change
in Net Income

The ongoing high unemployment rate has also impacted the state’s hospitals, largely by changing the payer mix. “As more people lose their jobs,” says Queen’s CFO Rick Keene, “they may be on Medicare or Medicaid or uninsured as opposed to being on HMSA or another big carrier.” That often means lower reimbursements or no payment at all for the hospital.

Keene points out that the operating margin for Queen’s was only about 1 percent in 2011, so even modest swings in revenue have a big effect on the bottom line, especially with a budget of more than $658 million. “We can be within 1 percent of our budgets on both the expense and revenue sides and still have potentially a 30-percent change in our operating income,” he says.

Unemployment has had an even more pronounced effect on income at the Hawaii Health Systems Corp., which serves as the state’s safety net for healthcare. “That means we provide a considerable amount of uncompensated care,” says CEO Bruce Anderson. He also notes that a high percentage of HHSC’s revenue comes from Medicaid/Medicare reimbursements, which have been declining. “We’re looking at losing over $10 million in reimbursements over the next year,” Anderson says. “Medicare is being reduced by 3 percent nationwide. That will pose additional challenges for us.”

Unemployment also affected the bottom line of the state’s insurance companies. That’s because workers’ compensation premiums are based on payroll. As companies reduced their workforces, they paid lower premiums. Similarly, business-insurance premiums are a function of a company’s gross revenues; declining or stagnant revenues mean lower premiums for the insurance companies.

Jeff Shonka, CFO of First Insurance Co. of Hawaii, explains, “The single biggest reason for the decline in revenues since 2006 has been the continued drop in workers’ compensation rates.” Today, those rates are half what they were in 2006. That’s great for business owners, but it has played havoc with the insurance companies’ revenues. For FICOH, gross written premiums fell from a high of $206 million in 2007 to $176 million in 2009 before rising slightly in both 2010 and 2011 to again reach $186 million.

Only investment income has kept Hawaii’s insurance industry in the black. Although most of Hawaii’s property and casualty companies made money on their investments, all but three – Island Insurance, Zephyr, and Hawaiian Insurance and Guaranty – had underwriting losses for 2011.

The Recession and its Aftermath

Chaminade Tuition

Iolani School Financial Aid

Hawaii Health Systems Corp.

$247 million State appropriations to HHSC over the past three years

$56 million Expected additional cost of the Patient Protection and Affordable Healthcare Act (“Obamacare”) to HHSC over 10 years

$17.9 million Net investment gain in 2011 for First Insurance Co. of Hawaii

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