Financial Overview
A summary of State Fund’s results of operations for years ended December 31, 2011 and 2010 and its corresponding financial ratios as shown below reveal well-executed pricing disciplines, improving results from the most experienced claims team in the marketplace, early benefits from expense management protocols, and the consistent performance of a well-balanced and highly secured investment strategy.
| (In millions) | 2011 Actual | 2011 Adjusted Actual | 2010 Actual | |
| Net premiums earned | $ | 1,002 | 1,002 | 1,136 |
| Losses incurred | 252 | 752 | 850 | |
| Loss adjustment expenses incurred | 928 | 393 | 521 | |
| Underwriting and administrative expenses | 401 | 386 | 409 | |
| Net underwriting loss | (580) | (530) | (644) | |
| Net investment gain | 857 | 857 | 895 | |
| Other expenses | (98) | (98) | (80) | |
| Income before dividends | 179 | 229 | 171 | |
| Dividends to policyholders | (50) | (50) | - | |
| Net income | $ | 130 | 180 | 171 |
| Loss ratio | 25.2% | 75.1% | 74.8% | |
| LAE ratio | 92.7% | 39.3% | 45.9% | |
| Underwriting expense ratio | 40.3% | 38.8% | 36.5% | |
| Combined ratio | 158.2% | 153.2% | 157.2% |
During the third quarter State Fund completed our periodic analyses of the adequacy of the loss and Loss Adjustment Expense (LAE) reserves. The analyses indicated that while loss and LAE reserves overall remain adequate, LAE reserves needed strengthening. Effective September 30, 2011, State Fund reallocated $500 million of reserves for prior accident years from loss reserves to LAE reserves. The reallocation had no effect on total reserves or net income, but did affect losses and LAE incurred, as well as the related ratios.
In October 2011, State Fund announced a reduction in force of 1500-1800 positions in 2012. In December 2011, approximately 1,000 employees volunteered for transition payments and exited State Fund. Less than 750 employees will be laid off in 2012. State Fund accrued $50 million of expenses related to the reduction in force (RIF) plan.
The 2011 adjusted actual reflects the results of operations excluding the reserve reallocations and RIF costs.
Management fully expects the transformation set in motion in 2011 will begin to drive substantial improvements in operating performance, while maintaining the levels of service and responsiveness the market has come to expect from State Fund.
State Fund’s financial position at December 31 was as follows
(in millions):
| Admitted Assets | 2011 | 2010 | |
| Bonds, at amortized cost | $ | 18,940 | 18,382 |
| Cash and other investments | 491 | 1,414 | |
| Total cash and invested assets | 19,431 | 19,796 | |
| Other assets | 441 | 476 | |
| Total admitted assets | $ | 19,872 | 20,272 |
| Liabilities and Policyholders' Surplus | |||
| Losses and loss adjustment expenses reserves | $ | 13,707 | 14,375 |
| Other liabilities | 503 | 431 | |
| Total liabilities | 14,210 | 14,806 | |
| Policyholders' surplus | 5,662 | 5,466 | |
| Total liabilities and policyholders' surplus | $ | 19,872 | 20,272 |
State Fund maintained a balanced investment portfolio that was focused on both credit quality and investment yield (99.8% of the $18.9 billion bond portfolio was rated NAIC 1, the NAIC's highest quality credit class). The weighted average credit quality of the overall bond portfolio was Aa1/AA by Moody's and Standard & Poor’s, respectively. Book yield at December 31, 2011 was 4.43%, down from 4.47% at December 31, 2010. The bond portfolio increased by 3% compared to prior year as a result of expanded authority to invest in corporate bonds which became effective on January 1, 2011.
Losses and loss adjustment expenses reserves decreased 4.7% in 2011. Management believes that its reserves are adequate, and State Fund’s appointed Actuary, Guy Avagliano of Milliman, Inc., consulting actuaries, attested to the adequacy of State Fund’s carried reserves as of December 31, 2011 and 2010.
State Fund operates in conformity with the California law imposed for risk-based capital (RBC). As of December 31, 2011 and 2010, policyholders’ surplus exceeded the minimum RBC requirements. In addition, it passed all the Insurance Regulatory Information System (IRIS) tests at year-end 2011 and 2010.
Policyholders’ surplus increased $196 million or 4% compared to prior year mainly due to net income of $130 million and change in non-admitted assets of $62 million. The largest component of the change in non-admitted assets was a reduction in overdue uncollected premiums.
State Fund’s statements of cash flow are summarized below
(in millions):
| 2011 | 2010 | ||
| Premiums collected net of reinsurance | $ | 950 | 1,082 |
| Net investment income | 875 | 916 | |
| Recoveries from premiums charged off | 13 | 13 | |
| Benefits and loss related payments | (1,418) | (1,530) | |
| Other underwriting expenses | (839) | (872) | |
| Net cash used in operations | (419) | (391) | |
| Proceeds from investments sold, matured, or repaid | 3,886 | 3,796 | |
| Cost of investments acquired | (4,440) | (2,916) | |
| Net cash provided by (used in) investments | (554) | 880 | |
| Net cash provided financing and miscellaneous sources | 76 | 71 | |
| Net change in cash, cash equivalents and short-terminvestments | (897) | 560 | |
| Cash, cash equivalents and short-term investments, beginning of year | 1,027 | 467 | |
| Cash, cash equivalents and short-term investments, end of year | $ | 130 | 1,027 |
Primary sources of cash included cash flow from premiums, investment income and the sale or maturity of invested assets. Primary uses of cash included the purchase of long-term investments and the payments of benefits, loss related expenses, and other underwriting expenses.
As a result of State Fund’s geographic consolidation, $45 million of proceeds were collected from the sale of real estate offices located in San Francisco and San Bernardino in October 2011 and December 2011, respectively.
During 2011, State Fund began investing in corporate bonds.
