Message from the President

I’ve been thinking a lot recently about the idea of momentum. In the U.S., we have an affinity for movement and speed, so we generally think momentum is a good thing. But momentum in and of itself isn’t necessarily positive. It takes a lot of energy to create momentum, but once you do, it has a force of its own: you can easily pick up speed in the wrong direction as well as in the right one. Today, after more than a year as State Fund’s President and CEO, I can say with confidence that we are headed in the right direction, and picking up speed as we go.

There’s no doubt in my mind the 1913 Legislature knew what it was doing when it created State Fund. With the three roles instilled by Legislature—to compete fairly with other insurers; to provide insurance to virtually any California business that needs it; and to handle all claims with substantial justice—State Fund is an important resource for California employers and injured workers, and can have an influence on the state’s economy.

When I joined State Fund the company had a lot going for it: financial stability, dedicated employees, and a deep commitment to its mission to serve all Californians. But with an expense ratio well above industry benchmarks, and the expectations of declining investment income it was not on a sustainable path.

We took a hard look at where we were and where we needed to be – an assessment made critical by the fact that California was in the midst of the worst recession since the 1930s. The board, the executive team and I agreed that State Fund has an important role to play in California’s workers’ compensation market, and on a broader level in ensuring California continues to offer opportunity and prosperity to its citizens, and it was clear the company wasn’t going to be able to fulfill that role if it didn’t change. We also agreed that the greatest thing we could do for California was to help business owners manage the cost of workers' compensation so they can build businesses and hire more Californians. With this in mind we mapped a new path toward a more efficient and effective State Fund.

We began this journey with the geographic restructuring we announced in 2010, which, when completed, will have consolidated our real estate footprint and streamlined our operations. The changes we announced in 2011 pushed us ahead farther and faster. Some of these, like the decision to reduce the size of our fleet of cars, were easy. Others, like the decision to reduce staff, were very difficult. But the fact is that by the end of 2013, these changes will save us some $350 million annually. This is money that we can and will use to maintain fair prices, provide safety education and programs to California employers to reduce work related injuries and illnesses and to pay benefits to Californians injured on the job – in short, to fulfill our mission.

There’s no question in my mind that this is a marathon, not a sprint. Changing the culture of a company is hard under any circumstances, and we’re asking a lot of our employees, but I believe passionately that we are on the right path, and picking up speed with each step we take. We are committed to building a competitive company with a resourceful, creative workforce that provides fair prices and excellent service. Although our progress will not always be smooth, realizing that vision will deliver significant value to California employers and injured workers, and result in a more agile State Fund.

Fueling much of our sense of urgency around transforming State Fund is that we see the current market as overheated, with too much capital supporting a slow growing economy. 2011 was a year to maintain discipline, improve operating efficiencies, reduce expenses, and prepare for a future that may demand much more from State Fund. We did just that!

As proof of that momentum, I am pleased to report that our financial position continues to improve. In 2011 State Fund wrote approximately $1 billion dollars in premium and recorded net income of $229 million, (before dividends and restructure costs). We made sufficient progress in 2011 to support the declaration of a $50 million dividend for our policyholders, the first in a decade, so we know we are on the right track.

In closing, I would like to express my sincere thanks to the more than 130,000 policyholders who chose State Fund for their workers’ compensation needs this year, and to the dedicated State Fund employees who made it possible for us to serve them.

We are proud to have served California for nearly a century, and have the passion, commitment, dedicated staff, and financial capital to do it for the next 100 years.

Tom Rowe

President and CEO