Financial Overview
Results of Operations
A summary of State Fund’s results of operations for years ended December 31, 2012 and 2011 and its corresponding financial ratios as shown below indicates a substantial improvement in operating performance as a result of the transformation efforts that was set in motion in 2010.
| (In millions) | 2012 | 2011 | |
| Net premiums earned | $ | 923 | 1,002 |
| Losses incurred | 692 | 252 | |
| Loss adjustment expenses incurred | 208 | 928 | |
| Underwriting and administrative expenses | 357 | 401 | |
| Net underwriting loss | (334) | (580) | |
| Net investment gain (loss) | 802 | 857 | |
| Other income (loss) | (11) | (98) | |
| Income before dividends | 458 | 179 | |
| Dividends to policyholders | (100) | (50) | |
| Net income | $ | 359 | 130 |
| Loss ratio | 75.0% | 25.2% | |
| LAE ratio | 22.5% | 92.7% | |
| Underwriting expense ratio | 40.2% | 40.3% | |
| Combined ratio | 137.7% | 158.2% |
During 2012 State Fund improved pricing fairness, credit discipline, claims service, and expense management, generating significant economic value to policyholders. Income before dividends of $458 million was $279 million more than prior year and the board of directors declared a $100 million dividend. State Fund announced a rate reduction of 7% effective March 1, 2013.
Financial Position
State Fund’s financial position at December 31 was as follows (certain reclassifications have been made to 2011 to conform to the 2012 presentation):
| Admitted Assets (in millions) | 2012 | 2011 | |
| Bonds, at amortized cost | $ | 18,233 | 18,940 |
| Cash and other investments | 431 | 491 | |
| Total cash and invested assets | 18,664 | 19,431 | |
| Other assets | 770 | 441 | |
| Total admitted assets | $ | 19,434 | 19,872 |
| Liabilities and Policyholders' Surplus (in millions) |
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| Losses and loss adjustment expenses reserves | $ | 12,398 | 13,436 |
| Other liabilities | 1,024 | 774 | |
| Total liabilities | 13,422 | 14,210 | |
| Policyholders' surplus | 6,012 | 5,662 | |
| Total liabilities and policyholders' surplus | $ | 19,434 | 19,872 |
State Fund maintained a balanced investment portfolio that was focused on both credit quality and investment yield (99.3% of the $18.2 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, 2012 was 4.10%, down from 4.43% at December 31, 2011.
Losses and loss adjustment expenses reserves decreased 7.7% in 2012. 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, 2012 and 2011.
State Fund operates in conformity with the California law imposed for risk-based capital (RBC). As of December 31, 2012 and 2011, policyholders’ surplus exceeded the minimum RBC requirements. In addition, it passed all the Insurance Regulatory Information System (IRIS) tests at year-end 2012 and 2011.
Policyholders’ surplus increased $350 million or 6% compared to prior year mainly due to net income of $359 million. State Fund restricted $1 billion of policyholders’ surplus to recognize the contingent liability for unfunded pension and OPEB related to State Fund’s current and retired employees.
Cash Flow
State Fund’s statements of cash flow are summarized below:
| (In millions) | 2012 | 2011 | |
| Premiums collected net of reinsurance | $ | 833 | 950 |
| Net investment income | 843 | 875 | |
| Miscellaneous income | 25 | 13 | |
| Benefits and loss related payments | (1,492) | (1,418) | |
| Other underwriting expenses | (838) | (839) | |
| Dividends paid | (19) | - | |
| Net cash used in operations | (648) | (419) | |
| Proceeds from investments sold, matured, or repaid | 4,874 | 3,886 | |
| Cost of investments acquired | (4,186) | (4,440) | |
| Net cash provided by (used in) investments | 688 | (554) | |
| Net cash provided by financing and miscellaneous sources | 261 | 76 | |
| Net change in cash, cash equivalents and short-term investments | 301 | (897) | |
| Cash, cash equivalents and short-term investments, beginning of year | 130 | 1,027 | |
| Cash, cash equivalents and short-term investments, end of year | $ | 431 | 130 |
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.
Effective January 1, 2013, State Fund’s investment authority was expanded to include investing in equities.