2013 Financial Summary

Results of Operations


A summary of State Fund’s results of operations for years ended December 31, 2013 and 2012 and its corresponding financial ratios as shown below indicates a substantial improvement in operating performance as a result of the transformation efforts that were set in motion in 2010.

(In millions)   2013 2012
Net premiums earned $ 1,094 923
Losses incurred   820 692
Loss adjustment expenses incurred   295 208
Underwriting and administrative expenses   280 357
Net underwriting loss   (302) (334)
Net investment gain (loss)   688 802
Other income (loss)   (22) (11)
Income before dividends   364 458
Dividends to policyholders   (85) (100)
Net income $ 279 359
       
Loss ratio   75.0% 75.0%
LAE ratio   27.0% 22.5%
Underwriting expense ratio   25.5% 40.2%
Combined ratio   127.5% 137.7%

 

During 2013 State Fund continued to focus on fair pricing, credit discipline, claims service, and expense management, generating significant economic value to policyholders. The strong growth in 2013 premiums was a result of a hardening market combined with its introduction of Tiered pricing in March. State Fund realized an income before dividends of $364 million. The board of directors declared a $100 million dividend for 2013 and 2012. State Fund filed a rate reduction of 7% effective March 1, 2013.

Financial Position

State Fund’s financial position at December 31 was as follows:

(In millions)      
Admitted Assets   2013 2012 
Bonds, at amortized cost $ 17,459 18,233
Common stocks   917 -
Cash and other investments   155 431
Total cash and invested assets   18,531 18,664
Other assets   698 770
Total admitted assets $ 19,229 19,434
       
Liabilities and Policyholders' Surplus      
Losses and loss adjustment expenses reserves $ 11,596 12,398
Other liabilities   1,280 1,024
Total liabilities   12,876 13,422
Policyholders' surplus   6,353 6,012
Total liabilities and policyholders' surplus $ 19,229 19,434

 

State Fund maintained a balanced investment portfolio that was focused on both credit quality and investment yield (98.4% of the $17.4 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 Aa2/AA by Moody's and Standard & Poor’s, respectively. Book yield at December 31, 2013 was 3.85%, down from 4.10% at December 31, 2012. 

In 2013, State Fund started investing in stocks as a result of the passage of SB 1513 which expanded State Fund’s investment authority. At year end, State Fund had $917 million in common stocks.

Losses and loss adjustment expenses reserves decreased 6.5% in 2013.  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, 2013 and 2012.

State Fund operates in conformity with the California law imposed for risk-based capital (RBC). As of December 31, 2013 and 2012, policyholders’ surplus exceeded the minimum RBC requirements.

Policyholders’ surplus increased $342 million or 6% compared to prior year mainly due to net income of $279 million.  The restricted surplus for the unfunded pension and OPEB at December 31, 2013 was $957 million, down from $1 billion at December 31, 2012.

Cash Flow

State Fund’s statements of cash flow are summarized below:

(In millions)   2013 2012
Premiums collected net of reinsurance $ 1,047 833
Net investment income   754 843
Miscellaneous income   12 25
Benefits and loss related payments   (1,510) (1,492)
Other underwriting expenses   (655) (838)
Dividends paid   (44) (19)
Net cash used in operations   (397) (648)
Proceeds from investments sold, matured, or repaid   3,976 4,874
Cost of investments acquired   (4,018) (4,186)
Net cash provided by (used in) investments   (42) 688
Net cash provided by financing and miscellaneous sources  
163

261
Net change in cash, cash equivalents and short-term investments  
(276)

301
Cash, cash equivalents and short-term investments, beginning of year  
431

130
Cash, cash equivalents and short-term investments, end of year
$

155

431

 

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.