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.