2014 Financial Summary

Results of Operations

State Fund’s results of operations for years ended December 31, 2014 and 2013 and its corresponding financial ratios are shown below:

(In millions)		2014	2013
Net premiums earned	$	1,669	1,094
Losses incurred		1,372	821
Loss adjustment expenses incurred		603	295
Underwriting and administrative expenses		375	280
Net underwriting loss		(681)	(302)
Net investment gain (loss)		731	688
Other income (loss)		(17)	(22)
Income before dividends		33	364
Dividends to policyholders		4	(85)
Net income	$	37	279

Loss ratio		82.2%	75.0%
LAE ratio		36.1%	27.0%
Underwriting expense ratio		24.8%	25.5%
Combined ratio		143.2%	127.5%

During 2014 State Fund continued to experience growth in premiums as a result of a hardening market combined with a continued acceptance of our tiered pricing that was introduced in March 2013. State Fund showed a $681 million of underwriting loss compared to $302 million underwriting loss in prior year. This was mainly due to strengthening of reserves. As part of the overall Enterprise Risk Management policy and State Fund’s unique role in the market place, the Board has adopted a more conservative posture related to reserving. The board of directors declared a $37 million dividend for 2014 compared with a $100 million dividend for 2013. The 2014 policyholders’ dividends were offset by a $41 million release of excess 2012 dividends reserves. State Fund realized a net income of $37 million and $279 million for years ended December 31, 2014 and 2013.

Financial Position

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

(In millions)
Admitted Assets		2014	2013
Bonds, at amortized cost	$	17,938	17,460
Common stocks		994	917
Cash and short-term investments		76	155
Total cash and invested assets		19,008	18,532
Other assets		733	697
Total admitted assets	$	19,741	19,229

Liabilities and Policyholders' Surplus
Losses and loss adjustment expenses reserves	$	11,966	11,596
Other liabilities		1,400	1,280
Total liabilities		13,366	12,876
Policyholders' surplus		6,375	6,353
Total liabilities and policyholders' surplus	$	19,741	19,229

State Fund maintained a balanced investment portfolio that was focused on both credit quality and investment yield (98% of the $17.9 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 Aa2/AA by Moody's and Standard & Poor’s, respectively. Book yield at December 31, 2014 was 3.68%, down from 3.85% at December 31, 2013.

State Fund continued to invest in stocks since 2013 when it consequently expanded its investment authority with the passage of SB 1513. Stocks are about 5.25% of the total security portfolio which is in line with the investment policy.

As a result of reserves strengthening, losses and loss adjustment expenses reserves were 3.2% higher compared to December 31, 2013 balance. 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, 2014 and 2013.

State Fund operates in conformity with the California law imposed for risk-based capital (RBC). As of December 31, 2014 and 2013, policyholders’ surplus exceeded the minimum RBC requirements.

Policyholders’ surplus grew by $22 million to a total of $6.38 billion at December 31, 2014. The restricted surplus for the unfunded pension and OPEB at December 31, 2014 was $906 million, down from $957 million at December 31, 2013.

Cash Flow

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

(In millions)		2014	2013
Premiums collected net of reinsurance	$	1,469	1,047
Net investment income		719	754
Miscellaneous income		9	12
Benefits and loss related payments		(1,188)	(1,511)
Other underwriting expenses		(760)	(655)
Dividends paid to policyholders		(63)	(44)
Net cash used in operations		186	(397)
Proceeds from investments sold, matured, or repaid		3,031	3,976
Cost of investments acquired		(3,424)	(4,018)
Net cash provided by (used in) investments		(393)	(42)
Net cash provided by financing and miscellaneous sources		128	163
Net change in cash, cash equivalents and short-term investments		(79)	(276)
Cash, cash equivalents and short-term investments, beginning of year		155	431
Cash, cash equivalents and short-term investments, end of year	$	76	155

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.