2015 Financial Summary

Results of Operations

State Fund’s results of operations for years ended December 31, 2015 and 2014 and its corresponding financial ratios are shown below:

(In millions)		2015	2014
Net premiums earned	$	1,605	1,669
Losses incurred		1,252	1,372
Loss adjustment expenses incurred		454	603
Underwriting and administrative expenses		382	375
Net underwriting loss		(483)	(681)
Net investment and realized gain (loss)		731	731
Other income (loss)		(16)	(17)
Income before dividends		233	33
Dividends to policyholders		38	4
Net income	$	271	37

Loss ratio		78.0%	82.2%
LAE ratio		28.3%	36.1%
Underwriting expense ratio		23.5%	24.8%
Combined ratio		129.8%	143.1%

During 2015 State Fund’s premium growth has leveled off compared to an increase in premium in 2014. State Fund had a $483 million underwriting loss compared to a $681 million underwriting loss in prior year. The prior year’s underwriting loss was significantly higher due to strengthening of reserves. The board of directors did not declare dividends for 2015. An excess policyholder dividend reserve of $38 million was released for prior years. In 2014 the board of directors declared a $37 million dividend but an excess policyholder’ dividend reserve of $41 million was released from 2012 that offset the dividend declared. State Fund realized a net income of $271 million and $37 million for years ended December 31, 2015 and 2014, respectively.

Financial Position

State Fund’s financial positions at December 31 are as follows:

(In millions)
Admitted Assets		2015	2014
Bonds, at amortized cost	$	18,492	17,938
Common stocks		893	994
Real estate		248	253
Cash and short-term investments		62	76
Total cash and invested assets		19,695	19,261
Other assets		534	480
Total admitted assets	$	20,229	19,741

Liabilities and Policyholders' Surplus
Losses and loss adjustment expenses reserves	$	12,273	11,966
Other liabilities		1,417	1,400
Total liabilities		13,690	13,366
Policyholders' surplus		6,539	6,375
Total liabilities and policyholders' surplus	$	20,229	19,741

State Fund maintained a balanced investment portfolio that was focused on both credit quality and investment yield (96% of the $18.5 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, 2015 was 3.53%, down from 3.68% at December 31, 2014.

State Fund continued to invest in stocks since 2013 when its investment authority was expanded with the passage of SB 1513.

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, 2015 and 2014.

State Fund operates in conformity with the California law imposed for risk-based capital (RBC). As of December 31, 2015 and 2014, policyholders’ surplus exceeded the minimum RBC requirements.

In 2015, State Fund engaged Milliman for actuarial consulting services to project the impact on Statutory accounting of GASB 68, Accounting and Financial Reporting for Pensions and GASB 75, Accounting and Financial Reporting for Postemployment Benefits Other than Pension. Due to the significant increase of State’s Unfunded Actuarial Accrued Liabilities as a whole and a selection of more conservative actuarial assumptions applicable to our operations, the restricted surplus for the unfunded pension and OPEB at December 31, 2015 increased to $1.6 billion, up from $906 million at December 31, 2014. Policyholders’ surplus grew by $164 million to a total of $6.5 billion at December 31, 2015.

Cash Flow

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

(In millions)		2015	2014
Premiums collected net of reinsurance	$	1,562	1,469
Net investment income		715	719
Miscellaneous income		20	9
Benefits and loss related payments		(1,006)	(1,188)
Other underwriting expenses		(844)	(760)
Dividends paid to policyholders		(48)	(63)
Net cash used in operations		399	186
Proceeds from investments sold, matured, or repaid		2,863	3,031
Cost of investments acquired		(3,406)	(3,424)
Net cash provided by (used in) investments		(543)	(393)
Net cash provided by financing and miscellaneous sources		129	128
Net change in cash, cash equivalents and short-term investments		(15)	(79)
Cash, cash equivalents and short-term investments, beginning of year		76	155
Cash, cash equivalents and short-term investments, end of year	$	62	76

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.