2016 Financial Summary
Results of Operations
State Fund’s results of operations for years ended December 31, 2016 and 2015 and its corresponding financial ratios are shown below:
|Net premiums earned||$||1,527||1,605|
|Loss adjustment expenses incurred||493||454|
|Underwriting and administrative expenses||382||382|
|Net underwriting loss||(478)||(483)|
|Net investment and realized gain (loss)||696||732|
|Other income (loss)||(31)||(16)|
|Income before dividends||187||233|
|Dividends to policyholders||5||38|
|Underwriting expense ratio||23.9%||23.5%|
State Fund’s premium continued to decline in 2016. The decline of State Fund’s premium can be attributed to the soft market and increased competition. In response to favorable loss development State Fund lowered its premium rate by 9.5% effective September 1, 2016 and implemented other initiatives throughout 2016 to create product and service values for its customers. State Fund had a $478 million underwriting loss in 2016 compared to a $483 million underwriting loss in prior year. The 2016 underwriting loss decreased due to lower losses incurred resulting from reduced new claims reported and claims inventory compared to prior year. The board of directors did not declare a dividend for 2015. Excess policyholders’ dividend reserve of $5 million and $38 million were released in 2016 and 2015, respectively, for prior years. State Fund realized a net income of $192 million and $271 million for years ended December 31, 2016 and 2015.
State Fund’s financial positions at December 31 are as follows:
|Bonds, at amortized cost||$||18,905||18,492|
|Cash and short-term investments||224||62|
|Total cash and invested assets||20,269||19,695|
|Total admitted assets||$||20,731||20,229|
|Liabilities and Policyholders' Surplus|
|Losses and loss adjustment expenses reserves||$||12,503||12,273|
|Total liabilities and policyholders' surplus||$||20,731||20,229|
State Fund maintained a balanced investment portfolio that was focused on both credit quality and investment yield (93% of the $18.9 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, 2016 was 3.32%, down from 3.53% at December 31, 2015.
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, 2016 and 2015.
State Fund operates in conformity with the California law imposed for risk-based capital (RBC). As of December 31, 2016 and 2015, policyholders’ surplus exceeded the minimum RBC requirements.
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. In 2016, State Fund reduced $71 million and $384 million from its restricted surplus to its unrestricted surplus for unfunded actuarial accrued liabilities for pension and OPEB, respectively, which represented the contingent liability for State Fund employees who are assigned to the State Contracts operations at State Fund. These State Fund employees adjust and administer the workers’ compensation claims for various state government agencies pursuant to a master service agreement entered into by CalHR on behalf of a number of state agencies. The pension and OPEB costs for these State Fund employees will eventually be the responsibility of CalHR and these government agencies whose workers’ compensation claims have been adjusted by State Fund. As a result, the restricted surplus for the unfunded pension and OPEB at December 31, 2016 decreased to $1.2 billion, down from $1.7 billion at December 31, 2015. Policyholders’ surplus grew by $156 million to a total of $6.7 billion at December 31, 2016.
State Fund’s statements of cash flow are summarized below:
|Premiums collected net of reinsurance||$||1,506||1,562|
|Net investment income||715||715|
|Benefits and loss related payments||(933)||(1,006)|
|Other underwriting expenses||(847)||(844)|
|Dividend paid to policyholders||(13)||(48)|
|Net cash used in operations||444||399|
|Proceeds from investments sold, matured, or repaid||3,470||2,863|
|Cost of investments acquired||(3,759)||(3,405)|
|Net cash provided by (used in) investments||(289)||(542)|
|Net cash provided by financing and miscellaneous sources||
|Net change in cash, cash equivalents and short-term investments||
|Cash, cash equivalents and short-term investments, beginning of year||
|Cash, cash equivalents and short-term investments, end of year||
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.