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:

(In millions)		2016	2015
Net premiums earned	$	1,527	1,605
Losses incurred		1,130	1,252
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
Net income	$	192	271

Loss ratio		74.0%	78.0%
LAE ratio		32.3%	28.3%
Underwriting expense ratio		23.9%	23.5%
Combined ratio		130.2%	129.8%

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.

Financial Position

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

(In millions)
Admitted Assets		2016	2015
Bonds, at amortized cost	$	18,905	18,492
Common stocks		895	893
Real estate		245	248
Cash and short-term investments		224	62
Total cash and invested assets		20,269	19,695
Other assets		462	534
Total admitted assets	$	20,731	20,229

Liabilities and Policyholders' Surplus
Losses and loss adjustment expenses reserves	$	12,503	12,273
Other liabilities		1,533	1,417
Total liabilities		14,036	13,690
Policyholders' surplus		6,695	6,539
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.

Cash Flow

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

(In millions)		2016	2015
Premiums collected net of reinsurance	$	1,506	1,562
Net investment income		715	715
Miscellaneous income		16	20
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		7	129
Net change in cash, cash equivalents and short-term investments		162	(14)
Cash, cash equivalents and short-term investments, beginning of year		62	76
Cash, cash equivalents and short-term investments, end of year	$	224	62

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.