2021 Annual Report President's Letter

After a truly unique and challenging 2020, it is easy to think of 2021 as something more pedestrian. But as I sit here and think about last year in its entirety, I'm quickly reminded how 2021 was also one of the most unusual in my career—both from a personal and professional perspective.

Over the course of 2021, the pandemic dominated nearly every aspect of our lives. Just about anyone who wanted a COVID vaccine in this country was able to get one. Many had two or three doses! But multiple COVID variants still moved quickly throughout our communities and continued to affect the way we lived, worked, and played.

Our global supply chain—something that is often nearly invisible to most people—became a regular conversational topic and inflation began to rear its head for the first time in recent memory. By the end of 2021, the economy seemed to be a little unsure of where it was going. And the insurance market in California was also just beginning to show some signs of uncertainty.

Of course, uncertain times—like those we have seen the last two years—are when State Fund's role in the marketplace becomes crystal clear. We are the only workers' compensation carrier that is absolutely committed to California. No matter what happens over the next year, 5 years, 10, 20, 50, or 100 years—we will be here for the business owners and injured workers who need us.

How do we ensure we are here for the long term? While there are many factors, the single most important is our financial strength. In fact, our current financial position is the primary reason that, when we realized significant capital gains toward the end of 2021, we were able to commit to returning approximately $55 million to our policyholders in the form of a dividend for the 2021 policy year. This is the third year in a row we have been able to return money to our policyholders and we are very pleased to support California businesses, and the broader California economy, in this way.

Key Actions and Results in 2021

In addition to declaring a 2021 dividend, we also demonstrated significant progress across a number of different initiatives and delivered positive results in key operational areas. Here are a few examples:

We renewed policies totaling $929 million in Estimated Annual Premium (EAP), a 13% year-over-year increase. While it was a challenging year to write new business due to the pandemic and the continued soft market in California, our renewal performance was excellent. We believe our continued focus on making it easier to do business with us and providing excellent service are improving our retention.
We paid out $45 million in 2020 EAP dividends and $2 million in 2020 Large Account Safety Dividends to eligible 2020 policyholders. (We are continuing to pay dividends from the 2020 policy year as policyholders complete policy audits and dividend eligibility requirements.)
We had $165 million of net income before dividends and increased our policyholders' surplus by $202 million in 2021. Again, we continue to improve our financial strength despite the disruptions we have faced these past two years.
We completed the vast majority of the development work on our new BindNow quote and bind system for brokers. BindNow allows our brokers to get a quote, pay online and bind a policy for small commercial policies in just minutes instead of days. As I write this in the spring of 2022, BindNow has gone live and we have already bound hundreds of policies in the system.
We continued to make significant progress in our long-term effort to modernize our policy administration system and other core technologies. In 2021, we rolled out a long list of enhancements to help us move a significant majority of our policies into these "NextGen" systems.
We began a series of initiatives focused on using automation, artificial intelligence, and other technologies to become more efficient, reduce expenses, and improve our customers' experience with us even more. These projects will also allow us to scale up our operational capacity quickly if needed without incurring significant new expenses.
We improved all customer experience measures when compared to 2019, and achieved two of the three goals set for the year. We are seeing evidence year after year that we are achieving our goal of becoming easier to do business with.
We again exceeded the Finance and Insurance industry benchmark for our overall employee engagement score. We believe our culture is a pillar of our success and we are looking very closely at ways to maintain our strong culture as our employees continue to spend a lot of their time working from home under our new hybrid workforce model.
Nearly 1,000 employers signed up for our Online Safety University by the end of 2021. That includes more than 2,500 employees and—since most employees sign up for multiple classes—more than 12,000 course enrollments overall. Our Online Safety University is a benefit we provide exclusively to policyholders, and we believe it is an important value-added service that helps differentiate us in a very competitive market.
More than 1,700 employers in California used our online Injury and Illness Prevention Program (IIPP) Builder. We have received very positive feedback on this tool and we continue to improve it and make easier to use and more comprehensive. In fact, Cal/OSHA now includes a link to our IIPP Builder on their website.
We launched our Safety Training and Recognition Program (STAR). We have more than 500 employers in the program who committed to a year of online safety training through our Online Safety University. Some employers with high experience modifications are also eligible to receive financial incentives if they complete the program.

Financial Highlights

Here are our 2021 financial highlights that are described in more detail in this report:

Our net income before dividends was $165 million.
Our net investment income and realized gain on sale of equity securities was $674 million, about $12 million higher than the prior year mainly due to an increase in gain on sale of equity investments.
We wrote approximately $1.2 billion in premium in 2021, which is about 15% higher than the prior year.
Our combined ratio of 143.6% was 2 points higher than in 2020.

As I consider 2022 and beyond, I continue to feel confident that whatever happens with the pandemic, the California insurance market and the broader economy, State Fund is well positioned to continue to fulfill its role now and into the future.

Sincerely,

Vern Steiner
President & CEO