State Compensation Insurance Fund, California’s largest workers’ compensation writer and market of last resort, continues to shed premium and miss many of its budget projections for the quarter ending June 30, 2010. State Fund lost more than $60 million in premium compared to the same time last year and missed its second-quarter budget by more than $95 million. According to Chief Financial Officer Jay Stewart, revenue was less than budgeted, but other income helps fill the hole. But bigger trouble may be on the horizon.
“State Fund continues to face a very soft market through the first six months of the year,” says Stewart. “It resulted in less revenue than budgeted, [but] the good news is we were able to control expenses and we had strong investment income.”
Financial Trouble Ahead
But big trouble may loom. State Fund’s investment consultants tell the board that investment revenue will be down – perhaps significantly – from prior years because many of its high-paying bonds are maturing, and replacements generate far less. State Fund’s investment income from claims reserves has carried through its very significant underwriting losses for the past few years. State Fund has a very large exposure to state and municipal bonds, which despite their rating are falling out of favor with many informed investors. Many of California’s cities and counties face serious financial trouble.
The combination of lower investment results and lower premiums and an already extraordinary high combined ratio may be coming together to create a financial crisis of epic proportions. State Fund may have no choice but to shed 1,600 to 2,400 workers to lower expenses.
Brokers to whom State Fund has denied commissions on direct accounts are beginning to move business in droves. State Fund lost 6,500 policies in recent months. It has no A.M. Best or other ratings, having chosen some years ago to decline being rated because the rating would not have been positive (see story State Fund Suffers…).
State Fund policyholders receive no guarantee from the State of California.
Stewart says year-to-date net income is $34 million versus a budget of $5 million. But net premium written at quarter end was $577 million versus a budget of $673 million, missing the mark by $96 million. That’s a decrease of $67 million compared to the same quarter ending June 30, 2009.
In addition, net earned premium was $569 million for the quarter ending June 30, 2010 versus a budget of $655 million. Compared to the same period in 2009, this year is lower by $43 million.
Losses incurred were $428 million versus a budget of $491 million. “They’re down in relation to premium. 2009 losses for the same period of time were $461 million,” Stewart says.
Loss adjustment expenses at quarter end were $290 million versus a budget of $350 million. At the end of the same period in 2009, loss adjustment expenses were $315 million.
Underwriting expense was $223 million versus a budget of $243 million. The quarter ending June 30, 2009 underwriting expense was $219 million.
“Underwriting loss was better than budget at $372 million loss versus a budget of $394 million. The underwriting loss for the second quarter a year ago was $382 million,” Stewart says.
The combined ratio for the quarter ending June 30, 2010 ticked up slightly from the first quarter to 172.5% compared to a budget of 164%.
“Our balance sheet remains strong, with assets exceeding our liabilities by approximately $5.3 billion,” Stewart says. “That’s $155 million greater than a year ago and approximately a 3% increase in surplus.”