Though the books are closed on 2008, final numbers still are being tallied. But State Compensation Insurance Fund’s board of directors got a preview of the carrier’s financials last week during two days of meetings.
Clearly, SCIF sells insurance below cost. Whether that complies with the constitutional requirement of being “fairy competitive” ultimately may be up to the SCIF board, the Governor’s Office or the courts.
CFO Jay Stewart reports that the carrier continues to shed premium. According to preliminary year-end results, SCIF had $1.72 billion in direct written premiums and $1.66 billion in earned premiums in 2008. These results compare to $2.34 billion in direct and $2.28 billion in earned premiums in 2007.
Overall, Stewart says SCIF ended the year with a combined ratio of 148%, including a loss ratio of 75%. The carrier’s loss adjustment and underwriting expenses are coming in over budget, but much of this, he says, is due to new accounting methodologies for SCIF’s liability for retiree health benefits. Whereas in past years, the carrier was booking approximately $40 million to $45 million for these expenses, in 2008 it will record a $165 million charge.
Stewart explains that the increase is due to the recognition of future liabilities for these benefits, as opposed to operating on the pay-as-you-go approach that the state has used in the past.
“We book what we’re assessed and basically this year we were assessed two-thirtieths, instead of just one-thirtieth,” he told the board, noting that the total liability is allocated over 30 years. Stewart explained that the charge for 2008 was essentially double what it will be in 2009 due to the discrepancy between the fiscal calendars of SCIF and the state. While the state operates on a July 1 to June 30 fiscal calendar, SCIF operates on a calendar-year basis.
More Investments Impaired
The board also heard that 14 corporate bonds accounting for 1.16% of SCIF’s investment portfolio are out of compliance with its investment policies, which require an A rating for bonds. Overall, the current face value of the bonds is $220 million, and that includes $95 million in Lehman Brother bonds whose value has already been written down.
The one addition to the list since the board’s meeting in November is a $10 million bond from International Lease Finance Corp., an AIG subsidiary. “The recommendation is to hold the bond,” Leslie Dawe, fiscal and investment services manager for SCIF, told the board’s investment committee, noting that International Lease had been acquired by AIG but is a fairly strong company in its own right.
“The thinking is that it will be sold off [by AIG],” Stewart added.
Due to public noticing requirements, the investment committee’s report included data only through the end of November, but Dawe noted that one of the troubled bonds in the list — a $30 million bond from MBIA, Inc. — was divested in December. A full report on that will be made to the board at its next meeting in March.
But beyond the troubled bonds, Stewart reported that the carrier’s investment portfolio returned income of approximately $990 million, though impairments brought net return down to $900 million. SCIF had budgeted for $970 million in investment earnings.
The carrier also is charging off $88 million in uncollected premiums. When the board met in November, Stewart estimated that uncollected premiums would reach $100 million for the year, but now he says enhanced collection efforts have brought that number down.
All told, Stewart says, the carrier should end the year with $86.5 million in net income and its assets should exceed liabilities to the tune of $5.1 billion.
SCIF’s year-end financials should be finalized by the end of February and a final report will be presented to the board at its next meeting on March 12 and 13.