California State Compensation Insurance Fund (SCIF) continues to suffer financially from underwriting losses, premium decreases and account flight as competitors and the economy take business from the state’s largest workers’ comp carrier. Through the first nine months of the year, the quasi-public agency’s policy count was off by 12% and net premiums earned were off by 10% when compared to the same point in 2009.
But the carrier reports net income of $100 million through the end of September. This comes in $79 million ahead of budget and $27 million ahead of last year. These results offset underwriting losses and are buoyed by the carrier’s return on its sizeable investment portfolio, which allows it to overshadow more basic operating problems.
“Our financial results are impacted by economic conditions, as you know, including unemployment and market pricing,” says SCIF interim Chief Financial Officer Dan Sevilla. He points out that through the first nine months of the year, SCIF had written 17,000 fewer policies when compared to last year’s total of around 142,000 policies. The 12% decline in number of policies was also accompanied by a drop in average value of a policy, down $600 to an average of $7,100.
Overall, this added up to a 10% drop in net earned premium from the prior year and came in at $850 million. The upside to policy flight is that losses were also down 10% to $638 million. Loss adjustment expenses, underwriting expenses and other expenses were 8% below last year’s levels to $777 million for an expense ratio of 91%. The combined ratio clocked in at 166%.
Changing Investment Outlook
While the operational side continued to struggle, Sevilla reports that SCIF investments have brought in $657 million in revenue so far this year. This is 4% more than expected but 4% behind last year’s pace.
Longer term, these investment returns could drop off as higher-yielding bonds are retired and replaced by lower-performing bonds, a problem that many insurers face. But SCIF is preparing to counter this loss in revenue by exercising its newfound authority to invest in corporate securities.
“After 30 years, we have legislation that was passed this year that approved the investment in corporate bonds effective January 1, 2011, and we have changed the [Investment] Guidelines to add that sector into our policy,” says former Sen. Mike Machado, SCIF board member.
“In the case of corporate bonds, we can have a maximum of, I believe it is, 45% of our portfolio in corporate bonds, 20% in municipal bonds, and those two sectors are considered to be credit risk investments,” says Machado. “The maximum we can have for credit risk investments will be 55%.”
According to Peter Guastamachio, SCIF’s chief investment officer, the policy will require corporate securities to be rated A2/A/A by at least two nationally recognized rating organizations to qualify for purchase by the carrier’s investment manager unless he gives prior approval to the purchase. And single corporate issuers rated Aa3/AA- or better may not exceed 1% of the book value of the portfolio, while those rated below that level may not exceed 0.75%.
Investments in commercial paper — unsecured, short-term debt sold by corporations — also will be allowed, with limits. All purchases have to be rated A1/P1 by at least two nationally recognized rating services and to be eligible may not exceed 180 days’ maturity or account for more than 10% of the issuers’ outstanding paper. The issuing corporations also must have shareholder equity of at least $10 billion, under the new investment guidelines adopted by the full board of directors.
The expanded investment authority was granted by the passage of SB 1407, carried by the Senate Banking, Finance and Insurance Committee. The bill was intended to bring SCIF’s investment authority up to that of domestic insurers.