california self-insurers’ security fund alternative security program overview november 10, 2010
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California Self-Insurers’ Security Fund
Alternative Security Program Overview
November 10, 2010
2
Disclosure
Securities or investments are offered through MMC Securities Corp (“MMCSC”), a registered broker-dealer, and member of FINRA/SIPC. Main office: 1166 avenue of the Americas, New York, NY 10036. Phone: 212.345.5000. MMCSC, Oliver Wyman, and Marsh Inc. are affiliated entities that are owned and operated by Marsh & McLennan Companies, Inc. MMCSC or any of its affiliates may have an independent business relationship with any of the companies described herein. Trademarks and service marks are the property of their respective owners.
This material has been prepared for informational purposes only. It is not an offer to buy or sell any security or commodity or other financial instrument or to participate in any trading strategy. The implementation of or investment in the Alternative Security Program (“ASP”) involves a high degree of risk and should be considered only by institutional investors who can bear the economic risks of replacing collateral with a portfolio based approach utilizing synthetic collateralized debt obligations and credit default swaps (“credit derivatives”). Certain inherent risks of credit derivatives include, but are not limited to the following: counterparty default risk; correlation may exist between reference entities and counterparties not assumed in risk models; reference entities may exhibit greater correlation than assumed in risk models; estimated recovery rates may greatly differ from actual recovery rates; reference entities may default on their worker’s compensation payments without triggering an ISDA default; and depending on future market conditions, credit protection may not be available at renewal of the ASP or may only be available at excessive cost. ASP sponsors/Investors should not rely on rating agency ratings and should conduct their own analysis or due diligence – identical ratings for different financial products do not guarantee identical risk characteristics since default rates may vastly differ.
Certain of the information contained herein concerning credit ratings and default rates is based upon or derived from information provided by third-parties and other industry sources as indicated herein. Results from simulations are for illustrative purposes only and certain assumptions have been made regarding simulations because some models are proprietary to their respective owners and cannot be replicated. No representation or warranty, express or implied, is made by MMCSC as to the accuracy or completeness of the information set forth herein, and nothing contained in this presentation is, or shall be relied upon as, a promise or representation, whether as to the past or the future. MMCSC has not independently verified any such information and assumes no responsibility for its accuracy or completeness. In addition, this presentation includes certain estimates and assumptions made by MMCSC which may or may not prove accurate. Certain assumptions have been made for modeling purposes only to simplify the presentation and/or calculation and are for illustrative purpose only; this does not reflect the performance of any specific scenario. Simulated performance is hypothetical and may not take into account material economic and market factors. Accordingly, there can be no assurance that estimated returns will be realized or that actual returns or performance results will not materially differ from those estimated herein. Therefore, recipients should not place undue reliance on these results. Past performance is not indicative of future results, which may vary.
No person has been authorized to make any representation or give any information with respect to the ASP, other than the information contained herein. Prospective institutional investors should not rely on any information other than that contained in this presentation or any supplement to this presentation.
Neither MMCSC nor any of its registered representatives, is making any representation regarding the legality of an investment herein by institutional investors. Prospective institutional investors are not to construe the contents of this presentation as legal, tax or business advice. Each institutional investor should consult with its own advisors as to legal, tax business, financial, and related aspects of investing in the ASP.
This material may not be redistributed without the prior written consent of MMCSC.
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Contents
Self-Insurers’ Security Fund
Alternative Security Program (“ASP”)
Assessments
Financial Strength
Self Insurers’ Security Fund
5
Self-Insurers’ Security FundOverview
Mission Statement:
"To provide continuity of workers' compensation benefits to injured workers of insolvent, private self-insured companies at the lowest overall long-term cost, equitably distributed to the self-insurance community."
Source: California Self-Insurers Security Fund 2010, http://securityfund.org
Purpose: Ensure the timely payment of workers compensation (“WC”) claims to injured workers in the event of default by a member
Founded:
Organization:
Authority:
July 6, 1984 by the State of California
501(c)(6) non-profit
CA Labor Code Sections 3740-3747
Governance: Board of Trustees
6 elected by member companies
1 ex-officio from CA Department of Industrial Relations (“DIR”)
Membership: All CA employers self-insured for WC
588 self insured entities
$6.6 billion exposure
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Self-Insurers’ Security FundBoard composition and staff
Tim East, ChairThe Walt Disney Corporation
Sean McNallyGrimmway Farms
Janice MurphyKaiser Permanente
Jill DulichMarriott International
Theresa MuirSouthern California Edison
William ZachrySafeway Inc.
Board of Trustees:
Staff:
Jeff Pettegrew, Executive Director
Ming Kan, Controller
Cathy Aguilar, Claims Manager
Regulator:
James Ware, Chief, Office of Self Insurance Plans (“OSIP”)
Source: California Self-Insurers Security Fund 2010, http://securityfund.org
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Self-Insurers’ Security FundStructure
Office of Self Insured Plans (“OSIP”)
Aud
its a
nd r
egul
ator
y en
forc
emen
t
Ass
essm
ents
Defaulted estate
Self insured employers
Department of Industrial Relations (“DIR”)
Self Insurers’ Security Fund
(“SISF”)
Ann
ual r
epor
ting
requ
irem
ents
Def
aulte
d es
tate
Defaulted self insured employer
Risk takersCredit fees
Default protection
Collateral
ASPExcluded
Claimants
Def
aulte
d cl
aim
pa
ymen
ts
Ongoing claim payments
Self insured employersClaimants
ClaimantsClaimants
Legal authority
Self insured employers
Alternative Security Program
9
Self-Insured
Employer
Security Fund
Injured workers
Regulator
Bank / Surety
WC Obligation
WC Obligation
Additional Assessment
Security
Fees/Premium
Security AssessmentFees/Premium
Alternative Security ProgramStructure
10
Alternative Security ProgramParticipation requirements
Source: California Code of Regulations, Title 8, Subchapter 2, Article 3 - §15220
Full net worth
net income (5 year average)
credit rating
≥ $5,000,000
≥ $500,000
≥ B3/B-
Partial as for Full, but either downgraded for “cause,” OR revoked
Excluded new self insured – 3 year wait
defaulted
failure to post (60+ days)
revoked (minimum or no claims)
at the Board’s request e.g. one ineligible rating
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ASP participation expanded in 2010 due to improved credit ratings…
Sources: Office of Self Insurance Plans, CA Self Insurers’ Security Fund 6/28/10
$ in millions1. The following were not assessed - Employers revoked prior to 2003 - Partial deposits posted to OSIP - the first $220,000 of each Excluded deposit
Alternative Security ProgramSummary
$ # $ # $ %Assessed
ASP 5,848 350 5,525 338 323 6% Excluded 599 238 741 258 (142) -19%
6,448 588 6,266 596 181 3%
Not Assessed1 124 110 14 12%
Total Security 6,572 588 6,377 596 195 3%
2010/11 2009/10 %Δ
12Source: Moody’s Analytics Industry Groups, Office of Self Insurance Plans, Factiva, Company financial statements
Industry concentrations remain primarily in Medical Services, Food & Beverage and Utilities…
Others <$100 Each13%
Aerospace & Defense2%
Automotive2%
Hotels & Restaurants2%
Air Transportation2%
Broadcast Media2%
Business Services3%
Consumer Durables Retl/Whsl
4%
Food & Beverage4%
Telephone6%
Consumer Products Retl/Whsl
10%
Utilities12%
Food & Beverage Retl/Whsl
18%
Medical Services20%
2010/11
2009/10
Alternative Security ProgramIndustry distribution
13
Ratings improved with the economic outlook, raising the weighted average rating (WARF)…
0%
5%
10%
15%
20%
25%
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3
% o
f A
SP
No
tio
nal
2010/11 2009/10
Baa3
WARF 488 619
Source: OSIP, Bloomberg, Moody’s, S&P, Moody’s KMV CreditEdge & RiskCalc at 5/15/10
Alternative Security ProgramRating distribution
Assessments
15
Although the ELP fee increased reflecting higher risk transfer costs, the DLF declined significantly…
33.8 32.7 32.6 32.6
18.423.3
19.0
12.8
19.9
17.1
14.4
14.2
20.6
20.1
23.525.2
11.3
9.66.2
Excess LiabilityProtection - ELP
Pre-exsiting defaultshortfall - PEDSF
Default Loss Fund -DLF
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
Aggregate fees 66.5 59.4 53.2 46.8 31.9 38.7 46.8 44.2
ASP Size 4,675 5,201 5,893 5,516 5,318 5,596 5,545 5,870
% 1.42 1.14 0.90 0.85 0.60 0.69 0.84 0.75
$ millions
30%
29%
27%
30%
65%
52%
50%
51% 55% 61% 70%
35% 48%50%
19% 16%12%
57%
43%
AssessmentsTotal
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AssessmentsRates
Although 2010 rates increased on average 5.5%, they remain significantly below those at ASP inception…
1. Moody’s equivalentSource: CA Self Insurers’ Security FundPast performance does not guarantee future results
0
100
200
300
400
500
600
Aa
a
Aa
1
Aa
2
Aa
3
A1
A2
A3
Ba
a1
Ba
a2
Ba
a3
Ba
1
Ba
2
Ba
3
B1
B2
B3
Rat
e -
bas
is p
oin
ts
03/04
09/10
10/11
-34%
-57%
-33%
-38%-40%
Index Rating1 10/11 09/10 % Δ
1 Aaa 16 16 3%
2 Aa1 18 17 3%
3 Aa2 21 20 5%
4 Aa3 24 23 6%
5 A1 29 27 7%
6 A2 36 34 7%
7 A3 44 41 7%
8 Baa1 58 55 5%
9 Baa2 71 66 7%
10 Baa3 90 83 8%
11 Ba1 124 119 5%
12 Ba2 142 136 5%
13 Ba3 170 156 9%
14 B1 244 237 3%
15 B2 293 283 4%
16 B3 355 338 5%
Financial Strength
18
… and gross assets have increased 629% since ASP inception…
1. Unaudited Sep 30, 2010Past performance does not guarantee future results.
1
204
45
79
109
153
191216
229
275
327
149
(3)
(55)
52
101
143155
113
(100)
(50)
0
50
100
150
200
250
300
350
2003 2004 2005 2006 2007 2008 2009 2010 Current
$ m
illion
s
Net Gross
Financial StrengthAssets
Capital Target(Net Assets)
19
Financial StrengthRecent defaults
A summary of the Fund’s claim reserves is as follows…
Default EstateTotal Reserves
(Net) SISF PaidUltimate Loss
Cost Security Deposit Over/(Under)
7/21/2010 Triple A Machine Shop 197,950 197,950 292,901 94,951 8/3/2009 Fleetwood 27,340,033 2,405,606 29,745,639 11,563,964 (18,181,675) 4/3/2009 Circuit City Stores 18,374,074 3,499,705 21,873,779 14,119,256 (7,754,523)
3/30/2009 Fairchild 1,464,960 1,053,653 2,518,613 1,141,943 (1,376,670) 11/25/2008 Mervyn's 30,626,968 4,404,129 35,031,097 720,000 (34,311,097)
2008-Current 78,003,985 11,363,093 89,367,078 27,838,064 (61,529,014)
2007 & Prior 64 Estates 42,240,382 167,600,003 209,840,385 100,415,453 (109,424,932)
120,244,367 178,963,096 299,207,463 128,253,517 (170,953,946)
Source: CA Self Insurers’ Security Fund Independent Actuarial Report and Estate Financial Data Report 6/30/2010Past performance does not guarantee future results.
The Fund has been carefully following the ongoing conservation of Contractors Access Program, and has sufficient financial resources to address any liabilities that may be assumed from this situation.
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