CA Self-Insurers’ Security FundAlternative Security Program OverviewNovember 15, 2011

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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.

• Vishal Rana is a Registered Representative of MMCSC.

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Jeff Pettegrew, Executive Director

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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, 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

587 self insured entities

$6.7 billion exposure

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1

1. Serves as delegate of Christine Baker, Director of Industrial RelationsSource: California Self-Insurers Security Fund, http://securityfund.org

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Vishal Rana, Senior Vice President

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Structure

Self-Insured

Employer

Security Fund

Injured workers

Regulator

Bank / Surety

WC ObligationFees/Premium

Security Assessment

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Structure

Self-Insured

Employer

Security Fund

Injured workers

Regulator

WC Obligation

WC Obligation

Additional Assessment

Security

Assessment

Bank / SuretyFees/Premium

Security

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Structure

Self-Insured

Employer

Security Fund

Injured workers

Regulator

WC Obligation

Security

Assessment

(fees/premium)

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Structure

Self-Insured

Employer

Security Fund

Injured workers

Regulator

WC Obligation

WC ObligationSecurity

Assessment

(fees/premium)

Security

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Participation 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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Participation Summary

Although the number of ASP participants decreased slightly (exclusions & defaults) deposits increased by 2.5% …

Sources: Office of Self Insurance Plans, CA Self Insurers’ Security Fund 6/28/11

1. Employers revoked prior to 2003, and $220,000 of each Excluded and Partial deposit posted individually

2011/12 2010/11 Δ

Assessed $ (mill) # $ (mill) # $ %

ASP (composite deposit) 5,997 345 5,848 349 149 2.5%

Excluded 576 242 599 239 (24) -3.9%

6,573 587 6,448 588 125 1.9%

Not Assessed1 110 124 (14)

Total Security 6,682 587 6,572 588 111 1.7%

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Industry Distribution

Source: Moody’s Analytics Industry Groups, Office of Self Insurance Plans, Factiva, Company financial statements

The portfolio remains reasonably diverse with major concentrations consistent with 2010/11…

Medical Services20%

Food & Beverage Retl/Whsl

18%

Utilities12%Consumer Products

Retl/Whsl11%

Telephone6%

Food & Beverage4%

Consumer Durables Retl/Whsl

4%

Business Services3%

Broadcast Media3%

Air Transportation2%

Hotels & Restaurants2%

Automotive2%

Aerospace & Defense2%

Others <$100 Each11%

2011/12

2010/11

14

0%

5%

10%

15%

20%

25%

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 NR

% o

f A

SP

No

tio

nal

Rating Equivalent

2011/12 $ 2010/11 $

Rating Distribution

Source: Office of Self Insurance Plans, Bloomberg, Moody’s, S&P, Moody’s KMV CreditEdge & RiskCalc at 7/20/11

The overall portfolio credit rating was essentially unchanged with a generally improving portfolio…

Baa3

WARF 482 488

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Assessment Rates

Rates were unchanged from last year and remain significantly below ASP inception in 2003…

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

11/12 & 10/11

Index Rating1

11/12 & 10/112

1 Aaa 16.0

2 Aa1 18.0

3 Aa2 21.0

4 Aa3 24.0

5 A1 29.0

6 A2 36.0

7 A3 44.0

8 Baa1 58.0

9 Baa2 71.0

10 Baa3 90.0

11 Ba1 124.0

12 Ba2 142.0

13 Ba3 170.0

14 B1 244.0

15 B2 293.0

16 B3 355.0

-34%

-57%

-33%

-38%-40%

1. Moody’s equivalent2. CA Self Insurers’ Security FundPast performance does not guarantee future results

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Assessment Components

The total assessment comprises two elements, the first covers expenses (Excess Liability Protection fee - “ELP”) and the second provides funding (“default Loss Fund fee – “DLF”) to build capital and pay current claims …

Risk transfer

General administrative

Placement

Line of Credit

Claims

Capital

DLFELP

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Total Assessment

The 2011/12 total assessment was held constant despite higher hedging costs…

$ millions

2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Aggregate fees 66.5 59.4 53.2 46.8 31.9 38.7 46.8 44.2 45.5

ASP Size 4,675 5,201 5,893 5,516 5,318 5,596 5,545 5,870 5,974% 1.42 1.14 0.90 0.85 0.60 0.69 0.84 0.75 0.76

33.8

51%

32.7

55%

32.6

61%

32.6

70% 18.4

48%

23.3

50%19.0

43% 9.7

21%

12.8

19%

19.9

30% 17.1

29%14.4

27%14.2

30%

20.6

65%

20.1

52%

23.5

50% 25.2

57% 35.8

79%

11.3

35%

6.2

12%

9.6

16%

ELP

Pre-existing defaultshortfall - PEDSF

DLF

Past performance does not guarantee future results.Source: CA SISF

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7245

79109

153

191216 229

275

352

149

(3)

(55)

52

101

143155

113

(100)

(50)

0

50

100

150

200

250

300

350

400

2003 2004 2005 2006 2007 2008 2009 2010 2011

$ m

illio

ns

Net Gross

Financial Strength

The Fund’s strong financial position has enabled it to absorb the adverse impact of recent defaults (remains under review) …

1. Per OW Capital Study 3/15/11 - Baseline capital target, Protracted recession low inflationSource: Audited Self-Insurers’ Security Fund Financial Statements 2003-2010 ( 2011 unaudited)Past performance does not guarantee future results.

312 Net Capital Target1

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Jill Dulich, Claims Committee - Chair

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Default History

Defaults tend to occur in clumps following economic slowdowns…

Source: California Self-Insurers Security Fund, http://securityfund.org

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Recent defaults(slide added after presentation)

A summary of recent defaults is as follows…

Date of Default Employer

11/25/08 Mervyn's LLC

03/30/09 Fairchild Holding Corp.

04/03/09 Circuit City Stores, Inc.

08/03/09 Fleetwood Enterprises Inc.

07/21/10 Triple A Machine Shop

11/18/10 Contractor's Access Program SIG

04/19/11 Mainstay Business Solutions

05/17/11 Interlake Material Handling

05/23/11 Mid Valley Plastering

08/08/11 T & R Painting and Drywall

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Financial Strength

The ASP is operating as intended and annual claims payments remain manageable…

Source: California Self-Insurers Security Fund, http://securityfund.org

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