2019 Member Informational Meeting

April 8th 2019

Daniel Sovocool, Nixon Peabody

Grant Heinitz, SISF Credit Risk Manager

Jill Dulich, SISF Claims and Operations Manager

1

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."

2

Purpose: Ensure the timely payment of workers compensation 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

7 elected by member companies

1 ex-officio from CA Department of Industrial Relations

(“DIR”)

Membership: All non-public entity CA employers self-insured for WC

540 self-insured entities

$8.3 billion exposure

3

Board of Trustees

4

Tim East, Chairperson, The Walt Disney Company

Janice Murphy, Kaiser Permanente

Steve Tolan, Nordstrom, Inc.

Toni Allen, Monterey Mushrooms, Inc.

John Smolk, Southern California Edison Company

William Lyons, Recology, Inc.

Stacy Bratcher, University of Southern California

Lyn Asio-Booz, Chief, Self Insurance Plans (OSIP), DIR [ex officio]

Board of TrusteesTim East, The Walt Disney Co., Chairperson Janice Murphy, Kaiser Permanente

Steve Tolan, Nordstrom, Inc. Toni Allen, Monterey Mushrooms, Inc.

John Smolk, So Cal Edison Co. William Lyons, Recology, Inc.

Stacy Bratcher, University of Southern California Lyn Asio-Booz, Director Delegate, DIR/OSIP

Executive

CommitteeTim East, Chair

Finance CommitteeJohn Smolk, Chair

Tim East

Audit

CommitteeJanice Murphy, Chair

Bill Lyons

Credit

CommitteeTim East, Chair

Janice Murphy

Bill Lyons

Lyn Asio-Booz

Claims CommitteeSteve Tolan, Chair

Toni Allen

Board and Committees

5

CA Self-Insurance Overview

6

Entities 540 (including 25 SIG’s)

Payroll $95 billion

Employees 2.3 million (1 in 8 in state)

Source: Office of Self-Insurance Plans

ASP – Financial Strength

7

The ASP is operating as intended and both gross and net assets continue to grow

¹ SISF Monthly Financials 12/31/18 unaudited

Source: Audited SISF Financial Statements Jun 30. 2006-2018

100

142 155

103

144

58

112 117

208

245

285

372

435 436

153

191

216 218

315

379363

486 484

459

486508

543532

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019¹

($ m

illio

ns)

Net Gross

Estates and Workers’ Compensation Claims

8

2019 2018 D

Estates 86 85 1

46 46 0

Claims 854 957 -103

(as of 2/28)

Claim Liability (net) $381,200,737 $386,302,296 -$5,101,559

$36,341,934 $45,111,000 -$8,769,066

$30,653,508 $39,432,000 -$8,778,492

$448,196,179 $470,845,296 -$22,649,117

$255,562,783 $251,051,000 $4,511,783

SISF total net assets (as of 12/31) $435,597,150 $428,668,257 $6,928,893

$11,000,000 $10,500,000 $500,000

$2,000,000 $2,500,000 -$500,000

$13,000,000 $13,000,000 $0

Projected annual costs - claims (net of excess)

- claims admin

- Total

Paid (1984-2018)

Open Case Reserves (EFL)

IBNR + ULAE (actuarial estimate as of 12/31)

OSIP Deposits turned over to Fund

Total (1968 to date)

Active (1984 to present)

Open

Investment Returns

9

23,388,361

44,101,825

9,097,129

6,195,831

27,616,614 27,855,285

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

2013 2014 2015 2016 2017 2018

IN $ DOLLARS

FISCAL YEAR

INVESTMENT RETURNS

6.1%

1.6%2.2%

10.5%

6.7% 6.1%

Last six fiscal years

Total Spending and Investment Returns

10

Last six fiscal years

23,388,361

44,101,825

9,097,129 6,195,831

27,616,614 27,855,285

75,951,003

65,252,991 66,848,910

47,782,378

34,955,421

26,558,391

-

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

2013 2014 2015 2016 2017 2018

IN $ DOLLARS

FISCAL YEAR

INVESTMENT RETURNS

TOTAL SPENDING (CLAIMS & ULAE PAID, G&A, HEDGING)

6.1% 1.6%2.2%

10.5%6.7%

6.1%

% Net Assets / Gross Assets (ASP inception)

11

-4%

47%

66%

75%72%

49%

55%

16%

32%

24%

43%

53%

59%

73%

80%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

FISCAL YEARCAP MSB HISIP

Default History

12

Defaults as of 3/20/19, SISF fiscal years (example: 2019 = 7/1/18 to 6/30/19)

0

2

4

6

8

10N

um

ber

of

def

ault

s

Number of Defaults

Default History (cont’d)

13

Defaults generally in line with economic cycles

SISF Payments are from date of Default to 12/31/18 (net of recoveries), SISF fiscal years (example: 2019 = 7/1/18 to 6/30/19

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

90.7

1.6 0.8 1.2 0.7

5.5

16.011.6

41.3

0.2

77.5

0.24.0

0.0 0.83.7

184.5

2.80.9

5.3

0.3

4.2

34.0

13.9

82.3

2.9

105.5

5.63.5

0.05.4

Gross Outstanding w/IBNR

SISF Payments

Security Deposit

Members by Status

14

Last six fiscal years

2014 2015 2016 2017 2018 2019 YTD

Active 283 287 295 291 281 274

Revoked 265 260 259 260 267 266

Total 548 547 554 551 548 540

283

287

295

291

281

274

265

260259 260

267 266

250

260

270

280

290

300

Active

Revoked

Seven New Self-Insurers

Simplified Admission Requirements

16

• Expedited OSIP and SISF decision-making on entry into self-insurance

• Credit-based underwriting for new admission

• Credit-based, expedited decision-making for entry into ASP (no waiting period)

Credit level

Rating Equivalency

Member TypeDeposit

retained by SISF

Collateral posted with

OSIP

Expedited decision-making

for entry into ASPS&P Fitch Moody's

1 AAA AAA Aaa

Fully Participating

100% -

Immediate Entry

2 AA+ AA+ Aa1 100% -

3 AA AA Aa2 100% -

4 AA- AA- Aa3 100% -

5 A+ A+ A1 100% -

6 A A A2 100% -

7 A- A- A3 100% -

8 BBB+ BBB+ Baa1 100% -

9 BBB BBB Baa2 100% -

10 BBB- BBB- Baa3 100% -

11 BB+ BB+ Ba1 100% -Subject to Credit

Committee Approval

12 BB BB Ba2 100% -

13 BB- BB- Ba3

Partial Participating

90% 10%

14 B+ B+ B1 75% 25%

15 B B B2 50% 50% Not Admitted on midyear basis16 B- B- B3 25% 75%

17

Grant Heinitz

Credit Risk Manager

ASP – Overview

18

¹ SISF Monthly Financials 12/31/18 unaudited

• Successful implementation of 2018/19 Alternative Security Program

– 6th year post SB863

– ASP and Composite Deposit decreased slightly (-2.5%) and (-3.4%)

• Financial strength of Fund continues to improve¹

– net $436 mill

– gross $532 mill

• Overall portfolio credit rating stable – Baa1

• Assessment decreased 15.0% ($31.1mm vs. $36.6mm) from the prior year

• $10mm in Premium credit was returned to eligible members

• Actual assessment decreased 42% ($21.1mm net of Premium Credit)

ASP – Participation Summary

19

ASP liabilities have decreased consistently since the passage of SB863…

2018/19 2017/18 Δ

$ (mm) # $ (mm) # $ (mm) %

Fully 6,195 325 6,759 310 (564) -8.3%

Partial 697 54 375 49 322 85.9%

Composite Deposit 6,892 378 7,134 359 (242) -3.4%

Partial 609 54 488 49 121 24.7%

Excluded 770 161 862 189 (92) -10.7%

3701 Security 1,379 1,350 29 2.1%

Total 8,270 540 8,484 548 (213) -2.5%

ASP – Industry Distribution

20

Industry exposure is relatively unchanged across all groups

Source: Moody’s Analytics Industry Groups, SEC, Company financial statements

2018/19

2017/1832.4%

$2.30bn

11.0%$785mm

7.9%$564mm

7.1%$509mm

4.8%$342mm

4.2%

3.9%

3.7%

3.1%

2.5%

2.8%

1.8%1.5%

1.9%1.4%

11.8%

33.0%$2.27bn

10.0%$688mm

8.2%$563mm

6.7%$460mm

4.8%$328mm

4.6%

4.0%

3.2%

3.0%

2.5%

2.5%

1.7%

1.6%1.5%

1.3%

11.5%Medical Services

Utilities

Consumer Durables Retl / Whsl

Food & Beverage Retl / Whsl

Consumer Products Retl / Whsl

Air Transportation

Business Services

Telephone

Hotels & Restaurants

Broadcast Media

Food & Beverage

Oil Refining

Educational Services

Agriculture

Aerospace & Defense

Others < 1.3%

ASP – Rating Distribution

21

Source: Moody’s, S&P, Fitch Ratings, Moody’s RiskCalc and CreditEdge

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

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

% o

f A

SP L

iab

iliti

es

Rating Equivalent

2018/19

2017/18

Baa1

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

ASP – Assessment Components

22

The total assessment comprised of two elements

ELP (Excess Liability Protection) fee - covers risk transfer expenses and partial admin costs

DLF (Default Loss Fund) fee - builds capital, covers partial admin costs,

and pays current claims

General administrative

ELP

Risk transfer

Placement

DLF

Capital

Claims

General administrative

ASP – Total Assessment

23

2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19

64.2 59.6 53.6 41.4 31.9 38.7 46.0 44.3 46.1 46.9 31.1 30.6 49.1 43.1 36.5 21.1

4,699.0 5,797.0 5,893.0 5,516.1 6,086.1 6,386.6 6,376.8 6,571.5 6,682.2 7,011.4 8,860.2 8,900.4 8,878.3 8,716.7 8,483.7 8,270.2

1.4 1.0 0.9 0.8 0.5 0.6 0.7 0.7 0.7 0.7 0.4 0.3 0.6 0.5 0.4 0.3

Aggregate fees

Total liabilities

%

Source: 2018/19 liabilities as of 4-1-2019

34.453%

35.249%

35.870% 31.4

76%

11.335%

18.047%

23.551%

19.444% 10.3

22%8.9

19%

17.356% 10.6

35%

30.863%

29.168% 22.2

61%18.259%

-10.0-32%

12.019%

9.616%

6.212%

17.728% 14.7

25% 11.618%

10.024%

20.665%

20.753%

22.549% 24.9

56% 35.978%

38.081% 13.8

44% 20.065%

18.237% 14.0

32%14.339% 12.9

41%

ELP

Pre-existing default shortfall - PEDSF

Premium Credit

DLF

ASP – Assessment Rates

24

Considering the capital needs of the Fund and the current credit environment, assessment rates

decreased across all levels

Index Rating 2018/19 2017/18 % Δ

1 Aaa / AAA+ 13 14 -7%

2 Aa1 / AA+ 16 17 -6%

3 Aa2 / AA 20 21 -7%

4 Aa3 / AA- 21 22 -6%

5 A1 / A+ 25 26 -6%

6 A2 / A 27 28 -7%

7 A3 / A- 31 33 -6%

8 Baa1 / BBB+ 39 41 -6%

9 Baa2 / BBB 47 50 -6%

10 Baa3 / BBB- 64 67 -5%

11 Ba1 / BB+ 100 106 -6%

12 Ba2 / BB 122 131 -6%

13 Ba3 / BB- 138 148 -6%

14 B1 / B+ 155 165 -6%

15 B2 / B 192 206 -6%

16 B3 / B- 221 236 -6%

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Rat

e -

bas

is p

oin

ts

Credit Index

Assessment rates

2018/19

2017/18

2003/2004

ASP – Assessment vs. Surety Rates

25

A comparison between surety and 2018/19 ASP assessment rates

¹ Assessment rates 2018/19

² JLT Specialty – general market indications of available terms 2018-19

I Investment Grade I Non-Investment Grade I

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Bp

s

Credit Levels

ASP vs. Surety Rates

ASP¹

Surety 2018-19²

26

Jill Dulich

Claims and Operations Manager

Open Claims Count

27

1605

2545

2025

16621608

1187

872

796

0

500

1000

1500

2000

2500

3000

2012 2013 2014 2015 2016 2017 2018 2019(12/31/18)

# O

F O

PEN

CLA

IMS

FISCAL YEAR

Claims Paid

28

Last six fiscal years

45,742,759

40,571,357

25,579,224

18,742,888

13,101,048

10,890,432

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

2014 2015 2016 2017 2018 2019 (Projected)

CLA

IMS

PA

ID I

N $

FISCAL YEAR

Total Claims and ULAE Expenses

29

Last six fiscal years

52,635,400

46,983,511

29,525,322

22,182,860

15,476,729

12,898,753

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

2014 2015 2016 2017 2018 2019 (Projected)

TOTA

L C

LAIM

S A

ND

ULA

E EX

PEN

SE I

N $

FISCAL YEAR

Estimated Future Liabilities for Claims and ULAE

30

Last six fiscal years

358,353,166

263,940,638

212,758,888

194,020,343

134,779,970

106,412,633

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

2013 2014 2015 2016 2017 2018

RES

ERV

E IN

$

FISCAL YEAR

31