California depends on State Fund to provide businesses with a strong and stable choice for their workers’ compensation insurance and to protect businesses and injured employees. We have lived up to this mission for almost 100 years. As our 2009 results show, consistently taking a conservative, “steady hand” approach to managing our business has allowed us to maintain a strong capital base while making needed investments in our organization.
Safe in a Stormy Economy Despite facing challenges – some unique to State Fund, others common to all businesses in this economy - State Fund continues to weather the current economic storm well. As State Fund’s market share has been returning to more historically typical ranges, the leadership team has focused on maintaining sound financial fundamentals and a strong underwriting discipline. As a result, our net income was up in 2009—$143 million for the year versus $75 million for the prior year.
Secure Investments This positive net income allowed us to contribute $161 million to policyholder surplus. We also managed to strengthen our balance sheet and capital base thanks substantially to strong investment income results. At the end of last year, 99.8 percent of our portfolio was rated NAIC 1, the highest rating that the National Association of Insurance Commissioners gives to investments.
Operating Ratios Other important financial metrics for 2009 include our operating ratios. State Fund maintained a 75.3 percent loss ratio, identical with the prior year. This translates to $940 million of incurred loss in 2009 versus $1.3 billion the prior year. We also lowered underwriting expenses from $538 million in 2008 to $456 million last year.
Loss Adjustment Expense (LAE) Ratio – Targeted For Improvement One area we are managing through on a longer term basis is our loss adjustment expense (LAE) ratio. Even though our real loss adjustment expenses declined in 2009, our LAE ratio increased to 46 percent in 2009, from 36.7 percent in 2008, contributing to a 2009 combined ratio (defined as the sum of loss and expense ratios) of 161.5 percent. The increase is due to a substantial inventory of open claims dating from 2001 to 2006, when many carriers either became insolvent or left the market and State Fund assumed an unusually high market share to ensure California’s businesses and injured workers would be covered. Although the LAE and resultant combined ratio are above industry benchmarks, State Fund is successfully managing through this challenge. We expect the ratios to return to more traditional levels over the next few years as these claims are resolved.
We recognize that our LAE and resulting combined ratio are higher than industry benchmarks and deserve some discussion. State Fund has a substantial inventory of open claims that are a legacy from the years our market share was unusually high during the workers’ compensation crisis from 2001 to 2006. State Fund is successfully managing through this challenge. We expect the ratios to return to more traditional levels over the next few years as these claims are resolved.
Doing Business With Us is Easier During 2009 State Fund made significant progress in streamlining our operations, and improving governance and transparency. We recently implemented straight-through processing for many of our insurance policy renewals (a simple online process), and are moving forward with a number of other initiatives designed to make it easier to do business with State Fund.
Our Promise to California State Fund continues to be a vital provider of workers’ compensation insurance in California. We have never pulled out of the market due to an economic downturn and we never will. We protect employers and workers, and help support California’s entrepreneurial spirit.
