Transcript Title

CA Self-Insurers’ Security Fund
Alternative Security Program Overview
November 15, 2011
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 thirdparties 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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Purpose:
Ensure the timely payment of workers compensation (“WC”) claims to injured
workers in the event of default by a member
Founded:
July 6, 1984 by the State of California
Organization:
501(c)(6) non-profit
Authority:
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
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
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1
1. Serves as delegate of Christine Baker, Director of Industrial Relations
Source: California Self-Insurers Security Fund, http://securityfund.org
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Vishal Rana, Senior Vice President
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Structure
Fees/Premium
Bank / Surety
Security
Regulator
Self-Insured
Employer
WC Obligation
Injured workers
Assessment
Security Fund
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Structure
Fees/Premium
Bank / Surety
Self-Insured
WC Obligation
Employer
Security
Assessment
Regulator
Injured workers
Additional
Assessment
Security Fund
Security
WC Obligation
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Structure
Self-Insured
Employer
WC Obligation
Injured workers
Assessment
(fees/premium)
Security
Regulator
Security Fund
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Structure
Self-Insured
Employer
WC Obligation
Injured workers
Assessment
(fees/premium)
Security
Regulator
Security Fund
Security
WC Obligation
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Participation Requirements
≥ $5,000,000
≥ $500,000
≥ B3/B-
Full
net worth
net income (5 year average)
credit rating
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
Source: California Code of Regulations, Title 8, Subchapter 2, Article 3 - §15220
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Participation Summary
Although the number of ASP participants decreased slightly (exclusions & defaults) deposits increased by 2.5% …
2011/12
Assessed
ASP (composite deposit)
Excluded
Not Assessed1
Total Security
Δ
2010/11
$ (mill)
#
$ (mill)
#
$
%
5,997
345
5,848
349
149
2.5%
576
242
599
239
(24)
-3.9%
6,573
587
6,448
588
125
1.9%
110
6,682
124
587
6,572
(14)
588
1. Employers revoked prior to 2003, and $220,000 of each Excluded and Partial deposit posted individually
Sources: Office of Self Insurance Plans, CA Self Insurers’ Security Fund 6/28/11
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1.7%
11
Industry Distribution
The portfolio remains reasonably diverse with major concentrations consistent with 2010/11…
2011/12
Others <$100 Each
11%
Aerospace & Defense
2%
Automotive
2%
Medical Services
20%
2010/11
Air Transportation
2%
Broadcast Media
3%
Hotels & Restaurants
2%
Consumer Durables
Retl/Whsl
4%
Food & Beverage
Retl/Whsl
18%
Business Services
3%
Food & Beverage
4%
Telephone
6%
Consumer Products
Retl/Whsl
11%
Utilities
12%
Source: Moody’s Analytics Industry Groups, Office of Self Insurance Plans,
JulyFactiva,
7, 2015 Company financial statements
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Rating Distribution
The overall portfolio credit rating was essentially unchanged with a generally improving portfolio…
Baa3
WARF 482 488
25%
2011/12 $
2010/11 $
% of ASP Notional
20%
15%
10%
5%
0%
Aaa Aa1 Aa2 Aa3
A1
A2
A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3
B1
B2
B3
NR
Rating Equivalent
Source: Office of Self Insurance Plans, Bloomberg, Moody’s, S&P, Moody’s
July KMV
7, 2015 CreditEdge & RiskCalc at 7/20/11
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Assessment Rates
Rates were unchanged from last year and remain significantly below ASP inception in 2003…
11/12 &
2
10/11
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
300
-57%
200
-33%
100
1. Moody’s equivalent
2. CA Self Insurers’ Security Fund
Past performance does not guarantee future results
-38%
-40%
0
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B3
6
-34%
400
B2
29.0
B1
A1
Ba3
5
Ba2
24.0
Ba1
Aa3
11/12 & 10/11
Baa3
4
500
Baa2
21.0
Baa1
Aa2
A3
3
03/04
A2
18.0
A1
Aa1
Aa3
2
600
Aa2
16.0
Aa1
Aaa
Aaa
1
Rate - basis points
Index Rating1
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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 …
ELP
DLF
General administrative
Capital
Risk transfer
Claims
Line of Credit
Placement
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Total Assessment
The 2011/12 total assessment was held constant despite higher hedging costs…
$ millions
ELP
19.9
30%
17.1
29%
14.4
27%
12.8
Pre-existing default
shortfall - PEDSF
19%
9.6
16%
6.2
14.2
30%
23.5
12%
20.1
20.6
DLF
33.8
32.7
32.6
32.6
51%
55%
61%
70%
50%
25.2
57%
52%
79%
65%
23.3
18.4
11.3
50%
19.0
43%
48%
35%
Aggregate fees
ASP Size
%
35.8
9.7
21%
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
66.5
59.4
53.2
46.8
31.9
38.7
46.8
44.2
45.5
4,675
1.42
5,201
1.14
5,893
0.90
5,516
0.85
5,318
0.60
5,596
0.69
5,545
0.84
5,870
0.75
5,974
0.76
Past performance does not guarantee future results.
Source: CA SISF
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Financial Strength
The Fund’s strong financial position has enabled it to absorb the adverse impact of recent defaults (remains under review) …
400
Net
Gross
352
350
300
275
$ millions
250
216
229
191
200
153
150
143
155
149
113
109 101
79
100
50
312 Net Capital
Target1
72
52
45
0
(3)
(50)
(55)
(100)
2003
2004
2005
2006
2007
2008
1. Per OW Capital Study 3/15/11 - Baseline capital target, Protracted recession low inflation
Source: Audited Self-Insurers’ Security Fund Financial Statements 2003-2010 ( 2011 unaudited)
Past performance does not guarantee future results.
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2009
2010
2011
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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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Please submit your questions via the chat box
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