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CA Self-Insurers’ Security Fund Alternative Security Program Overview. November 15, 2011. Disclosure.
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CA Self-Insurers’ Security FundAlternative 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 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.
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
1 1. Serves as delegate of Christine Baker, Director of Industrial Relations Source: California Self-Insurers Security Fund, http://securityfund.org
Structure Bank / Surety Self-Insured Employer Injured workers WC Obligation Fees/Premium Security Assessment Regulator Security Fund
Structure Bank / Surety Self-Insured Employer Injured workers WC Obligation Fees/Premium Additional Assessment Security Assessment Regulator Security Fund Security WC Obligation
Structure Self-Insured Employer Injured workers WC Obligation Assessment (fees/premium) Security Regulator Security Fund
Structure Self-Insured Employer Injured workers WC Obligation Assessment (fees/premium) Security Regulator Security Fund Security WC Obligation
Participation Requirements Source: California Code of Regulations, Title 8, Subchapter 2, Article 3 - §15220
Participation Summary Although the number of ASP participants decreased slightly (exclusions & defaults) deposits increased by 2.5% … 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
Industry Distribution The portfolio remains reasonably diverse with major concentrations consistent with 2010/11… 2010/11 Source: Moody’s Analytics Industry Groups, Office of Self Insurance Plans, Factiva, Company financial statements
Rating Distribution The overall portfolio credit rating was essentially unchanged with a generally improving portfolio… Baa3 WARF 482488 Source: Office of Self Insurance Plans, Bloomberg, Moody’s, S&P, Moody’s KMV CreditEdge & RiskCalc at 7/20/11
-34% -57% -33% -38% -40% Assessment Rates Rates were unchanged from last year and remain significantly below ASP inception in 2003… 1. Moody’s equivalent 2. CA Self Insurers’ Security Fund Past performance does not guarantee future results
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 … DLF ELP Capital General administrative Claims Risk transfer Line of Credit Placement
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% 14.2 30% 12.8 19% 9.6 16% 6.2 12% Pre-existing default 23.5 50% shortfall - PEDSF 25.2 57% 20.1 52% 35.8 79% 20.6 65% 33.8 51% 32.7 55% DLF 32.6 61% 32.6 70% 23.3 50% 19.0 43% 18.4 48% 11.3 35% 9.7 21% Past performance does not guarantee future results. Source: CA SISF
Financial Strength The Fund’s strong financial position has enabled it to absorb the adverse impact of recent defaults (remains under review) … 312 Net Capital Target1 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.
Default History Defaults tend to occur in clumps following economic slowdowns… Source: California Self-Insurers Security Fund, http://securityfund.org
Recent defaults(slide added after presentation) A summary of recent defaults is as follows…
Financial Strength The ASP is operating as intended and annual claims payments remain manageable… Source: California Self-Insurers Security Fund, http://securityfund.org