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California Self-Insurers’ Security Fund

California Self-Insurers’ Security Fund. Alternative Security Program Overview. November 10, 2010. Disclosure.

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California Self-Insurers’ Security Fund

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  1. California Self-Insurers’ Security Fund Alternative Security Program Overview November 10, 2010

  2. 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. • This material may not be redistributed without the prior written consent of MMCSC.

  3. Contents • Self-Insurers’ Security Fund • Alternative Security Program (“ASP”) • Assessments • Financial Strength

  4. Self Insurers’ Security Fund

  5. Self-Insurers’ Security FundOverview 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 2010, http://securityfund.org

  6. Self-Insurers’ Security FundBoard composition and staff Board of Trustees: Tim East, Chair The Walt Disney Corporation Sean McNally Grimmway Farms Janice Murphy Kaiser Permanente Jill Dulich Marriott International Theresa Muir Southern California Edison William Zachry Safeway Inc. Staff: Regulator: Jeff Pettegrew, Executive Director Ming Kan, Controller Cathy Aguilar, Claims Manager James Ware, Chief, Office of Self Insurance Plans (“OSIP”) Source: California Self-Insurers Security Fund 2010, http://securityfund.org

  7. Self-Insurers’ Security FundStructure Legal authority Self Insurers’ Security Fund (“SISF”) Department of Industrial Relations (“DIR”) Risk takers Credit fees Excluded ASP Office of Self Insured Plans (“OSIP”) Collateral Default protection Defaulted estate Audits and regulatory enforcement Defaulted claim payments Defaulted estate Annual reporting requirements Assessments Claimants Claimants Claimants Self insured employers Self insured employers Claimants Self insured employers Ongoing claim payments Defaulted self insured employer

  8. Alternative Security Program

  9. Alternative Security ProgramStructure Bank / Surety Self-Insured Employer Injured workers WC Obligation Fees/Premium Additional Assessment Security Assessment Fees/Premium Regulator Security Fund Security WC Obligation

  10. Alternative Security ProgramParticipation requirements Source: California Code of Regulations, Title 8, Subchapter 2, Article 3 - §15220

  11. Alternative Security ProgramSummary ASP participation expanded in 2010 due to improved credit ratings… $ in millions 1. The following were not assessed - Employers revoked prior to 2003 - Partial deposits posted to OSIP - the first $220,000 of each Excluded deposit Sources: Office of Self Insurance Plans, CA Self Insurers’ Security Fund 6/28/10

  12. Alternative Security ProgramIndustry distribution Industry concentrations remain primarily in Medical Services, Food & Beverage and Utilities… 2010/11 2009/10 Source: Moody’s Analytics Industry Groups, Office of Self Insurance Plans, Factiva, Company financial statements

  13. Alternative Security ProgramRating distribution Ratings improved with the economic outlook, raising the weighted average rating (WARF)… Baa3 WARF 488619 Source: OSIP, Bloomberg, Moody’s, S&P, Moody’s KMV CreditEdge & RiskCalc at 5/15/10

  14. Assessments

  15. AssessmentsTotal Although the ELP fee increased reflecting higher risk transfer costs, the DLF declined significantly… 30% 29% 27% 19% 30% 16% 12% 50% 57% 52% 65% 51% 55% 61% 70% 50% 43% 48% 35% $ millions

  16. -34% -57% -33% -38% -40% AssessmentsRates Although 2010 rates increased on average 5.5%, they remain significantly below those at ASP inception… 1. Moody’s equivalent Source: CA Self Insurers’ Security Fund Past performance does not guarantee future results

  17. Financial Strength

  18. Financial StrengthAssets … and gross assets have increased 629% since ASP inception… Capital Target (Net Assets) 1 1. Unaudited Sep 30, 2010 Past performance does not guarantee future results.

  19. A summary of the Fund’s claim reserves is as follows… Financial StrengthRecent defaults The Fund has been carefully following the ongoing conservation of Contractors Access Program, and has sufficient financial resources to address any liabilities that may be assumed from this situation. Source: CA Self Insurers’ Security Fund Independent Actuarial Report and Estate Financial Data Report 6/30/2010 Past performance does not guarantee future results.

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