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24Apr 2020

State Fund CFO Discusses Dividends and Withstanding Crisis

Pete Guastamachio was appointed State Fund’s Chief Financial Officer in September 2014. He brings more than 35 years of high-level experience from the financial sector, and joined State Fund in February 2009, as our first Chief Investment Officer.

We met with Pete to learn more about State Fund’s dividends declaration, an approximate $160 Million approved by the board in 2019.

Is this size dividend typical among carriers within California’s workers’ comp market?

In a normal market, a 15% dividend is pretty significant. Normally, you would expect to see a dividend between 3% and 10%. A 15% dividend is not typical; especially in a year where we’re giving a 10% rate reduction.

Why does State Fund distribute dividends? Why not put the money back into the organization or reduce policyholder rates?

The dividend gets paid out when our reserves and surplus are adequate and we have additional funds available that can be distributed back to our policyholders.  As a not-for-profit workers’ compensation insurance carrier, State Fund has the legal responsibility to regularly evaluate our surplus to determine if a dividend distribution is appropriate.

You could technically offer a rate reduction. However, there is a bigger risk because there is uncertainty as to how much revenue you’re going to have in the next year. Typically, when our revenues start to increase, it tends to increase very quickly in medium to high double digits.

But let’s say you gave a rate reduction of 10% and your revenues doubled; you might not be able to handle that on a loss ratio basis because you also don’t know what the quality of the business you’re going to get is. So there’s much more risk in reducing rates than in paying a dividend. With a dividend you know what’s happening with your exposure and loss ratio  making it possible to give any extra profit back to the policyholders. Therefore, it’s a much safer and cleaner way to return money to our policyholders.

What does this dividend say about State Fund’s finances?

Financially, we are very strong. The dividend says, if we make a profit, we don’t need to keep or apply all that profit in the form of additional reserves and surplus to strengthen our balance sheet. It says that we’re confident that we’re strong enough financially to weather any storm and we can give back to our policyholders. 

Specifically, where have we seen savings that put us in a position to offer dividends?

The biggest area where we’ve seen savings is in claims. Part of it had to do with Senate Bill 863 that reformed laws regarding liens. It increased permanent disability benefits while reducing administrative costs for employers and carriers; so there are savings there.

We’ve also made substantial savings in other areas. As an example, in 2014 we spent approximately $120 million a year just for pharmaceutical expenses and in 2019 we spent $30 million a year; so that’s a $90 million a year savings over six years. We have also vetted our medical provider network (MPN) to make it more efficient and trained all doctors managing acute and chronic pain to find alternatives to prescribing opioids. Our MPN is outcome based to make sure that the injured worker gets the appropriate treatment quickly.  That facilitates healing and earlier return to work; that is a win-win for the injured worker and the policyholder.

Additionally, we reengineered our claims processes to focus on improved quality outcomes.  That includes facilitating earlier resolution of claims.  Thus not requiring and carrying the developmental future reserve needs.

There have been large savings from closing claims through C&Rs (Compromise & Release). Typically, the longer you have a claim, the more it’s going to cost you over time. By settling the claim quicker, you actually reduce the tail on it so you aren’t subject to all the things that could happen to it over ten, twenty, or thirty years that could make it become more expensive. It is also worth noting that industry-wide, we have seen decreases in losses and settlement costs.

How is our rock-solid financial position an asset to our policyholders?

We’ve been here more than 100 years and we’ll be here another 100 years to provide stability to California’s employers. We have the capacity to double or triple our revenues and still be considered financially very strong. We’re a not-for-profit entity and here to provide fairly-priced workers’ compensation insurance, help make workplaces safe, and restore injured workers.

We are currently experiencing an unprecedented event. State Fund has strengthened its balance sheet, investment portfolio, and liquidity exactly for this type of crisis. During this global pandemic we can continue to financially support our policyholders as demonstrated by some of the recent actions that we have taken as a company.

Disclaimer: Under California law it is unlawful for an insurer to promise the future payment of dividends under an unexpired workers’ compensation insurance policy or to misrepresent the conditions for dividend payment. Dividends are payable only pursuant to conditions determined by the Board of Directors or other governing board of the Company following policy expiration. It is a misdemeanor for any insurer or officer or agent thereof, or any insurance broker or solicitor, to promise the payment of future workers’ compensation dividends. Past dividend performance is no guarantee of an insurer’s future dividend performance.

 

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