2016 Member Informational MeetingMarch 14th, 2016

Tim East, SISF Chair Daniel Sovocool, Nixon Peabody Grant Heinitz, SISF Credit Risk Manager Jill Dulich, SISF Claims and Operations Manager

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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."

2

Purpose: Ensure the timely payment of workers compensation claims to injured workers in the event of default by a member

Founded:

Organization:

Authority:

July 6, 1984 by the State of California

501(c)(6) non-profit

CA Labor Code Sections 3740-3747

Governance: Board of Trustees 7 elected by member companies 1 ex-officio from CA Department of Industrial Relations (“DIR”)

Membership: All non-public entity CA employers self-insured for WC 547 self-insured entities $8.8 billion exposure

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Board of Trustees

4

Tim East, Chairperson, The Walt Disney Company

Theresa Muir, Southern California Edison (retired)

Janice Murphy, Kaiser Permanente

William Zachry, Safeway

Steve Tolan, Nordstrom

Anil Suri, Pacific Gas & Electric

Toni Allen, Monterey Mushroom

Lyn Asio-Booz, Acting Chief, Self Insurance Plans (OSIP), DIR [ex officio]

Board of Trustees Tim East, The Walt Disney Co., Chairperson William Zachry, Safeway Theresa Muir, So Cal Edison (retired) Janice Murphy, Kaiser Permanente

Steve Tolan, Nordstrom Anil Suri, Pacific Gas & Electric Toni Allen, Monterey Mushroom Lyn Asio-Booz, Director Delegate, DIR/OSIP

Executive Committee Tim East, Chair Theresa Muir

Finance Committee William Zachry, Chair

Tim East

Audit Committee

Janice Murphy, Chair Theresa Muir

Credit Committee Tim East, Chair Janice Murphy

Theresa Muir Anil Suri

Claims Committee Steve Tolan, Chair

Toni Allen, Monterey Mushroom Francisco Cano, So Cal Edison¹

Joel Sherman, Grimmway Farms¹

Board and Committees

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¹ Advisory only

CA Self-Insurance Overview

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Public and Private

Entities 13,012

Payroll $207 billion

Employees 4.2 million (1 in 4 in state)

Private Sector only

Entities 547 (including 26 SIG’s)

Payroll $90 billion

Employees 2.2 million (1 in 8 in state)

Source: 2014 annual reports submitted to OSIP

Default History

7

Defaults have been lumpy and generally in line with economic cycles

Data as of 12/31/15 SISF Payments are from date of Default to 12/31/15 (net of recoveries)

Security DepositSISF PaymentsGross Outstanding w/IBNR

Default History (cont’d)

8

Defaults tend to occur in clumps following economic slowdowns

Data as of 2/25/16

Num

ber

of d

efau

lts

0

3

5

8

10

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number of Defaults

Default History (cont’d)

9

A summary of recent defaults is as follows

Default Estate

4/19/2011 Mainstay Business Solutions

5/17/2011 Interlake Material Handling, Inc

5/23/2011 Mid Valley Plastering, Inc.

8/8/2011 T & R Painting

6/22/2012 Administrative Concepts Corp.

7/6/2012 Grossman's Inc.

1/23/2013 Interstate Brands Corporation (Hostess Brands, Inc.)

4/10/2013 Health Industries Self Insurance Program (HISIP)

2/13/2015 White Rose, Inc. (formerly Di Giorgio Corporation)

8/6/2015 Federal Employees Distribution Company

Data as of 2/25/16

Estates and Workers’ Compensation Claims

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2016 2015 Δ

Estates 81 80 1

48 47 1

Claims 1,625 2,022 -397

Claim Liability (net) $351,874,000 $321,438,000 $30,436,000

$77,453,000 $98,580,000 -$21,127,000

$61,910,000 $76,298,000 -$14,388,000$491,237,000 $496,316,000 -$5,079,000

$247,365,000 $246,980,000 $385,000

SISF total net assets (as of 1/31) $284,173,000 $228,730,000 $55,443,000

$24,274,000 $40,571,000 -$16,297,000

$3,980,000 $6,412,000 -$2,432,000

$28,254,000 $46,983,000 -$18,729,000

Total (1968 to date)

Active (1984 to present)

Open

Projected annual costs - claims

- claims admin

- Total

Paid (1984-2015)

Open Case Reserves (EFL)

IBNR + ULAE (actuarial estimate as of 12/31)

OSIP Deposits turned over to Fund

Recent SISF Initiatives, Changes

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• Renegotiated both TPA contracts

• RFP and award of new Financial Arranger contract (JLT)

• Hired part-time Claims and Operations Manager, closed nearly 400 open claims

• Extensive work on improved risk management framework and risk capital / hedging

“dashboard”

• Moved offices to Oakland, reduced operational expense

• Member-only portal

Regulation Changes of Note

12

• Replaces minimum financial capacity requirement with financial statement and

acceptable credit rating requirements (15203.2(a))

• Simplifies reactivation requirements for private self-insurers who previously voluntarily

revoked (15203.10.)

• Simplifies (and lowers) security deposit requirements for new self-insurers (60% of one

year average incurred versus old three full years of incurred)(15210)

• States that self-insurer loses all right, title, and interest in deposit upon default

(consistent with Labor Code)

Regulation Changes of Note, Cont’d

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• Eliminates requirement of 90-day OSIP audit of claims post-default (15216) • Eliminates the minimum deposit requirement for ASP participants (15220) • Broadens authority of OSIP to downgrade to partial status, including late submission

of actuarial reports (15220)

• Strengthens authority of SISF to downgrade (15220) • Streamlines the initial security deposit for new groups (15496)

Partial Participating Category

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• Members will post a portion of their actuarially-determined liabilities on an individual basis • Affected members are those with published or equivalent ratings between the following:

Ba3 / BB- and B3 / B- (level 13 – level 16)

S&P Fitch Moody's Credit level   Security deposit

covered by SISF

Collateral posted with

OSIP

AAA AAA Aaa 1

Fully Participatin

g

100% -

AA+ AA+ Aa1 2 100% -

AA AA Aa2 3 100% -

AA- AA- Aa3 4 100% -

A+ A+ A1 5 100% -

A A A2 6 100% -

A- A- A3 7 100% -

BBB+ BBB+ Baa1 8 100% -

BBB BBB Baa2 9 100% -

BBB- BBB- Baa3 10 100% -

BB+ BB+ Ba1 11 100% -

BB BB Ba2 12 100% -

BB- BB- Ba3 13Partial

Participating

90% 10%

B+ B+ B1 14 75% 25%

B B B2 15 50% 50%

B- B- B3 16 25% 75%

The fund has restructured the collateral requirements for the lower tier of the ASP

ASP – Assessment vs. Surety Rates

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A comparison between surety rates and 2015/16 ASP assessment rates is found below

¹ Assessment rates 2015/16 ² Marsh & McLennan – general market indications of available terms 2015 ³ JLT Specialty – general market indications of available terms 2016

Bps

0.0

100.0

200.0

300.0

400.0

Credit Levels

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

ASP¹Surety - 2015²Surety - 2016³

I Investment Grade I Non-

Investment Grade I

ASP – Overview

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Source: SISF Monthly Financials 1/31/16 unaudited

• Successful implementation of 2015/16 Alternative Security Program – 3rd year post SB863 – ASP and Composite Deposit decreased slightly (-0.59%) and (-1.44%) – New policy development and implementation – Expanded risk monitoring

• Financial strength of Fund at highest level since inception – net $284 mill

– gross $477 mill

• Overall portfolio credit rating stable – Baa2

• Assessment rates increased across all rating levels vs. 2014/15

Regulation Changes of Note – Ratings

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More flexibility has been created in procuring the rating so that the process is not overly restrictive and does not favor one group/size of employer over another.

S&P Fitch Moody's Credit level

AAA AAA Aaa 1AA+ AA+ Aa1 2AA AA Aa2 3AA- AA- Aa3 4A+ A+ A1 5A A A2 6A- A- A3 7

BBB+ BBB+ Baa1 8BBB BBB Baa2 9BBB- BBB- Baa3 10BB+ BB+ Ba1 11BB BB Ba2 12BB- BB- Ba3 13B+ B+ B1 14B B B2 15B- B- B3 16

• Section 15520 - participation in alternative composite deposit • Fitch ratings have been included alongside Moody’s and S&P in the amendment • Ratings from all three agencies may be used to determine member participation and assessments

ASP – 2015/16 vs. 2003/04

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¹ SISF Monthly Financial 1/31/16 unaudited ² ASP liabilities and idealized assessment as of 7/1/15

2015 2003 ∆ %ASP² 8,878.33 4,699.02 4,179.31 89%

Assets¹Gross 476.91 45.00 431.91 960%Net 284.17 (55.00) 339.17

Assessments²$ 50.03 66.50 (32.80) -25%

New Self-Insureds’

New Self-Insureds’, Cont’d

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Our portfolio base continues to grow with the addition of new self-insureds’ year over year

Data as of 3/9/16

Num

ber o

f new

self-

insu

red

s'

0

5

10

15

20

2010 2011 2012 2013 2014 2015

New self-insureds'

ASP – Industry Distribution

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Industry exposure is relatively unchanged across all groups

Source: Moody’s Analytics Industry Groups, SEC, Company financial statements

2015/16

2014/15

13.2%

1.4%1.8%

2.4%

2.5%

3.0%

3.5%

3.5%

4.6%

5.1%

7.2% 10.3%

11.2%

30.3%

Medical ServicesUtilitiesFood & Beverage Retl/WhslConsumer Durables Retl/WhslConsumer Products Retl/WhslTelephoneBusiness ServicesFood & BeverageHotels & RestaurantsBroadcast MediaAir TransportationOil RefiningAerospace & DefenseOthers <1%

ASP – Assessment Components

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The total assessment comprises of two elements

ELP (Excess Liability Protection) fee - covers expenses and admin costs

DLF (Default Loss Fund) fee - builds capital and pays current claims

General administrative

ELP

Risk transfer

Placement

DLF

Capital

Claims

ASP – Assessment Rates

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Considering the capital needs of the Fund and a deteriorating credit market, assessment rates increased across all levels

Index Rating 2015/16 2014/15 % Δ

1Aaa / AAA+ 11 5 110%

2 Aa1 / AA+ 16 9 80%3 Aa2 / AA 20 10 102%4 Aa3 / AA- 22 13 74%5 A1 / A+ 24 14 79%6 A2 / A 27 19 45%7 A3 / A- 32 22 49%8 Baa1 / BBB+ 40 30 33%9 Baa2 / BBB 47 36 30%

10 Baa3 / BBB- 71 55 29%11 Ba1 / BB+ 114 79 44%12 Ba2 / BB 172 102 69%13 Ba3 / BB- 200 135 48%14 B1 / B+ 244 176 39%15 B2 / B 332 219 52%16 B3 / B- 393 270 46%

Assessment rates

Rate

- ba

sis p

oint

s

0

150

300

450

600

Credit Index

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

2015/162014/152003/2004

ASP – Financial Strength (Investments)

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Both gross and net assets continue to grow

¹ SISF Monthly Financials 1/31/16 unaudited Source: Audited SISF Financial Statements Jun 30. 2005-2015

($ m

illio

ns)

0

125

250

375

500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016¹

477459

484486

363379

315

218216191

153

109

284

245

208

117112

58

144

103

155142

100

52

Net Gross

ASP – Financial Strength

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Claims reserves and claims costs continue to decline

¹ SISF Monthly Financials 1/31/16 unaudited ² Per Claims & Admin YTD 1/31/16 - full year projected Source: Audited SISF Financial Statements Jun 30. 2005-2015

$ M

illio

ns

-200

-100

0

100

200

300

400

500

600

$ M

illio

ns

-15

0

15

30

45

60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016¹

Claims & Admin paid (LHS)Gross Assets (RHS)Investment Income (LHS)Claim reserves, incl. IBNR (RHS)

'(10.0)

7.8

42.8

22.4

3.9

37.6

17.1

'(12.0)

'(0.3)

16.0

5.8 3.1

28.3

47.0

52.6

33.1 31.0

21.5

17.0

10.6 7.7 7.9 7.5 8.4

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