1. CHWCA
Financial Overview

2. Historical Highlights: A Conservative Approach to Pooling
Financial Stability Plan ~ Adoption and Revision
The “Confidence Level” Funding Challenge
Discount Factors too
Responsiveness to external influences
Excess insurance market ~ Purchase or pooling?
Return of Equity ~ Net $5.7 million returned since inception
Protection of Assets ~ Retaining Equity
Creative approaches
Mid Layer Pool
Investment Portfolio Benchmarks
Ex Mod Calculations
Strong Financial Position ~ Equity Position well above 90%
As Adrienne stressed, conservative is the order of the day in pooling, and you are a fortunate Board to have an EC that is committed to a conservative approach to their fiduciary duty. Following are examples of just that.
The FSP was developed in 2002 to swiftly address the current equity deficit and to turn that situation around, and then revised in 2007 to provide a thoughtful and conservative approach to the issuance of dividends. It continues to be used to provide guidance in fiduciary decisions.
2012 was the 6th year that CHWCA funded loss pooling premiums at the 80% CL. The prior 5 out of 6 years had been funded at 70%, and at expected before that. In 2013, the EC adopted a budget which funded at the 75% CL, and continued that trend for The challenge is to keep contribution rates and premiums stable. For 2015, we have returned funding to the 80% CL.
Now discount factors have been a hot topic of conversation for the past few years as pools have wrestled with the challenging investment market. Pooling rates are discounted as it is assumed that future earnings will make up the difference in those lower premiums collected. CHWCA has responded by acknowledging this issue and has steadily lowered its DF over the past six years from 4.0% all the way down to 3% in 2012 and 2.0% in The EC decided to lower the CL to 75% for the 2013 program year to offset increased premiums as a result of lower DF. The delicate balance between conservative, or high, funding CLs and lower premiums is always a challenge, and your EC wrestles with this challenge each year.
The insurance market moves in cycles, and when it hardens, rates increase. That has been happening over the past couple of years, and decisions regarding excess coverage needed to be made by your EC. The transition to a pooling arrangement with LAWCX was the response.
The rewards for pooling are this – when a program year comes in better than anticipated, $ can be returned to the members. $5.7 M in “net” dividends have been returned since inception , net dividends being the positive difference between total dividends released and assessments levied.
The protection of CHWCA’s assets to pay future claims is a driver in every decision made. We’ll be talking more about this in the next few slides.
Your EC is always considering creative approaches in every area. In regards to financial issues, the recent implementation of the MLP ensured lower premiums going forward through its pre-funding. In 2013 as a result of discussions at the August SP, a change in the investment portfolio benchmark was implemented. As CHWCA has plenty of liquid cash available to meet current and future cash flow needs, the benchmark was changed from the 1-3 ML Treas. To the 0-5 yr, allowing the investment mgr to gain precious add’l yield in purchasing longer maturities.
The ex mod calculation has been revised over the past three years in an attempt to smooth out premiums year over year, and as Adrienne mentioned, an internally rated CHWCA ex mod was implementing In Details will be shared on this momentarily.
And finally, the strongest financial position possible, equity well above the 90% CL.

3. This slide demonstrates CHWCA’s retained earnings, or equity, by program year. We’ve grouped together , as those years have been previously adjusted, and have a small aggragate balance, only $673k at the expected CL, which is what we would expect with years that have been previously adjusted.
Now, note the equity in the unadjusted years. The equity in PY’s 2006 – 2008 totals $6.9m. But for PY’s 2009 through the current 2014 PY, note that the equity balances for each year are either very small or negative. These current years have not trended well. It’s important to continue to take a conservative financial approach and keep an eye on those current years. We’ll be coming back to this slide a little later in the presentation.

4. Compares CHWCA’s 4 class code rates for the past 8 years
Compares CHWCA’s 4 class code rates for the past 8 years. The first 5 years represent 80% CL funding, 2013 and 2014, rep funding at 75%, and 2015 is back to 80%. Note how steady CHWCA’s 3 historical class codes have been.
CHWCA’s blended rate, the teal starred line, shown for comparison purposes only, has experienced an increase over the past three years, even with the lower CL funding for two of those years. That is a by-product of the hardening market, and workers’ comp reforms.
A bit more volatile has been CH’s newest construction class code rate, 5403, implemented in 2008 to more adequately capture that liability for those few HA’s who have that high end exposure. It took a couple of years to get a handle on it’s costs, but it’s steadied out nicely now.

5. This chart is fondly called “Ode to the Actuary”, as it compares the actuary’s ultimate projected loss costs for each PY at 12/31/14, the orange bar on the left, to the original deposit premiums collected in each of those years, represented by the green bar on the right. In only 5 years have the premiums collected NOT been enough to cover the actuary’s new estimate of what the total cost of these claims will be when all is said and done, and these years’ bars are colored light orange to differentiate them.
1992, and 1997 – The 2000 PY, not coincidentally, was the last year that the CHWCA program was funded at the expected CL.
Notice the decrease in premiums in the 2007 PY after several very high premium years. That was the 1st year CHWCA funded at 80%, taking advantage of lower actuarial rates due to improved loss development in the program.
Beginning in 2012, the funding retention dropped to $250k from $500k, due to the implementation of the MLP. Total premium decreased 9.3% that year from the prior year due to that change in funding retention.
CHWCA’s total projected loss for all PY’s is $72M as compared to total premiums collected over its history in the amount of $97 M.
This represents a loss ratio of 74% for the CHWCA program – an excellent indicator of CHWCA’s overall financial health.

6. This graph compares CHWCA’s total outstanding liabiliy, or what the actuary has determined is still to be paid out for all open program years, at various CL’s as of 12/31/14. The green bars represent the undiscounted value of the outstanding claims, and the orange bar represents the discounted value of these costs at CHWCA’s current discount rate of 2%. The orange expected bar equates to what is reflected on CHWCA’s balance sheet. The highest green bar is $6.6 million more than that figure and represents the absolute highest $ amount that these claims could cost CHWCA under the worst adverse scenario.
This is fascinating stuff, right? Maybe? Well, although this is interesting, the good news on this graph is the tan bar at the top. This bar represents CHWCA’s total assets for this same period of time, and illustrates that CHWCA has enough $, and then some, to cover the highest estimate of future claims costs.
As James Marta always says, “IF you have $, you have options.” CHWCA has $, and this is the final indication of financial health.

7. Ex-Mod Methodology: History, Impact, and Benefits
CHWCA
Ex-Mod Methodology:
History, Impact, and Benefits
As Adrienne and I have alluded to previously, CHWCA has a brand new ex mod methodology! So we thought that it might be fun, well, maybe at least fitting, to share the back-ground of the transition, and the highlights of the calculation, with you.
But first, a bit about the budgeting process, so you can see how the ex mod fits together with the whole.

8. ~ But First ~ The Budgeting Process in a Nutshell
Funding for Losses
Payroll by class code/$100 * actuarially determined rates at chosen confidence level
Adjusted for loss experience (experience modification factor, or Ex Mod)
Funding for Off-Balance brings us back to square one.
Purchased excess premium, TPA expense, and the DIR assessment
Allocated to members based on modified loss funding premium
Administrative costs
30% Allocated equally by member
70% Allocated based on size (payroll)
The current 2015 CHWCA budget is in your Board agenda beginning on page 22. This is our budget summary page. All calculations in the budget roll into this page which recaps the calculations and provides comparisons to prior year budget and actuals.
Flip two pages in to page 24. This is the initial calculation. We use prior year actual PR by classification, or class, code inflated by 5% as our exposure base and factor that with the actuarially determined rates that you see at the bottom of the page. This is your initial loss funding premium calculation called Funding for losses in the middle of the page. We then apply your ex mod –much more on this later – to arrive at the Funding adjusted for ex mod. Now let’s jump down to the last row of the page. Note that the total Funding for losses is $3.47 million, but when each member’s ex mod is applied, the total becomes $3.41 million. That is because the average ex mod is not a clean 1.0, but this requires a slight adjustment, because the result is that the actuarially-determined loss premium has become a bit inflated, by $57,000. We must now bring the total back down to that $3.41 million. We apply an off-balance factor to bring each member’s premium back down proportionally to end up where we need to be.
No, flip one page back to page 23. This is the secondary calculation. It begins with the loss funding premium we just discussed, then adds excess coverage, the TPA expense, or claims servicing and the DIR assessment, all allocated based on each member’s modified premium to factor in that all-important loss experience aspect. Next we factor in our admin costs which were detailed on the summary page. 30% and 70%.
Voila! The budget is done.

9. Experience Modification Factors
What IS an ex mod?
A little number with a big BIG impact!
Ex Mods adjust premiums based on loss experience.
CHWCA historically, and through the 2014 program year, used the WCIRB for the calculation of its ex mods.
The WCIRB provides ex mods for most commercially-insured entities and SCIF participants; so
The process compared each CHWCA member’s loss experience with all entities described above who have payroll within the same classification codes.
What is an experience modification factor, or ex mod? It is a factor that adjusts your premium based on your loss experience in relation to a comparison to someone else’s loss experience.
Who are those “someone elses’s” that you are being compared to?
Before 2015, and since inception, CHWCA had used the WCIRB method for the calc of its ex mods.
“The WCIRB provides ex mods for most commercially-insured entities, SCIF (State Compensation Insurance Fund) participants, and private self-insurance groups.”
So under the WCIRB calculation, CHWCA members’ loss experience had been compared to all entities described above who have payroll within the same class codes. Many of these entities are cities and districts with very different exposures from CHWCA’s housing authorities.

10. Experience Modification Factors: The WCIRB Methodology
Range of program years used in the calculation
The most current complete three year period.
The calculation is a ratio factoring “expected” with “actual” losses
“Expected” losses
“Actual” losses
The 2014 CHWCA WCIRB calculated ex mods ranged from 0.79 to 2.69
The WCIRB uses the most current complete 3 year period in the calculation, factoring payroll by class code and individual incurred loss information for each of the three years.
Under this method, your expected losses are calculated based on the average losses of all of the entities who have payroll in your class codes. These are the losses you are expected to have with your unique exposure, or payroll class code allocation mix.
Your actual losses are then compared to this average. If you have more losses than this average, your ex mod will be over 1.0 and you will pay a proportionately higher premium.
The 2014 CHWCA WCIRB calculated ex mods ranged from .79 to 2.69, not only a huge spread, but resulting in an average CHWCA ex mod of 1.59! Remember the small off-balance of $57,000 we had to adjust in the budget? Under the prior WCIRB calculation, the required adjustment was a whopping $1.6 million!

11. Experience Modification Factors: CHWCA’s Methodology Transition
Why the transition?
To reduce volatility in members’ ex mods and resulting premiums year over year
To allow CHWCA control over calculation and result of ex mods:
Each CHWCA member is now compared to their peers
Ex mods will reflect member’s risk control efforts
To enable CHWCA Risk Control Program to track and reward members with positive loss experience
Impact of risk control programs can be effectively measured
Stable and mature program that is not actively marketed, negating need for equitable comparison to other H.A.’s
So why did CHWCA transition to in internally-rated ex mod, thereby no longer using the WCIRB method?
Because CHWCA members were compared to all entities in the state in their respective class codes, ex mods and resulting premiums could swing dramatically year over year.
With an internally rated ex mod, CHWCA members are compared to their peers only. And in time, their ex mods will reflect their individual risk control efforts.
CHWCA members will benefit as the impact of risk control programs can be more effectively measured by a correlating change in ex mod. And this improvement can be more effectively tracked and rewarded.
In the early years, CHWCA was growing and engaged in marketing efforts. It was important to provide apples to apples comparisons by using the same rating structure as the broader market used. After 24 years in operation, CHWCA is stable and mature, and does not have the need to actively market the program.

12. Experience Modification Factors: CHWCA’s Methodology Transition
Three-year transition process – Approved by the E.C. in April 2012
2013 – WCIRB ex mods capped at 2.0 and .75 and ex mod increases from prior year capped at .25
2014 – WCIRB ex mods capped at 2.0 and .75 and ex mod increases and decreases from prior year capped at .25
2015 – Full transition to internally-rated ex mod.
A change of this magnitude required the appropriate transition. CHWCA has always been committed to providing as stable premiums as possible. So the CHWCA EC has been mindful of a slow but sure transition.
The first step was two years ago in The WCIRB ex mods were simply capped at 2.0 at the high end and ex mod increases from the prior year were capped at Members whose ex mods decreased were allowed to keep the full benefit of the decrease.
In 2014, the .25 capp change in decreasing ex mods was added to the changes from the prior year.
In 2015, the transition to an internally-rated ex mod was realized. However, this transition will also need to be eased into. Stable premiums are still the goal.

13. Experience Modification Factors: CHWCA’s New Methodology
E.C. approval of draft calculation in August 2014:
Use of three complete years of loss data and payroll exposure
The 2015 ex mod calculation used the years.
A claim that occurs today will affect your HA’s ex mod from
Individual losses capped at $100,000
A combination Credibility Formula:
The “Traditional” Credibility Formula - Weighted against average experience of all members, with largest member’s data “most credible”
The “Modified” Credibility Formula - Weighted against prior year ex mod
The continued application of a .25 cap on year over year changes from the prior year ex mod
The 2015 internally-rated capped ex mods range from .399 to 1.584
In April of 2014, the EC considered options prepared by CHWCA’s actuary, Jack Joyce of Bay Actuarial Consultants. After much discussion, the EC directed staff to bring back a draft calculation in August for the 2015 program year. Typically, losses valued as of 9/30 are used in the calculation, but for 2015 staff used losses valued as of 6/30 to develop the actual calculation used in the 2015 budget for presentation to the EC in August.
Let’s turn now to the legal size ex mod calculation hand-out. Im going to give you a very high-level explanation. For those who want more details, the calc is described in the box at the bottom of the page. Or, I invite you to meet with me tomorrow morning, and we can crunch these numbers!
The following parameters are used in the internally-rated calculation:
The use of 3 years of loss data and payroll exposure, the same as used in the WCIRB calculation.
The 2015 ex mod calc used the years, as the calculation was performed in 2014, so it was not yet complete.
This means that a claim that occurs today in 2015 will effect your ex mod from Ex mods are a lagging indicator of your actual loss experience.
2. Individual losses are capped at $100,000 in order to mitigate the occasional very large claim.
A credibility formula is applied using a combination of two approaches. The first is the traditional formula, columns 1-5 under the green heading bar. This approach factors each member’s experience with the other CHWCA members, with the largest member, Sacramento, receiving the highest credibility, or weight. This plays to the law of large numbers, which says that the more data you have (more exposure to loss), the more credible your data is, and the more it can be counted on to be representative of the norm.
The second approach is based on the prior year ex mod, and the calc is found in columns 6-12 under the pink heading bar. Each member is in effect compared to their own prior year experience, and weighted accordingly. This has kept the ex mods from changing dramatically from the prior year’s WCIRB calculated ex mod.
While these factors help to keep ex mods, and hence premiums stable, more help is needed. The final calculation is found in columns 13 and 14. CHWCA will continue for a period of time to place a .25 capp change on prior year ex mods, as we move through the transition.

14. CHWCA
Dividend Calculation

15. 2014 DIVIDEND CALCULATION
CHWCA’s Financial Stability Plan provides for an ultra-conservative approach to the declaration of dividends.
If CHWCA’s program as a whole is funded above the 90% confidence level, an additional $2.5 million (5 times CHWCA’s SIR) is subtracted to determine if funds are “available” for the issuance of dividends.
Program years must be a full five years old to be “eligible” for the issuance of dividends, to conservatively allow for adequate claim development in more recent years.
Dividends have been declared:
In April 2007 in the amount of $2.26 million,
In April 2010 in the amount of $2.34 million,
In April 2011 in the amount of $2.25 million,
In August 2011 in the amount of $1.25 million (to fund the mid-layer pool), and
In February 2015 in the amount of $160,000
CHWCA’s Div Calc is outlined in the Financial Stability Plan, which governs CHWCA’s financial funding and equity decisions.
Read text.
over $8 million has been released in the last 7 years.

16. I’ll go over the calculation briefly, pointing out the pertinent numbers, so you can get an idea of how this works.
I know that the numbers are too small to see up here, so you have a printed copy of the dividend calculation. It’s simply up on the screen so I can point to the areas that I’m talking about.
This year I summarized CHWCA’s first 11 years into one column to make for easier reading. Less numbers, bigger numbers, are ALWAYS better, right?
Top half of page includes all revenues and expenses, and prior dividends and assessments, which when combined, result in CHWCA’s equity positions. Last column on the right shows these 3 equity positions in the 3 bold boxes, xxxxxx.
As contributions are at various CL, Equity is also. Equity at expected is what appears on your FS. GAAP. To arrive at higher CL equity positions, we factor in additional IBNR reserves as provided by our actuary, which when applied, results in reduced equity.
Brown Column to left of PYs is MLP. Small contributions, own actuarial calculated reserves, funded by dividend release. Own equity position that is included in the total equity for the pool.
And now for the Reader’s Digest version of the calculation.
From equity at 90% we subtract 5 X CHWCA’s SIR of $500k, which is $2.5m. This is the aggragate or total CHWCA pool “Available” funds for distribution, $2.074m. CHWCA’s FSP does not allow a distribution of more than this amount under any circumstances.
We then look to the PY’s. Only years a full 5 years old can be adjusted, using the equity balances at the 70% CL. We want to leave the current years alone, as they are still developing. However, if a current year is negative we include those balances in the calculation. We take the cumulative 70% CL balance through 2009, and subtract the negative equity from current years. This results in $6.78 m. This is the “eligible” amount that could be released, however we can’t release more than the pool “available” balance.
The reason for this large discrepancy is a trend that we looked at in a previous slide (GO to slide 3). Note the equity balances in the current years that are still developing. Only 1 out of those 5 years has a negative balance, or deficit, at expected, and 3 out of 5 years have negative balances at 70%, all are neg at 90. This trend alerts us to the fact that we need to be watchful over the next few years, and do everything we can to mitigate the losses in those years.
Now, for some positive news. (BACK to slide 16) Take a look at the IBNR in each of those negative years. In each case, it is considerably higher than the negative equity in the same year. If those years develop favorably, that deficit will turn into a surplus. I know ICS and Jackie Miller are doing everything in their power to do just that!

17. 2014 DIVIDEND CALCULATION Congratulations
2014 DIVIDEND CALCULATION Congratulations! The Executive Committee has approved a dividend release in the amount of $207,400!

18. Questions?
THANK YOU!