BILL ANALYSIS                                                                                                                                                                                                    �




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair


          SB 1513 (Negrete McLeod) - State Compensation Insurance Fund: 
          investments
          
          Amended: April 16, 2012         Policy Vote: Insurance 8-0
          Urgency: No                     Mandate: No
          Hearing Date: May 14, 2012      Consultant: Bob Franzoia
          
          This bill may meet the criteria for referral to the Suspense 
          File.


          Bill Summary: SB 1513 would authorize the board of directors of 
          the State Compensation Insurance Fund (SCIF) to invest or 
          reinvest, an aggregated maximum of 20 percent of the moneys that 
          are in excess of the admitted assets over the liabilities and 
          required reserves, in specified investments.

          Fiscal Impact: Increased investment risk
              >

          Background: A financial review of SCIF, as well as other 
          insurers, included assessing such aspects of their investment 
          portfolio as liquidity, diversification and quality.  This bill 
          would have permitted SCIF to expand its investment portfolio in 
          riskier products without any limitations.  While the expansion 
          would help with diversification, there were significant concerns 
          with the resulting additional risks.  The current version of the 
          bill reflects efforts to limit this risk to an acceptable level 
          by providing a 20 percent cap on specified investments.

          The 20 percent limit was calculated as follows:

           *   Total liabilities were deducted from total assets.  (SCIF 
          is required to support all of its policy-related liabilities 
          with currently authorized investments).
           *   Deduction for various assets and accounts (real estate, 
          surplus enhancements for reinsurance, additional capital SCIF 
          will need to set aside for higher risk investments) that need to 
          be supported by the surplus.
           *   Deduction of a 10 percent cushion for market fluctuation of 
          assets supporting the liabilities.
           *   Deduction of an additional cushion for operational risk.








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           *   The remaining balance equated to approximately 20 percent 
          of surplus.

          Proposed Law: State Fund Prohibited Excess Funds Investments 
          this bill would allow:
          (1) Insurance Code 1191 (a North American company's stock).
          (2) Insurance Code 1192.4 (10 percent maximum of capital and 
          surplus in Canadian corporate stock).
          (3) Insurance Code 1192.6 (mortgage, mortgage-backed bond, 
          mortgage participation, pass-through, conventional pass-though, 
          trust or participation certificate secured with real property or 
          pool of real property). 
          (4) Insurance Code 1192.10 (securities with undivided interest 
          in, right to receive payments from or payable primarily from 
          distributions on pools of financial assets other than those 
          permitted by Insurance Code 1192.6, as specified). 
          (5) Insurance Code 1194.7 (federal home loan bank stock).
          (6) Insurance Code 1198 (maximum investment limit on corporate 
          capital stock of 10 percent of insurer's admitted assets 
          exceeding liabilities & reserves).

          Staff Comments: Existing law authorizes SCIF to invest primarily 
          in bonds.  While this minimizes risk, it can also limit 
          investment earnings. 

          By way of comparison, the State Teachers' Retirement System has 
          similar investments with the exception of Insurance Code 1194.7 
          (federal home loan bank stock).  STRS invests in Insurance Code 
          1192.4 (Canadian corporate stock) but without a ten percent 
          limit.
           
          Clearly, the biggest risk is investment in Insurance Code 1191 
          (North American company stock).  Both PERS and STRS have had 
          losses in this investment.

          Recommended Amendments: In order to provide legislative 
          oversight of the expanded investment options, staff recommends 
          the bill be amended to require SCIF to report on these 
          investments in its 2018 annual report.  For example,
          - Have the new investments reduced the volatility in market 
          price of the investment portfolio.   In other words, when bonds 
          prices fall (interest rates go up), did the market value of the 
          SCIF equities increase or fall less than the fixed income 
          portfolio.








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          -  Over longer periods of time (3 years, 5 years, and 10 years) 
          did the equity portfolio outperform the bond portfolio on a 
          total return basis (income plus appreciation)?
          - Have the SCIF investment managers outperformed the S&P 500 
          index?  Have the SCIF investment managers outperformed strategy 
          specific benchmarks, for example, the Russell 1000 for a 
          dividend growth strategy.