BILL ANALYSIS �
SB 1513
Page 1
Date of Hearing: August 8, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 1513 (Negrete McLeod) - As Amended: June 27, 2012
Policy Committee: InsuranceVote:11
- 0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill allows the board of directors for the State
Compensation Insurance Fund (SCIF) to invest or reinvest, an
aggregated maximum of 20% of the funds that are in excess of
the admitted assets over the liabilities and required reserves,
in stocks, mortgages, and Federal Home Loan Bank shares until
January 1, 2025. In addition, this bill requires the Department
of Insurance to submit to the Legislature by January 1, 2019, an
assessment of the benefits and risks of SCIF's investment
strategy.
FISCAL EFFECT
Expansion of the SCIF investment portfolio into higher risk
investments has the potential to increase returns for the SCIF
portfolio. However, to the extent SCIF assumes increased risk,
there may be periods of greater losses than with a more
conservative portfolio. The returns will depend on the
investments, economic conditions and the ability of SCIF to
hedge the risks they assume.
COMMENTS
1)Purpose . The intent of this legislation is to expand SCIF's
investment authority to diversify its investments, increase
its portfolio stability, and hedge its portfolio against
inflation.
2)Background . SCIF provides California's worker's compensation
insurance to any interested employer, including those unable
to self-insure or find private sector alternatives. SCIF was
SB 1513
Page 2
created in 1914 to help ensure all employers have a strong and
stable option for their workers' compensation needs.
SCIF, like other insurance carriers, relies both on income
from premiums and growth from investments. The success of
investment strategies directly impacts the bottom
profitability of a carrier. As a quasi-governmental agency,
SCIF remains a nonprofit entity and must return excess income,
over legally required reserves or surplus, to the
policyholders.
Under current law, SCIF is authorized to invest money that is
in excess of current requirements. The investments, however,
are generally limited to long-term corporate and municipal
bonds.
3)Institutional investment strategy . Historically, institutional
investors, including insurance companies and both public and
private pension managers, invested most of their portfolio in
fixed income securities, namely bonds. These investments
offered an acceptable rate of return and a near guaranteed
protection of the principal from risk of default.
However, there were other risks to fixed-income portfolios.
If interest rates rose, the face value of the bonds in the
portfolio could be adversely affected. Many institutional
investors experienced significant losses when the inflation of
the latter half of the 20th century led to an increase in
interest rates. Fixed income investments began to lose favor
among institutional investors as the jump in interest rates
severely impacted fixed income portfolios. Another issue with
fixed-income portfolios was that the returns did not match
those of competing investments, such as real estate or stocks.
CalPERS provides an example of the change in investment
strategies that has occurred over time. At one time, CalPERS
was prohibited from any investments other than bonds. The
first flexibility was granted when they were allowed to invest
in real estate. Soon after CalPERS began investing in
equities or stocks, but was limited to no more than 25% of
their portfolio. The passage of Proposition 21 in 1984
erased all limitations. CalPERS now aims for approximately
60% investment in equities.
SB 1513
Page 3
Analysis Prepared by : Julie Salley-Gray / APPR. / (916)
319-2081