2013 Annual Report

President's Message

CompSource takes pride in its rich history of protecting Oklahoma’s workforce. 2013 marked our 80th year of business and we are proud of the role we play in Oklahoma’s workers’ compensation market. While this year was a time for celebration and reflection, it was also the most significant year of growth in our company’s history. The steps we have taken to ensure continued success in the future will allow us to enhance the services we provide and continue to fulfill the commitment made to Oklahomans 80 years ago. Providing a strong, stable source for workers’ compensation insurance will always be our first priority.

As we have discussed in the past, the Oklahoma Legislature passed the CompSource Mutual Insurance Company Act, privatizing CompSource Oklahoma, in May of 2013. Taking effect Jan. 1, 2015, this change allows for CompSource Oklahoma to transition from a quasi-state entity to a private, mutual insurance company. Although this will be a significant change for our organization, CompSource’s commitment to Oklahoma and its business community will not change. We will continue serving Oklahoma as the assured market for workers’ compensation insurance, a service that we are proud to provide. Protecting Oklahoma’s most valuable asset, its people, will remain at the forefront of all that we do.

Our commitment to protecting Oklahoma’s workforce begins with preventing workplace accidents. By partnering with our policyholders to stop workplace accidents before they happen, we are not only keeping Oklahoma’s workers safer but also being financially responsible as a company. We dedicate a significant amount of resources to assist policyholders in providing the safest possible work environments, including offering employers access to industry-specific safety education programs, train-the-trainer opportunities, sample safety manuals and other loss prevention resources. In addition, we have a dedicated staff of safety consultants who assist employers in determining the most effective loss prevention strategies for their organizations. Fostering a loss prevention culture and investing in the safety of their workplace empowers business owners to play a part in controlling their workers’ compensation costs.

In 2013, the Loss Prevention department’s safety consultants conducted approximately 3,000 workplace visits to policyholders across the state. Partnering with policyholders to create a culture of safety within their businesses is the guiding force behind the decision to offer the services of a dedicated team of safety professionals. In the coming year, we plan to increase the safety resources available to employers by launching a new section of our website devoted to safety and loss prevention services and offering access to streaming safety and health videos and pre-packaged safety talks.

Another vital aspect of protecting Oklahoma’s workforce is having the knowledge, skill and experience to help guide our policyholders and claimants. We pride ourselves on the fact that our policyholders, agents, injured workers and others in the industry look to us for our expertise. Being knowledgeable of our state’s system has become even more important with the landmark legislation passed in 2013 when Gov. Mary Fallin signed Senate Bill 1062 into law. This legislation created the Administrative Workers’ Compensation system, changing Oklahoma’s court-based system to an administrative system. As an organization, we have made it a priority to familiarize ourselves with all aspects of this new law, especially when it comes to our Claims Adjusters. It’s important that we quickly gain the same level of expertise with the new system that we have with the previous system and we are optimistic that the new system will help get claims settled in a more expedient manner and ultimately help lower the cost of claims.

As we move forward as a company, we understand that enhancing our service offerings will be an important part of our success, which is what led to the decision to upgrade our enterprise software solution. This was a necessary step in allowing us the flexibility to expand and enhance the technology as we continue to grow. The new system will increase our operating efficiency, standardize more internal processes and assist us in providing enhanced service to our policyholders and injured workers. This year we have completed several phases of development and testing in preparation for the implementation of this new system, which is expected to launch in August of 2014 and will have positive effects for years to come.

In addition to the significant advancements made in 2013, we also had an exceptional year financially. During the year, our earned premiums increased 10.6 percent and our loss ratio improved to 96 percent from 101.5 percent in 2012. These improved results were primarily due to a hardening workers’ compensation market, improved pricing strategies, an increase in agent program premium and more effective claims-management practices.

As I look back on 2013 and all the positive change that occurred, I know that CompSource is stronger than ever and poised for future success as a private, mutual insurance company. On behalf of the Board of Managers and the employees of CompSource, thank you for your continued support.

Sincerely,

Jason Clark

CompSource Cares

CompSource has a long tradition of giving back to the communities in which we live and work. Each year employees go above and beyond to help Oklahomans in need. Whether it’s doing our part to help the environment through our green initiative or gathering supplies for Oklahomans impacted by natural disasters; CompSource cares. In 2013, our employees generously donated their time and resources to the initiatives listed below:

Financial Summary
(Statutory Basis)

CompSource’s financial condition improved for the second straight year, despite fragile growth in the U.S. economy. Policyholder surplus increased by $76.5 million, or 30.5%, to $327.7 million during 2013, resulting from net income of $48.1 million and net unrealized capital gains of $36.8 million, which more than offset an increase in non-admitted assets of $8.4 million. Strong returns in the U.S. equity markets during 2013 fueled an increase in the fair values of equity securities resulting in unrealized capital gains which directly benefitted surplus. CompSource’s underwriting results improved again during 2013, as premiums earned rose by 10.6% and the calendar year loss and loss adjustment expense ratio (“loss ratio”) improved by 5%. Net investment income rose to $82.5 million in 2013, an increase of $35.5 million resulting from realized capital gains related to re-balancing the investment portfolio as a step toward risk mitigation through a reduction in exposure to the equity market. Surplus improved by a total of $108.2 million, or 49.3%, from December 31, 2011, to December 31, 2013. The $327.7 million surplus figure as of December 31, 2013, is the highest level of surplus ever attained by CompSource on a statutory accounting basis.

Premiums earned (in millions)

Premiums earned rose by $29.8 million, or 10.6%, to $310 million during 2013, as the market for workers’ compensation insurance continued to harden. Market hardening is characterized by rate increases and reduced availability of coverage in the marketplace. CompSource’s loss ratio improved to 96% for 2013, from 101.5% during 2012. Improved pricing strategies, an increase in agent program premium, and effective claims management through enhanced cost containment strategies, preferred medical providers and pharmacy management programs continue to positively impact underwriting results.

CompSource’s expense ratio, which measures other underwriting expenses such as premium taxes and agent commissions in relation to premium written, was unchanged for 2013 at 15.1%.

Net investment income (in millions)

Although interest rates rose during 2013, they remain low as compared to historical averages. Net investment income increased to $82.5 million from an increase in net realized capital gains of $34.3 million and an increase in interest income of $1.2 million. The realized capital gains resulted from re-balancing the investment portfolio to targets as a risk mitigation strategy by reducing equity exposure. Total return, which is a combined measurement of both investment income earned and the change in fair values, declined to 5.2% for 2013. This decline was primarily from the shift in Federal Reserve monetary policy, which caused interest rates to rise and bond fair values to fall.

Additional operational information

Outlook

Industry observers expect further rate increases by workers’ compensation insurance carriers across the country during 2014, but at a slower pace than 2012 and 2013. Major markets such as New York and California saw rate increases of 6.7% and 9.5%, respectively, in late 2013. Overall, premium growth is forecasted from modest rate increases and employment growth. Wage inflation and increases in medical costs are expected to be significant drivers of workers’ compensation claim severity in the broad market as the economy continues to improve.

During 2013, the Oklahoma Legislature passed and the Governor signed into law SB 1062, which significantly changed the workers’ compensation system in Oklahoma by implementing an administrative system, effective February 1, 2014. This legislation could impact competition for workers’ compensation insurance in the near term, and is expected to reduce the medical and indemnity costs associated with workers’ compensation claims in Oklahoma.

The CompSource Mutual Insurance Company Act was signed into law during 2013 and provides that CompSource, after a transition period, will become a domestic mutual insurance company effective January 1, 2015. Surplus on January 1, 2015, will become surplus of the new domestic mutual insurance company. The transition to a domestic mutual insurance company and the implementation of an administrative workers’ compensation system will certainly be key considerations as CompSource develops operational and strategic plans for the short and long term.

As CompSource transitions to CompSource Mutual Insurance Company, our ability to deliver on our promises of financial stability and superior service will be strengthened. These goals will shape our strategic planning and guide us as we chart a path toward the future as a trusted partner to the Oklahoma business community. Our unwavering commitment to be a stabilizing force in the workers’ compensation insurance market will continue with CompSource Mutual Insurance Company as the assured provider of coverage.