WE ARE WCF 2003 ANNUAL REPORT WORKERS COMPENSATION FUND. reliable responsive knowledgeable resourceful safe secure

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1 WE ARE WCF 2003 ANNUAL REPORT WORKERS COMPENSATION FUND reliable responsive knowledgeable resourceful safe secure



4 FINANCIAL HIGHLIGHTS December 31, (In thousands) Revenues $ 271,773 $ 223,273 Premiums earned, net of reinsurance 227, ,446 Net investment income 44,391 42,827 Realized gains (losses) on investments 7,935 (25,896) Underwriting gain (loss) 2,084 (38,750) Policyholder dividends 3,000 2,442 Net income (loss) 48,959 (26,549) December 31, Admitted assets 953, ,504 Cash and invested assets 921, ,557 Reserve for losses and loss adjustment expenses 600, ,958 Policyholder s surplus 293, ,816 December 31, Loss and loss adjustment expense ratio Expense ratio Combined ratio

5 WE ARE WCF 2003 ANNUAL REPORT WORKERS COMPENSATION FUND We are all different, yet we all want the same qualities in a workers compensation insurer. Safety, security, reliability, responsiveness, knowledge and resources. Above all, we want confidence that we ve made a good choice. WCF has offered all of these for eight decades to nearly every kind of customer. We insure very large companies and very small ones, young workers just starting out and seasoned employees who know the ropes, office jobs and high wire jobs, bankers and sommeliers. We are a constant in the Utah workers compensation market, offering employers a competitive choice. We are also changing to continue our tradition of dependability and unparalleled resources. In 2004, WCF goals include holding premium rates steady, developing and implementing long-range technology plans, establishing strategies to improve safety and customer service for non-english speaking employers and employees, and continuing to improve our profitability. MEETING OUR GOALS WILL FURTHER WCF S SUCCESS AS WELL AS THAT OF OUR CUSTOMERS AND UTAH S WORKERS COMPENSATION SYSTEM. WE ARE COMMITTED TO OUR CUSTOMERS AND THEIR EMPLOYEES, OUR COMPANY, AND OUR EMPLOYEES. WE ARE WCF.

6 DEAR POLICYHOLDERS AND FRIENDS: After five straight years of declining results, Workers Compensation Fund ( WCF or Company ) recorded an underwriting profit of $2.1 million in The dramatic turnaround from an underwriting loss of $38.7 million in 2002 was the result of increased premium rates, and a marked decrease in the number and cost of catastrophic claims. Losses incurred in 2002 were the worst in decades for WCF. The Company s net income was $49.0 million in 2003 after recording a net loss of $26.5 million in The Company s wholly-owned out-of-state subsidiary, Advantage Workers Compensation Insurance Company ( Advantage ), contributed $9.6 million of net income in 2003 after incurring a loss of $7.9 in The improved performance for Advantage was also the result of increased pricing and a decrease in catastrophic claims as well as the elimination of unprofitable classes of business and non-renewal of individual accounts with poor loss experience. WCF remains financially strong with policyholder surplus of $293.4 million at year-end During the mid- 90s, premiums declined significantly, making it difficult for insurance companies to make an adequate return in Utah and across the country. The result has been fewer companies willing to offer workers compensation insurance in Utah. WCF s market share has risen to nearly 70%. Current premium rates appear to be adequate, which means competitors will re-enter the market in 2004 and beyond. Workers compensation premiums are being driven upward both nationally, and in Utah, by increased medical costs. Prescription drug costs have skyrocketed with the increased use of high-cost painkillers such as OxyContin. WCF continues to use managed care programs designed to provide the best medical care at reasonable prices. In 2003, these programs saved $27.4 million. Our safety professionals work diligently to assist employers to reduce accidents and our fraud investigators continued to search out fraudulent activity. Fraud investigations saved $5.4 million in A major issue for the ongoing financial success of WCF has been our ability to serve Utah companies with operations outside the state. In 1995, the Company began offering workers compensation insurance in other states through a contract with another insurance company. This relationship had a number of problems and, in 1998, WCF acquired Advantage and began offering multi-state coverage through this wholly-owned subsidiary. The program worked well until 2001, when the Idaho Insurance Department questioned Advantage s right to hold an insurance license in that state because of an Idaho statute that prohibits insurers that are owned or controlled by another state from doing business in Idaho. There are 26 states other than Idaho with similar restrictions. At issue in Idaho was the governor of Utah s appointment of WCF s board of directors and the question of who owned the Company. These issues were referred to an administrative hearing. The hearing officer in Idaho ruled that WCF was owned by its policyholders, but the appointment of the board by the governor gave the State of Utah the right to control the Company s operations. Therefore, Advantage did not qualify to do business in Idaho. Idaho s regulators provided time for the Utah State Legislature to change the appointment mechanism to help Advantage meet the Idaho statutory requirements. In the 2002 general session of the Utah State Legislature, a bill was introduced to remove the governor from appointing WCF s board of directors. The bill was on its way to becoming law when the governor asked that it be tabled to allow time for the state of Utah to address whether it wanted to assert an ownership claim to WCF and its assets. In the intervening two years, the state, in fact, asserted a claim that it owned WCF and all of its assets. In October 2003, the Company filed a declaratory action in Utah district court asking a judge to rule that WCF is owned by its policyholders.

7 During the 2004 general session of the Utah State Legislature, the Company worked with the legislature and the governor s office to settle the ownership issue and to make legislative changes that would clarify the control issues that were problematic in Idaho. The proposed legislative solution included a $50 million payment from WCF to the state for settlement of the issues. The proposed legislation was not enacted, leaving both the ownership and control issues unresolved. With the help of Utah s governor s office and Idaho regulators, WCF identified a solution to the control issue. However, the ownership issue remained with the declaratory action still pending in court. On March 5, 2004, district Judge Timothy R. Hanson granted WCF s motion for summary judgment and ruled in favor of WCF policyholders stating in part, The Court concludes that the WCF is entitled to a declaratory judgment as a matter of law that the State has no ownership in the WCF or its assets other than as a policyholder. This is an important milestone for WCF and its policyholders. The Company now has the ability to resolve the licensing issues in Idaho and proceed with its successful business strategy in other states. The ruling means that the Utah legislature cannot enact statutes that take WCF assets or unconstitutionally limit WCF or Advantage from conducting business. It also means that the Company and its policyholders retain the $50 million that was offered as a settlement with the state. With these protections in place, WCF will continue to provide insurance to all Utah businesses including those who cannot find coverage elsewhere and will therefore continue to be exempt from federal income taxes. Utah businesses can expect to see only moderate rate increases over the next couple of years as other insurance companies return. Utah s overall premiums remain among the lowest in the nation with an average rate of 1.60% of payroll in 2003 compared to 1.90% in The one constant in Utah s workers compensation system has been, and will be, that WCF will continue to provide excellent service and the best value available to all Utah businesses. Now with the court ruling, we will also continue to offer workers compensation insurance to our customers outside Utah through Advantage. Thank you for your trust and continued support of WCF. It is your Company we will continue to work hard to control premium rates and provide excellent service to you and your employees. Sincerely, Lane A. Summerhays President & CEO Melvin C. Green Chair, Board of Directors

8 > reliable responsive knowledgeable resourceful safe secure

9 WE ARE RELIABLE AS GOOD STEWARDS OF THE PREMIUMS OUR CUSTOMERS PAY, WE WILL BE HERE FOR THEM TOMORROW. As the Industrial Revolution changed the way Utahns worked, so too did it change the needs of employers. Hazardous occupations and working conditions brought an appeal for safety as well as a reliable means of taking care of those injured on the job. Deemed by President William H. Taft as one of the great steps of progress toward a satisfactory solution of an important phase of the controversies between employer and employee that has been proposed.., the workers compensation system was set in motion in In Utah, WCF was formed in 1917 to offer Utah employers a competitive, dependable and reasonably priced source of workers compensation insurance. After 87 years, of being tested by fluctuating workplace demographics, technologies and economics we are still fulfilling our purpose. We have always been motivated by our vision and commitment to our policyholders, our injured workers, our employees and our company. POLICYHOLDERS At one time or another since 1917, almost every Utah employer has been our policyholder. Over the previous five years, the number of businesses insured by WCF has grown. In 2003, 32,211, or 69%, of businesses chose WCF as their workers compensation insurer. WCF offers its policyholders, and all Utah businesses, longterm value, stability and partnership. Our policyholders have access to extensive services not offered by other insurers, including safety and loss prevention, fraud investigations, return to work programs, and claims management. We also help any business needing workers compensation insurance, regardless of their potential for loss. As Utah s carrier of last resort, we help new businesses just getting started, businesses in higher hazard industries, and businesses in between. And, we insure them at reasonable premiums consistent with maintaining our financial strength.

10 WE ARE RELIABLE INJURED WORKERS Injured employees need a dependable, fail-safe insurer. After an injury, an employee wants to focus on healing and getting back to work, not on how to pay the bills. WCF is here to help injured employees quickly return to work and resolve their claim. When an employee cannot get back to work quickly or has a catastrophic claim, we establish financial reserves to ensure they will always have access to quality medical services and the care they may need. Additionally, a team of experts formulate a plan of care for severe injuries and work with families as they adjust to a new life. 70% 60% 50% 40% WCF EMPLOYEES Hiring and retaining good employees is essential to our ability to offer customers quality, multi-dimensional service. More than 60% of our employees have been with WCF over five years, and 26% have been here more than 10 years. Our employees have the tools to do their job with the greatest efficiency as well as the latitude to do what is right for the customer. Employee retention and empowerment offers our customers the consistency they have come to expect. 30% 20% 10% 0% WCF MARKET SHARE, * WCF On June 30, 1917, we officially opened for business. Our first policies were recorded by hand in ledgers with meticulous detail. While computers have taken over this role, the principle is still in practice at WCF. We have maintained our ability to be a guaranteed source of workers compensation insurance by offering sound premiums and employing solid business practices. Across all our departments, we have one over reaching goal: provide the best workers compensation insurance service in Utah. *2003 Projected

11 WCF S VISION WE ARE AN INNOVATIVE INSURANCE COMPANY, COMMITTED TO CREATING SUPERIOR VALUE, PROVIDING EXCEPTIONAL CUSTOMER SERVICE, PROMOTING WORKPLACE SAFETY, BUILDING STRONG PARTNERSHIPS AND AGGRESSIVELY MANAGING COSTS. To our customers, we are committed to > Understand and meet their needs while providing prompt, friendly, competent and honest service. > Reduce the number of accidents and minimize their losses by providing safety programs and effective claims management. > Develop strategic partnerships to control costs and ensure quality care. > Educate and involve them in claims and policy decisions. To our injured employees, we are committed to > Adjust claims in a timely, accurate and fair manner. > Work closely with them to find innovative and effective ways to ensure their full recovery and early return to work. > Provide prompt, accurate information in a caring and respectful atmosphere. To our employees, we are committed to > Treat each other with dignity and respect. > Empower them to make decisions that are in the best interest of our customers, our beneficiaries and our Company. > Provide them the information and resources necessary to deliver the highest level of customer service. > Encourage creativity, innovation, responsiveness and accountability. To our Company, we are committed to > Provide the highest level of personalized service to our customers. > Assure our longevity by remaining financially stable and by aggressively pursuing growth and improvement opportunities. > Demonstrate integrity and professionalism in everything we do. > Develop strategic partnerships with professional providers and regulatory agencies. > Demonstrate responsible corporate citizenship.

12 reliable secure > responsive reliable > knowledgeable safe responsive resourceful knowledgeable safe resourceful secure

13 WE ARE RESPONSIVE FROM WEB SERVICES THAT HELP EMPLOYERS FILE CLAIMS AND SUBMIT PAYROLL REPORTS TO LANGUAGE SERVICES THAT HELP INJURED EMPLOYEES ACCESS THEIR BENEFITS, WE LISTEN TO OUR CUSTOMERS. In the maze of business insurance, it has been said that workers compensation is a confusing and inconvenient necessity. At WCF, we know it does not have to be that way. From Web services that help employers file claims and submit payroll reports to language services that help injured employees access their benefits, we listen to our customers. WCF is local. We offer personalized service and can quickly respond to market changes. Our 300+ employees are located in Salt Lake City, Ogden and St. George. We travel to every region of the state throughout the year, from safety seminars in Moab, Logan and Cedar City to customer service visits in Hurricane and Kanab. With customer input, we are able to keep WCF a company for Utah. Recent advances at WCF include additional Internet features, customer service enhancements and bolstered assistance for non-english speaking customers. HISPANIC SERVICES Recently, our Spanish-speaking customer population has surged. In 2001, a Spanish Translation Unit was created to provide interpreter services. The unit began with one employee, but was quickly overwhelmed by the demand. At the end of 2003, the Unit had four employees in addition to two bilingual customer service representatives. One unit member is a claims adjuster who only helps Spanish-speaking injured workers. We also began work on a long-term strategy for connecting the growing Spanish-speaking worker population with our goals of on-the-job safety and customer service. When work is completed in 2004, our aims are to: help employers work through language and cultural barriers to keep all workers safe; educate workers about their right to a safe workplace; and integrate Spanish-speaking customers needs with those of all of our customers.

14 WE ARE RESPONSIVE 2003 INTERNET APPLICATION USE First Reports of Injury 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 0 1,000 2,000 3,000 4,000 5,000 Certificate of Insurance Requests 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 0 2,000 4,000 6,000 8,000 Completed Payroll Reports WEB SERVICES To simplify the paperwork burden, WCF has invested in information and Internet technology upgrades. Last year, online payroll reporting was introduced. More than 50% of all requested payroll reports were received online versus by mail. Claims filing, certificate of insurance requests, loss runs and OSHA log completion via the Internet remain our most popular features. Next year, we will begin accepting payments online another way to make doing business with us as easy as possible. CUSTOMER SERVICES A frequent request of our customers is the ability to reach WCF employees with less effort and wait time. During 2003, we implemented a new telephone system that was designed primarily by our customers. Throughout the process of planning, testing and implementation, a core group of customers helped us create a system in which callers can get to the right department or person quickly. In addition, we added options in Spanish that reach a translator directly TELEPHONE DATA 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 0 1,000 2,000 3,000 4,000 Loss Runs 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 10,000 calls received per month, on average, to our main telephone numbers. 4 SECONDS average time to answer underwriting and claims calls. 95% of calls reached their intended destination without being dropped or transferred. 0 2,000 4,000 6,000 8,000 10,000

15 Customer Advisory Council Each year, we invite 40 customers to tell us what we re doing right, what we re doing wrong, and what we re not doing, but should be. These customers have roots across the state, represent most industries and company sizes, and are vocal. Twice a year, we meet to discuss marketplace trends and ask for feedback on Company practices that are in use or those that have been proposed. We ask for recommendations on issues such as effectively delivering safety resources, improving the premium audit process, and helping employers navigate workers compensation. What comes out of these meetings is renovation. Every department is required to study and respond to the Council s inquiries and ideas. Since 2000, the Council has influenced more than 50 modifications in WCF s operations COUNCIL MEMBERS > Alpine Roofing Specialists > Alta Industries > Alta Ski Lifts > Americom Technology > Bailey's Storage & Moving > Barney Trucking > Central Utah Water Conservancy District > Coray & Sons > DATS Trucking > EB Berger > Galleon Armored Car > Godfrey Trucking > Hallmark Cabinets > John Clayton Construction > Liberty Safe & Security > LKL Associates > Mac Management > May Foundry > Nature's Way > Redman Van & Storage > Roman Catholic Diocese of SLC > Roofers Supply > Ruby's Inn > Sandy City > Skip Dunn Excavating > South Davis Community Hospital > Spectrum Press > Sweet Candy Company > Tooele City > Trans Jordan Cities > Turn Community Services > Utah Construction Personnel > Utah Symphony & Opera > Utility Coatings & Fabrication > Warburtons > Wasatch Mental Health Services > Waterproofing West

16 reliable secure responsive reliable >> knowledgeable safe resourceful responsive safe knowledgeable secure resourceful

17 WE ARE KNOWLEDGEABLE WE ARE A RESOURCE FOR INJURED EMPLOYEES TO ENSURE THEY RECEIVE HIGH QUALITY CARE AND SERVICE. WE ARE ALSO A RESOURCE FOR EMPLOYERS TO HELP MANAGE CLAIMS AND CONTROL COSTS. When an employee is injured, we are here to help in more ways than just paying bills. We are a source for injured employees to ensure they receive high quality care and service. We are also a source for employers to help manage claims and control costs. FOR INJURED EMPLOYEES > Our injured workers have a single point of contact with a claims adjuster. This reduces confusion and uncertainty and provides consistent service and reassurance. > Payments are made promptly. Once a claim is accepted, injured employees receive initial compensation payments quickly. > When an employee needs help getting back to work, or cannot return to his or her former job, a vocational rehabilitation counselor can help. They provide vocational testing, job skills seminars and counseling. > For disabling injuries, nurse case managers evaluate an injured employee s needs and coordinate with health care providers to facilitate healing, recovery and return to work. > For catastrophic injuries, we have a specialized team to develop a life care plan for the injured worker, and monitor treatment and care. FOR POLICYHOLDERS > You also have a single point of contact with a claims adjuster assigned to your business. > In conjunction with a safety and loss prevention representative, our professionals can analyze your company's accident trends, and suggest ways to reduce injuries and claims costs. > Vocational rehabilitation counselors can help you develop an early return to work program. > Our subrogation unit will pursue third-party recoveries, which help keep your experience modification factor and premiums as low as possible. Last year, the unit recovered $2.88 million from third parties responsible for workplace injuries.

18 WE ARE KNOWLEDGEABLE Medical Bill Audit Provider Network Utilization Review Medical Case Management Vocational Rehabilitation Total: MANAGED CARE SAVINGS, , In millions $0 $5 $10 $15 $20 $25 $30

19 To keep costs in check and, in turn, premiums, it is essential that claims are reported immediately. Our professionals have extensive education, experience and training to handle all aspects of claims. The sooner they can begin work with an injured employee, the better the outcome for both employee and employer. Our claims services bring together a preferred provider network, prescription drug discounts, provider bill and utilization review, medical case management and vocational rehabilitation. This combination gives injured employees a solid foundation of care and support. It also allows our policyholders to participate in controlling claims costs. PREFERRED PROVIDER NET WORK Our partnerships with Intermountain Health Care, University of Utah Health Sciences Center, Gunnison Valley Hospital and others give our customers employees access to the finest medical care in the region. With nationally recognized doctors and cutting-edge facilities, our providers offer our injured employees high-quality care close to home. Our network saved WCF $6.2 million in PROVIDER BILL REVIEW We look at every submitted bill as well as the doctor's notes to ensure payments are made correctly. We also provide training within the medical community on workers compensation billing procedures. Reviews saved WCF $15.4 million last year. UTILIZATION REVIEW For inpatient hospitalizations, and many outpatient procedures, we have a team of registered nurses and physician consultants who proactively review and approve proposed medical treatments. In 2004, our utilization review efforts saved $3.7 million. MEDICAL CASE MANAGEMENT Coordinating medical care is critical to control costs. Our nurse case managers evaluate injured employees circumstances and coordinate care to help in their recovery. These efforts saved $1.2 million in VOCATIONAL REHABILITATION Returning injured employees to productive work in a timely manner is cost-effective as well as morale boosting. Our certified counselors work with employers, injured employees and physicians to confirm work capabilities and assist with job modifications. Our efforts saved nearly $1 million last year. WCF and its team of professionals will help you manage your claims and costs, and help your injured employees get back to work. HOW YOU CAN MANAGE YOUR CLAIMS COSTS > Promote safety in the workplace. > Report injuries as soon as possible to WCF. > Conduct drug and alcohol testing. > Use our preferred provider facilities. > Make your claims adjuster aware of any third party or subrogation claims. > Properly track and report claims you believe are fraudulent or questionable. > Help injured employees return to work as quickly as possible after an accident. 10% 15% 20% 25% 30% MANAGED CARE SAVINGS AS A PERCENTAGE OF BILLED CHARGES,

20 reliable secure responsive reliable > knowledgeable safe > resourceful responsive safe knowledgeable secure resourceful

21 WE ARE RESOURCEFUL WHETHER IT S AN EMPLOYEE EXAGGERATING AN INJURY OR AN EMPLOYER INTENTIONALLY MISCLASSIFYING ITS EMPLOYEES TO GET A BETTER RATE, OUR CUSTOMERS DON T LIKE TO PAY FOR OTHERS FRAUDULENT BEHAVIOR. Workers compensation fraud can be both humorous and infuriating. Humorous because the cheater s antics are so foolish. Infuriating because they got away with it even for a day. Whether it s an employee exaggerating an injury, an employer intentionally misclassifying its employees to get a better rate, or a medical provider charging for services never provided, our customers don t like to pay for others fraudulent behavior. They know it means they can t offer their employees more benefits and pay because premiums are higher, or that a competitor has an edge because it isn t paying its fair share. And fraud is big business. The Coalition Against Insurance Fraud estimates that all forms of insurance fraud cost $80 billion annually in the U.S. The Insurance Research Council found that one in five workers say they've been aware of fraud in their workplace. To tackle workers compensation fraud, WCF formed a Special Investigations Unit in The Unit s directive is to protect our policyholders and their employees by detecting and stopping fraud. Staffed by former police officers, the unit uses neural network technology, similar to that used by credit card companies, to flag suspicious claims and policies. Those claims and policies, along with claims adjusters referrals and employers tips, are investigated to determine the probability of fraud. If fraud is found, we are able to put a stop to it. That s not all. The Unit refers its investigations to the Utah State Insurance Fraud Division or the Salt Lake County District Attorney's Office for prosecution. Our Special Investigations Unit has been very successful. Since 1992, it has saved WCF and its customers more than $52 million through claims not paid, court-ordered restitution and civil recovery. The Unit s work has also helped secure 228 criminal fraud convictions

22 WE ARE RESOURCEFUL IT SEEMED LIKE A GOOD IDEA AT THE TIME......OUR FIVE BEST TALL TALES. $8 $7 $6 $5 $4 $3 $2 $1 $0 FRAUD INVESTIGATION SAVINGS*, In Millions of Dollars *Financials savings through reserves savings, court ordered restitution and civil recovery CRIMINAL FRAUD CONVICTIONS, The Pilot As a hang glider test pilot, The Pilot enjoyed a challenge. While demonstrating a product to a group, the aircraft malfunctioned and plummeted. Luckily, he had a parachute and was able to make it safely to the ground, except for a dislocated shoulder. For the next two years, The Pilot claimed his arm was too severely injured to return to work. Physicians tried every available treatment with no success. In the meantime, The Pilot decided to move to sunny, southern California. After a tip from a former employer, surveillance video showed him parasailing off cliffs at Torrey Pines Glider Port in La Jolla, California. WCF asked The Pilot to return to Utah for an independent medical exam. At the exam, he told the physician he could not open his car door because of his shoulder pain. After seeing the surveillance, the doctor released The Pilot to go back to work. Subsequently, The Pilot pleaded guilty to workers compensation fraud. WCF saved almost $120,000 in medical and lost time benefits. Dr. Imitation Dr. Imitation claimed she cut her ankle and leg after tripping over a pallet. Additionally, she said she was being treated by a physician and was paying the costs herself. Dr. Imitation provided WCF with medical bills and other documentation, and asked to be reimbursed for almost $6,000 in medical services and $8,500 in lost time benefits. WCF discovered Dr. Imitation submitted 15 false, forged documents and bills from a fictitious doctor. The plan was.

23 even enhanced by setting up a post office box solely for this correspondence exchange. Dr. Imitation pleaded guilty to workers compensation fraud. WCF saved more than $23,000 in medical and lost time benefits. The Hunter As an ironworker, The Hunter injured his knee when he slipped at work. The injury seemed to get worse over time and he told the doctor he could not walk five feet. Surveillance caught The Hunter mowing lawns, trimming hedges and doing other yard work without any hint of pain. After the yard work, he complained again to the doctor about pain. Within a week, the Hunter loaded an ATV into a trailer and drove to a local canyon. While there, he unloaded the ATV, drove it around on unimproved dirt roads, and hunted for 12 hours. The Hunter was convicted of workers compensation fraud. WCF saved almost $15,000 in medical and lost time benefits, and restitution. Mr. Basketball Mr. Basketball was a nursing home health professional who claimed to injure his back while lifting a patient. After significant rehabilitation time, he said the injury was only getting worse. The pain was so intense he couldn t even walk to the mailbox. Larry Bird. He was running, dribbling, shooting and scoring to help his team win. Mr. Basketball was convicted of workers compensation fraud. WCF saved more than $48,000 in medical and lost time benefits, and restitution. The Cowboy After injuring his back working as a plumber, The Cowboy claimed he could not tie his shoes or clean his house, let alone work. With such an aggravating injury, a doctor performed back surgery and The Cowboy stayed off work. But, this did not affect his participation in a nine-day Pony Express re-enactment. After grooming and saddling his horse, The Cowboy rode up to five hours a day on a trip from Missouri to Utah. His picture was even in a local paper at the end of the marathon ride. Later, surveillance video showed The Cowboy participating in a rodeo. After the rodeo, The Cowboy said he still could not work due to the surgery. He told the claims adjuster, Say I go ride a horse for even a half hour, get off and put it away, I ll spend the rest of the day in pain, severe pain. During this same discussion, he was asked about the Pony Express ride. The Cowboy s response Is it against the law to take a vacation? The Cowboy was convicted of workers compensation fraud. WCF saved more than $75,000 in medical and lost time benefits. However, surveillance video showed Mr. Basketball could not only walk to the mailbox, he could play basketball like

24 reliable secure responsive reliable > knowledgeable safe resourceful responsive > safe knowledgeable secure resourceful

25 WE ARE SAFE FOR OVER 80 YEARS, WCF HAD BEEN UTAH S SAFETY NET. WE WORK HARD TO KEEP EVERY EMPLOYEE SAFE. Each day, we go to work assuming we will return home safely to our families. But staying safe on the job can t be taken for granted. It requires constant education, awareness and attention. A great deal of focus has been placed on safety over the last few decades, with more research and resources dedicated to it. Injury and fatality rates in Utah and across the United States are at historically low levels. In fact, the Centers for Disease Control reports the number of employees who are killed on the job today is 90% lower than it was in At WCF, we partner with our policyholders to find solutions that will continue to protect their employees. Since no two companies are alike, we offer traditional resources, such as safety manuals, literature and seminars, as well as custom programs, such as on-site training and industry-specific safety roundtables. Even with renewed focus on safety, preventable accidents still account for almost all on-the-job injuries. Our safety and loss prevention representatives keep this in mind as they collaborate with our policyholders to develop a safety culture in companies. This includes: creating an atmosphere in which even the smallest incidents are investigated to determine how it can be prevented in the future; training employees on all of the hazards they face in their job; and rewarding safety milestones. To establish or refine a safety program, WCF has the best resources in Utah, namely our many safety professionals. Highly specialized, they have expertise in areas such as workplace violence, industrial hygiene, construction, fall safety, defensive driving, and ergonomics. We provide more than 100 safety seminars each year across Utah. To efficiently reach more people, we successfully utilized Internet technology in 2003 to provide Webcasts of seminars in outlying areas. If there s a safety concern we have not encountered before, we have the experience to find the right people and the right solution.

26 WE ARE SAFE 2003 SAFETY STATS 5 6,977 safety visits were made. 1,007 on-site training presentations were conducted at the policyholders places of business. 4 13,329 people were trained during the on-site visits safety seminar training sessions were presented. 2,426 people were trained at the safety seminar sessions WCF ACCIDENT RATE Inflation adjusted; number of claims per $1 million of payroll

27 TRIED & TRUE EFFECTIVE SAFETY PROGRAM ELEMENTS 1 Have a written safety policy and commitment from management that is not just lip service. 2 Write clear, concise safety rules to help employees understand how to protect themselves from on-the-job injuries. 3 Check job candidates references before hiring; do not hire on the spot. 4 Conduct drug testing before hire, at random, for cause and post accident. 5 Require every employee to wear a seat belt every time they use company vehicles. 6 For jobs that require driving, check motor vehicle records before hiring and organize ongoing defensive driving training after hiring. 7 For labor intensive jobs, lead a warm-up exercise program before work begins. 9 Require employees to make training presentations at safety meetings. 10 Hold a 3 minute safety message before work begins each day to encourage employees to work together safely. 11 Immediately investigate any injuries, near misses, or incidents involving equipment or material damage to identify causes and take corrective action. Require employees to be involved in the investigation and submit ideas to prevent future incidents. 12 Establish an early return to work program. 13 Set up safety incentive programs that require employee participation to receive the rewards. 14 Enforce safe behavior and policy compliance with a disciplinary program for those who work unsafely. 8 Hold regular safety meetings and provide time for employee feedback.

28 reliable secure responsive reliable > knowledgeable safe resourceful responsive safe knowledgeable > secure resourceful

29 WE ARE SECURE WE ARE ABLE TO SERVE ALL OF OUR CUSTOMERS DURING THE GOOD TIMES AND DURING THE HARD TIMES. If WCF s finances were to be characterized in one word, it would be conservative. It s the responsible way of doing business. We want to ensure that we are always able to meet our obligations. Our cautious outlook has served us well. Even with the workers compensation market turbulence, low equity returns and the 30-year low interest rates of the last three years, we have been able to care for all of our customers. We focus on the fundamentals of insurance, including lowering our combined ratio, maintaining adequate policyholder surplus and conservative loss reserves, holding operating costs in check, and making sound investment decisions. COMBINED RATIO Ideally, an insurance company has a combined ratio of less than 100. This means it spends less for claims than the premium dollars it takes in. With our obligation to the market of last resort in Utah, it has been difficult for WCF to achieve a combined ratio under 100 on a consistent basis. However, in the past few years, with the weakened investment climate, WCF has had to radically improve its combined ratio, going from in 2001 to in 2002 and to 99.1 in Most of this improvement has come from premium increases, reduced claims costs and operational efficiencies.

30 WE ARE SECURE POLICYHOLDERS SURPLUS Also stated as net worth, our policyholders surplus at the end of 2003 was $293.4 million. The surplus is a measure of our financial stability because it shows we have enough capital to support our operations. Our surplus, combined with our strong reserving practices, dominant market position and unparalleled local presence has led A.M. Best Company to assign WCF an A- (Excellent) rating for six consecutive years. CLAIMS RESERVES Reserving for future costs of current claims is complex and is in the world of actuaries. There are many things that could happen to alter the ultimate cost of a claim, such as medical inflation. Strong reserving practices enables us to cover injured workers for the life of their claims even when unforeseeable events occur. We protect you and your employees in the long term. $300 $650 $250 $600 $200 $550 $150 $100 $500 $50 $450 $0 POLICYHOLDERS SURPLUS, In millions of dollars. $400 CLAIMS RESERVES*, In Millions of dollars. *recorded gross reserves

31 OPERATING COSTS As we told our policyholders that premium increases were necessary, we also reigned in our operating costs. In 2003, there were only minimal cost increases to support customer service functions, such as online payroll reporting and additional claims adjusters. In 2003, we continued to gain efficiencies in our gross written premiums and the number of policies per full-time WCF employee. Your insurance coverage and claims are processed now more efficiently than ever. INVESTMENTS We continue to conservatively invest premiums to meet our obligations to injured employees. We invest only in high quality bonds, with other investments in stocks, real estate and mortgage loans. Our decision to continue stock investments during 2003 resulted in gains of $29 million. Like our premiums, our investments represent the best value over time. $700 $600 $500 Aaa/AAA Insured Aa/AA A/A US Government Guarantee $400 Aaa/AAA $300 $200 $100 US Agencies ( Aaa Quality ) $0 GROSS WRITTEN PREMIUMS PER FULL-TIME EMPLOYEE, In thousands of dollars. WCF BOND PORTFOLIO Credit Quality: Moody s, Standard & Poor s

32 BOARD OF DIRECTORS Melvin C. Green, Chair Mr. Green chairs WCF s Board of Directors. He spent 25 years in the insurance industry as founder and partner of Galbraith & Green, Inc., a health benefit plan administrator for self-funded employers. Mr. Green is a graduate of Brigham Young University. He serves on the executive, investment, compensation and marketing committees. His term expires in S. Camille Anthony Ms. Anthony is executive director of administrative services for the State of Utah. She holds a bachelor s degree and a juris doctorate from the University of Utah. Ms. Anthony serves on the audit committee and will remain on the Board for the duration of her position as executive director of administrative services. Robert D. Myrick, Vice Chair Mr. Myrick serves as vice chair of WCF s Board of Directors. He is president and chief operating officer of Morgan Stanley Bank. In addition, he has more than 30 years experience in the banking and financial industry. He holds a bachelor s degree and a master of business administration from the University of Utah. He serves on the executive, audit, investment and compensation committees. His term expires in Dallas H. Bradford Mr. Bradford is a retired certified public accountant. He spent 33 years with Arthur Anderson. In the Salt Lake office, he was head of the tax division and managing partner. Mr. Bradford is a graduate of Brigham Young University. He serves on the executive and audit committees. His term expires in 2006.

33 Howard E. Dransfield Mr. Dansfield is a retired Mobil Oil Corporation executive with more than 35 years experience in national sales and marketing. He is a graduate of Brigham Young University. He serves on the executive, compensation and marketing committees. His term expires in Lane A. Summerhays Mr. Summerhays is president and chief executive officer of WCF. He is a certified public accountant and holds a bachelor s degree and a master of business administration from the University of Utah. He serves on the executive, investment, marketing and compensation committees. Mr. Summerhays will remain on the Board for the duration of his tenure as CEO of WCF. Judd A. Turner Mr. Turner is an insurance broker and vice president at Fred A. Moreton & Company. He holds a bachelor s degree from Brigham Young University and a master of business administration from the University of Utah. Mr. Turner is also a certified property casualty underwriter. He serves on the audit, investment and marketing committees. His term expires in 2006.

34 CORPORATE OFFICERS Lane A. Summerhays President, Chief Executive Officer, Board Member Mr. Summerhays joined WCF in 1992 as president, chief executive officer and director. Prior to WCF, he was senior vice president and chief financial officer of ALTA Health Strategies. He also worked in public accounting for Deloitte Haskins and Sells and Arthur Andersen. A certified public accountant, Mr. Summerhays holds a bachelor s degree in accounting and a master of business administration from the University of Utah. Dennis V. Lloyd Senior Vice President, Chief Legal Counsel Mr. Lloyd joined WCF in 1981 and is responsible for adjudication, subrogation, insurance regulation, business operation and government relations. Prior to WCF, he worked for the Utah Legislative Auditor General. Mr. Lloyd holds a bachelor s degree in finance, a juris doctorate and master of business administration from the University of Utah. Thomas E. Callanan Senior Vice President, Chief Marketing and Underwriting Officer Mr. Callanan joined WCF in 1994 and is responsible for marketing and sales, underwriting and loss control, advertising and communications, and branch operations. In addition, he is president of WCF s subsidiary, Advantage Workers Compensation Insurance Company. Prior to WCF, Mr. Callanan was a senior executive with Guaranty National Corporation and CIGNA Corporation. He is a graduate of Wayne State University and has a master of business administration from the University of Utah. He is also a chartered property-casualty underwriter. Ray D. Pickup Senior Vice President, Chief Financial Officer Mr. Pickup joined WCF in 1993 and is responsible for investments, financial operations, human resources and information technology. Prior to WCF, he was vice president of finance at First Health Strategies and a senior audit manager for Ernst & Young and Touche Ross & Co. Mr. Pickup holds a bachelor s and master s degree from Brigham Young University and is a certified public accountant.

35 Robert H. Short Senior Vice President, Chief Operations Officer Mr. Short joined WCF in 1993 and is responsible for claims administration, medical management and special investigations. In addition, he is president of WCF s subsidiary Pinnacle Risk Management Services, a third-party administrator. Prior to WCF, he was senior vice president of administration at First Health Strategies. Mr. Short is a graduate of the University of Utah.




39 Financial Report Table of Contents Management s Discussion & Analysis Report of Independent Auditors Statements of Admitted Assets, Liabilities & Policyholders Surplus Statutory Basis Statements of Operations and Changes in Policyholders' Surplus Statutory Basis Statements of Cash Flows Statutory Basis Notes to Statutory Basis Financial Statements

40 Management's Discussion and Analysis of Financial Condition and Results of Operations YEAR ENDED DECEMBER 31, 2003 DESCRIPTION OF BUSINESS Workers Compensation Fund (the Company) is a statutorily created corporation owned by its policyholders. The Company provides disability and medical insurance coverage within the state of Utah s mandatory workers compensation system. The Company is governed by a seven-member Board of Directors, which consists of five public directors, the executive director of the State s administrative services department representing the state of Utah (the State) as a policyholder, and the Company s president. Three of the five public directors represent policyholders other than the State. Two of the five public directors are from the public in general. Four of the five public directors must have experience in at least one of the following professions: actuarial, accounting, investments, risk management, occupational safety, casualty insurance or legal. The plan for selecting the five public directors is outlined in the Company s bylaws and comports with the Company s enabling statute as well as Insurance Code requirements for the selection of directors of mutual insurance companies. The five public directors are appointed by the Governor of the State with the advice and consent of the Senate. The Company s Board of Directors, not the Governor or the State, has ultimate control of the Company, maintaining managerial, financial, and operational responsibility. The Company is subject to regulation and examination by the Utah Insurance Department. The Company functions as an autonomous mutual insurance company supported solely from its own revenues. All assets, debts and obligations of the Company are separate and distinct from the assets, debts and obligations of the State. Advantage WorkComp Services, Inc. (Advantage Services), a wholly-owned subsidiary, provides bill review, utilization review, medical case management and other services to workers compensation insurers and to companies that self-insure. The Company has a majority investment in Pinnacle Risk Management Services, Inc. (Pinnacle), a company licensed in several states to provide third-party administration of claims to self-insured clients. Advantage Workers Compensation Insurance Company (Advantage), a wholly owned subsidiary domiciled in the state of Indiana and licensed in 41 states and the District of Columbia, writes workers compensation coverage for the Company s Utah policyholders with operations in other states as well as customers of the Company s subsidiaries. The assets of Advantage consist of investments and premium receivables. Univantage Insurance Company (Univantage), a whollyowned subsidiary, licensed in Utah to write life and health and accident insurance, is currently inactive and has no policyholders. Assets of Univantage consist entirely of investments and cash. OVERVIEW Workers Compensation Fund had net income for the year ended December 31, 2003, of $49.0 million. For 2003, the Company recorded an underwriting gain of $2.1 million and a combined ratio of 99.1 %. The $46.9 million or 26% growth in net earned premium in 2003 resulted from increases in insured payroll, increases in aggregate premium rates, and decreases in premiums ceded. Improvements in underwriting results were due to lower loss and loss adjustment expenses relative to premium. Loss ratios improved due to decreases in claim severity and frequency. The Utah Insurance Department approved an NCCI recommended loss-cost premium rate decrease for 2003 of 7%, compared to a zero percent change in rates that was recommended and approved for In addition to the improvement in underwriting results, results also improved significantly due to a more favorable investment environment. Net investment income increased from $42.8 million to $44.4 million. Realized capital gains, including the impact of impairments, were $7.9 million in 2003 compared to realized capital losses of $25.9 million in Overall, policyholders surplus increased $73.6 million or 33.5% from December 31, 2002, to December 31, FINANCIAL POSITION Total cash and invested assets at December 31, 2003, were 2

41 Management's Discussion and Analysis of Financial Condition and Results of Operations $921.5 million, an increase of $124.9 million, or 15.7%, since December 31, The increase resulted primarily from the investment of net cash provided by operations of $95.3 million, a net change in unrealized capital gains of $24.4 million and net realized capital gains of $7.9 million. Net cash generated from operations was principally the result of $46.4 million of cash received from net investment income and $48.9 million of cash provided by underwriting during the year. The $95.3 million of cash provided from operations was used primarily to invest in bonds ($42.4 million), common stocks ($9.1 million), first lien mortgage loans ($4.3 million), and real estate ($0.1 million). Approximately $1.5 million was used in other uses of cash, and the remainder contributed to the $37.8 million increase in cash and short-term investment balances. The components of cash and invested assets consisted of the following: December Bonds 72.4% 78.0% Stocks 16.6% 14.5% Mortgage loans.8% 0.4% Real estate 3.2% 3.8% Cash, cash equivalents, and short-term investments 7.0% 3.3% 100.0% 100.0% The quality of the Company's investment portfolio remains excellent. At December 31, 2003, investments in bonds totaled $667.4 million. All of the Company's bonds are investment grade quality and rated NAIC Class 1 investments. The book value of investments in non-affiliated common stocks increased from $93.0 million at December 31, 2002, to $131.1 million at December 31, 2003, due to unrealized gains of $23.4 million, net additional investment of $9.1 million, and $5.6 million of realized gains. The two office buildings owned by the Company were fully occupied in The Company occupies 95% of one of the buildings with the remaining 5% leased to a tenant. The other building was fully leased to a tenant under an eightyear contract effective August 1, The Company participates in first lien mortgage loans in partnership with local community banks. Mortgage loan balances increased from $2.9 million to $7.3 million, primarily on a loan for restoration of a historical commercial building that is currently occupied and contracted for lease by the Internal Revenue Service. Accrued investment income decreased $0.9 million between December 31, 2002, and December 31, 2003, due to lower market yield rates and the timing of receipts. Short-term investments totaled $34.8 million and consisted of two NAIC exempt dollar valued mutual funds, for which the underlying securities are primarily U.S. government obligations, and one NAIC Class 1 dollar valued mutual fund. At December 31, 2003, uncollected premiums totaled $14.5 million, an increase of $5.0 million or 52.6% from December 31, 2002, due primarily to the 26.0% increase in the Company s earned premium revenue and additional earned but unbilled premiums. The Company is periodically assessed by the Utah Property and Casualty Insurance Guaranty Association to cover the deficits of insolvent insurance companies. These mandatory assessments may be recovered through reduction in future premium taxes in the five years following payment. As of December 31, 2003 and 2002, the Company has accrued $1.96 million and $2.07 million for guaranty fund assessments, respectively. At December 31, 2003 and 2002, deferred assets of $3.14 million and $3.64 million, respectively, were recorded for future premium tax deductions related to these assessments. In 2003 and 2002, $392,000 was offset each year against premium tax payments and a corresponding reduction was made to the deferred premium tax asset. During 2003, receivables from subsidiaries increased $1.1 million. The increase was primarily due to a $1.4 million loan to Pinnacle under a line of credit agreement. Amounts 3