Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 1 TEXAS MUTUAL INSURANCE COMPANY Tel: 512-224-3800 AMB#: 11453 FEIN#: 74-2615873 6210 East Highway 290, Austin, Texas, United States 78723 Web: www.texasmutual.com Fax: 800-359-0650 NAIC#: 22945 BEST'S RATING The company is assigned the classification of NR-5 (Not Formally Followed) as it is a company that A. M. Best gathers information on and reports on, but is not formally evaluated for the purposes of assigning a rating. FIVE YEAR RATING HISTORY Best's Date Rating 06/20/08 NR-5 06/21/07 NR-5 06/02/06 NR-5 06/23/05 NR-5 06/25/04 NR-3 KEY FINANCIAL INDICATORS Statutory Data ($000) Direct Net Pretax Period Premiums Premiums Operating Ending Written Written Income 2003 674,353 665,257 95,389 2004 714,040 706,763 78,543 2005 701,956 696,850 61,529 2006 743,095 740,023 24,069 2007 751,916 751,005 31,448 09/2007 563,452 562,443-6,062 09/2008 570,422 572,127 22,352 Statutory Data ($000) Total Policy- Period Net Admitted holders' Ending Income Assets Surplus 2003 122,843 2,182,174 857,123 2004 114,666 2,605,486 1,040,257 2005 113,229 2,899,583 1,137,438 2006 68,887 3,303,272 1,261,597 2007 68,120 3,603,806 1,306,020 09/2007 33,566 3,524,466 1,298,636 09/2008 8,443 3,521,164 1,089,993
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 2 Profitability Leverage Liquidity Inv. Pretax Overall Oper. Period Comb. Yield ROR NA Inv NPW Net Liq Cash- Ending Ratio (%) (%) Lev to PHS Lev (%) flow (%) 2003 96.0 4.1 14.5 80.2 0.8 2.3 164.7 174.6 2004 100.3 3.7 11.2 84.2 0.7 2.2 166.5 169.3 2005 105.5 3.7 8.6 74.4 0.6 2.2 164.6 156.0 2006 113.1 4.2 3.3 78.5 0.6 2.2 161.8 155.6 2007 114.7 4.5 4.3 77.0 0.6 2.3 156.8 146.2 5-Yr Avg 106.2 4.1 8.2 09/2007 120.0 XX -1.1 XX 0.6 2.3 158.4 134.1 09/2008 117.4 XX 3.9 XX 0.7 2.9 144.8 126.1 BUSINESS REVIEW Texas Mutual Insurance Company, formerly The Texas Workers Compensation Insurance Fund, was created in August 1991, through the passage of House Bill 62 by the Texas legislature, operates as a domestic mutual insurance company licensed to sell workers compensation insurance in Texas. The company was created to operate competitively in the Texas workers compensation insurance market and became the insurer of last resort, beginning January 1, 1994, when the Texas Workers Compensation Insurance Facility ceased writing new workers compensation insurance policies. The company was capitalized by a $300 million bond issue authorized by state law. Repayment of the Revenue Bonds was to be provided through maintenance taxes assessed on all insurance companies authorized and admitted to write workers compensation insurance in the state of Texas. As of December 31, 1999, the company had defeased or provided for reimbursement all amounts pertaining to the Revenue Bonds. The company operates through a nine member Board of Directors. Four of the Board members are appointed by policyholders with the remaining five members, including the chairman, appointed by the Governor and confirmed by the Senate. 2007 BUSINESS PRODUCTION AND PROFITABILITY ($000) % of Pure Loss Product Premiums Written Total Loss & LAE Line Direct Net NPW Ratio Reserves Workers' Comp 751,916 751,005 100.0 65.4 1,886,322 Totals 751,916 751,005 100.0 65.4 1,886,322 Major 2007 Direct Premium Writings By State ($000): Texas, $751,916 (100.0%). PROFITABILITY ANALYSIS
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 3 Company Industry Composite Pretax Return Pretax Return Period ROR on Comb. Oper. ROR on Comb. Oper. Ending (%) PHS(%) Ratio Ratio (%) PHS(%) Ratio Ratio 2003 14.5 32.7 96.0 84.9 6.2 22.8 103.4 92.4 2004 11.2 19.4 100.3 88.8 9.7 17.9 100.7 89.7 2005 8.6 9.0 105.5 92.2 15.0 17.7 99.2 85.8 2006 3.3 10.6 113.1 96.5 15.9 15.5 100.8 83.1 2007 4.3 2.6 114.7 95.0 15.8 11.4 104.4 83.4 5-Yr Avg 8.2 13.0 106.2 91.6 12.4 16.2 101.6 87.0 09/2007-1.1 XX 120.0 100.5 XX XX XX XX 09/2008 3.9 XX 117.4 95.9 XX XX XX XX UNDERWRITING EXPERIENCE Net Undrw Loss Ratios Expense Ratios Income Pure Loss & Net Other Total Div. Comb Year ($000) Loss LAE LAE Comm Exp. Exp. Pol. Ratio 2003 24,968 62.5 8.5 71.0 9.9 11.1 21.0 4.0 96.0 2004-3,274 61.7 9.2 70.9 10.7 11.1 21.8 7.6 100.3 2005-34,725 68.4 5.6 74.0 11.5 12.1 23.6 7.9 105.5 2006-97,265 65.6 8.4 74.0 12.0 12.1 24.1 15.0 113.1 2007-112,571 65.4 6.5 71.9 12.2 11.6 23.8 19.0 114.7 5-Yr Avg 64.8 7.6 72.4 11.3 11.6 22.9 10.9 106.2 09/2007-113,191 62.0 9.9 71.9 XX XX 23.4 24.7 120.0 09/2008-99,584 55.3 9.5 64.8 XX XX 24.0 28.5 117.4 INVESTMENT INCOME ANALYSIS ($000) Company Net Realized Unrealized Inv Capital Capital Year Income Gains Gains 2003 72,913 27,454 118,602 2004 80,936 36,123 69,307 2005 95,015 51,700-15,686 2006 121,916 44,818 57,908 2007 143,827 36,673-35,227 09/2007 106,752 39,628 7,209 09/2008 122,097-13,909-208,872
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 4 Company Industry Composite_ Inv Inc Inv Total Inv Inc Inv Growth Yield Return Growth Yield Year (%) (%) (%) (%) (%) 2003 3.9 4.1 13.0-5.9 3.9 2004 11.0 3.7 8.7 10.8 3.8 2005 17.4 3.7 5.2 17.5 3.9 2006 28.3 4.2 8.0 18.5 4.2 2007 18.0 4.5 4.5 13.9 4.4 5-Yr Avg 16.7 4.1 7.3 11.5 4.1 09/2007 XX XX 4.9 XX XX 09/2008 XX XX -2.9 XX XX INVESTMENT PORTFOLIO ANALYSIS 2007 Inv Asset Assets % of Invested Assets Annual Class ($000) 2007 2006 % Chg Long-Term bonds 2,385,475 69.8 68.2 11.7 Stocks 816,685 23.9 27.0-3.6 Affiliated Investments 21,698 0.6 0.6 13.0 Other Inv Assets 191,565 5.6 4.2 46.5 Total 3,415,422 100.0 100.0 9.0 2007 BOND PORTFOLIO ANALYSIS % of Mkt Val Avg. Class Class Struc. Struc. Asset Total to Stmt Maturity 1-2 3-6 Secur. Secur. Class Bonds Val(%) (Yrs) (%) (%) (%) (% of PHS) Governments 21.1 2.7 6.6 100.0 States, terr & poss 20.7 0.9 6.0 100.0 48.1 19.1 Corporates 58.2 0.2 5.1 90.8 9.2 18.0 20.1 Total all bonds 100.0 0.9 5.6 94.6 5.4 20.4 39.2 CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Growth Pretax Total Net Operating Inv. Contrib. Year Income Gains Capital 2003 95,389 146,056 2004 78,543 105,430 2005 61,529 36,014 2006 24,069 102,726 2007 31,448 1,446 5-Yr Total 290,978 391,671 09/2007-6,062 46,837 09/2008 22,352-222,781
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 5 Source of Surplus Growth Other, Change PHS Net of in Growth Year Tax PHS (%) 2003-3,994 237,451 38.3 2004-839 183,134 21.4 2005-362 97,181 9.3 2006-2,636 124,159 10.9 2007 11,530 44,423 3.5 5-Yr Total 3,700 686,348 09/2007-3,736 37,040 2.9 09/2008-15,598-216,027-16.5 QUALITY OF SURPLUS ($000) % of PHS Dividend Requirements Year- Cap Stk/ Un- Stock- Div to Div to End Contrib. assigned holder POI Net Inc. Year PHS Cap. Other Surplus Divs (%) (%) 2003 857,123 100.0 2004 1,040,257 100.0 2005 1,137,438 100.0 2006 1,261,597 100.0 2007 1,306,020 100.0 09/2007 1,298,636 100.0 09/2008 1,089,993 100.0 LEVERAGE ANALYSIS Company Industry Composite NPW to Reserves Net Gross NPW to Reserves Net Gross Year PHS to PHS Lev Lev PHS to PHS Lev Lev 2003 0.8 1.1 2.3 2.4 1.6 3.4 5.8 6.4 2004 0.7 1.1 2.2 2.3 1.4 3.1 5.3 5.9 2005 0.6 1.2 2.2 2.2 1.2 3.0 4.8 5.3 2006 0.6 1.3 2.2 2.3 0.9 2.7 4.3 4.7 2007 0.6 1.4 2.3 2.4 0.8 2.5 3.9 4.3 09/2007 0.6 1.4 2.3 XX XX XX XX XX 09/2008 0.7 1.9 2.9 XX XX XX XX XX PREMIUM COMPOSITION & GROWTH ANALYSIS
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 6 Period DPW GPW Ending ($000) (% Chg) ($000) (% Chg) 2003 674,353 10.7 674,417 9.7 2004 714,040 5.9 716,113 6.2 2005 701,956-1.7 706,591-1.3 2006 743,095 5.9 750,173 6.2 2007 751,916 1.2 760,489 1.4 5-Yr CAGR 4.3 4.3 5-Yr Change 23.5 23.7 09/2007 563,452-0.1 569,549 0.0 09/2008 570,422 1.2 579,285 1.7 Period NPW NPE Ending ($000) (% Chg) ($000) (% Chg) 2003 665,257 10.0 658,504 35.0 2004 706,763 6.2 701,188 6.5 2005 696,850-1.4 716,698 2.2 2006 740,023 6.2 735,611 2.6 2007 751,005 1.5 729,530-0.8 5-Yr CAGR 4.4 8.4 5-Yr Change 24.2 49.6 09/2007 562,443 0.1 546,787-0.7 09/2008 572,127 1.7 568,213 3.9 LOSS & ALAE RESERVE DEVELOPMENT: CALENDAR YEAR ($000) Original Developed Develop. Develop. Develop. Unpaid Unpaid Calendar Loss Reserves to to to Reserves Resrv. to Year Reserves Thru 2007 Orig.(%) PHS (%) NPE (%) @12/2007 Dev.(%) 2002 697,631 964,260 38.2 43.0 197.7 614,929 63.8 2003 897,838 1,087,701 21.1 22.2 165.2 749,151 68.9 2004 1,113,457 1,236,984 11.1 11.9 176.4 914,013 73.9 2005 1,350,550 1,380,247 2.2 2.6 192.6 1,138,731 82.5 2006 1,615,918 1,596,411-1.2-1.5 217.0 1,436,496 90.0 2007 1,857,020 1,857,020 254.6 1,857,020 100.0 LOSS & ALAE RESERVE DEVELOPMENT: ACCIDENT YEAR ($000) Original Developed Develop. Unpaid Acc Yr. Acc Yr. Accident Loss Reserves to Reserves Loss Comb Year Reserves Thru 2007 Orig.(%) @12/2007 Ratio Ratio 2002 257,112 238,825-7.1 92,028 66.0 92.3 2003 363,296 282,444-22.3 134,222 58.2 83.2 2004 368,344 317,167-13.9 164,862 60.1 89.4 2005 386,727 335,232-13.3 224,718 63.0 94.5 2006 418,097 380,474-9.0 297,765 68.0 107.0 2007 420,524 420,524 420,524 76.7 119.5 ASBESTOS & ENVIRONMENTAL (A&E) RESERVES ANALYSIS
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 7 Company Net A&E Reserve Net Reserves Retention IBNR Year ($000) (%) Mix (%) 2003 218 100.0 2004 194 100.0 2005 166 100.0 2006 144 100.0 2007 119 100.0 Company Industry Composite Comb Comb Comb Comb Survival Ratio Ratio Survival Ratio Ratio Ratio Impact Impact Ratio Impact Impact Year (3 yr) (1 yr) (3 yr) (3 yr) (1 yr) (3 yr) 2003 0.1 1.9 2004 0.1 1.4 2005 0.4 0.1 0.1 8.5 1.0 1.4 2006 0.3 0.1 0.1 7.9 0.5 0.9 2007 0.3 0.1 0.1 8.6 0.7 0.7 CEDED REINSURANCE ANALYSIS ($000) Company Industry Composite Ceded Business Rein Rec Ceded Business Rein Rec Ceded Reins Retention to PHS Reins to Retention to PHS Reins to Year Total (%) (%) PHS (%) (%) (%) PHS(%) 2003 58,270 98.6 5.7 6.8 91.2 51.7 66.4 2004 83,492 98.7 7.1 8.0 91.4 42.6 55.8 2005 78,186 98.6 6.0 6.9 90.7 36.9 48.5 2006 72,746 98.6 5.0 5.8 90.6 32.2 41.4 2007 80,825 98.8 5.5 6.2 90.2 30.0 38.8 2007 REINSURANCE RECOVERABLES ($000) Paid & Total Unpaid Unearned Other Reins Losses IBNR Premiums Recov* Recov US Insurers 47,961 13,955 61,916 Pools/Associations 1,757 521 2,278 Other Non-US 5,521 1,627 7,148 Total (ex US Affils) 55,239 16,103 71,342 Grand Total 55,239 16,103 71,342 * Includes Commissions less Funds Withheld INVESTMENT LEVERAGE ANALYSIS (% OF PHS)
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 8 Company Industry Composite Class Real Other Non-Affl Class 3-6 Estate/ Invested Common Inv. Affil 3-6 Common Year Bonds Mtg. Assets Stocks Lev. Inv. Bonds Stocks 2003 13.2 1.9 65.1 80.2 4.9 38.4 2004 12.6 1.8 69.8 84.2 3.8 33.4 2005 10.7 63.7 74.4 1.8 3.6 32.3 2006 9.9 1.6 67.0 78.5 1.5 3.3 29.4 2007 10.3 4.3 62.4 77.0 1.7 3.1 27.8 LIQUIDITY ANALYSIS Company Industry Composite Gross Gros Quick Current Overall Agents Bal Quick Current Overall Agents Ba Year Liq (%) Liq (%) Liq (%) to PHS(%) Liq (%) Liq (%) Liq (%) to PHS(% 2003 55.5 150.8 164.7 1.7 35.6 110.7 123.5 9. 2004 71.7 154.3 166.5 1.3 37.0 113.7 125.3 6. 2005 67.8 154.2 164.6 1.0 39.4 115.3 126.7 6. 2006 63.7 152.5 161.8 1.1 38.2 117.7 128.7 5. 2007 55.1 147.7 156.8 1.3 35.5 120.0 131.1 5. 09/2007 XX 149.0 158.4 1.0 XX XX XX XX 09/2008 XX 135.4 144.8 1.4 XX XX XX XX CASH FLOW ANALYSIS ($000) Company Industry Composite_ Underw Oper Net Underw Oper Underw Oper Cash Cash Cash Cash Cash Cash Cash Year Flow Flow Flow Flow (%) Flow (%) Flow (%) Flow (%) 2003 238,035 316,321-46,951 156.1 174.6 137.8 149.2 2004 235,386 326,011-5,593 150.1 169.3 138.2 149.9 2005 187,615 290,433-27,496 136.2 156.0 131.9 147.0 2006 177,563 307,876 51,331 132.0 155.6 118.4 133.3 2007 132,143 277,302 20,786 122.0 146.2 111.3 129.4 09/2007 56,978 165,535 16,778 111.7 134.1 XX XX 09/2008 20,465 139,602 5,063 103.8 126.1 XX XX HISTORY The Texas Workers Compensation Insurance Fund was formed in August 1991 through the passage of House Bill 62 by the Texas Legislature as a governmental corporation licensed to sell workers' compensation insurance in Texas effective January 1, 1992. The Texas Workers' Compensation Insurance Fund was created to operate competitively in the Texas workers' compensation insurance market and became the insurer of last resort, beginning January 1, 1994, when the Texas Workers' Compensation Insurance Facility ceased writing new workers' compensation insurance policies. Effective September 1, 2001, the Texas Workers' Compensation Insurance Fund became Texas Mutual Insurance Company (the "company") through the passage of Texas House Bill 3458. The legislation mandates that the company operate as a domestic mutual insurance company with the consent of the Commissioner of Insurance to write workers' compensation insurance in the State of Texas. Although the Texas Legislature established the company, all monies, revenues and assets belong solely to the company and may not be borrowed or appropriated by the State of Texas. In addition, as a mutual organization, the company is no longer subject to the Texas Sunset Act, Chapter 325, of the Government Code. The company is treated by the State of Texas as a commercial insurance company subject to the rules and regulations of the Texas Department of Insurance ("TDI"). The company will continue to serve as a competitive force in the Texas workers' compensation insurance market and as the insurer
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 9 of last resort. MANAGEMENT The Texas Workers' Compensation Insurance Fund had a nine-member Board of Directors (the "Board") made up of Texas business employers who were appointed by the Governor and confirmed by the Senate. Effective September 1, 2001, the company continues to have a nine-member Board; however, the Governor appoints only five members, including the chairman, and the company's policyholders elect the remaining four. Legislation prohibits the appointment of any person who has a potential conflict of interest because of other involvement within the insurance industry. Officers: President, Russell R. Oliver; Chief Operating Officer, Ronald O. Wright; Senior Vice Presidents, Perry M. Barron, Lisa M. Corless, Elliot S. Flood, Terry L. Frakes, Cecily A. Gallagher, L. Randall Johnson, William A. McLellan, Jr., Mary B. Nichols. Directors: Robert C. Barnes, Judy S. Broussard, Richard A. Cooper, Jay L. Eisen, Delia M. Reyes, James D. Ross, George Wesch, Jr., Charles H. Whiteside. REGULATORY An examination of the financial condition was made as of December 31, 2004 by the Insurance Department of Texas. The 2007 annual independent audit of the company was conducted by Deloitte & Touche, LLP. The annual statement of actuarial opinion is provided by Mark M. Mulvaney, Milliman USA. The company is licensed in Texas. TERRITORY BALANCE SHEET ($000) ADMITTED ASSETS 12/31/2007 12/31/2006 2007 % 2006 % Bonds 2,385,475 2,135,174 66.2 64.6 Preferred stock 1,493 1,505 0.0 0.0 Common stock 815,191 845,695 22.6 25.6 Cash & short-term invest 106,586 85,800 3.0 2.6 Other non-affil inv asset 56,444 20,495 1.6 0.6 Real estate, offices 21,698 19,195 0.6 0.6 Total invested assets 3,386,888 3,107,864 94.0 94.1 Premium balances 180,844 163,228 5.0 4.9 Accrued interest 28,535 24,449 0.8 0.7 All other assets 7,539 7,731 0.2 0.2 Total assets 3,603,806 3,303,272 100.0 100.0
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 10 LIABILITIES & SURPLUS 12/31/2007 12/31/2006 2007 % 2006 % Loss & LAE reserves 1,886,322 1,651,802 52.3 50.0 Unearned premiums 341,433 319,958 9.5 9.7 Conditional reserve funds 30 161 0.0 0.0 All other liabilities 70,001 69,755 1.9 2.1 Total liabilities 2,297,786 2,041,676 63.8 61.8 Unassigned surplus 1,306,020 1,261,597 36.2 38.2 Total policyholders' surplus 1,306,020 1,261,597 36.2 38.2 Total liabilities & surplus 3,603,806 3,303,272 100.0 100.0 SUMMARY OF 2007 OPERATIONS ($000) FUNDS PROVIDED STATEMENT OF INCOME 12/31/2007 FROM OPERATIONS 12/31/2007 Premiums earned 729,530 Premiums collected 732,297 Losses incurred 476,977 Benefit & loss related pmts 242,968 LAE incurred 47,723 Undrw expenses incurred 178,940 LAE & undrw expenses paid 218,805 Div to policyholders 138,462 Div to policyholders 138,380 Net underwriting income -112,571 Undrw cash flow 132,143 Net investment income 143,827 Investment income 144,968 Other income/expense 191 Other income/expense 191 Pre-tax oper income 31,448 Pre-tax cash operations 277,302 Realized capital gains 36,673 Net income 68,120 Net oper cash flow 277,302 INTERIM BALANCE SHEET ($000)
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 11 ADMITTED ASSETS 03/31/2008 06/30/2008 09/30/2008 Cash & short term invest 37,872 136,104 111,649 Bonds 2,514,327 2,517,714 2,439,717 Preferred stock 1,492 1,492 1,490 Common stock 767,477 737,682 666,110 Other investments 79,148 81,949 66,249 Total investments 3,400,317 3,474,939 3,285,214 Premium balances 199,720 205,291 198,121 Reinsurance funds 995 1,253 1,809 Accrued interest 31,072 29,063 30,578 All other assets 6,011 5,735 5,442 Total assets 3,638,115 3,716,281 3,521,164 LIABILITIES & SURPLUS 03/31/2008 06/30/2008 09/30/2008 Loss & LAE reserves 1,954,273 2,010,117 2,023,645 Unearned premiums 358,002 361,678 345,346 Conditional reserve funds 30 30 30 All other liabilities 41,949 202,590 62,149 Total liabilities 2,354,254 2,574,414 2,431,171 Unassigned surplus 1,283,860 1,141,867 1,089,993 Policyholders' surplus 1,283,860 1,141,867 1,089,993 Total liabilities & surplus 3,638,115 3,716,281 3,521,164 INTERIM INCOME STATEMENT ($000) Period Ended Period Ended Increase/ 09/30/2008 09/30/2007 Decrease Premiums earned 568,213 546,787 21,426 Losses incurred 314,455 339,036-24,582 LAE incurred 53,794 54,228-434 Underwriters expenses incurred 137,419 131,621 5,798 Div to policyholders 162,130 135,094 27,036 Net underwriting income -99,584-113,191 13,607 Net investment income 122,097 106,752 15,344 Other income/expenses -161 377-538 Pre-tax operating income 22,352-6,062 28,414 Realized capital gains -13,909 39,628-53,537 Net income 8,443 33,566-25,123 INTERIM CASH FLOW ($000)
Best's Insurance Reports - Property Casualty, US, 2008 Edition (2008 9-Month Supplement, Version 2008.3) Page 12 Period Ended Period Ended Increase/ 09/30/2008 09/30/2007 Decrease Premiums collected 554,733 543,038 11,694 Benefit & loss related pmts 193,329 179,169 14,160 Undrw expenses paid 182,602 175,093 7,509 Div to policyholders 158,337 131,798 26,539 Underwriting cash flow 20,465 56,978-36,513 Investment income 119,848 108,180 11,667 Other income/expense Pre-tax cash operations Net oper cash flow -711 377-1,088 139,602 165,535-25,934 139,602 165,535-25,934