Dear Member Self-Insurer:

We recognize and are proud that self-insurance is part of the storied history of workers’ compensation in our state. In 2009, membership in the North Carolina Self-Insurance Security Association (“Security Association”) included 123 individual employers and six group self-insurers. Our member businesses represent billions of dollars in payroll to employees and millions of dollars in premium tax payments to the State of North Carolina from a vast array of enterprises including, but not limited to universities, trucking companies, major retailers, hospitals, public utilities, hospitality, food services, financial institutions and health insurers. Self-insurance affords our member companies the flexibility to manage risk and exercise control over this important component of our business operations.

The 2009 recession presented challenges to every economic sector, especially to manufacturing and transportation. The Security Association remained alert to the financial condition of its member self-insurers as new insolvencies were presented and various alternatives to secure approximately $442 million in outstanding liabilities were considered.

Despite turbulent economic times for many industries, the Security Association has worked diligently to provide stewardship of the North Carolina Self-Insurance Security Fund which serves as the statutory safety net for all member self-insurers. Economic events in 2009 highlighted the value of an alternative security system for member self-insurers because of the cost savings of participating in an aggregate risk portfolio.

As of December 31, 2009, the Security Association had responded to 60 insolvencies in 23 years and has continued to position itself to address future challenges. We look forward to continuing to foster the important role of self-insurance in the North Carolina workers’ compensation system for the mutual benefit of North Carolina employers and their employees

The efforts to provide security for the hundreds of millions of dollars in outstanding liabilities led to the creation of the Association Aggregate Security System (“AASS”). The AASS affords financially stable individual self-insured employers the opportunity to pool their liabilities in a risk portfolio that is secured by the Security Association on an aggregate basis. The relative creditworthiness of each member self-insurer is reviewed annually. Member self-insurers that are excluded from the AASS because of their financial condition must submit an individual statutory deposit to the Department of Insurance.

Member self-insurers participating in the AASS pay an annual assessment to the Security Association. The proceeds of the annual AASS assessment are used to purchase the aggregate coverage and to increase the Security Fund pursuant to an Implementation Plan approved each year by the Department of Insurance. By pooling their liabilities, the participating self-insurers spread the aggregate risk and reduce the cost of security. The annual assessments are usually less costly than individual statutory deposits.

2009-2010 AAAS

In November 2009, the Security Association implemented the fourth annual AASS.  Each member self-insurer that participated in the AASS paid a portion of the cost of the aggregate security based on its credit rating and its pro-rata share of the aggregate workers’ compensation liabilities.  The 2009-2010 AASS assessment rates were identical to the 2008-2009 rates.   Participation in the AASS is mandated by statute pursuant to N.C. Gen. Stat. § 97-185(a1); however, member self-insurers that do not meet minimum participation requirements are excluded from the AASS and must post individual security.  The 2009-2010 AASS covered one hundred one (101) member self-insurers and twenty-two (22) member self-insurers were excluded based on credit ratings less than B2 (Moody’s).  [For a complete discussion of the 2009-2010 AASS please visit the Security Association website at www.ncsisa.org.]

As part of its due diligence and management of the Security Fund the Security Association has continued to evaluate the structure of the AASS, alternative means of protecting the aggregate member risk portfolio and mechanisms that may provide greater coverage for member self-insurers.

In December, 2009 the Security Association also assessed the six (6) group self-insurers.  The group self-insurers do not participate in the AASS.   No other assessments of individual or group self-insurers were needed in 2009.

Security Association Financials

Attached is a summary of the Security Association audited financial statements for the years 2007-2009. [A copy of the Security Association 2009 audited financial statements and the 2009 IRS Form 990 are available upon request.] Please note that the Security Association financial statements are stated on an accrual basis and its liabilities for those years are based on actuarial reports that includes incurred but not reported (“IBNR”) liabilities for insolvencies that have resulted in claims against the Security Association. The 2009 actuarial report reflects estimated claims liabilities of $6.733 million based upon insolvencies referred to the Security Association as of December 31, 2009.  Note that the estimated claims liabilities at December 31, 2009 are approximately $0.937 million less than the $7.670 million claims estimate at December 31, 2008.

Security Association assets are invested pursuant to an investment policy that is reviewed and approved annually by the North Carolina State Treasurer. The Security Association experienced investment gains of approximately $1.353 million in 2009 and net Security Association assets increased by approximately $2.79 million.

2009 Member Insolvencies

The following six member self-insurers filed for bankruptcy protection.  Each of the referenced debtors was afforded relief from the automatic stay during 2009 to pay their respective workers’ compensation liabilities incurred during the period of self-insurance:

The Security Association paid covered claims during 2009 brought against the insolvent group self-insurer, American Yarn Spinners.

During 2009, the Security Association addressed claims transferred from insolvent former individual member self-insurers, including but not necessarily limited to: Beacon Manufacturing Company, Collins & Aikman Corporation, Dan River, Inc., Joan Fabrics Corporation, Pillowtex, Inc., Dominion Yarns, Vintage Enterprises Inc., WestPoint Stevens, Inc.,   A complete list of member self-insurer insolvencies with active claims is detailed on the Security Association website.

In 2009, the Security Association realized recoveries as a creditor in bankruptcy proceedings, from surety bonds and excess policies totaling $888,978

Legislative Initiatives

In 2009, the North Carolina General Assembly amended the Security Association statutory mandate to further protect the self-insurance community with greater clarifications regarding assessments of group self-insurers, further safeguards for members if statutory deposits are required and additional guidance on financial information that must be submitted to the North Carolina Department of Insurance.

Board of Directors

Pursuant to the Plan of Operation, the Security Association will nominate and elect candidates for its Board of Directors at its 2010 Annual Meeting at 12:00 noon on July 22, 2010.  Board member, Stuart Driscoll of T. R. Driscoll, Inc. is Chair of the Nominating Committee that is reviewing potential candidates.  If you are interested in serving or want to recommend a candidate for the Board of Directors, please contact Mr. Driscoll on or before May 15, 2010 at:

T. R. Driscoll, Inc.
P.O. Drawer 1549
Lumberton, NC 28359
sdriscoll@trdriscoll.com
(910) 738-6226

The Security Association will elect Directors at its Annual Meeting at 12:00 noon on July 22, 2010.

Again, thank you for your continued support of the self-insurance industry.  As always, on behalf of the Security Association Board of Directors, we welcome your insight and participation.

Sincerely,

NORTH CAROLINA SELF-INSURANCE SECURITY ASSOCIATION

/s/ Thomas R. Yarboro

Thomas R. Yarboro
Chairman, Board of Directors