Dear Member Self-Insurer:

In 2010, the members of the North Carolina Self-Insurance Security Association (“Security Association”) included 117 individual employers engaged in a vast array of enterprises including but not necessarily limited to: universities, trucking companies, major retailers, hospitals, public utilities, hospitality, food services, financial institutions, health insurers and six group self-insurers. Member self-insurers remit billions of dollars in payroll to employees and millions of dollars in premium tax payments to the State of North Carolina. Self-insuring workers’ compensation liabilities remains an important business tool in North Carolina, allowing our member companies the flexibility to directly manage and control this important business risk.

There were three new member-insurers that were licensed by the North Carolina Department of Insurance (“NCDOI”) during the year and one application was pending at the end of 2010 whose license was issued during the first quarter of 2011.

We are pleased to report that 2010 marked a year of significant accomplishment for the Security Association. During 2010, the Security Association retained an Executive Director and revised its risk management strategy by investigating and purchasing $25 million of aggregate reinsurance, with a $10 million aggregate retention, that covers both individual company and group member insolvencies. The Security Association also designed and obtained NCDOI approval for the 2010-2011 Association Aggregate Security System (“AASS”) that provides insolvency protection for individual member self-insurers in lieu of individual company deposits, surety bonds or letters of credit. The Association continued its fiscal stewardship of the Security Fund and realized an increase of approximately $3.4 million in net assets in 2010.

Experience has shown that the demands of a modern economy sometimes results in member insolvencies. In the 24-year history of the Security Association, we have responded to 62 insolvencies, including two new insolvencies in 2010.

The 2010 activities of the Security Association are discussed in more detail as follows:

In May, 2010 the Security Association contracted with Preslar Risk Services, Inc. for the services of Dewey Preslar as Executive Director. He was instrumental in the negotiation and placement of the Security Association aggregate insurance coverage and structuring and obtaining NCDOI approval for the 2010 AASS. Members may communicate with the Executive Director through the Security Association website, www.ncsisa.org.

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 to determine eligibility to participate in the AASS and the AASS assessment rate for each eligible member. Member self-insurers may be excluded from participating in the AASS on the basis of creditworthiness or previous defaults. In addition, newly licensed individual self-insurers must be a member of the Security Association for one year before they are considered for participation in the AASS. Member self-insurers that are excluded from the AASS 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 add to the Security Fund pursuant to an Implementation Plan approved each year by the Department of Insurance. By pooling their liabilities, the participating individual self-insurers spread the aggregate risk and reduce the cost of security. It is the intent of the Security Association that the annual AASS assessments should be less costly than providing individual statutory deposits. Group self-insurers do not participate in the AASS.

In November 2010, the Security Association implemented the fifth 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. For the first time, aggregate reinsurance was the primary AASS security instrument. The aggregate reinsurance was supplemented by the purchase of credit instruments covering a limited number of member self-insurers. The 2010-2011 AASS assessment rates were less than to the 2009-2010 rates.

Participation in the AASS is mandated by statute pursuant to N.C. Gen. Stat. § 97-185(a1); however the Board of the Security Association has discretion to establish a minimum threshold for participation in the AASS. Member self-insurers that do not meet minimum participation requirements are excluded from the AASS and must post individual security. For the 2010-2011 AASS the Security Association determined that there would be no minimum credit rating for participation. Therefore, the 2010-2011 AASS included 114 member self-insurers. Two member self-insurers were excluded because they had not satisfied the 12 month membership requirement for newly licensed self-insurers. [For a description of the 2010-2011 AASS please visit the Security Association website at www.ncsisa.org.

In November, 2010 the Security Association also assessed the six (6) group self-insurers. The group self-insurers do not participate in the AASS. No other individual or group self-insurers assessments were made in 2010.

Attached is a summary of the Security Association audited financial statements for the years ended December 31, 2008-2010. [The 2010 Security Association audited financial statements and the 2010 IRS Form 990 filed by the Security Association 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 include’ incurred but not reported (“IBNR”) liabilities for insolvencies that have resulted in claims against the Security Association. The 2010 actuarial report reflects estimated claims liabilities of $6.3 million based upon insolvencies referred to the Security Association as of December 31, 2010. The estimated claims liabilities at December 31, 2010 are approximately $0.4 million less than the $6.7 million claims estimate at December 31, 2009.

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 $1.0 million in 2010 and net Security Association assets increased by approximately $3.4 million.

The following two (2) member self-insurers filed for bankruptcy protection during 2010. Each of the referenced debtors was afforded relief from the automatic stay during 2010 to pay their respective workers’ compensation liabilities incurred during the period of self-insurance:

[Townsends subsequently defaulted on its obligations to pay its workers’ compensation liabilities and its claims were referred to the Security Association in March, 2011.]

During 2010, the Security Association addressed claims transferred from insolvent former member self-insurers, including but not necessarily limited to: American Yarn Spinners Self-Insurance Fund, Beacon Manufacturing Company, Collins & Aikman, Dan River, Dominion Yarns, Fleetwood Enterprises, Joan Fabrics Corporation, National Workers’ Compensation Fund, Pillowtex Inc., Vintage Enterprises and WestPoint Stevens, Inc. A complete list of member self-insurer insolvencies with active claims is detailed on the Security Association website.

In 2010, the Security Association realized recoveries as a creditor in bankruptcy proceedings, from surety bonds and excess policies totaling $1.2 million.

In 2010, the Security Association responded to issues arising out of former member self-insurer insolvencies including: BI-LO, LLC, Cone Mills, Crescent Resources, Flying J, Freymiller Trucking, Inc., General Motors, Interstate Brands, Orbit Industries and Wellman, Inc.

                                                      Group Self-Insurers

During 2010, the Security Association continued to work with the NCDOI to address the assessment of former member-employers of the American Yarn Spinners Self Insurance Fund as well as issues relating to the closure of the estate and the outstanding Security Association claim. In addition, the Security Association worked with the NCDOI on a potential Loss Portfolio Transfer and other disputed issues in connection with the Rehabilitation of the Phoenix Fund.

One fund, Carolina Electrical Cooperatives Self-Insurance Fund submitted a plan of dissolution which was approved by the NCDOI in December of 2010.

                                                      Legislative Initiatives

In 2010, the Security Association worked with the NCDOI on draft legislation that would, in pertinent part, remove the statutory requirements that the Commissioner of Insurance must approve the Security Association Plan of Operation, the election of the Security Association Board of Directors and the annual AASS Implementation Plan. The NCDOI has presented the draft legislation to the 2011 North Carolina General Assembly and legislative action is pending.

                                                      Board of Directors

Pursuant to the Plan of Operation, the Security Association will nominate and elect candidates for its Board of Directors at its 2011 Annual Meeting at 12:00 noon on July 21, 2011. Board member, Tia Schweikert of Lowe’s Companies, 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 Ms. Schweikert on or before May 31, 2011 at:

                                                      Lowe's Companies, Inc.
                                                      1000 Lowe's Boulevard
                                                      Mooresville, NC 28177
                                                   tia.1.schweikert@lowes.com
                                                            (704) 758-3055

The Security Association will elect Directors at its Annual Meeting at 12:00 noon on July 21, 2011.

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

                                                             
                                                            Thomas R. Yarboro
                                                            Chairman, Board of Directors

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