CompSource Oklahoma statutory financial statements : with independent auditors' report thereon.

              COMPSOURCE OKLAHOMA
Statutory Financial Statements
December 31, 2010 and 2009
(With Independent Auditors’ Report Thereon)
COMPSOURCE OKLAHOMA
Table of Contents
Page
Independent Auditors’ Report 1
Statutory Statements of Admitted Assets, Liabilities, and Surplus, December 31, 2010 and 2009 3
Statutory Statements of Operations and Surplus, Years ended December 31, 2010 and 2009 4
Statutory Statements of Cash Flow, Years ended December 31, 2010 and 2009 5
Notes to Statutory Financial Statements 6
Schedules
1 – Summary Schedule of Investments, December 31, 2010 26
2 – Schedule of Investment Risk Interrogatories, December 31, 2010 27
3 – Schedule of Reinsurance Interrogatories, December 31, 2010 29
Independent Auditors’ Report
The Board of Managers
CompSource Oklahoma:
We have audited the accompanying statutory statements of admitted assets, liabilities, and surplus of
CompSource Oklahoma (CompSource), a component unit of the State of Oklahoma, as of December 31,
2010 and 2009, and the related statutory statements of operations and surplus, and cash flow for the years
then ended. These financial statements are the responsibility of CompSource’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of CompSource’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
As described more fully in note 1 to the statutory financial statements, CompSource prepared these
statutory financial statements using accounting practices prescribed or permitted by the Oklahoma
Insurance Department or prescribed by Title 85 of the Oklahoma Statutes, which practices differ from
U.S. generally accepted accounting principles. The effects on the financial statements of the variances
between the statutory basis of accounting and U.S. generally accepted accounting principles also are
described in note 15.
In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial
statements referred to above do not present fairly, in conformity with U.S. generally accepted accounting
principles, the financial position of CompSource Oklahoma as of December 31, 2010 and 2009, or the
results of its operations or its cash flows for the years then ended.
Also, in our opinion, the financial statements referred to above present fairly, in all material respects, the
admitted assets, liabilities, and surplus of CompSource Oklahoma as of December 31, 2010 and 2009, and
the results of its operations and its cash flow for the years then ended, on the basis of accounting described
in note 1.
As discussed in note 1 to the statutory financial statements, CompSource adopted the revised guidance in
Statement of Statutory Accounting Principles (SSAP) No. 91R, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and the provisions of SSAP No. 100, Fair Value
Measurements, in 2010 and SSAP No. 43R, Loan-Backed and Structured Securities, in 2009.
KPMG LLP
210 Park Avenue, Suite 2850
Oklahoma City, OK 73102-5683
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.
2
Our audits were made for the purpose of forming an opinion on the statutory financial statements taken as a
whole. The supplementary information included on the summary schedule of investments, schedule of
investment risk interrogatories, and schedule of reinsurance interrogatories is presented for purposes of
additional analysis and is not a required part of the statutory financial statements, but is information
required to be presented. Such information has been subjected to the auditing procedures applied in the
audits of the statutory financial statements and, in our opinion, are fairly stated, in all material respects, in
relation to the statutory financial statements taken as a whole.
March 25, 2011
3
COMPSOURCE OKLAHOMA
Statutory Statements of Admitted Assets, Liabilities, and Surplus
December 31, 2010 and 2009
Admitted Assets 2010 2009
Investments:
Debt securities, at amortized cost (fair value of $986,299,969 and
$934,596,898 at December 31, 2010 and 2009, respectively) $ 916,757,027 894,229,351
Equity securities, at fair value (cost of $120,095,037 and
$115,371,738 at December 31, 2010 and 2009, respectively) 191,772,083 153,161,014
Cash and short-term investments, at cost, which approximates
fair value 65,659,997 74,156,454
Total cash and investments 1,174,189,107 1,121,546,819
Accrued investment income 9,773,164 9,689,805
Premiums due and other receivables (less allowance for doubtful
accounts of $3,057,817 and $2,681,084 at December 31,
2010 and 2009, respectively) 46,981,156 39,522,650
Earned but unbilled premiums 1,484,370 1,685,497
Receivable from sale of securities 711,505 207,854
Note receivable from Multiple Injury Trust Fund 22,966,223 24,227,651
Property occupied by CompSource, at cost (less accumulated
depreciation of $5,817,500 and $5,251,275 at December 31,
2010 and 2009, respectively) 14,355,422 14,757,352
Electronic data processing equipment, at cost (less accumulated
depreciation of $6,854,640 and $6,340,851 at December 31,
2010 and 2009, respectively) 1,097,776 851,389
Securities lending reinvested collateral assets 117,871,960 —
Other assets 11,364,257 11,051,610
Total admitted assets $ 1,400,794,940 1,223,540,627
Liabilities and Surplus
Reserve for losses $ 883,559,923 852,676,143
Reserve for loss adjustment expenses 72,911,126 71,582,934
Unearned premiums 32,699,343 30,698,776
Policyholder deposit premiums 37,941,783 38,405,280
Payable for securities lending 121,972,337 —
Accounts payable and other liabilities 15,906,326 19,745,659
Total liabilities 1,164,990,838 1,013,108,792
Assigned surplus for catastrophes 5,000,000 5,000,000
Unassigned surplus 230,804,102 205,431,835
Total surplus 235,804,102 210,431,835
Contingencies (notes 8, 10, and 16)
Total liabilities and surplus $ 1,400,794,940 1,223,540,627
See accompanying notes to statutory financial statements.
4
COMPSOURCE OKLAHOMA
Statutory Statements of Operations and Surplus
Years ended December 31, 2010 and 2009
2010 2009
Premiums earned $ 247,263,714 243,919,452
Underwriting deductions:
Losses incurred (241,036,247) (242,687,014)
Loss adjustment expenses (21,063,286) (21,956,744)
Other underwriting expenses (40,540,388) (39,541,981)
Bad debt expense (1,748,745) (1,526,854)
Total underwriting deductions (304,388,666) (305,712,593)
Net underwriting loss (57,124,952) (61,793,141)
Investment income:
Net investment income 43,786,383 45,738,972
Net realized capital gains (losses) 6,003,540 (626,725)
Net investment income 49,789,923 45,112,247
Other income:
Finance and service charges 12,219 58,094
Loss on sale of fixed assets 3,131 (5,929)
Interest from other invested asset 413,241 464,285
Total other income 428,591 516,450
Net loss $ (6,906,438) (16,164,444)
Surplus, beginning of year $ 210,431,835 183,697,469
Net loss (6,906,438) (16,164,444)
Net unrealized capital gains 33,580,498 42,941,966
Change in nonadmitted assets (1,079,300) (1,983,246)
Cumulative effect of change in accounting principle, note 1(q) — 1,940,090
Temporary impairment on securities lending (222,493) —
Net change in surplus 25,372,267 26,734,366
Surplus, end of year $ 235,804,102 210,431,835
See accompanying notes to statutory financial statements.
5
COMPSOURCE OKLAHOMA
Statutory Statements of Cash Flow
Years ended December 31, 2010 and 2009
2010 2009
Premiums collected $ 241,917,125 247,549,903
Loss and loss adjustment expenses paid (229,887,561) (233,455,869)
Underwriting expenses paid (39,661,340) (34,282,205)
Other underwriting expense (1,748,745) (1,526,854)
Cash used in underwriting (29,380,521) (21,715,025)
Net investment income received 46,970,014 47,842,675
Other income 428,591 516,450
Net cash provided by operations 18,018,084 26,644,100
Proceeds from investments sold, matured, or repaid:
Debt securities 129,030,573 127,349,367
Equity securities 10,339,286 5,089,838
Notes receivable from Multiple Injury Trust Fund 1,261,426 1,135,682
Miscellaneous proceeds 712,192 4,419,141
Total investment proceeds 141,343,477 137,994,028
Cost of investments acquired:
Debt securities (151,155,977) (170,453,104)
Equity securities (12,513,842) (8,141,183)
Real estate (164,294) (4,875)
surplus debenture (246,180) —
Net change in (receivable) payable for securities (77,228) (345,829)
Miscellaneous applications (557,876) (4,419,980)
Total investments acquired (164,715,397) (183,364,971)
Other cash applied (3,142,621) (3,708,946)
Net change in cash and short-term investments (8,496,457) (22,435,789)
Cash and short-term investments, beginning of year 74,156,454 96,592,243
Cash and short-term investments, end of year $ 65,659,997 74,156,454
See accompanying notes to statutory financial statements.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
6 (Continued)
(1) Operational Authority and Summary of Significant Accounting Policies
(a) Operational Authority
CompSource Oklahoma (CompSource) was created in 1933 under Title 85 of the Oklahoma Statutes
(Title 85). The primary purpose of CompSource is to provide a source for workers’ compensation
insurance for all Oklahoma employers. CompSource operates in a manner similar to any other
insurance company. It is governed by a Board of Managers (the Board) and is administered by the
President and Chief Executive Officer, who is appointed by the Board.
CompSource is a component unit of the State of Oklahoma (the State) and is combined with other
unrelated funds to comprise the major component units of the State. CompSource meets the
definition of both a major component and that of an enterprise fund. Enterprise funds are financed
and operated in a manner similar to private business enterprises where the intent of the governing
body is that the cost (expense, including depreciation) of providing goods or services to the general
public on a continuing basis be financed or recovered primarily through user charges.
(b) Principles of Presentation
The accompanying statutory financial statements have been prepared in conformity with accounting
practices prescribed or permitted by the Oklahoma Insurance Department or prescribed by Title 85,
which is a comprehensive basis of accounting other than U.S. generally accepted accounting
principles (GAAP). Effective January 1, 2001, the National Association of Insurance Commissioners
(NAIC) and the State require that insurance companies domiciled in the State prepare their statutory
basis financial statements in accordance with the NAIC Accounting Practices and Procedures
Manual – Version January 1, 2001 (Statements of Statutory Accounting Practices, or SSAPs),
subject to any deviations prescribed or permitted by the State of Oklahoma insurance commissioner.
There were no differences in practices prescribed or permitted by the insurance commissioner of the
State or prescribed by Title 85 from the statements of statutory accounting principles that impacted
CompSource’s statutory financial statements at December 31, 2010 or 2009.
The preparation of financial statements in conformity with insurance accounting practices prescribed
or permitted by the Oklahoma Insurance Department or prescribed by Title 85 requires management
to make estimates and assumptions that affect the reported amounts of admitted assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the
reporting periods. Management evaluates its estimates and assumptions on an ongoing basis using
historical experience and other factors, including the current economic environment, which
management believes to be reasonable under the circumstances. Management adjusts such estimates
and assumptions when facts and circumstances dictate. As future events and their effects cannot be
determined with precision, actual results could differ significantly from these estimates. Changes in
those estimates resulting from continuing changes in the economic environment will be reflected in
the financial statements in future periods.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
7 (Continued)
(c) Differences between Statutory Accounting Principles and Accounting Principles Generally
Accepted in the United States of America
SSAPs differ from GAAP in several respects, which causes differences in reported assets, liabilities,
fund equity (statutory capital and surplus), change in fund equity (statutory net income), and cash
flows. The principal SSAPs that differ from GAAP include the following: (1) assets are included in
the statutory statements of admitted assets, liabilities, and surplus at “admitted asset values,” and
“nonadmitted assets” are excluded through a charge against surplus; (2) debt securities are carried at
amortized cost rather than fair value; (3) change in unrealized gains or losses on equity securities is
charged or credited directly to surplus; (4) policy acquisition costs are expensed as incurred, while
under GAAP these costs are deferred and recognized over the periods benefited; and (5) the statutory
statements of cash flow are presented on the basis prescribed by the NAIC.
(d) Investments
The investment policy adopted by the Board is more restrictive than state statutes requiring
CompSource to invest primarily in fixed income securities, including “A” rated debt securities,
commercial paper, and money market funds. In addition, no more than 20% of the investment
portfolio may be invested in equity securities.
Debt securities and stocks are valued in accordance with the laws of the State or the valuations
prescribed by the Committee on Valuation of Securities of the NAIC. Generally, debt securities are
stated at amortized cost and equity securities at fair values based upon market quotations. Short-term
investments are reported at cost, which approximates fair value.
Unrealized gains and losses on equity securities are accounted for as direct increases or decreases in
surplus. Realized gains and losses are determined by the first-in, first-out method. Purchases and
sales of investments are recorded as of the trade date. CompSource periodically reviews its
investments to determine if a provision for other-than-temporary impairment is necessary.
Investments determined to be other-than-temporarily impaired are written down to fair value or the
present value of future cash flows for certain loan-backed and structured securities with the
write-down recorded as a realized loss.
(e) Allowance for Doubtful Accounts
CompSource provides an allowance for doubtful accounts by charging operations for estimated
premiums receivable that will not be collected. The adequacy of the allowance is determined by
management based on several factors, including historical loss experience, review of past-due
accounts, and business and economic conditions.
(f) Property Occupied by CompSource and Electronic Data Processing (EDP) Equipment
Property occupied by CompSource and EDP equipment is stated at cost less accumulated
depreciation. Depreciation for admitted and nonadmitted assets is calculated on the straight-line
method over the estimated useful lives of the assets. When assets are disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain or loss is
recognized in operations. The cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
8 (Continued)
(g) Losses and Loss Adjustment Expenses
Reserves for losses and allocated loss adjustment expenses are provided based on case-basis
estimates for losses reported and CompSource’s historical loss experience for claims incurred but not
reported (IBNR). Reserves for unallocated loss adjustment expenses are estimated based on
CompSource’s historical ratios of paid unallocated loss adjustment expenses to paid losses and paid
allocated loss adjustment expenses. Adjustments to the liability based on subsequent developments
or other changes in the estimate are reflected in results of operations in the period in which such
adjustments become known. Although such estimates are CompSource’s best estimates of the
expected values, the actual results may vary from these values, and such variances could be
significant (see note 8).
(h) Excess-of-Loss Coverage
CompSource administers claim payments and provides excess-of-loss coverage to certain
governmental entities. The premiums and fees received in connection with these transactions are
included in premiums earned and were approximately $9,866,000 and $9,367,000 in 2010 and 2009,
respectively. The liability for claims in excess of the respective retention limits for all policy years
was approximately $66,054,000 and $62,420,000 at December 31, 2010 and 2009, respectively, and
are included in reserves for losses in the statutory statements of admitted assets, liabilities and
surplus.
(i) Policyholder Deposit Premiums
Policyholder deposit premiums are collected in advance to reduce credit risk for premiums collected
on a monthly or quarterly basis. At the end of the policy period, the deposit is applied to either final
audit premium, renewal deposit premium, or is refunded to the policyholder.
(j) Compensated Absences
Vested or accumulated vacation leave is recorded as an expense and a liability as the benefits accrue
to the eligible employees up to a maximum of 480 hours. There are no accumulating sick leave
benefits that vest for which any liability must be recognized. Accounts payable and other liabilities
include a liability for vested or accumulated vacation leave at December 31, 2010 and 2009 of
approximately $1,792,000 and $1,704,000, respectively.
(k) Revenue Recognition
Insureds pay premiums on a monthly, quarterly, or annual basis. Earned premiums are recognized as
income as follows:
Monthly – One-twelfth of the estimated annual premium income is accrued each month. Actual
payroll information for a month is submitted by the insured during the following month, and the
difference between the accrual and the premium based on the actual payroll information is
recognized at that time.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
9 (Continued)
Quarterly – One-twelfth of the estimated annual premium income is accrued each month. Actual
payroll information for a quarter is submitted by the insured during the month following the end of
the quarter, and the difference between the accrual and the premium based on the actual payroll
information is recognized at that time.
Annual – One-twelfth of the annual premium is recognized each month. Unearned premiums
represent the portion of the annual premiums that is applicable to the unexpired term of the policies
in force.
CompSource estimates earned but unbilled audit premium and records the amount as an adjustment
to earned premium during the policy period. At the end of the policy period, CompSource audits the
payroll information provided by the insured, and any adjustments to earned premium are recognized
in income.
(l) Workers’ Compensation Court Tax
The Workers’ Compensation Court tax is equal to 1% of all direct premiums written, and is imposed
on all insurance companies that write workers’ compensation insurance policies in Oklahoma. This
tax is included in other underwriting expenses in the statutory statements of operations and surplus.
This tax supports the operations of the Workers’ Compensation Court.
(m) Multiple Injury Trust Fund Tax
The Multiple Injury Trust Fund tax is based on a statutory formula used by the Workers’
Compensation Court of the State of Oklahoma. The rates are in effect for each July 1 through
June 30 and are adjusted annually. Payors of the tax are eligible to receive a rebate equal to
two-thirds of the premium tax assessment. The Multiple Injury Trust Fund tax expense, which is
recorded in other underwriting expenses in the statutory statements of operations and surplus,
reflects the premium tax expense incurred during 2010 and 2009, net of the rebate. Receivables from
the Oklahoma Tax Commission for the rebate are recorded when the premium tax liability is
incurred.
(n) Market Equalization Assessment
As set forth in 85 O.S., Section 154, CompSource is required to pay a market equalization
assessment. The assessment, which is payable annually to the Oklahoma State Treasury to the credit
of the General Revenue Fund, is equal to 2.25% of all of CompSource’s direct written premiums.
The assessment amounted to approximately $5,597,000 and $5,516,000 in 2010 and 2009
respectively, and is included within other underwriting expenses in the statutory statements of
operations and surplus.
(o) Administrative Expenses
As set forth in Title 85, CompSource’s administrative expenses at no time shall exceed 20% of
earned premiums for the year. For the year ended December 31, 2010, CompSource’s percentage of
administrative expense (general and administrative expense and depreciation expense, which are
included in other underwriting expenses) to net earned premiums was 6.8% in accordance with
financial statements that are prepared in accordance with GAAP.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
10 (Continued)
(p) Income Taxes
As described in note 1, CompSource was created under and derives its operational authority from
Title 85 of the Oklahoma Statutes. As the assured market for workers’ compensation insurance, the
primary purpose of CompSource is to provide a source for workers’ compensation insurance for all
Oklahoma employers. CompSource also meets the definition of a component unit of the State as
defined by Governmental Accounting Standards Board Statement No. 14, The Financial Reporting
Entity. Management believes CompSource is a tax-exempt entity pursuant to Internal Revenue Code
Section 501(c)(27)(B). Accordingly, the statutory financial statements do not include a provision for
federal or state income tax.
(q) Accounting Changes
Effective July 1, 2009, CompSource adopted SSAP No. 43R, Loan-Backed and Structured
Securities. CompSource evaluated loan-backed securities held as of June 30, 2009, for which
other-than-temporary impairments had been recognized. CompSource identified those securities
which it did not currently intend to sell and had the intent and ability to retain for a period of time
sufficient to recover the amortized cost basis. As a result of this analysis, CompSource recorded a
cumulative adjustment of $1,940,090 to surplus with a corresponding adjustment to debt securities.
In May 2010, the Statutory Accounting Principles Working Group adopted securities lending
guidance which revised the statutory accounting guidance for securities lending transactions
previously included within SSAP No. 91R, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (SSAP No. 91R). The revised guidance provides for a
modified GAAP approach for defining what collateral should be accounted for as on-balance sheet
and off-balance sheet, allows for one-line reporting for certain securities lending collateral and
requires additional disclosures in the annual statement to increase transparency for these types of
transactions. CompSource adopted the amendments to SSAP No. 91R as of December 31, 2010.
Pursuant to the adoption of the amendments to SSAP No. 91R, CompSource recognized the
applicable portion of securities lending collateral as an asset on the balance sheet and a liability to
return such collateral.
In December 2009, the Statutory Accounting Principles Working Group issued SSAP No. 100, Fair
Value Measurements (SSAP No. 100), which defines fair value, establishes a framework for
measuring fair value in statutory accounting principles, and expands disclosures about fair value
measurements. This statement does not require any new fair value measurements. SSAP No. 100
applies under other accounting pronouncements that require or permit fair value measurements. The
provisions of SSAP No. 100 are effective for December 31, 2010 annual financial statements, with
interim and annual financial statement reporting thereafter. CompSource adopted SSAP No. 100 as
of December 31, 2010. The adoption had no impact on the statutory financial statements and all
required disclosures are included in the notes to the statutory financial statements.
(r) Reclassifications
Certain reclassifications have been made to previously presented 2009 balances to conform to the
current year presentation.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
11 (Continued)
(2) Nonadmitted Assets
Assets in the statutory statements of admitted assets, liabilities, and surplus are stated at admitted asset
values, which are the values permitted to be reported in the annual report to the Oklahoma Insurance
Department. All other assets are “nonadmitted assets” and are excluded from the statutory statements of
admitted assets, liabilities, and surplus by a charge to surplus. Nonadmitted assets (principally furniture,
fixtures, application software, and non-EDP equipment) as of December 31, 2010 and 2009 amounted to
approximately $5,515,000 and $4,436,000, respectively.
(3) Fair Values of Financial Instruments
Fair value estimates are made at a point in time, based on relevant market data as well as the best
information available about the financial instruments. Fair value estimates for financial instruments for
which no or limited observable market data is available are based on judgments regarding current
economic conditions, credit and interest rate risk, and loss experience. These estimates involve significant
uncertainties and judgments and cannot be determined with precision. As a result, such calculated fair
value estimates may not be realizable in a current sale or immediate settlement of the instrument. In
addition, changes in the underlying assumptions used in the fair value measurement technique, including
discount rate and estimates of future cash flows, could significantly affect these fair value estimates. Fair
value estimates, methods, and assumptions at December 31, 2010 and 2009 are described below for
CompSource’s financial instruments:
Cash and short-term investments, accrued investment income, premiums due and other receivables,
receivable from sale of securities, securities lending reinvested collateral assets, and accounts payable and
other liabilities. The carrying amounts reported in the statutory statements of admitted assets, liabilities,
and surplus approximate their fair values because of the short maturity of these financial instruments.
Investment securities. Fair values for debt securities are based on quoted market prices, where available,
which do not vary significantly from the fair values established by the NAIC. If quoted prices are not
available from active exchanges for identical instruments, then fair values are estimated using quoted
prices from less active markets, quoted prices of securities with similar characteristics, or by pricing
models utilizing other significant observable inputs. The carrying amount and fair value for debt securities
were $916,757,027 and $986,299,969, respectively, at December 31, 2010, and $894,229,351 and
$934,596,898, respectively, at December 31, 2009. Equity securities are carried at fair value based on
quoted market prices, which do not vary significantly from the fair values established by the NAIC.
Note receivable from Multiple Injury Trust Fund. The carrying amount of the note receivable reported in
the statutory statements of admitted assets, liabilities, and surplus amounted to $22,966,223 and
$24,227,651 as of December 31, 2010 and 2009, respectively. The fair values of approximately
$23,433,000 and $21,433,000 as of December 31, 2010 and 2009, respectively, are estimated based on the
discounted cash flows to be received using an estimated yield-to-maturity of a debt instrument of similar
credit quality and maturity.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
12 (Continued)
Assets that are recorded at fair value are categorized into a three-level fair value hierarchy as required by
SSAP No. 100 and reflected in the following table. A discussion of each of the three levels is provided
below the table.
Level 1 Level 2 Level 3 Total
Assets recorded at fair value:
Bonds:
Loan backed securities $ — 585,221 — 585,221
Common stock 70,899,260 120,872,823 — 191,772,083
Securities lending reinvested
collateral assets — 117,871,960 — 117,871,960
Total assets at
fair value $ 70,899,260 239,330,004 — 310,229,264
The following are the levels of the hierarchy and a brief description of the type of valuation inputs that are
used to establish each level:
Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets that
independent pricing sources have the ability to access. Since the valuations are based on quoted
prices that are readily and regularly available in an active market, valuation of these securities does
not entail a significant amount or degree of judgment. These assets include actively traded
exchange-listed common stocks.
Level 2 – Valuations based upon quoted prices for similar assets in active markets, quoted prices for
identical or similar assets in inactive markets, or valuations based on models where the significant
inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss
severities) or can be corroborated by observable market data. These assets include loan-backed
securities carried at fair value, units in commingled funds, and a cash collateral pool. The
commingled funds are managed by an investment company investing in actively traded
exchange-listed common stocks, for which the net asset values of the units represent the fair values
of the funds. The securities lending reinvested collateral assets are invested in a cash collateral pool,
which is managed by CompSource’s master custodian for which the net asset value of the pool
represents the fair value of the asset.
Level 3 – Valuations that are derived from techniques in which one or more of the significant inputs
are unobservable, including broker quotes which are nonbinding. CompSource has no assets or
liabilities measured at fair value in this category.
The Company evaluates the transfers into and out of Level 3 at the end of each fiscal reporting period.
During 2010, CompSource had no assets or liabilities measured at fair value in this category.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
13 (Continued)
(4) Investments
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for
investment securities by major type were as follows as of December 31:
Gross Gross
Amortized unrealized unrealized
2010 cost/cost holding gains holding losses Fair value
U.S. government obligations and
government-sponsored agencies $ 225,455,119 20,062,947 — 245,518,066
Corporate obligations 471,398,520 37,831,936 (1,431,107) 507,799,349
Loan-backed and structured
securities 219,903,388 13,710,561 (631,395) 232,982,554
Investment in debt
securities 916,757,027 71,605,444 (2,062,502) 986,299,969
Investment in equity securities 120,095,037 71,816,049 (139,003) 191,772,083
$ 1,036,852,064 143,421,493 (2,201,505) 1,178,072,052
Gross Gross
Amortized unrealized unrealized
2009 cost/cost holding gains holding losses Fair value
U.S. government obligations and
government-sponsored agencies $ 241,894,841 13,045,557 (500,078) 254,440,320
Corporate obligations 404,866,303 26,446,162 (2,470,109) 428,842,356
Loan-backed and structured
securities 247,468,207 8,979,104 (5,133,089) 251,314,222
Investment in debt
securities 894,229,351 48,470,823 (8,103,276) 934,596,898
Investment in equity securities 115,371,738 38,353,893 (564,617) 153,161,014
$ 1,009,601,089 86,824,716 (8,667,893) 1,087,757,912
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
14 (Continued)
The amortized cost and fair value of investments in debt securities as of December 31, 2010, by contractual
maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers
of such securities may have the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Fair
cost value
Due in one year or less $ 44,149,637 44,690,913
Due after one year through five years 298,838,611 324,239,266
Due after five years through ten years 219,990,393 234,940,296
Due after ten years 133,874,998 149,446,940
696,853,639 753,317,415
Loan-backed and structured securities 219,903,388 232,982,554
$ 916,757,027 986,299,969
Proceeds from sales of debt and equity securities were as follows for the years ended December 31:
Debt securities
Gross Gross
realized realized
Proceeds gains losses
2010 $ 98,707,637 5,647,912 (2,145,880)
2009 100,795,213 3,575,683 (122,581)
Equity securities
Gross Gross
realized realized
Proceeds gains losses
2010 $ 10,339,286 3,224,165 (87,552)
2009 5,089,838 2,352,606 (71,652)
CompSource recognized a realized capital loss of $635,105 and $6,395,043 for the other-than-temporary
impairment of debt and equity securities for the years ended December 31, 2010 and 2009, respectively.
CompSource recognized a net realized capital gain for the sale of previously impaired debt securities and
equity securities of $8,005,668 and $5,870,765 for the years ended December 31, 2010 and 2009,
respectively.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
15 (Continued)
Included in the realized capital loss for other-than-temporary impairment for the years ended December 31,
2010 and 2009 are impairment losses of $47,237 and $34,245, respectively, on subprime asset-backed
securities. CompSource does not engage in subprime residential mortgage lending. CompSource’s
exposure to subprime lending is limited to investments in debt securities collateralized by mortgages that
have characteristics of subprime lending such as adjustable rate mortgages and alternative documentation
mortgages. These investments are in the form of asset-backed securities collateralized by subprime
mortgages. At December 31, 2010, the total cost, book adjusted carrying value, and fair values of these
investments are approximately $2,480,843, $2,294,784, and $2,256,960, respectively, comprising
approximately 0.3% of CompSource’s total fixed maturity portfolio. At December 31, 2009, the total cost,
book adjusted carrying value, and fair values of these investments are approximately $5,143,000,
$5,107,000, and $2,101,000, respectively, comprising approximately 0.6% of CompSource’s total fixed
maturity portfolio. The average credit rating of all of these securities were A+ and AA as of December 31,
2010 and 2009, respectively, and reflects CompSource’s practice of minimizing exposure to low quality
(subprime type) credit risk.
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss
position, at December 31, 2010 were as follows:
Less than 12 months 12 months or longer Total
Unrealized Unrealized Unrealized
Fair value losses Fair value losses Fair value losses
U.S. government obligations –
agencies $ — — — — — —
Corporate obligations 48,909,822 (1,428,632) 494,400 (2,475) 49,404,222 (1,431,107)
Loan-backed and structured
securities 14,899,027 (375,897) 7,020,037 (255,498) 21,919,064 (631,395)
Subtotal – debt
securities 63,808,849 (1,804,529) 7,514,437 (257,973) 71,323,286 (2,062,502)
Common stocks 2,117,780 (139,003) — — 2,117,780 (139,003)
Subtotal – equity
securities 2,117,780 (139,003) — — 2,117,780 (139,003)
Total $ 65,926,629 (1,943,532) 7,514,437 (257,973) 73,441,066 (2,201,505)
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
16 (Continued)
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss
position, at December 31, 2009 were as follows:
Less than 12 months 12 months or longer Total
Unrealized Unrealized Unrealized
Fair value losses Fair value losses Fair value losses
U.S. government obligations –
agencies $ 15,262,982 (500,078) — — 15,262,982 (500,078)
Corporate obligations 54,566,401 (810,344) 17,803,009 (1,659,765) 72,369,410 (2,470,109)
Loan-backed and structured
securities 29,540,551 (370,908) 22,806,410 (4,762,181) 52,346,961 (5,133,089)
Subtotal – debt
securities 99,369,934 (1,681,330) 40,609,419 (6,421,946) 139,979,353 (8,103,276)
Common stocks 4,032,918 (546,330) 434,482 (18,287) 4,467,400 (564,617)
Subtotal – equity
securities 4,032,918 (546,330) 434,482 (18,287) 4,467,400 (564,617)
Total $ 103,402,852 (2,227,660) 41,043,901 (6,440,233) 144,446,753 (8,667,893)
Investment securities are regularly reviewed by management for impairment based on criteria that include
the extent to which cost exceeds fair value, the duration of the valuation decline, the financial health and
specific prospects for the issuer, and CompSource’s intent and ability to hold the investment to recovery.
The unrealized loss in obligations of U.S. government obligations – agencies are due to interest rate
fluctuations that result in a decline in market values from original purchase price. Because the securities
were acquired during a period of low interest rates, unrealized losses may continue and may become more
severe in a rising rate environment. CompSource expects the unrealized losses to reverse as the securities
shorten in duration and mature, and as CompSource has the ability and intent to hold these investments
until a market price recovery or maturity, these investments are not considered other-than-temporarily
impaired.
The investments included in corporate obligations are primarily corporate bonds. All corporate bonds are
investment grade and have no credit impairments. The unrealized loss is due to an increase in interest rates.
The unrealized loss may continue and may become more severe in a continued rising interest rate
environment. Because the decline in fair value is attributable to changes in interest rates and not credit
quality, and because CompSource has the ability and intent to hold these investments until a market price
recovery or maturity, these investments are not considered other-than-temporarily impaired.
The investments included in loan-backed and structured securities comprise U.S. government sponsored
agency mortgage-backed securities, U.S. government sponsored agency-backed collateral mortgage
obligations, commercial mortgage-backed securities, private label collateral mortgage obligations, and
asset-backed pass through obligations. The unrealized losses on these securities are due to interest rate
increases and not declines in credit quality. The cash flows of these securities are determined by the
principal and interest payments of the underlying loans, which are passed through to the security holders.
Additionally, those securities issued by a U.S. government-sponsored entity include the guarantee of
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
17 (Continued)
timely payment of principal and interest by those entities. Because the decline in fair value is attributable
to changes in interest rates and not credit quality, and because CompSource has the ability and intent to
hold these investments until a market price recovery or maturity, these investments are not considered
other-than-temporarily impaired.
The investments in equity securities with unrealized losses are in high-quality companies. Based on analyst
projections, the companies are financially stable and continued earnings growth is expected. As a result of
these factors, these investments are not considered other-than-temporarily impaired.
Major categories of net investment income for the years ended December 31, 2010 and 2009 are
summarized as follows:
2010 2009
Fixed maturities $ 39,356,039 39,794,936
Equity securities 2,566,351 2,405,491
Real estate 1,013,276 1,017,504
Short-term investments 982,264 2,337,314
Other invested assets 1,657,917 1,727,276
45,575,847 47,282,521
Investment expenses (1,789,464) (1,543,549)
$ 43,786,383 45,738,972
CompSource’s investment policy provides for its participation in a securities lending program. The
program is administered by CompSource’s master custodian. Certain securities of CompSource are loaned
to participating brokers, who must provide collateral in the form of cash, U.S. Treasury or government
agency securities, or letters of credit issued by approved banks. Under the terms of the agreement,
collateralization of the fair value of the loaned securities must be provided in the amount of 102% for loans
of securities for which the principal trading market is the United States.
CompSource began an orderly wind down of the securities lending program during 2009.
The market value of securities on loan was approximately $133,133,000 and $180,794,000 at
December 31, 2010 and 2009, respectively. Total collateral provided by participating brokers was
approximately $136,154,000 and $184,795,000 at December 31, 2010 and 2009, respectively, consisting of
both cash and noncash collateral. Cash collateral provided amounted to approximately $121,972,000 and
$177,198,000 at December 31, 2010 and 2009, respectively. Noncash collateral provided, consisting of
U.S. Government debt, amounted to approximately $14,182,000 and $7,597,000 at December 31, 2010 and
2009, respectively.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
18 (Continued)
Cash collateral provided by brokers participating in the securities lending program is invested in a cash
collateral pool, which is managed by CompSource’s master custodian. Investments of the cash collateral
pool consist of overnight deposits, repurchase agreements, commercial paper, fixed and floating rate
asset-backed debt securities, and floating rate notes. CompSource’s proportionate share of expected
maturities of the investments of the cash collateral pool was as follows at December 31, 2010:
Amortized
Maturity cost Fair value
Less than or equal to 30 days $ 112,451,555 112,451,555
31 - 60 days — —
61 - 90 days 75,843 73,680
91 - 365 days — —
Greater than one year 5,567,055 5,346,725
Total cash collateral pool 118,094,453 117,871,960
Liquidating Trust 3,877,884 —
Total $ 121,972,337 117,871,960
The difference between the amortized cost and fair value of CompSource’s proportionate share of the
investments of the cash collateral pool at December 31, 2010 represents unrealized losses considered to be
temporary.
CompSource recorded an unrealized loss of approximately $174,000 and an unrealized gain of
approximately $39,000 during 2010 and 2009, respectively, which represent CompSource’s proportionate
share of the change in market value of one investment of the liquidating trust. This unrealized loss and gain
are included in net investment income and represent debt securities issued by a structured investment
vehicle. The structured investment vehicle was placed in receivership and was transferred out of the cash
collateral pool into a liquidating trust effective October 1, 2008. This investment is considered to be
other-than-temporarily impaired.
CompSource has pledged a U.S. Treasury note to the U.S. Department of Labor to secure certain liabilities
for workers’ compensation claims as required by the Federal Longshore and Harbor Workers’
Compensation Act. The book value of the note was $361,094 and $505,172 at December 31, 2010 and
2009, respectively; the fair value of the note was $360,896 and $512,130 at December 31, 2010 and 2009,
respectively.
CompSource has pledged a U.S. Treasury note to secure a letter of credit issued on behalf of CompSource
for a reinsurance contract utilized during 2010. The book value of the note was $2,499,937 and $2,499,872
at December 31, 2010 and 2009, respectively; the fair value of the note was $2,518,850 and $2,500,875 at
December 31, 2010 and 2009, respectively.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
19 (Continued)
(5) Cash
Amounts on deposit with the Office of the State Treasurer (State Treasurer) were $18,482,899 and
$32,031,116 as of December 31, 2010 and 2009, respectively. These deposits consist of cash deposited to
OK INVEST, an internal investment pool of the State Treasurer with holdings limited to high rated money
market mutual funds, obligations of the U.S. government, U.S. government agencies and instrumentalities,
and collateralized tri-party repurchase agreements. Participants are limited to qualifying agencies and funds
within the State’s reporting entity, and each participant maintains an interest in the underlying investments
of OK INVEST and shares the risk of loss on the funds in proportion to the respective investment in the
funds.
(6) Notes Receivable from the Multiple Injury Trust Fund
During 2010 and 2009, the note receivable from the Multiple Injury Trust Fund (Trust Fund) amounted to
$22,966,223 and $24,227,651, respectively. Advances to the Trust Fund were made in prior years as
permitted by Title 85 Section 138(B). The agreements were entered into to satisfy delinquent permanent
partial disability awards and simple interest due on such awards owed by the Trust Fund. An Addendum to
the Multiple Injury Trust Fund Loan Agreement, entered into on December 4, 2009, left a balance due of
approximately $25,363,000. The single remaining note bears interest at a rate of 7% annually and is
payable over 13.25 years in quarterly installments with the final payment due on March 31, 2022. The
loans and lines of credit are secured by Trust Fund revenues, any equity or other interest of the State of
Oklahoma, and any amounts appropriated or otherwise available to the Trust Fund. The loan and the lines
of credit are also secured by any underlying claims paid by virtue of these agreements including but not
limited to any special priority, right to interest, or enforcement mechanism available. Legislation was
enacted to establish a Multiple Injury Trust Fund tax based on a statutory formula used by the Workers’
Compensation Court of the State of Oklahoma. Effective January 1, 2009 through June 30, 2009, the tax
rate was 2.50%; effective July 1, 2009 through June 30, 2010, the tax rate was 2.60%; and effective July 1,
2010 the tax rate was 2.59% of direct written premiums on workers’ compensation risks located in this
state. This cash flow is estimated to be sufficient to service the interest and principal on the loans and line
of credit.
(7) Property Occupied by CompSource and EDP Equipment
Property occupied by CompSource and EDP equipment consists of the following at December 31:
Estimated
useful lives
(years) 2010 2009
Land — $ 1,179,000 1,179,000
Building and improvements 20 to 40 18,993,922 18,829,627
EDP equipment 3 to 8 7,952,416 7,192,240
28,125,338 27,200,867
Accumulated depreciation (12,672,140) (11,592,126)
$ 15,453,198 15,608,741
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
20 (Continued)
Depreciation expense was $2,314,440 and $1,258,184 in 2010 and 2009, respectively.
(8) Reserve for Losses and Loss Adjustment Expenses
CompSource estimates losses and loss adjustment expenses based on historical experience and payment
and reporting patterns. These estimates are based on data available at the time of the estimate and are
reviewed by CompSource’s independent consulting actuary.
Inherent in the estimates of the ultimate liability for unpaid claims are expected trends in claim severity,
claim frequency, and other factors that may vary as claims are settled. The amount and uncertainty in the
estimates are affected by such factors as the knowledge of the actual facts and circumstances and amount
of historical claims experience relative to the development period that has been affected by the change in
premium levels and increase in closing and settlement of claims. The ultimate cost of insurance claims can
be positively or adversely affected by costs such as medical expenses and awards by the Workers’
Compensation Court.
Activity in the reserve for losses and loss adjustment expenses is summarized as follows (in thousands):
2010 2009
Balance, beginning of year $ 925,181 894,015
Less reinsurance recoverables (922) (946)
Net balance, beginning of year 924,259 893,069
Incurred losses and loss adjustment expenses:
Current year 259,342 249,047
Prior year 2,758 15,597
Total incurred 262,100 264,644
Paid losses and loss adjustment expenses:
Current year 36,429 36,969
Prior year 193,459 196,485
Total paid 229,888 233,454
Net balance, end of year 956,471 924,259
Plus reinsurance recoverables 873 922
Balance, end of year $ 957,344 925,181
As a result of changes in estimates of insured events in prior years, the provision for losses and loss
adjustment expenses increased by approximately $2,758,000 in 2010 due to unfavorable development of
case-basis reserves, which was offset partially by less than anticipated incurred but not reported losses and
loss adjustment expenses, and increased by approximately $15,597,000 in 2009 due to unfavorable
development of case-basis reserves and less than anticipated incurred but not reported losses and loss
adjustment expenses.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
21 (Continued)
At December 31, 2010 and 2009, CompSource recorded the liability for losses and loss adjustment
expenses based on an estimate of its independent consulting actuary. The gross reserves of approximately
$957 million and $925 million are the independent actuary’s and management’s best estimates of reserves
at December 31, 2010 and 2009, respectively.
(9) Premium Deficiency Reserves
As of December 31, 2010, the actuarial analysis indicated that a premium deficiency reserve was not
required for CompSource. CompSource did consider anticipated investment income as a factor in this
analysis.
(10) Reinsurance Transactions
CompSource limits the maximum net loss that can arise from risks by entering into reinsurance agreements
to assign risk to other insurers on a catastrophic basis. Premiums paid for this reinsurance were
approximately $2,057,000 and $2,021,000 in 2010 and 2009, respectively. No losses in 2010 or 2009 have
been ceded under the catastrophic reinsurance agreement.
Included in losses and loss adjustment expenses are reinsurance recoverables with a single reinsurer of
approximately $873,000 and $924,000 at December 31, 2010 and 2009, respectively.
Reinsurance contracts do not relieve CompSource from its primary obligation to policyholders. Failure of
reinsurers to honor their obligations could result in losses to CompSource. Management believes that all
reinsurers presently used are rated A or better by A.M. Best, are financially sound, and will be able to meet
their contractual obligations.
(11) Operating Leases
In the ordinary course of business, CompSource enters into various operating leases for office and storage
space and equipment. Total operating lease expense approximated $206,000 and $225,000 for 2010 and
2009, respectively.
(12) Surplus
Title 85, Section 137 of the Oklahoma Statutes requires the assignment of surplus funds for catastrophic
reserves until such time as, in the judgment of the Board, such surplus funds or catastrophic reserves shall
be sufficiently large to cover a catastrophic hazard and other unanticipated losses. Surplus assigned for
catastrophes totaled $5,000,000 at December 31, 2010 and 2009.
Included in the annual financial statements filed with the Oklahoma Insurance Department is a calculation
of CompSource’s risk-based capital. Risk-based capital is a method of establishing the minimum amount
of capital appropriate for an insurance company to support its overall business operations. The adequacy of
a company’s actual capital may then be measured by comparison to its risk-based capital for determination
of whether actual capital falls into one of four impairment categories. Risk-based capital standards are used
by regulators to commence appropriate regulatory actions relating to insurers that show indications of
weak or deteriorating conditions. The risk-based capital approach also provides an additional standard for
minimum capital requirements that companies should meet to avoid being placed in conservatorship.
Although CompSource is not subject to the risk-based capital requirements of Title 36, the capital levels
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
22 (Continued)
for 2010 and 2009 do not fall into any one of the four impairment categories as outlined by the risk-based
capital calculation.
(13) Pension Plan
(a) Plan Description
CompSource contributes to the Oklahoma Public Employees Retirement Plan (the Plan), a
cost-sharing multiple-employer public employee retirement system administered by the Oklahoma
Public Employees Retirement System (the System). The Plan provides retirement, disability, and
death benefits to plan members and beneficiaries. The benefit provisions are established and may be
amended by the legislature of the State. Title 74 of the Oklahoma Statutes, Sections 901-943, as
amended, assigns the authority for management and operation of the Plan to the Board of Trustees of
the System. The System issues a publicly available annual financial report that includes financial
statements and required supplementary information for the Plan. That annual report may be obtained
by writing to the System, PO Box 53007, Oklahoma City, Oklahoma 73152-3007 or by calling
1-800-733-9008.
(b) Funding Policy
Employees and CompSource are required to contribute at a rate set by statute. The contribution
requirements of employees and CompSource are established and may be amended by the legislature
of the State. The contribution rate for CompSource and employees for 2010 and 2009 is as follows:
Employee Employer
rate rate
July 1, 2010 – December 31, 2010 3.5% 15.5%
July 1, 2009 – June 30, 2010 3.5 15.5
January 1, 2009 – June 30, 2009 3.5 14.5
CompSource’s contributions to the Plan for the years ended December 31, 2010 and 2009 were
approximately $2,307,000 and $2,274,000, respectively, and equal its required contributions for each
year. Employee contributions for the years ended December 31, 2010 and 2009 were approximately
$536,000 and $540,000, respectively.
(14) Deferred Compensation Plan and Deferred Savings Incentive Plan
The State offers to its own employees, state agency employees, and other duly constituted authority or
instrumentality employees a deferred compensation plan created in accordance with Internal Revenue
Code, Section 457, and Chapter 45 of Title 74, Oklahoma Statutes. The Oklahoma State Employees
Deferred Compensation Plan (the DCP), also known as SoonerSave, is a voluntary plan that allows
participants to defer a portion of their salary into the DCP. Participation allows employees to shelter the
portion of their salary that is deferred from current federal and state income tax. Taxes on the interest or
investment gains on this money, while in the DCP, are also deferred. The deferred compensation is not
available to employees until termination, retirement, death, or approved unforeseeable emergency.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
23 (Continued)
Under SoonerSave, the untaxed deferred amounts are invested as directed by the participant among various
DCP investment options. Under terms of the Trust, tax deferred amounts may be used only for the
exclusive benefit of the DCP participants and their beneficiaries. Further information may be obtained
from the DCP’s audited financial statements for the year ended June 30, 2010. CompSource believes that it
has no liabilities in respect to the State’s DCP.
A monthly contribution of $25 is made by CompSource for each employee qualified to participate in a
defined contribution plan, the Savings Plan, which was established pursuant to Section 401(a) of the
Internal Revenue Code. The Savings Plan is administered by the Oklahoma Public Employees Retirement
System.
(15) Reconciliation to GAAP
CompSource files statutory financial statements with the Oklahoma Insurance Department. Accounting
principles used to prepare these statutory financial statements differ from financial statements prepared on
the basis of GAAP.
The reconciliation between statutory surplus and fund equity at December 31 is as follows:
2010 2009
Statutory surplus as filed $ 235,804,102 210,431,835
Net unrealized gains on debt securities 69,521,883 39,488,568
Nonadmitted assets 5,514,952 4,435,653
Deferred acquisition costs 1,539,279 1,270,922
Fund equity $ 312,380,216 255,626,978
The reconciliation between statutory net loss and change in fund equity at December 31 is as follows:
2010 2009
Statutory net loss as filed $ (6,906,438) (16,164,444)
Change in net unrealized gains on debt and
equity securities 69,821,982 80,407,400
Unrealized gains (losses) on U.S. government inflation
protected securities 352,431 (59,007)
Change in net unrealized (losses) gains due to
other-than-temporary impairments for statutory purposes (6,783,094) 94,832
Change in deferred acquisition costs 268,357 648,382
Change in fund equity $ 56,753,238 64,927,163
The Oklahoma Insurance Department may conduct an examination of CompSource in the same manner as
a domestic insurance company if the examination does not conflict with any provisions in Title 85 of the
Oklahoma Statutes. The Oklahoma Insurance Department may also recommend adjustments to certain
accounts based on its judgment about information available at the time of the examination.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
24 (Continued)
(16) Contingencies
At December 31, 2010, CompSource was a defendant in a policyholder suit, filed June 15, 2009, regarding
employers��� liability coverage. The suit also seeks class action status regarding certain employers who
purchased workers’ compensation and employers’ liability insurance policies from June 1, 2004 to the
present. While it is not possible to predict with certainty when this matter will be completely resolved, it is
possible that the disposition of the litigation could occur in the near term. In the opinion of CompSource’s
management, after considering the advice of counsel, the ultimate resolution of this proceeding could have
a material effect on CompSource’s financial condition, changes in financial condition, and cash flow. At
December 31, 2010, the financial statements do not include any expenses or liabilities related to the above
action, as a loss has not been deemed probable or estimable. Management is vigorously defending this
case.
Also at December 31, 2010, CompSource was a defendant in a policyholder suit, filed October 30, 2009,
regarding the refund of premium for a canceled workers’ compensation insurance policy. The suit also
seeks class action status for certain policies canceled under similar circumstances. While it is not possible
to predict with certainty when this matter will be completely resolved, it is possible that the disposition of
the litigation could occur in the near term. In the opinion of CompSource’s management, after considering
the advice of counsel, the ultimate resolution of this proceeding could have a material effect on
CompSource’s financial condition, changes in financial condition, and cash flow. At December 31, 2010,
the financial statements do not include any expenses or liabilities related to the above action, as a loss has
not been deemed probable or estimable. Management is vigorously defending this case.
CompSource is involved in various claims and legal actions arising in the ordinary course of business. In
the opinion of CompSource’s management, after considering the advice of counsel, the ultimate disposition
of these matters will not have a material adverse effect on CompSource’s financial condition, changes in
financial condition, and cash flow.
(17) Legislative Measures and Subsequent Events
During 2009, the Oklahoma Legislature passed and Governor Henry signed into law House Bill 1963,
which states that it is the intent of the Legislature that CompSource be converted into a private insurance
company no later than December 31, 2010. House Bill 1963 also created, until December 31, 2011, the
Task Force on the Privatization of CompSource Oklahoma to examine the related issues. The Task Force
was also authorized to publish and submit to the Speaker of the House of Representatives, the President
Pro Tempore of the Senate, and the Governor its findings and recommendations by December 1, 2009,
including recommendations for any resulting legislation. The Final Report from the Task Force included
the “Task Force Members’ Findings and Recommendations” which provided the recommendations of each
Task Force member. Overall, a majority of Task Force members favored mutualization over other
privatization options. As of December 31, 2010, no legislation has been enacted by the Oklahoma
Legislature regarding privatization.
COMPSOURCE OKLAHOMA
Notes to Statutory Financial Statements
December 31, 2010 and 2009
25
A number of legislative measures have been introduced before the Oklahoma Legislature, which convened
February 7, 2011, regarding the privatization of CompSource. Although no measures are currently pending
before the Legislature, such legislation could become active. While such legislation would have no
material impact on CompSource’s statutory financial statements as of December 31, 2010, the outcome of
such legislation cannot presently be determined and could have a material adverse effect on CompSource’s
financial condition, changes in financial condition, and cash flow.
26
Schedule 1
COMPSOURCE OKLAHOMA
Summary Schedule of Investments
December 31, 2010
Gross Admitted
investment assets
holdings Percentage as reported Percentage
Investment categories:
Bonds:
U.S. Treasury securities $ 179,456,645 13.490% $ 179,456,645 13.490%
U.S. government agency obligations (excluding mortgage-backed securities):
Issued by U.S. government sponsored agencies 45,998,472 3.458 45,998,472 3.458
Non-U.S. government (including Canada, excluding mortgage-backed securities) 1,387,246 0.104 1,387,246 0.104
Securities issued by states, territories, and possessions and political
subdivisions in the U.S.:
States, territories, and possessions general obligations 4,038,625 0.304 4,038,625 0.304
Political subdivisions of states, territories and possessions and political
subdivisions general obligations 2,450,000 0.184 2,450,000 0.184
Revenue and assessment obligations 11,700,000 0.879 11,700,000 0.879
Loan-backed and structured securities (includes residential and commercial MBS):
Pass-through securities:
Guaranteed by GNMA 18,654,034 1.402 18,654,034 1.402
Issued by FNMA and FHLMC 89,928,693 6.760 89,928,693 6.760
All other 215,725 0.016 215,725 0.016
CMOs and REMICs:
Issued or guaranteed by GNMA, FNMA, FHLMC, or VA 45,178,683 3.396 45,178,683 3.396
All other 65,926,251 4.956 65,926,251 4.956
Other debt and other fixed income securities (excluding short-term):
Unaffiliated domestic securities 451,822,653 33.963 451,822,653 33.963
Equity securities:
Publicly traded equity securities (excluding preferred stocks) 70,899,260 5.329 70,899,260 5.329
Other unaffiliated equity securities 120,872,823 9.086 120,872,823 9.086
Real estate investments:
Property occupied by the company 14,355,422 1.079 14,355,422 1.079
Receivable for securities 711,505 0.053 711,505 0.053
Cash and short-term investments 65,659,997 4.936 65,659,997 4.936
Other invested assets 141,084,428 10.605 141,084,428 10.605
Total invested assets $ 1,330,340,462 100.000% $ 1,330,340,462 100.000%
See accompanying independent auditors’ report.
Schedule 2
COMPSOURCE OKLAHOMA
Schedule of Investment Risk Interrogatories
December 31, 2010
27 (Continued)
1. State the total admitted assets as reported on page 2 of the annual statement: $1,400,794,940
2. State by investment category the 10 largest exposures to a single issuer/borrower/investment, excluding
U.S. government, U.S. government agency securities, and those U.S. government money market funds
listed in the Appendix to the SVO Purposes and Procedures Manual as exempt, property occupied by the
company, and policy loans.
Percentage of
total
admitted
Investment category Amount assets
State Street S&P 500 Index $ 78,981,792 5.638%
State Street S&P Equal Weighted Index Fund 41,891,032 2.991
Amgen Inc. 10,117,528 0.722
Abbey National North American LLC 9,999,358 0.714
National Rural Utilities 9,333,116 0.666
Comcast Corp 8,191,602 0.585
JPMorgan Chase & Co 8,120,221 0.580
Oracle Corp 8,101,500 0.578
Emerson Electric Co 8,090,043 0.578
E.I. Du Pont De Nemours 7,969,877 0.569
3. State the amounts and percentages of total admitted assets in bonds, short-term investments, and preferred
stocks by NAIC rating.
Percentage
of total
admitted
Amount assets
Bonds and short-term investments:
NAIC-1-highest quality $ 860,201,942 61.408%
NAIC-2-high quality 101,490,871 7.245
NAIC-3-medium quality — —
NAIC-4-low quality — —
NAIC-5-low quality 3,286 —
NAIC-6-lowest quality 427 —
$ 961,696,526 68.653%
Schedule 2
COMPSOURCE OKLAHOMA
Schedule of Investment Risk Interrogatories
December 31, 2010
28
13. State the amounts and percentages of admitted assets held in the largest 10 equity interests (including
investments in the shares of mutual funds, preferred stocks, publicly traded equity securities, and other
equity securities, and excluding money market and bond mutual funds listed in the Appendix to the SVO
Practices and Procedures Manual as exempt or Class 1).
Percentage of
total
admitted
Investment category Amount assets
State Street S&P 500 Index $ 78,981,792 5.638%
State Street S&P Equal Weighted Index Fund 41,891,032 2.991
Atmel Corp 2,646,336 0.189
Las Vegas Sands Corp. 2,586,985 0.185
Cummins Inc. 2,486,226 0.177
Bucyrus International Inc. 2,208,180 0.158
Cameco Corp 2,204,748 0.157
Precision Castparts Corp. 2,074,229 0.148
Goodrich Corp. 1,770,207 0.126
Stillwater Mining Co. 1,705,865 0.122
20. State the amounts and percentages of total admitted assets subject to the following types of agreements:
Percentage of At end of each quarter
December 31, total admitted March 31, June 30, September 30,
2010 assets 2010 2010 2010
Securities lending $ 122,890,639 8.773% $ 173,522,238 131,859,642 115,049,758
All other investment risk interrogatories have been omitted because they are not applicable.
See accompanying independent auditors’ report.
Schedule 3
COMPSOURCE OKLAHOMA
Schedule of Reinsurance Interrogatories
December 31, 2010
29 (Continued)
1. Are any risks reinsured under a quota share reinsurance contract with any other entity that includes a
provision that would limit the reinsurer’s losses below the stated quota share percentage (e.g., a deductible,
a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions)?
Yes[ ] No[X]
2. Has the reporting entity reinsured any risk with any other entity and agreed to release such entity from
liability in whole or in part, from any loss that may occur on this risk, or portion thereof, reinsured?
Yes[ ] No [X]
3. Has the reporting entity ceded any risk under any reinsurance contract (or under multiple contracts with the
same reinsurer or its affiliates) for which during the period covered by the statement: (i) it recorded a
positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders
or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded
greater than 5% of prior year-end surplus as regards policyholders; (ii) it accounted for that contract as
reinsurance and not as a deposit; and (iii) the contract(s) contain one or more of the following features or
other features that would have similar results:
(a) A contract term longer than two years and the contract is noncancelable by the reporting entity
during the contract term;
(b) A limited or conditional cancellation provision under which cancellation triggers an obligation by
the reporting entity, or an affiliate of the reporting entity, to enter into a new reinsurance contract
with the reinsurer, or an affiliate of the reinsurer;
(c) Aggregate stop loss reinsurance coverage;
(d) An unconditional or unilateral right by either party to commute the reinsurance contract, whether
conditional or not, except for such provisions which are only triggered by a decline in the credit
status of the other party;
(e) A provision permitting reporting of losses, or payment of losses, less frequently than on a quarterly
basis (unless there is no activity during the period); or
(f) Payment schedule, accumulating retentions from multiple years or any features inherently designed
to delay timing of the reimbursement to the ceding entity?
Yes[ ] No[X]
Schedule 3
COMPSOURCE OKLAHOMA
Schedule of Reinsurance Interrogatories
December 31, 2010
30
3. Has the reporting entity during the period covered by the statement ceded any risk under any reinsurance
contract (or under multiple contracts with the same reinsurer or its affiliates), for which, during the period
covered by the statement, it recorded a positive or negative underwriting result greater than 5% if prior
year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end
loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders;
excluding cessions to approved pooling arrangements or to captive insurance companies that are directly or
indirectly controlling, controlled by, or under common control with (i) one or more unaffiliated
policyholders of the reporting entity, or (ii) an association of which one or more unaffiliated policyholders
of the reporting entity is a member where:
(a) The written premium ceded to the reinsurer by the reporting entity or its affiliates represents fifty
percent (50%) or more of the entire direct and assumed premium written by the reinsurer based on its
most recently available financial statement; or
(b) Twenty-five percent (25%) or more of the written premium ceded to the reinsurer has been
retroceded back to the reporting entity or its affiliates?
Yes[ ] No[X]
5. Except for transactions meeting the requirements of paragraph 30 of SSAP No. 62, Property and Casualty
Reinsurance, has the reporting entity ceded any risk under any reinsurance contract (or multiple contracts
with the same reinsurer or its affiliates) during the period covered by the financial statement, and either:
(a) Accounted for that contract as reinsurance (either prospective or retroactive) under SSAP and as a
deposit under GAAP; or
(b) Accounted for that contract as reinsurance under GAAP and as a deposit under SSAP?
Yes[ ] No[X]
See accompanying independent auditors’ report.