6.	Workers’ Compensation Claims

The Company is a self-insured employer with respect to workers’ compensation coverage for all of its employees (including employees co-employed through our client service agreements) working in California, Oregon, Maryland, Delaware and Colorado, except as described below. The Company’s ability to self-insure in California ended on December 31, 2014, as described in more detail below. In the state of Washington, state law allows only the Company’s staffing services and internal management employees to be covered under the Company’s self-insured workers’ compensation program. Additionally, the Company operates a wholly owned fully licensed insurance company, Ecole Insurance Company (“Ecole”), in Arizona to provide workers’ compensation coverage to our employees in Arizona.

To manage our financial exposure, in the event of catastrophic injuries or fatalities, the Company maintains excess workers’ compensation insurance through our wholly owned captive insurance company, Associated Insurance Company for Excess (“AICE”), with a per occurrence retention of $5.0 million, except in Maryland and Colorado, where our per occurrence retention is $1.0 million and $2.0 million, respectively. AICE maintains excess workers’ compensation insurance coverage with ACE Group (“ACE”), between $5.0 million and $15.0 million per occurrence, except in Maryland, where coverage with ACE is between $1.0 million and $25.0 million per occurrence, and in Colorado, where the coverage with ACE is between $2.0 million and statutory limits per occurrence. Prior to December 1, 2012, similar excess workers’ compensation coverage was through American International Group. The Company continues to evaluate the financial capacity of its insurers to assess the recoverability of the related insurer receivables.

The Company has provided a total of $216.0 million and $112.4 million at December 31, 2014 and 2013, respectively, as an estimated future liability for unsettled workers’ compensation claims liabilities. The estimated liability for unsettled workers’ compensation claims represents management’s best estimate based upon an actuarial valuation provided by a third party actuary at December 31, 2014 and 2013. Included in the claims liabilities are case reserve estimates for reported losses, plus additional amounts based on projections for incurred but not reported claims and anticipated increases in case reserve estimates. Also included in these estimates are amounts for unallocated loss adjustment expenses, including legal costs. These estimates are continually reviewed and adjustments to liabilities are reflected in current operating results as they become known.

Our workers’ compensation claims liabilities do not represent an exact calculation of liability, but instead represent management’s best estimate, generally utilizing actuarial expertise and projection techniques, at a given accounting date. The process of estimating unpaid claims and claim adjustment expense involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events such as changes in claims handling procedures, changes in individuals involved in the reserve estimation process, legal trends and legislative changes.

We have undertaken a number of steps during the past two years to improve our workers’ compensation claims administration practices. These steps include hiring additional claim administrators in response to our business growth, and working to close litigated claims more quickly.

Beginning in late 2013, as part of our efforts to improve our claims handling practices, the Company initiated a specific case reserve study on its open workers’ compensation claims with injury dates in 2012 and earlier. The specific case reserve study resulted in moving dollars from the general reserve of incurred but not reported claims and future loss development into specific case reserves for individual claims. This process was intended to provide management with a more accurate estimate of the ultimate total cost of each claim at a detailed level. Additionally, in mid-2013, the Company initiated a change to its individual claim handling practices by recording specific case reserves on new claims at amounts that include all of the anticipated future costs and working to close claims more quickly with the goal of reducing the ultimate cost of the claims.

In May 2014, the Company engaged an actuarial consultant to assist management in studying selected historical claims experience and the impact of the change in its claims handling process. During the third quarter of 2014, the Company engaged a new actuary to assist management in determining its best estimate of the Company’s workers’ compensation liability. Based on the work of the new actuary and a thorough review of the Company’s claims handling practices and the results of the work performed by the actuarial consultant engaged during the second quarter of 2014, management reached the conclusion in October 2014 that, based on actuarial methods, the estimate of workers’ compensation liability should reflect a significant increase for the potential development of prior period claims. The Company recorded total workers’ compensation claims expense of $101.2 million during the third quarter of 2014, including a $61.3 million change in estimate relating to prior period claims. Management’s primary considerations in arriving at its estimate of workers’ compensation liability include the significant increase in the Company’s business in recent years, the potential for unexpected future adverse development of open claims, and the increasing complexity and uncertainty surrounding healthcare costs.

Included in the foregoing liabilities are insured claims that will be paid by the Company’s former excess workers’ compensation insurer and for which the Company has reported a receivable from the insurer for the insured claims liability. Insured claims totaled $781,000 and $768,000 at December 31, 2014 and 2013, respectively.

Liabilities incurred for work-related employee fatalities and for severely injured workers, as determined by the state in which the accident occurred, are recorded either at an agreed lump-sum settlement amount or the net present value of future fixed and determinable payments over the actuarially determined remaining life expectancy of the beneficiary, discounted at a rate that approximates a long-term, high-quality corporate bond rate. We present our accrued liabilities for workers’ compensation claims on a gross basis along with a corresponding receivable from our insurers, as we are the primary obligor for payment of the related insured claims.

At December 31, 2014, our long-term workers’ compensation claims liabilities in the accompanying consolidated balance sheet included $271,000 for work-related fatalities. The aggregate undiscounted payout amount related to the catastrophic injuries and fatalities is $360,000. The discount rates applied to the discounted liabilities range from 4.25% to 9.00%. These rates represented the then-current rates for high quality long-term debt securities available at the date of loss with maturities equal to the length of the payout period to the beneficiaries. The actuarially determined payout periods to the beneficiaries range from 7 to 32 years.

In February 2014, the Company entered into a workers’ compensation insurance arrangement with ACE to provide coverage to BBSI employees in California beginning in the first quarter of 2014. The current agreement is effective through January 2016 with the potential for annual renewals thereafter.

The arrangement, typically known as a fronted program, provides BBSI a licensed, admitted insurance carrier in California to issue policies on behalf of BBSI without the intention of transferring any of the worker’s compensation risk for the first $5.0 million per claim. The risk of loss up to the first $5.0 million per claim is retained by BBSI through an indemnity agreement.

During the first quarter of 2014, the Company made an initial deposit of $20.0 million into a trust account established between the Company and ACE related to the new ACE fronted insurance program. The Company began making monthly payments in April 2014 into the trust account to be set aside for the payment of future claims. The balance in the trust account as of December 31, 2014 totaled $50.1 million. The trust account balance is included as a component of the current and long-term restricted marketable securities and workers’ compensation deposits in the accompanying consolidated balance sheet.

The states of California, Oregon, Maryland, Washington, Delaware and Colorado require us to maintain specified investment balances or other financial instruments, totaling $198.5 million at December 31, 2014 and $72.9 million at December 31, 2013, to cover potential claims losses. In partial satisfaction of these requirements, at December 31, 2014, we have provided surety bonds and standby letters of credit totaling $194.9 million. The investments are included in restricted marketable securities and workers’ compensation deposits in the accompanying consolidated balance sheets. During the fourth quarter of 2014, the state of California increased the Company’s surety deposit requirement to $190.6 million (which is included in the total $194.9 million of surety bonds and standby letters of credit), which the Company satisfied through the posting of third party issued surety bonds which are backed by a $114.3 million letter of credit. In conjunction with this letter of credit, the Company posted $114.3 million of certificates of deposit with Wells Fargo as collateral, this amount is included in long-term assets on the consolidated balance sheet.

The following table summarizes the aggregate workers’ compensation reserve activity (in thousands):


	Year Ended December 31,
	2014		2013		2012
Balance at January 1,
Workers’ compensation claims liabilities	$	112,444	$	70,564	$	51,193
Claims expense accrual:
Current year		97,883		63,822		38,386
Prior years		67,101		23,445		12,344

		164,984		87,267		50,730

Claims payments related to:
Current year		13,183		10,586		6,746
Prior years		48,263		34,801		24,613

		61,446		45,387		31,359

Balance at December 31,
Workers’ compensation claims liabilities	$	215,982	$	112,444	$	70,564

Incurred but not reported (IBNR)	$	113,984	$	69,611	$	47,992