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Combined Loss Ratio of 168%State Fund Loses More in First Quarter

State Compensation Insurance Fund is still the state’s largest player in  the California workers’ comp market, but it continues to lose market share to private carriers, especially its larger-premium accounts. The policy count is down 9%, while its average policy size is down 15% to $7,400 at the end of the first quarter of 2011, according to the latest figures from State Fund’s financial unit.

It continues to write business at a significant underwriting loss, putting pressure on the private market. State Fund CFO Dan Sevilla, Jr. notes that net earned premiums and losses at the quasi-governmental carrier were both down 16% from the prior period at $234 million and $175 million, respectively. On the claims handling and underwriting side, expenses were down 15% from the prior period to $219 million total, giving it a combined ratio of 168.

But despite these sobering numbers, better-than-expected investment income and a decrease in its underwriting loss allowed State Fund to report net income of $48 million, which was $59 million better than budgeted and $21 million more than it earned in the prior period.

Overall, State Fund had an underwriting loss of $160 million, but this was down 15% from the $189 million underwriting loss last year and a full $20 million less than budgeted. But once again, State Fund’s saving grace was the return on its sizeable investment portfolio. Those earnings came in at $208 million and allowed for the positive net income.

In industry ratios, State Fund’s loss ratio held steady at 75%, while its loss adjustment expense ratio increased 4 points to 52.6%, and its underwriting expense ratio dropped 5 points to 40.2%. In the end, its combined ratio changed only slightly, dropping 1.2% to clock in at 167.5%.


Picked Clean

Tom RoweOn the policy flight issue, State Fund CEO Tom Rowe explained that the carrier is no longer being picked clean of its choicest accounts. Apparently those horses have already left the barn. Instead, he says the accounts State Fund is now losing are on average just “average.”

“There’s still an open market for workers’ comp in California, and our competitors are taking business from us. What we have done over the last several years is mark each risk for risk quality. So we actually understand the relative quality of the book we retain and the relative quality of the book that is lost to the marketplace,” Rowe told the board. “In that analysis for the first quarter…the quality of the business we’re keeping is the same as the quality of the business that is being ceded to the market. So the market is no longer picking the best risk, they’re picking our average risk, which is kind of what you would expect to see in the late stages of an ultra-soft market.”

And Rowe says these carriers are paying a premium to acquire the business. Overall, Rowe claims, these accounts are being picked up at discounts average over 30% of State Fund’s expiring price. Noting its 75% loss ratio, Rowe says the competitive market “is now pricing new business at loss ratios that are projected to be in excess of 100%.”

While Rowe continues to focus his comments on private competitors rather than on why brokers are moving their accounts, State Fund steadfastly refuses to answer questions about how many policyholders are either leaving or staying, using broker-of-record letters. But sources tell Workers’ Comp Executive the number is “not insignificant.”

(Filed by Brad Cain in San Francisco)


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