California’s ongoing soft market for workers’ comp coverage and the depressed-economy crisis are taking their toll on the state’s largest carrier, which continues to shed premium by the bucketload. State Compensation Insurance Fund (SCIF) ended 2009 with its lowest market share number in years after shedding $500 million in premium in 2009, and first-quarter numbers show the trend continues unabated.
“Throughout first quarter, State Fund has continued to face a soft market and pressure from our competitors, which has resulted in less revenue than budgeted,” chief financial officer Jay Stewart told the board. “But we were able to control expenses and maintain investment income, resulting in a first-quarter net income of $26 million, which was above budget.”
What wasn’t said explicitly is that the market is far more competitive than SCIF expected.
Stewart notes that SCIF’s budget called for $340 million in premium during the quarter, an uptick of approximately $13 million from the first quarter of last year. The actual result? It missed the mark by 18%, writing just $279 million by the end of the quarter or $48 million less than last year’s depressed numbers.
Earned premium showed a similar story. Budget called for it to earn $330 million when it actually earned just $277 million. It also had to write off $6 million in premium as uncollectible, although this was less than expected.
SCIF filed for a 5% increase in its pure premium rates last year. But as can be seen, higher rates haven’t boosted its premium totals and may have accelerated loss of business. SCIF filed for a 0% overall change for its midyear policies but announced that it was revising its underwriting criteria to extend merit rating to its midlevel accounts — businesses with $25,000 to $60,000 in premium. Combined, these policies account for about 8% of SCIF’s book of business.
Brokers say the change was positive.
“It was probably a smart move on their part. At least it gives them a competitive position in trying to retain that premium size,” says one broker.”Without any ability to apply schedule credits, they were just getting killed.”
But others doubt if that will be enough to stanch the flow.
“They’re so uncompetitive right now, I don’t know if it’ll make any difference. Occasionally we get a big surprise from them, but it’s a rare occasion. There are still players out there who want to sharpen their pencil, so it’s been a long time since we’ve seen them come out on top,” notes another. “There’s still a need for them, but right now in my mind, they really are that market of last resort.”
Less Business, Lower Losses
The positive side of writing less premium is that losses were down largely in step with the premium decline.
Stewart says that incurred losses totaled $208 million during the quarter, down $22 million last year and off budget by $40 million. But its incurred loss ratio was steady at 75.2.
Loss adjustment expenses were at $134 million, significantly below budget and last year as well. Underwriting expenses were up from last year at $124 million but short of budget at $134 million.
But the bad news is that, added up, SCIF’s combined ratio climbed to 171.2 for the quarter, up from a budgeted combined ratio of 168.6. SCIF’s combined ratio for 2009 was 161.5. But Stewart said he expects that SCIF will be on budget by the end of the year.
Saved by Investments
Beyond the bleak financials, Stewart says that net investment income was $222 million for the quarter. “This represents a $9 million increase over budget and that was due primarily to higher yields than we budgeted,” he explains, noting that book yield was 4.6%.
Investment income helped boost SCIF’s net income to $26 million. The carrier had been budgeting for a $14 million net loss. Overall, Stewart reported that SCIF’s assets exceed liabilities by $5.3 billion, up $159 million from the prior year.
Interm president Doug Stewart says first-quarter results are good. “State Fund showed net income of $26 million. This was well above what was anticipated and allowed us to add $24 million to our policyholders surplus and further strengthening our balance sheet,” he told the board.