Falling workers’ compensation premium rates and stiff competition are taking their toll on the bottom line of Zenith National Insurance Corp., a leading insurer.
The Los Angeles-based company recently reported a 35 percent decline in first quarter earnings compared to a year earlier as more firms have entered the market and driven down rates.
“Right now we are in a soft pricing cycle and a very competitive insurance market,” said Robert Paun, an analyst with Sidoti & Company.
But the sharp decline in earnings of a respected workers’ compensation insurer is being seen by some as a sign that it might be time for the industry to raise premium rates.
Zenith traditionally has followed a conservative strategy by underwriting low-risk policies and charging higher prices than competitors, which has enabled it to outperform the industry in terms of its ratio of claims losses to premium revenue.
However, a host of firms have entered the California market since reforms started driving down claims costs four years ago. Now, premium rates are so low that established companies like Zenith sell fewer policies.
“Five years ago, we were writing $1.50 in premiums for every $1 of capital. Last year we were writing 70 cents in premiums for every dollar of capital,” said Stanley Zax, chairman and president of Zenith National Insurance.
The company’s careful underwriting approach has served it well, allowing it to survive the shake-down that hit the market in the late 1990s when rock bottom rates and escalating medical and litigation costs caused scores of insurers to go under.
In the ensuing years, Zenith prospered as profits and earned premiums steadily rose, but over the past two years the company has seen its earned premiums fall by close to 40 percent, hitting $739 million in 2007. Profits also slid in 2007 for the first time in years, off nearly 10 percent to $234 million.
The declines don’t indicate the company is in trouble. In fact, Zenith recently earned an “excellent” financial strength rating from insurance industry ratings agency A.M. Best Co. And the company is so well capitalized that it pays a 5.3 percent dividend, very high for the industry. It’s even overcapitalized, given its decline in underwriting.
Awash with liquidity, Zenith is keeping its options open for future investments, including possible acquisitions, said Zax.
Premiums decline
However, the decline in profits at Zenith is a good barometer of the California insurance market.
Following the cutthroat competition of the late 1990s, premium rates rose drastically as insurers left the market and medical costs increased unabated until reforms proposed by Gov. Schwarzenegger went into effect.
Legislation in 2004 cut costs by forcing injured employees to go to panels of doctors chosen by insurers, limiting disability payments and attracting insurers back into the market.
Over the past four years, workers’ comp premiums have declined by more than 60 percent from historic high rates. The average insurer rate per $100 of payroll fell to $2.44 last year from $6.46 in 2003, according to the Workers’ Compensation Insurance Rating Bureau of California.
Indeed, there are worries now that rates might be going too low, and an increase is in order to avoid anything close to the market shakeout of earlier this decade.
Last fall the industry association Workers’ Compensation Insurance Rating Bureau proposed a 5.2 percent hike in rates. State insurance commissioner Steve Poizner later recommended no change in rates, arguing that cost reductions of 70 percent since 2004 should allow insurers to continue to pass on the savings to California businesses.
Nonetheless, it was the first time in four years that the commissioner had not asked for a decrease in rates. And all bets are off on whether a rate increase is in line for next year.
Eduardo Pavon, president of Woodworking by Degree, a North Hollywood maker of high-end cabinets, has seen his workers’ compensation premium rates decrease for several years.
And just a few months ago, his premium rates for his 45 employees decreased again. Pavon said his company runs a very safe shop to help keep rates down, and is in no position to absorb a rate increase.
“We may have to get more dollars for our products or ask our employees to take less,” he said.
Competition at work
Mario Guerra, president of the Woodland Hills-based commercial brokerage firm Scanlon, Guerra, Burke Insurance Brokers, said companies with good safety records are still benefiting from rate decreases.
However, companies without stellar records are no longer being able to command the favorable rates they did in the past, indicating the market may be hardening on its own.
“Competition is dictating that premiums are still going down for good accounts,” Guerra said. “For less desirable accounts without a good track record, they are not getting the discounts as they did in the past and they are seeing some increases.”
Still, it’s unclear where rates are going.
Randy Binner, an analyst at FBR Capital Markets, said Zenith is right to take a cautious approach and let its market share slide amid the uncertainty.
“Any company that grows a lot in a soft market, you have to wonder about what they are underwriting,” he said.
