Workers’ Comp Pioneer Reaches End of the Trail

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It’s a challenging time for the workers’ compensation industry as pressure for profit increases. And it’s in that climate that 74-year-old Stanley Zax announced his retirement as chief executive of Zenith National Insurance Corp. last week.

Zax announced his December retirement from the Woodland Hills workers’ comp firm after 34 years as CEO. He built the firm from a tiny local workers’ comp carrier into one of the largest in the state and even expanded it across the United States. The company specialized in selling high-cost insurance to accident-prone companies then working with the company to reduce accidents. Zenith routinely outperformed the industry with this strategy.

When Jack Miller succeeds Zax in January, he won’t have the same autonomy for innovation. Fairfax Financial Holdings Ltd. in Toronto bought Zenith 18 months ago in a cash deal valued at $1.4 billion and took it private.

That deal gives Zenith access to Fairfax’s substantial investment portfolio, but it also means Fairfax has a voice in major decisions at Zenith.

Neither Zax nor Miller could be reached for comment.

Miller, 66, has been a part of Zenith’s senior management team since he joined the company in 1998, so analysts and industry watchers said that they foresee Miller continuing on the same course that Zax set.

“We don’t expect either the focus of the company or its direction to change substantially once Miller takes over,” said Michael Lagomarsino, assistant vice president with A.M. Best Co., an insurance rating firm in Oldwick, N.J.

But Miller will face the challenges of the industry’s tougher market. Zenith’s financials have faced pressure as competition has intensified and the weak economy has led to a drop in premium dollars. For the first half of the year, Zenith reported a net loss of $26 million, compared with net income of $25 million in the first half of last year.

“These are the same pressures that have hit all workers’ compensation insurance carriers,” Lagomarsino said.

Yet Zenith is still in better shape than most of its California competitors. According to figures from the state Department of Insurance, Zenith reported a claims loss ratio of 60 percent in 2010, meaning its claims expenses consumed 60 percent of premium dollars. The California average was 72 percent.

The same market share report from the department showed Zenith as the fifth largest workers’ compensation carrier in the state, with $212 million in written premium dollars last year.

About 60 percent of Zenith’s business is in California; the company does business in 45 other states, much of it in Florida.

Zenith has a reputation for maintaining a low claims loss ratio. That stems from a key innovation Zax made more than 30 years ago. Most workers’ comp carriers were competing on price by trying to offer the lowest premiums. But Zax targeted companies that had higher-than-average workplace injury rates. Zenith charged higher premiums up front and then brought in workplace safety experts to help the company bring down injury rates. Lower premiums would result later.

“Zenith has some of the best workplace safety engineers in the business,” said Dale Debber, publisher of the Workers’ Comp Executive, an industry newsletter in Sacramento.

Debber said Zenith makes significant profit from the spread between the higher premiums it charges employer clients for the first couple of years and low claims expenses. Eventually, premium rates are dropped to reflect the lower number of claims.

“It’s a brilliant strategy,” Debber said, “both for the employer, who gets their premium lowered, and for Zenith, which can take advantage of this spread.”

That strategy allowed Zenith to steer clear of the carnage that occurred in the California workers’ compensation industry in the early 2000s. After years of pricing premiums below claims costs and relying on investment dollars to make up the difference, dozens of workers’ comp insurers were suddenly losing money when investment income dried. Twenty-eight carriers – about 15 percent of the total licensed workers’ comp carriers in the state – went belly up in a three-year period, causing employer premiums to skyrocket.

During his years at Zenith, Zax has frequently spoken his mind. He had a reputation for being blunt with subordinates, and was equally candid in addressing industry or political leaders, especially when warning of tough times ahead for workers’ compensation insurers.

“When Stanley speaks, people listen, even if they don’t like what he is saying,” said Mario Guerra, senior partner with Scanlon Guerra Burke NIA, an insurance brokerage in Woodland Hills. “He’s usually been proven right, though it’s sometimes years later. We in the industry came to look upon him as a leader.”

Debber of Workers’ Comp Executive noted that Zax was especially outspoken on the need for system reform.

Although long regarded as the heir apparent, Miller’s succession was called into question earlier this year when Zenith hired Janet Frank, the former chief executive of San Francisco-based State Compensation Insurance Fund. State Fund is by law the workers’ compensation carrier of last resort and is by far the largest carrier in California, with about 16 percent of the market (Zenith has 3 percent).

Frank was hired in January as president and chief operating officer of Zenith’s main insurance business; the move was widely seen in the industry as preparation for Frank to succeed Zax as chief executive.

But Frank quietly left Zenith over the summer, leaving the field clear for Miller.

Right out of the box, Miller will have to wrestle with how much to raise premiums this year as the competitive pressure increases.

“We’re seeing profits among carriers dropping all over California,” Debber said. “Zenith’s performance is predicting that the market is hardening. Employers should expect to pay more for workers’ comp insurance, starting with renewals in January.”

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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