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Insurer Holds On Tight Through Stormy Workers’ Comp Market

Insurer Holds On Tight Through Stormy Workers’ Comp Market


Staff Reporter

It’s a measure of the turbulence in California’s workers’ compensation market that Zenith National Insurance Corp. tapped its short-term lines of credit in the first quarter for $45 million to raise the financial cushion in case of unexpectedly high claims.

The Woodland Hills-based company, considered to be one of the better run insurers, had already set aside $19.5 million in the fourth quarter to beef up a separate pool of reserves it uses to pay expected claims.

Although the number of worker injury claims is dropping in California, the cost per claim is increasing and the fallout that began when insurers under-priced policies to gain market share has spread to those that didn’t.

“It just goes to show you that a company trying to price prudently still got bit by bad reserves,” said J. Nils Wright, former editor of the California Workers’ Comp Executive, an industry newsletter.

These kinds of problems have made insurers wary of doing business in the state. Standard & Poor’s and Fitch Ratings have each placed a negative outlook on their financial strength ratings for Zenith.

Zenith writes workers’ compensation insurance in 45 states, but more than half of its revenues in the category came from California last year. Florida is another big workers’ comp market, and Zenith underwrites a separate line of property and casualty reinsurance that accounted for $53.2 million of its $557 million in earned premiums in 2002.

After the California workers’ compensation market was deregulated in 1995, rates plummeted in an all-out war to gain market share. Several big names went bankrupt while others left the state.

Zenith cut rates, but not as sharply as many competitors. Still, it lost $46.8 million in 2000 and $25.9 million in 2001, though by last year it posted net income of $10.2 million.

The fourth quarter reserve charge resulted in an operating loss for all of last year. Zenith appears on track to show a profit this year, provided there aren’t more reserve charges coming down the pike.

The company earned $11.7 million in the first quarter ended March 31, compared to $2.8 million for the like period a year ago. The stock closed at $28.18 on June 3 after dipping below $20 in March. It also just closed a $110 million long-term convertible note offering that positioned it for further growth.

At the same time, its combined ratio the key measure of any insurer’s financial health fell below 100 percent, another good sign. The company paid out 96.5 cents in claims for every dollar in premiums it collected in the first quarter compared with $1.04.5 cents in the like year-ago period.

The ability to charge higher rates in California has been a factor; the company said in Securities and Exchange Commission filings that it plans to further grow its share of the state market.

Zenith has a 2.9 percent market share in California, second among private companies behind Everest National Insurance Co.’s 4.6 percent share. The State Compensation Insurance Fund, the public fund of last resort that has taken on huge amounts of business as private companies pulled out, holds half the market.

However, Insurance Commissioner John Garamendi has questioned the state fund’s financial health, and the fund sued Garamendi last month in a pre-emptive bid to prevent a state takeover. But it’s under pressure to increase premiums, and that would make it easier for Zenith to gain market share.

“The issues with regard to the state fund very well may be a benefit to Zenith,” said Joyce Sharaf, another A.M. Best analyst.

Zenith has positioned itself for that growth, with the convertible debt issuance that closed on March 31. The debt is structured as senior notes that are not due until 2023, although they can be converted into stock as early as 2010. It also cited a planned increase in its operations as a reason for the $45 million capital surplus increase.

Analysts also like the fact that Stanley Zax, the long-time president and chairman, remains in control, with a contract that extends to 2006. Zax did not return calls.

Concerns remain about the company’s reinsurance business, which after years of being profitable, contributed to its losses following two European wind storms in 1999 and the September 2001 World Trade Center tragedy, which cost it $38 million.

However, Zax is staying the course in the belief that the reinsurance business is profitable in the long run and provides a measure of diversification, Sharaf said.

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