Workers' comp, with direct written premiums of $42.6 billion in 2004 and net written premiums of $36.7 billion, had an estimated net combined ratio of 105.8 in 2004, compared to 112.4 in 2003.

The figures–derived from premium, loss and expense data retrieved from the U.S. Insurance product of National Underwriter Insurance Data Services/Highline Media–exclude results for some state funds per an agreement with the National Association of Insurance Commissioners, which is the ultimate source of the information. Including the state funds, overall direct premiums would be at least $10 billion higher, making workers' comp the largest commercial line.

Individually, the most notable state fund exclusion is the State Compensation Insurance Fund in California–which, with over $8 billion in premiums, is the nation's largest workers' comp insurer.

The second-largest, American International Group, shown at the top of our countrywide ranking (on page 13) presents a challenge when calculating industry ratios because of the insurer's financial reporting issues. While industry loss ratios cited in this article (and shown on accompanying charts) include AIG, the 2004 combined ratio estimate of 105.8 does not.

Despite the omissions, it is clear that workers' comp results improved enormously over the six-year period reviewed by National Underwriter, with the net loss ratio coming down from a high of 77 in 2001 and combined ratio heights reported at the 120 level for each year from 1999 to 2001.

Ten Points Of Profit For Some

Several insurers reported underwriting profits in the line in 2004. In fact, Woodland Hills, Calif.-based Zenith National, Bermuda-based ACE Ltd., Everest National Insurance Company in Liberty Corners, N.J., and the Lansing, Mich.-based Accident Fund (a subsidiary of Blue Cross Blue Shield of Michigan) each reported 2004 combined ratios below 90.

Three of the four wrote the bulk of their workers' comp business in just a handful of states. And it didn't hurt if one state was Florida–which had the second-lowest loss ratio in 2004, coming in at 47.9, compared to 67 for all states combined.

Michigan was also among the states with the lowest loss ratios, where the Accident Fund writes two-thirds of the business.

Zenith National and Everest each reported 86 percent of their direct writings in California and Florida, with 69 percent of Zenith's 2004 direct comp premiums from California alone, and Everest drawing 77 percent from the Golden State.

California comp reforms of recent years worked their way into results, improving year-to-year comparisons for many insurers.

While the overall direct loss ratio for California (at 64.3) was not much lower than the countrywide average (67.0), a 19-point improvement in California drove much of the five-point improvement in the national result. In fact, if California's results are removed from countrywide totals, the adjusted countrywide ratio, at 67.7, is just two points better than a ratio similarly adjusted ratio for 2003.

Results for our top-25 insurers (ranked by 2004 direct premiums) reveal that a strategy of concentrating business geographically–even in California–doesn't guarantee success. Hannover Group, for example, writing 72 percent of its comp business in California, reported a countrywide 2004 direct loss ratio that was more than 20 points worse than the industry and 30 points worse than its 2003 result.

New Jersey Manufacturers and SAIF Corp. (Oregon's competitive state fund)–with over 95 percent of their writings in two of the worst states, from a loss ratio standpoint–also fared poorly in industry comparisons. For New Jersey Manufacturers, the 2004 direct loss ratio was 89.1, while SAIF Corp. reported 123.3.

While geography had negative impacts on direct results for both these workers' comp specialists, New Jersey Manufacturers was one of nine groups in the top 25 to report an underwriting profit on a net basis, with a net combined ratio of 99.5 in 2004.

Several others reported much better net than direct results. Among them was ACE, reporting the lowest net comp combined ratio among the top 25–actually tying with Everest for the best profit result at 82.2.

Reserve Issues Behind Them

Back-breaking work that two of the biggest comp writers did in 2003 to dig out of loss reserve holes had what adjusters might refer to as a "temporary partial" impact on industry results. (Workers' comp claims are categorized by duration and severity of disability, with terms like "temporary total" and "permanent partial" used to determine benefits.)

Boston-based Liberty Mutual strengthened reserves for prior-year California workers' comp claims by almost $300 million on a pre-tax basis in 2003, while Chicago-based CNA reported a net reserve hike for large-account workers' comp business almost twice as big.

With Liberty ranked as the second-largest comp private insurer, and CNA just a few places lower, the charges had an impact on broader industry results. Removing premiums and losses for the two from direct Top-25 loss ratio calculations lowers the 2003 direct workers' comp loss ratio to 65.8–five points below the Top-25 result with the two included. The 2004 Top-25 loss ratio is also 65.8 without Liberty and CNA, suggesting that absence of reserve charges in 2004 explained all the improvement for the largest insurers as a group.

Eyes On Premiums–And California

Turning from losses to premiums, workers' comp direct written premiums increased more than 8 percent in 2004.

Taking advantage of the sunnier comp climate in California last year, insurers reported a 14 percent increase in direct premiums in California, and the top-25 insurers in the state saw a 23 percent jump. But even those figures don't reveal how competitive the West Coast has become, since premium changes reflect both changes in rates and exposures written.

Rate-cut figures released by California Insurance Commissioner John Garamendi earlier this month suggest that insurers easily put 25-to-30 percent more business on the books last year. He announced that comp insurers filed for rate cuts averaging 26.8 percent since reforms were enacted, with cuts averaging 14.6 percent for policies incepting after July 1, 2005. Assuming, then, that insurers reduced rates roughly 10- or 15 percent in 2004, the 14 percent premium growth figure from annual statement data implies a 25-30 percent jump in exposures.

"It's a market that's changing quite rapidly," said Joseph Taranto, Everest's chief executive, during an earnings conference call last month. "The market has gone from what was a terrific market to an okay market. We're thrilled we had a share of the last two or three years of California premium, [but] the rest of the world [also recognized the opportunity]," he added.

He also said that while legislative reforms worked–reducing costs enough to justify large rate cuts–insurers writing the same business in 2005 would see a 30 percent premium drop on rate alone, adding that Everest would write less California comp business in 2005 and 2006.

Everest was one of only a handful of insurers to report comp premium declines in 2004. Last year, in June, Everest announced the termination of its contract with the agency that produced the majority of its California comp business (when the agency hooked up with a competitor), and a shift in focus from writing only large-account business to include smaller accounts.

This year, Commissioner Garamendi has called for more rate cuts. He said reductions filed to date (26.8 percent) lag behind cuts he's recommended (some 36.5 percent) since 2003 and 2004 reforms took effect.

Nationally, rates are also falling, according to reports from the Council of Insurance Agents & Brokers. Figures included in the group's latest report reveal that workers' comp rates last showed an increase in second-quarter 2004–and then rose only 1 percent, compared to second-quarter 2003.

Since then, CIAB's quarterly reports, which are based on surveys of agents and brokers, show year-over-year workers' comp rate declines growing steadily larger in each successive quarter. According to CIAB, rates fell 2.7 percent in third-quarter 2004 compared to the prior-year third-quarter, 3.1 percent in fourth-quarter 2004, 5.3 percent in first-quarter 2005, and 7.3 percent in second-quarter 2005.

Overall premiums still grew for many workers' comp insurers in 2004, with eight of the top 25 reporting premium jumps in excess of 20 percent. Employers Insurance Group==a Reno, Nev.-based comp specialist that nearly doubled its writings==made its debut in the top-25 ranking, with 76 percent of its business coming from California and another 23 percent from Nevada.

Infographic:

Head: Worth Noting!

States with the lowest 2004 workers' comp loss ratios were:

o Hawaii: 41.6

o Florida: 47.9

o Texas: 51.8

States with highest 2004 workers' comp loss ratios were:

o Oregon: 105.1

o Kentucky: 96.7

o New Jersey: 82.3

Combined Ratio Graph:

Flag: Net Results Improve

Even financial reporting problems at the national's largest private comp insurer, AIG, failed to mar an improving picture of worker's comp underwriting results.

Line/Bar Graph:

Flag: Losses Grow More Slowly

Higher premiums weren't the only reason for declining loss ratios in 2004, as net incurred losses grew at a slower rate than in 2003.

Top 25

Flag: Who's In; Who's Out

Overall, the names appearing in NU's rankings have not changed much since last year. But as some exited the list–most notably Pennsylvania Manufacturers, ranked 15th last year–others debuted, including comp specialist Employers Insurance Group in Reno, Nev. (writing 99 percent of its business in California and Nevada), State Farm and Fairfax Financial.

California Chart

Flag: Results Reformed

Even with prices falling, insurers reported improved loss ratios in 2004, as reforms of 2003 and 2004 and smaller prior-year reserve charges impacted results. Seattle-based SeaBright, a specialty comp insurer for maritime employers and organized employers requiring collectively bargained workers' comp, made its first appearance, taking the 24th spot.

Florida Chart

Flag: Still Among The Best

It was hard to lose money on underwriting in the Florida comp market where loss ratios average 47.9. Nationally, loss expense ratios average about 14 and underwriting expense ratios around 24, keeping combined ratios for the state well below the breakeven 100-mark.