State Fund Withdraws from Best’s Rating Process

“In essence, we’d like to assure all of our policyholders that we are solvent, that we’re still financially strong,” said Jim Zelinski, spokesperson for California State Compensation Insurance Fund, in addressing newfound concerns of State Fund’s financial stability.

The recent withdrawal from A.M. Best’s interactive rating processes by the State Fund raised many questions in regards to the future of the worker’s compensation carrier. The withdrawal request (NR-4) was subsequent to the previous day’s downgrading by Best, rating State Fund “B,” down from “B+.”

The May 2 withdrawal from Best’s rating process is not a new path for State Fund. According to a Standard & Poor’s press release dated Dec. 4, 2001, State Fund also requested to be removed from S&P’s rating process, preceding the company’s downgrade to “BB+” from “BBB+.”

“We believe that A.M. Best, like other financial rating organizations, are maybe somewhat challenged by being able to evaluate State Fund in the context of it’s non-profit role,” said Zelinski. “In order to fulfill our mission, which is to provide a workers’ compensation market to all employers during all market conditions, we’re going to have a balanced book of business, [both] profitable and unprofitable.

“Rating organizations historically focus on for-profit private carriers, so we don’t believe that we can be fully and completely evaluated in the same context as a private carrier.”

Joseph Roethel, assistant vice president for A.M. Best, justified Best’s decision to downgrade State Fund to “B-.” That action basically reflected our concern with the fund’s substantial growth in the California workers’ compensation market and the resulting impact on the companies overall financial strength.”

Specifically, Best defines it’s “B-” rating as “fair,” companies characterized by fair balance sheet strength, operating performance and business profile when compared to set standards as defined by Best. Best further states that the companies, although they have the ability to meet their current obligations to policyholders, are vulnerable in their financial strength to conflicting changes in underwriting and economic conditions.

While Zelinski defends the rating, emphasizing, “the fair rating means that State Fund is able to meet its obligations to policy-holder’s,” he adds, “We certainly understand A.M. Best’s concern over the chaotic nature of the market. Again, we grew significantly in the past couple of years, because many carriers either left the market, refused to write business, or went insolvent, or again, went into regulatory supervision.

“This is not going to affect our relationship with agents and brokers, or any of our business partners. In fact it’s not going to have any impact on any aspect of our operations or services to policyholders. We’re going to do what we’ve always done.”

Similarly, it was S&P’s concerns over the State Fund’s rapid growth that led to its downgrade in December of 2001. In addition, S&P cites the State Fund’s weak operating performance as straining the State Fund’s capital.

S&P categorizes “BB+” as having marginal financial security characteristics, leading to the possibility of a company being unable to meet financial commitments if faced by adverse conditions.

“California’s stuck in a pricing environment that’s been very competitive since the advent of open rating in 1995,” said Roethel. “Inadequate pricing and in adverse loss reserve development have led to significant underwriting losses for many carriers, including the Fund. While the market itself has improved considerably over the last couple of years, we do believe that overall pricing levels remain inadequate.”

“There’s been a lot of troubles with some companies operating in their marketplace, and we’ve got concerns over future premium growth, and then again, its affect on capitalization.”

Roethel said that Best uses its own capital model to determine the financial strength of an organization.

“I think after awhile, ratings, on certain levels, don’t benefit companies. I’m not sure exactly why they don’t want the rating, but it’s an option that’s available to every company that we rate.”

According to Zelinksi, State Fund has a unique role in the marketplace. “We’re not simply driven by profit. We’re a non-profit public enterprise.

“There isn’t any question about State Fund’s ability to pay claims, either in the near term of long-term. And we want our policyholder’s and their injured workers to know that,” he added.

Zelinski did note that State Fund is working to boost surplus, and are working with the CDI on a plan to do so.

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