COVID-19 rebound lifts workers' comp funds to highest premium growth in years

Effects of the pandemic mostly provided tailwinds in 2021 to the top and bottom lines of State Compensation Insurance Fund, the California quasi-governmental workers' compensation insurer, and New York's State Insurance Fund Workers' Compensation Fund, which is better known as NYSIF.

Positive swings in premium volumes and for the two largest U.S. state workers' comp insurance funds are rooted in specific actions they took in 2020 following the declaration of a pandemic and the effects of the broader macroeconomic recovery on employer payrolls.

S&P Global Market Intelligence estimates based on disclosures in materials released ahead of a Feb. 24 board meeting that State Fund's net premiums written increased in 2021 at their fastest year-over-year rate since 2014. For NYSIF, the reported 2021 net premiums written growth rate would appear to mark an eight-year high.

These results are directionally consistent with those posted by private carriers, but they do not necessarily provide a read-across for the sector given the unique roles State Fund and NYSIF play in their respective markets, the persistence of certain top-line headwinds, and the eventuality that historically favorable calendar-year underwriting results at the industry level will normalize.

Net premiums earned at State Fund surged by 21.7% in 2021 to $1.24 billion. Our estimate of net premiums written growth of 14.6% is based on the company's reported expense ratio and its actual 2020 results. It had been since 2015 that State Fund posted positive year-over-year net premiums written growth in any amount.

Board meeting materials attributed the higher earned premiums to an increase in reported payroll policies resulting from the reopening of businesses as well as a $45 million 2020 reduction in estimated audit premium due to projected reduced payroll during COVID-19 that did not recur in 2021.

The total number of nonfarm employees in California plunged to a low of 14.9 million in April 2020 from 17.7 million just two months prior and since rebounded to 16.9 million in December 2021, according to U.S. Bureau of Labor Statistics data compiled by the Federal Reserve Bank of St. Louis.

At NYSIF, meanwhile, net premiums written rose by 7.6% in 2021 after plunging by 19.3%, according to data presented during a Feb. 16 board meeting. The retreat and recovery from an earned premiums standpoint was more dramatic as demonstrated by a swing to a growth rate of 13.6% in 2021 from a decline of 23.1% in 2020.

CFO William Gratrix, in comments made during the board meeting, primarily attributed higher earned premiums to deferrals of premium collections and audits on 2020 results as it sought to assist customers during the period that saw the worst economic fallout from the pandemic. Results in 2021 reflected the impact of customer billings that addressed the 2020 deferrals as well as significant premium audit adjustments, Gratrix said.

NYSIF and State Fund ranked as the ninth- and 14th-largest U.S. workers' comp writers, respectively, based on 2020 direct premiums written. Direct and net premiums written closely align for both of the funds. Their rates of contraction in 2020 were more dramatic than the 9% decline posted by U.S. property and casualty industry as a whole, and it appears that their 2021 expansion will also surpass their private market peers.

The year-over-year swings in net premiums written growth rates of 26.9 percentage points for NYSIF and an estimated 25.2 percentage points for State Fund are considerably wider than those posted by a handful of top-15 publicly-traded workers' comp writers that have broken out 2021 premium volumes for the business line.

At The Travelers Cos. Inc., the No. 1 U.S. workers' comp writer in 2020, premiums decreased by 5.2% in 2021 as compared with a 12% retreat in 2020 as Chairman and CEO Alan Schnitzer said during a January conference call that the company benefited from exposure growth that was "about as high as we've seen in a few years." Chubb Ltd.'s workers' comp premiums increased by 5.7% in 2021 after having dropped by nearly 4% in 2020. Old Republic International Corp.'s workers' comp premiums fell by 4.3% in 2021 and by 13.1% in the prior year. W. R. Berkley Corp. posted the widest swing of the four private market companies with a 2021 increase of 4.4% that management attributed to employer payroll growth having followed a 2020 decline of 14.1%.

On a statutory basis, U.S. P&C industry direct premiums written excluding State Fund grew by 0.8% for the first three quarters of 2021 versus a decline of 8.2% in the year-earlier period.

Workers' comp growth rates continue to lag the commercial lines as a whole as an extended period of favorable underwriting results have led to a bifurcation in pricing trends. Current voluntary market loss-cost or rate-level changes in the states where the National Council on Compensation Insurance has filed in its capacity as a licensed rating and statistical organization remain overwhelmingly negative, and individual carriers continue to offer broader pricing commentary by excluding the impact of workers' comp.

Headline profitability for the two state funds improved relative to 2020. NYSIF's combined ratio including policyholder dividends declined to 99.3% from 111.1%, reflecting the impact of factors such as higher earned premiums and what Gratrix reported as a $57 million release of COVID reserves and other favorable prior-year reserve development. State Fund's combined ratio including policyholder dividends of 143.6% was 7.6 percentage points lower than a 2020 result that incorporated $101 million of dividends that did not recur in 2021. Losses incurred increased on both absolute and relative bases as State Fund reported ongoing effects of COVID-19 claims, increased medical legal fees, and higher reserves in the transportation category that specifically pertained to parcel delivery.

Private market carriers appear poised to post a workers' comp combined ratio of less than 100% for an eighth straight calendar year. Their calendar-year combined ratios exceeded 100% 17 times in an 18-year stretch from 1996 through 2013.