The State Compensation Insurance Fund increased its share of the California workers' compensation market in 2018, but its top-line momentum appears to be short-lived.
Select first-quarter results, released in advance of a May 23-24 meeting of the quasi-governmental entity's board, show a sharp year-over-year decline in net premiums earned and offer a reminder of the extent to which 2018 volumes were boosted by a one-time event.
State Fund reported growth of nearly 1.9% in net premiums earned in 2018, but the outcome of premium audits fully accounted for the $24.3 million year-over-year increase, offsetting downward pressure on rates and policy count. CFO Peter Guastamachio, in an August 2018 presentation to the State Fund board, said the company had additional capacity to conduct those audits in 2018 as compared to 2017. As a result, the February board meeting minutes show, the net full-year boost from the auditing process on premiums rose to $193 million from $146 million.
The materials for the upcoming board meeting did not specifically quantify the impact of audited premiums on results for the first quarters of 2018 or 2019, other than to say they were lower in the most recent period. The company added that "unusually high" audited premiums in 2018 were the result of delays the year before resulting from legislation that adjusted the definition of an employee in relation to California's workers' comp system.
A 10% rate decrease that took effect Jan. 1; the impact of "stiffer competition" in California; and the retreat in audited premiums led to a 19.3% year-over-year decline in net premiums earned in the first quarter, State Fund disclosed. It was the company's largest such percentage drop since the fourth quarter of 2015.
State Fund did not quantify its amount of premiums written in the first quarter, but S&P Global Market Intelligence estimates a year-over-year decline of about 18%. The company blamed lower written premiums for a 6.2-percentage-point increase in its expense ratio for the quarter, which in turn led to a 6.7-point rise in the company's combined ratio to 135.3%. Its underwriting loss was nearly unchanged, however, at $103 million.
The minutes from the February meeting indicate that State Fund's estimated annual premium from both new and renewal business fell in 2018. Its policy count fell 5.4% during the year to 116,820.
Those headwinds aside, State Fund fared better than many of its private peers from a top-line growth standpoint in 2018.
Berkshire Hathaway Inc.'s U.S. property and casualty companies and State Fund finished the year in a near-dead heat in the California market, with workers' comp direct premiums written of just over and just under $1.34 billion, respectively. The gap in in-market premium volume between the two entities narrowed to less than $4 million in 2018 from more than $64.6 million in 2017.
State Fund's resulting share gain of approximately 0.2 percentage point marked its first positive movement from a relative positioning standpoint since 2014. Among the top 14 writers of California workers' comp business at the group or top-tier levels, only Insurance Co. of the West grew in-market premiums year over year. State Fund's decline of less than 1.6% was the least unfavorable comparison among the remaining 13 entities.
Insurance Co. of the West supplanted AmTrust Financial Services Inc. as California's No. 3 workers' comp writer in 2018. The Hartford Financial Services Group Inc., Travelers Cos. Inc. and Chubb Ltd. ranked fifth through seventh.
That the P&C industry experienced a decline of only 3.5% in California workers' comp direct premiums written in 2018 was generally regarded as the product of the positive impact from macroeconomic trends partially offsetting sharp downward pressure on rates.
The California Department of Insurance adopted advisory pure premium rates, effective July 1, 2017, Jan. 1, 2018, and July 1, 2018, that were double-digit percentages lower than on the same dates in the prior years. The advisory rate adopted by the department to take effect Jan. 1, 2019, represented a year-over-year decline of 16%.
Average pure premium rates filed by insurers remained well above the department's advisory rate, but they, too, have been falling. The average rate as of July 1, 2018, according to department figures, was down 9% from the same date in 2017.
Former Commissioner Dave Jones cited continued decreases in loss costs in setting the lower advisory rate, and he repeatedly urged the industry to pass along the purported savings to employers in the form of lower filed rates.
The industry's direct incurred loss and defense-and-cost-containment-expense ratio in calendar year 2018 on California workers' comp business tumbled to at least a 23-year low of 49.2% from 56.7% in calendar year 2017.