Employers Direct Stops Writing Workers’ Comp Insurance in California

Citing the strain of escalating medical costs on the workers’ compensation system, increasingly intense price competition, and the uncertainty over the sustainability of the 2003-2004 legislative reforms due to recent Court decisions, Agoura Hills, Calif.-based Employers Direct plans to stop soliciting new and renewal California business on a direct basis starting on Aug. 1, 2009.

Calling the California workers’ compensation insurance marketplace “volatile,” Employers Direct also said it was setting its rates at levels it sees as commensurate with the much higher risk profile of state workers’ comp claims. And to reflect its reduction in premiums, the company is reducing staff by approximately 18 percent.

“The current rapidly changing environment is a reminder of the volatility that saw a catastrophic upheaval in the marketplace just a decade ago,” noted CEO James Little. “There will always be pressure to cut rates, even after five years of sharp reductions. If the market continues to react viscerally to this demand – even as costs increase and investment income plummets – we will be well on the way to another crisis.”

Based on the announcement, A.M. Best Co. downgraded Employers Direct’s financial strength rating to “B++” from “A-” and issuer credit rating to “bbb+” from “a-.” The outlook for the ICR is negative, and the outlook for the FSR has been revised to stable from negative, the rating company said.

The rating actions reflect EDIC’s decision to stop soliciting business in California until market conditions improve and to discontinue its direct operations in the third quarter of 2009, as well as the continued adverse reserve development on workers’ compensation liabilities from prior accident years and the challenges associated with the competitive market conditions in the California workers’ compensation marketplace, which are magnified by the shortcomings in the company’s direct distribution business model, A.M. Best said.

Notwithstanding, EDIC’s ratings reflect its adequate capitalization and the benefits derived from being part of Alleghany Corp, A.M. Best said. The ratings also recognize the $50 million capital contribution made by Alleghany in 2007, the allocation of resources to support and enhance operations in light of EDIC’s recent operating challenges and Alleghany’s financial flexibility and historical track record of profitably operating well capitalized insurance subsidiaries.

A.M. Best said it will monitor EDIC’s results to ensure that its risk-adjusted capitalization remains supportive of its ratings.

“We pride ourselves on being on the leading edge of developments in this marketplace. We showed that when we entered the market in 2003 amid a scarcity of industry capacity,” Little said. “Today, we must be equally as bold in acknowledging that premium-writing capacity at today’s unprofitable levels no longer serves the best interests of workers’ compensation stakeholders – neither businesses nor insurers.”

In addition to California, Employers Direct Insurance Co. is licensed in Arizona, Colorado, Idaho, Illinois, Nevada, Oregon and Utah.

Topics California Commercial Lines Workers' Compensation Business Insurance AM Best