Calif. State Comp Insurance Fund Rating Lowered, Off WatchNeg

May 8, 2001

Standard & Poor’s (S&P) removed from CreditWatch and lowered its counterparty credit and financial strength ratings on the California State Compensation Insurance Fund from “A” to “BBB+.” The outlook is negative.

The ratings were placed on CreditWatch on April 17, 2001, with negative implications.

According to S&P, the downgrade reflects the steady deterioration in the fund’s capital adequacy, which was fueled by consecutive years of net operating losses, weakening reserve adequacy and rapid premium growth.

The fund has had operating losses each year since 1998. In addition, in recent years, its status as a California workers’ compensation carrier significantly exposed it to the severe price competition of that market.

The fund’s mandate to operate as a nonprofit public enterprise has also affected its operating results, as its goal is to provide insurance at cost and to return excess capital to policyholders in the form of dividends. As a result, the fund’s capital adequacy, albeit still strong, has steadily deteriorated, as illustrated by a S&P’s capital adequacy ratio of 170 percent at year-end 2000.

Since 1996, surplus has declined by 18 percent, whereas the fund’s market share has increased significantly to almost 30 precent from approximately 21 percent historically. S&P believes the rapid growth in the fund’s market share will strain its capital adequacy further.

In 2000, the fund’s net premiums written increased 45 percent to $1.79 billion from $1.24 billion in 1999. In the first quarter of 2001, net premiums written were $715 million, a 112 precent increase over the $337 million in the first quarter of 2000. This growth was caused by a combination of new policy growth and rate increases on existing accounts. New business growth is being driven by the substantial loss of capacity in the California workers’ compensation market that has resulted from the financial difficulties or market withdrawal of some major competitors.

The withdrawal of capacity is having a positive impact on rates, which should allow the fund — with its dominant market share — to gradually improve its earnings and capital. Standard & Poor’s believes the fund’s growth will slow down in the second half of 2001 as much of the displaced business in the marketplace gets absorbed.

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