Pinnacol Assurance Offers Colorado $330 Million to Become Private Insurer

By | March 19, 2010

Pinnacol Assurance, Colorado’s quasi-governmental workers’ compensation insurer, has submitted a potential separation agreement to Colorado Gov. Bill Ritter that would establish Pinnacol as a domestic mutual insurance company owned by its policyholders in exchange for $330 million that could help ease the state’s budget crisis.

The figure is an increase of $130 million from the $200 million Pinnacol initially offered on Feb. 15, 2010, to the state in exchange for its separation, and follows a review of the company’s worth by Morgan Stanley. The company did not indicate why it had increased its offering.

However, on Feb. 8 2010, Morgan Stanley was hired by the state as its financial advisor to evaluate Pinnacol’s worth in a potential separation transaction. The financial services firm noted Pinnacol is worth between $331 million and $374 million, following an analysis of the value of historical support provided by the state to Pinnacol, and Pinnacol’s capital position and ability to pay.

Morgan Stanley also estimated Pinnacol currently has $210 million to $264 million in capital available. If the state agrees to Pinnacol’s separation agreement proposal, the remaining funds would come from future earnings, Morgan Stanley report indicated.

Pinnacol President and CEO Ken Ross said that his company’s offer — a result of “consultation with [the company’s] financial and legal advisors, and an extensive review process with [its] board of directors – would include cash payments of $230 million spread over the next two years, and an additional sum of $100 million in the form of interest bearing surplus notes paid at 11 percent over the next 30 years.

He noted that Pinnacol’s board is recommended the company separate from the state and establish itself as a private mutual insurance company owned by its policyholders because it is an opportunity to:

  • Clarify policyholder ownership rights and give them more input into operations;
  • Restore stability to the company; and
  • Ensure the viability of the state’s workers’ compensation market for employers and their employees.

The company would remain committed to covering the residual workers’ compensation insurance market and to providing competitive and stable workers’ comp coverage in Colorado, Ross said. “Nothing in the transaction impairs Pinnacol’s future ability to consider reducing rates and issuing dividends, nor impairs its ability to meet obligations to injured workers and their families,” he said, noting the company has reduced rates by more than 50 percent in the past five years, and issued dividends of nearly $350 million in the same period.

In 2009, Colorado legislators floated the idea of taking $500 million from Pinnacol’s approximately $700 million surplus to help balance the budget, but the state solicitor general said such an action was unconstitutional. That led to negotiations between Pinnacol and Gov. Ritter on a way the insurer could help balance ease the state deficit. Meanwhile, the 2010 Legislature now is evaluating several bills that would place more restrictions on the insurer.

If Colorado accepts the $330 million proposal Ross submitted to Gov. Ritter on March 18, 2010, final terms would still be subject to review and approval by Pinnacol’s board, Ross said.

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