State Fund Off S&P CreditWatch
By Robert Warne - May 10, 2001There’s good and bad news woven into the credit rating on the California State Compensation Insurance Fund released by Standard and Poor’s May 7.
The good news is:
As a Security Circle insurer, SCIF voluntarily underwent S&P’s most comprehensive analysis and was assigned ratings in one of the top four categories for financial security. S&P removed SCIF from CreditWatch, where it was placed since April 17 with negative implications. The current rating on SCIF is a triple-‘B’-plus, down from a single-‘A’.
SCIF’s operating performance is expected to improve in 2001 as its rate increase for 2001 begins to affect its earnings. S&P believes that SCIF will have an return on revenue (ROR) of about negative 3% in 2001, an improvement over the negative 5% in 2000.
SCIF is expected to return to profitability in 2002, with an ROR of more than 2%, with the expectation that it should be able to obtain additional rate increases if needed. Capitalization is expected to remain very strong or strong in the foreseeable future, declining slightly in 2001 and 2002 and then improving in 2003, according to S&P.
The bad news, however, is:
The outlook for SCIF is negative—based on "deterioration in capital adequacy, fueled by consecutive years of operating losses since ’98, a weakening reserve adequacy and rapid premium growth."
In recent years, SCIF’s status as a California Workers’ Compensation carrier significantly exposed it to the severe price competition of that market.
SCIF’s mandate to operate as a nonprofit public enterprise has also affected its operating results, since its goal is to provide insurance at cost and to return excess capital to policyholders in the form of dividends. As a result, SCIF’s capital adequacy, though still strong, has steadily deteriorated, as illustrated by an S&P capital adequacy ratio of 170% at year-end 2000.
Since ’96, surplus has declined by 18%, whereas SCIF’s market share has increased significantly to almost 30% from approximately 21% historically. S&P believes the rapid growth in SCIF’s market share will strain its capital adequacy further.
SCIF’s net premiums written for 2000 increased 45% to $1.79 billion from $1.24 billion in ’99. In the first quarter of 2001, its net premiums written were $715 million, a 112% increase over the $337 million in the first quarter of 2000.
This growth is attributed to 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 WC 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 SCIF, with its dominant market share, to gradually improve its earnings and capital. S&P believes that SCIF’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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