Overview of Tennessee s s Workers Compensation Market Conditions and Environment Tennessee Advisory Council on Workers Compensation August 22, 2011 Mike Shinnick,, Workers Compensation Manager Tennessee Department of Commerce & Insurance 1
2010 Market Segments Million in Premiums $700 $600 $500 $400 $300 $200 $100 $0 $676 $648-4% -1% $170 $168-4% $24 $23 $34 $32 Voluntary Self Insureds SI Groups* TWCIP -6% 2009 2010 * Excluding government sponsored groups, Individual Self Insureds are on an equivalent premium 2
TN Large Deductibles History 3400 3300 3200 300 250 200-24% 3100-5% 150 3000 100 2900 50 2800 '04 '05 '06 '07 '08 '09p 0 '04 '05 '06 '07 '08 '09p Policy Count Policy Year Premium (millions) Source: NCCI 3
National Picture 4
Workers Comp Outperforms Overall P&C Line of Business Net Calendar Year Combined Ratio Private Carriers 2008 2009 2010 preliminary Personal Auto 100% 101% 101% Homeowners 117% 105% 107% Com. Multi Peril 104% 97% 101% Com. Auto 97% 100% 98% Workers Comp 101% 110% 115% Total P&C Industry 104% 101% 102% Sources: NCCI for Workers Compensation; Best Preview & ISO for all other lines 5
WC and P&C Calendar Year Combined 140 120 100 80 60 40 20 Ratios Except for 2008, WC Consistently Trails Overall P&C Results, on Average 6 Points Worse 118 122 P&C 111 110 107 Private Carriers 103 WC 93 101 101 110 115 Combined Ratio = Expense Ratio + Loss & LAE Ratio; results <100 equate to an underwriting profit 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p Source: NCCI (2010 is preliminary) 6
Workers Compensation Indemnity 12.00% Claims Cost Decreases in 2010 10.00% 8.00% 10.10% 9.20% 8.20% 6.00% 4.00% 2.00% 0.00% 3.10% 5.60% 5.90% 4.60% 3.40% 1.60% 0.80% -2.00% -4.00% -3.00% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p Source: NCCI (2010 is preliminary) 7
WC Medical Claim Cost Trends (Lost Time Cases) 16% 14% 13.50% 12% 10% 8% 6% 4% 7.30% 8.80% 7.70% 5.40% 9.10% 6.10% 6.10% 5.00% 5.40% Med Severity Med CPI 2% 2.00% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p Sources: NCCI - Med Severity; Economy.com Medical CPI * preliminary 8
Lost Time Frequency Shifts in 2010 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% -7% 3% -2.10% -4.50% -4.50% -4.10%-3.70% -4.50% -4.10% -5.55% -6.90% -6.60% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p Source: NCCI * Preliminary; 2010 frequency is adjusted for recessionary factors 9
Accident Year Combined Ratio Workers Compensation Private Carriers 140 120 100 80 125 106 97 88 87 86 98 104 109 114 60 40 20 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p Source: NCCI; 2010 is preliminary 10
Calendar Year WC Reserve Deficiencies Though Increasing are Manageable Billions 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: NCCI 11
Improved WC Investment Returns Percent 25 in 2010 Investment Gain on Insurance Transaction to Premium Ratio 20 15 Average 1990 to 2009: 14.6% 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p Sources: A.M. Best/NCCI (2010 is preliminary); Private Carrier results 12
Percent 25 20 15 10 5 0-5 -10 WC Results Operating Gain Slips Pre-Tax Operating Gain Ratio Private Carriers 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p Source: 1992-2009, Annual Statement Data; 2010 NCCI. Operating Gain equals 1.00 minus (Combined Ratio less Investment Gain on Insurance Transactions and Other Income) * 2010 is preliminary 13
40 35 30 25 20 15 10 5 0 According to Goldman Sachs, Pricing Declines Continue to Moderate Agent Responses on Policy Renewal Premiums vs. 12 Months Prior Down 21%+ Down 11-20% Down 1-10% No change Yet, over 75% of responses predicted premiums flat or down Up 1-10% Up 11%+ 'Jan-09 'Jan-10 'Jan-11 Source: Goldman Sachs Research, Proprietary Survey, January 2010 Pricing Survey, Insurance: Property & Casualty (Exhibit 8 Workers Compensation, Percentage of Respondents) 14
Tennessee Specific 15
Tennessee Direct Premium Written History 1,000,000,000 900,000,000 800,000,000 700,000,000 600,000,000 500,000,000 400,000,000 300,000,000 200,000,000 100,000,000 0-19% -4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: NAIC (Annual Statements) 16
Accident Year Combined Ratios 140 120 100 128 125 106109 103 100 97 88 96 87 91 86 98 94 104103 109 105 118 114 80 60 40 20 Countrywide Tennessee 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Source: NCCI; 2010 preliminary data 17
Loss Cost Filing & Final Approvals Since 2004 Reforms Were Implemented Year Filing Made NCCI Filed Rate Advisory Council Recommendation Commerce & Insurance Approved Rate Effective Date 2004-6.3% -6.3% -6.3% 9/1/2004 2005 +3.9% +3.9% +3.9% 7/1/2005 2005-6.9% -6.9% -6.9% (net -3.3%) 7/1/2005 2006 1.6% 1.6% 1.6% 3/1/2006 2007 1.4% 0% 1.4% 3/1/2007 2007 2.4% 2.4% 2.4% 7/1/2007 2007-7.2% -8.6% -7.2% 3/1/2008 2008-3.1-3.1-3.1 7/1/2008 2008-3.1-3.4-3.1 3/1/2009 2009 -.1 -.1 -.1 3/1/2010 2010-5.1-5.3-5.1 3/1/2011-18.7% approved since 9/1/04 18
Current NCCI Voluntary Market Filed Rate/Loss Cost Changes 10 5 0-5 -10-15 TN AL MS DC OK GA WV VT UT NC IL RI IA FL Source: NCCI; states filed through 4/15/2011 19
Tennessee Voluntary Market Loss Cost Multipliers (LCMs) Market appears at this 1.5 stage to have bottomed 1.45 out. Multipliers are 1.4 based on prior year 1.35 1.3 premium weighted 1.25 average market shares. 1.26 1.2 1.35 1.46 1.49 1.46 1.43 1.40 1.37 1.33 1.34 1.34 1.15 1.1 2001 2003 2005 2007 2009 2011 20
2010 LCM Distribution (by Direct Premium Written) Median 1.35 90% above 1.04 90% below 1.58 10% above 1.55 Assigned Risk LCM A complete listing of lost cost multipliers is posted on Department s website 21
Loss Cost Change Pricing Element 0 May '10 July '10 Sept '10 Nov '10 Jan '11 Mar '11 May '11-1 -2-3 -4 Line 1 Loss Cost Change -5-6 22
NCCI TN Price Change Analysis 6 4 2 0-2 May '10-4 July '10 Sept '10 Nov '10 Jan '11 Mar '11 May '11 Price Change Loss Cost Change -6-8 Source: NCCI; Loss cost change since one year prior Average reported net rate change between current & prior policy periods 23
TN WC Premium Tax Revenues YE 8/31/07 YE 8/31/08 YE 8/31/09 YE 8/31/10 Self Insurance $10,164,858 $9,662,965 $8,013,028 $6,718,164 Insurance $32,789,581 $35,317,758 $31,791,246 $25,910,877 Total Premium Tax* $42,954,439 $44,980,723 $39,804,274 $32,629,041 Data excludes.4% TOSHA Surcharge 24
Overview of Voluntary Market Conditions Continued profitability decline (cyclical) Prices continue to soften into second quarter 10 Investment climate improved in 2010, though 2011 appears to be on a reversal 9 new companies filed LCM s since 7/1/10 Reinsurance market remains soft, especially for the catastrophe layers. Source of Reinsurance market information: AonBenfield. 25
TWCIP The Assigned Risk Plan 26
TN Assigned Risk Premium History $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $32M $20,000,000 $0 1998 2000 2002 2004 2006 2008 2010 Source: Aon 27
TN Assigned Risk Loss Cost Multiplier 2 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 1.416 1.35 1.35 1.4971.497 1.7 1.7 History 1.95 1.95 1.85 1.7 1.63 1.54 1.51 1.55 1997 1999 2001 2003 2005 2007 2009 2011 28
LCM History: Voluntary vs. TWCIP 2010 Was the Lowest Differential in 12 Years TWCIP 23% On Average, Higher 2 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 2000 2002 2004 2006 2008 2010 16% Higher Voluntary LCM is a Weighted Average Voluntary TWCIP 29
TN Assigned Risk Market Share - NAIC Direct Premium Written 35 30 25 20 15 Trigger 10 5 4.7% 0 1996 1998 2000 2002 2004 2006 2008 2010 30
TN Assigned Risk Premium Bookings Millions 3.5 Down 2% in 2011 3 2.5 2 1.5 2010 2011 1 0.5 0 Jan Feb Mar April May June 31
TN Assigned Risk Policy Count Down 9% in 2011 Total Assignments 1200 1000 800 600 400 2010 2011 200 0 Jan Feb Mar April May June 32
Aon s s Actuarial Estimate of Break Even LCM for 3/1/2012 August 15, 2011 - Report Highlights (Includes both Servicing Carrier & Direct Assignment Carriers s loss data) Low Mid Point High 1.65 1.54 1.76 2002-2009 Data Aon Recommendation Projected full impact of adverse development is now 14.8 percent Though not shown in Aon s s report, the latest 2010 loss ratio for servicing carriers is 125.6%, well ahead of the pace for the early low premium years. Provision for uncollected premium, federal income taxes, and other expenses is up slightly to 29.5 points. 33
TWCIP (Servicing Carriers Only) Loss Ratio Valued 3/31/11 Leveled at 1.55 LCM 1.4 1.2 1.22 1 0.8 0.6 0.4 0.81 0.79 0.85 Break Even.713 0.63 0.63 0.67 0.6 0.54 0.59 0.62 0.79 0.2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 34
TWCIP (Servicing Carriers Only) Loss Ratio Valued 3/31/11 Leveled at 1.55 LCM 1.4 1.2 1.22 1 0.8 0.6 0.4 0.81 0.79 0.85 Break Even.713 0.63 0.63 0.67 0.6 0.54 0.59 0.62 0.79.91 0.2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2010 impacted by one claim with an incurred amount of $5.1M; loss ratio falls to.91 dropping this loss 35
2010 Self Insurance 36
List of Self-Insured Groups Self-Insured Groups Associated Builders & Contractors of TN Comptrust AGC of Tennessee Home Builders Association of TN TN Automotive Association TN Forestry Association Active Active Active Active Active Status TN Health Care Association TN Road Builders Association TN Association of Business Company Owners Managed Program TN Restaurant Association TN Trucking Association Self-Insured Group Trust Active Not Active Run Off Not Active Run Off Not Active Not Active 37
Overview of Self-Insurance Market (2010) Self-Insured Employers 97 Number of employees 238,748 Total Premium Equivalent $168 million Self-Insured Groups 6 Number of employees 33,555 Total Premium $23 million 38
Insolvencies Individual carrier data included in this section includes insolvencies over $1 Million in total losses 39
WC Insolvency Data -Valued 6/29/11 (Listed Only Carriers Having Over $1M Total Unpaid Losses) Carrier (Liquidation Date) Total # Claims Total $ Amount Paid Claims Total $ Unpaid Claims Reliance (10/01) 1,758 35,339,185 27,157,320 Home Ins. Co. (6/03) 124 2,497,872 2,497,872 Reciprocal of America (6/03) 313 1,491,425 3,233,085 Legion & Villanova (7/03) 1,874 37,564,635 27,161,399 Casualty Reciprocal (8/04) 52 2,849,914 1,424,781 Realm National (6/05) 52 2,592,726 3,997,374 Imperial Casualty (5/10)* 124 1,079,164 2,836,124 Pegasus (8/10)* 6 93,626 1,315,755 Atlantic Mutual (4/11)* 12 3,335 1,394,030 Totals (all since 10/3/01) 4,315 83,511,882 71,017,740 Source: TN Guaranty Association * New to listing: $6,722,034 Paid & Unpaid 40
WC Insolvency Data On the radar screen: Kemper Group (IL Domestic) Agreed Orders entered by Commissioner Flowers on July 6, 2005 suspending Kemper Companies licensed in TN. Premium as of December 31, 2009: $ -2K $8.3 million in unpaid losses 41
P&C Insurer Impairments: 1980-2010 The number of impairments varies significantly over the P&C insurance cycle, with peaks occurring well into hard markets 60 50 40 30 20 10 0 80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08 '10 Source: A.M. Best and Insurance Information Institute; 2010 preliminary estimate 42
Number of WC Carrier Insolvencies 6 Per Year Impacting TN 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: TN Guaranty Association; 2003 Legion and Villanova are combined & shown as one 43
TN Guaranty Fund Assessment History $18 $16 $14 (Millions) $12 $10 $8 $6 $4 $2 $0 1990-1999 2001 2003 2005 2007 2009 Source: TN Guaranty Association; $73M assessed since 2001, representing 51% of total losses (see slide 42) 44
TN Trucking Association Self- Insurance Group Trust Court entered order declaring liquidation complete on May 24, 2011 and closed proceedings. 45
TN Restaurant Association Self- Insurance Group Trust Restaurant liquidator has paid all claims in full and all litigation has been settled. Final procedural administrative tasks necessary for closure of the estate are almost complete. We will file a motion asking the court for a summary order closing restaurant receivership after these tasks are complete, expected by the end of 2011. 46
Overall Market Summary POSITIVES National company failure rate remains moderate Smallest TN residual market in 11 years Market remains very competitive Improved investment returns in 2010 NEGATIVES 18 point TN pure underwriting loss - worst combined ratio in 9 years First frequency increase in 13 years NCCI describes today s market as deteriorating Latest Plan results are poorer than expected 47
Summary: NCCI Filings Reported Quarterly Third Quarter 2010 No filings made Fourth Quarter 2010 No filings made First Quarter 2011 Item 01-TN TN-2001 Item RM-01 01-TN-2011 Item 02-TN TN-2011 Item RM-02TN 02TN-20112011 B-1422 Implemented gross receipts rule to determine chargeable payroll for non- exempt commercial construction projects effective March 1, 2011 Assigned Risk version of Item 01-TN TN-2001 Revisions to B-1420 B to amend premium determination for each partner and sole proprietor, basing it on the maximum payroll amount for partners and sole proprietors in the construction industry, effective March 1, 2011. Assigned Risk version of Item 02-TN TN-2011 Revision to Miscellaneous Values payroll determination formula for f Taxicab, Athletic Sports or Park (both contact and non-contact) and Carnival, Circus or Amusement Device Operator, adjusting to state average week wage instead of census factor, effective March 1, 2012. Second Quarter 2011 Item B-1423B Item P-1409P Eliminated ex-medical coverage rules from the manuals effective March 1, 2012 Withdrawal of ex-medical endorsements 48
Overview of the Tennessee Workers Compensation Market Conditions and Environment Copies of Presentation: tn.gov/commerce/insurance 49