Posted on 29 Jul 2010
Trouble in California's workers' compensation market hit insurer SeaBright Holdings Inc. hard on Wednesday.
SeaBright reported a second-quarter net loss $15.5 million, or 74 cents a share, versus net income of $4.3 million, or 20 cents a share, a year earlier.
The loss came as the insurer had to set aside more money to cover higher-than-expected claims from policies sold in previous years. Most of this was driven by SeaBright's book of workers' compensation insurance it sold in California.
"During the second quarter we undertook prudent measures to strengthen our loss reserves to reflect recent adverse claim development we have experienced, primarily in our California book of business," John Pasqualetto, SeaBright's chief executive, said in a statement.
"In California, we encountered increasing medical cost trends and longer average claim durations, made worse by protracted high unemployment levels," he added.
SeaBright has been raising prices for workers' comp coverage in California and the insurer asked for a 15.3% increase in the state on Tuesday. However, that wasn't enough for Bijan Moazami, an insurance analyst at FBR Capital Markets, who called the second-quarter results "terrible."
"The best course of action is the sale of the company," Moazami wrote in a note to investors.
SeaBright shares slumped 13% to close at $8.58 on Wednesday.
Workers' compensation insurance covers the cost of medical care, lost wages and rehabilitation for on-the-job injuries and provides benefits for the family of any employee killed in work-related accidents.
The workers' comp market in California has been plagued by intense competition, spiraling medical costs, fraud and abuse for many years. More than 20 firms either went bust or left the state from 2000 to 2003.
The 2008 financial crisis and recession, which has hit California particularly hard, may be creating more problems in this market. High unemployment in the state could be triggering more workers' comp claims.
Cliff Gallant, an insurance analyst at KBW, asked Evan Greenberg, chief executive of insurance giant Ace Ltd., about this potential trend during a Wednesday conference call.
Greenberg said there's always been a link between a "difficult" economy and "malingering claims" in the workers' comp market.
Ace's chief actuary, Sean Ringsted, noted that the combined ratio of the California workers' comp insurance market for 2009 is currently running "well above" 100%. That implies insurers in this market are making an underwriting loss, on average.
The severity, or size, of claims is down, but the frequency of claims is up, he also said.
"The industry in California is under a lot of pressure," Ringsted said. "How it impacts our book is something we are going through."