Worker’s comp insurers pinched by jobs’ weakness

By Reuters
Posted Oct. 22, 2010 at 1:17 p.m.

The weak outlook for U.S. employment could hurt insurers that cover work-related injuries.

Persistently high unemployment translates to fewer workers to cover, which cuts into revenue. And  “worker’s comp” providers face higher payouts because claiming workers are staying on benefits longer for lack of other jobs.

Companies such as Travelers Cos., Employers Holdings Inc., SeaBright Holdings Inc. and Amerisafe Incare  seeing the effects of weak employment. Even if the jobs market is showing marginal improvements, these companies are still likely to suffer.

In the second quarter, SeaBright gave a taste of what could be ahead for larger insurers when it added to reserves because of higher medical costs and longer claims in California.

“SeaBright is a very clear warning sign to investors that there could be some negative surprises in this space,” said James Ellman, president of San Francisco-based investment manager Seacliff Capital.

“It is an industry where losses are going up and this, unfortunately, happens when you get a recession.”

The companies that could be hit hardest are the ones that focus exclusively on workers compensation. SeaBright’s share valuation is among the lowest in the industry, trading at just under half its book value, or the net accounting value of its assets.

If the job market remains soft, the company could be hurt more, Ellman said.

A SeaBright spokesman said the company was in a quiet period before  earnings and as such restricted in its ability to comment.

Unemployment is showing signs of stabilizing, but  at high levels. The jobless rate in September was 9.6 percent, unchanged from the previous month.

Initial claims for state unemployment benefits fell to 452,000 in the latest week, the Labor Department said Thursday. Some 4.441 million people continued to collect jobless benefits in the week ended Oct. 9.

That is translating to injured workers relying on insurance payouts longer, John Robertson, director and senior actuary for the National Council on Compensation Insurance, said in an interview.

“One of the things we’re hearing anecdotally from carriers, part of the reason might be there’s less return-to-work opportunities,” Robertson said, referring to easier jobs that injured workers can do instead of their previous assignment.

But some insurers remain confident.

“There are certain states and certain industries where we’d be very concerned about comp … but in the aggregate we feel good,” Travelers President Brian MacLean said on a conference call Thursday.

Valuations in the industry reflect the divergent fortunes of the carriers. Employers Holdings has a price-to-book ratio of 1.34 and Amerisafe has a ratio of 1.18, while SeaBright’s stands at 0.48. The sector median is 0.96.

Analysts say performance in the industry is very much a company-by-company story, depending on what industries and regions a company participates in and how well it does at managing its book.

Lower employment is, in a sense, a boon to the workers comp insurers, because if fewer workers have jobs, fewer can get injured. The number of claims in 2009 fell 4 percent and it looks set to decline again this year, the NCCI said.

But the lack of workers means a lack of premiums, on top of the problems with longer and more expensive claims and rising medical costs to address them.

Morningstar equity analyst Drew Woodbury said a turn in unemployment would have a straight-line benefit in terms of adding new paying customers, but ongoing rate pressure would keep premiums in check.

“The premiums are still difficult to come by,” he added.

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