NCCI Reports on the State of the Workers Compensation Insurance Line

Business Wire, May 9, 2002

Business Editors

BOCA RATON, Fla.--(BUSINESS WIRE)--May 9, 2002

Company Analyzes Difficult Market; Announces 121% Combined

Ratio for 2001 Calendar Year

NCCI Holdings, Inc., today delivered its highly anticipated "State of the Workers Compensation Insurance Line" presentation to an estimated 500 insurance executives at the NCCI Annual Issues Symposium (AIS) in Orlando, FL.

"Unfortunately, this year the state of the workers compensation market remains difficult, with preliminary 2001 results reflecting one of the worst years in the market's history," said NCCI President and CEO Chapin Clark. "The 2001 numbers tell a grim story, with some of the bad news tied to the September 11 attacks on America."

NCCI announced a combined ratio of 121% for the 2001 workers compensation insurance calendar year. With an increase of 3 points from the 2000 combined ratio of 118%, this year's results mark the sixth straight year of deteriorating combined ratios.

During the mid-1990s, the combined ratio for workers compensation hovered around 100 (1994-1997), which is considered excellent for a long-tailed line like workers compensation. Unfortunately, that trend could not be maintained, and beginning in 1998, the combined ratio began to climb back to levels last seen in the early 1990s.

Of particular interest this year, NCCI reported that less than 2 percentage points -- or $500 million -- of the Calendar Year 2001 combined ratio on a net basis is attributable to claims resulting from the terrorist attacks of September 11. This impact is substantially less than originally expected because the vast majority of losses were ceded to reinsurers and will not appear in the workers compensation line on a net-of-reinsurance basis.

NCCI noted that as additional claims, such as respiratory diseases and stress, become more certain, the ultimate impact of September 11-related claims will likely change.

NCCI also reported that investment income associated with workers compensation insurance transactions fell dramatically in 2001 to an estimated 14% -- down from approximately 20% during 1997-2000. The decrease in investment income is due to drastically lower interest rates, as well as a reduction in realized capital gains.

Incorporating the combined ratio with the investment gains delivers a pretax operating loss for workers compensation of 7%, according to the numbers compiled by NCCI. From a historical perspective, 2001 marks the fourth consecutive year of declining pretax operating ratios and the first year to show a pretax loss since 1992.

NCCI also reported the following workers compensation market statistics:

-- For the second straight year, net workers compensation premium volume for
private carriers showed a strong gain, increasing 8.9% from 2000.

-- After two years with high combined ratios (137% in 1999; 133% in 2000), the
preliminary 2001 accident year figures are likely to improve to a combined
ratio of 127%, taking into account the impact of September 11.

-- The potential reserve deficiencies in workers compensation on an ultimate
payout basis could be as much as $21 billion in 2001.

-- During the last few years, approved rates/loss costs have been relatively
stable. After a period of material increases in the early 1990s, the average
decrease from 1994-1999 was approximately 5% annually.

-- The rate of change in the cost of workers compensation indemnity claims has
continued to increase in the last few years.

-- During the most recent 6 years, the average annual increase in medical claim
costs has risen to 7.5%. As with indemnity, the 2000 and 2001 average rates of
change for medical severity have shown notably worse results. In 2000, medical
severity increased at 8.1%; in 2001, medical severity increased at 11%.

-- Preliminary results indicate that the frequency of lost-time claims declined
during 2001 by approximately 4%. This continued a 10-year trend of decreasing
frequency averaging approximately 5% per year.

-- The workers compensation residual market grew by 74% to $615 million in
2001. Furthermore, during the first quarter of 2002, the number of newly
assigned policies in the residual market increased by 22%, and the premiums
increased by 63%, as compared with the first quarter of 2001.

"Given this challenging environment, NCCI expects a number of industry reactions in the coming year," Mr. Clark said. "Among these expected reactions are further carrier consolidation and possible requests by NCCI for loss cost increases. We also expect 2002 to be a transition year for the industry, with insurers continuing to evaluate and adjust their workers compensation strategies.

"NCCI expects that, although diminished investment income may inhibit results in the short term, a revitalized economy and better investment opportunities should help improve results in the long term. A government solution to limit insurer exposure to catastrophic losses in this line is also vital if workers compensation is to return to health.

"As market participants structure their business plans for 2002, NCCI will continue to support industry initiatives by analyzing data and conducting research on the economic factors affecting the market, including the fallout and proposed remedies associated with September 11," Mr. Clark concluded.