Privatization of employers insurance pays off

The letters of thanks continue to arrive in the Reno office of Employers Holdings Inc.

A small business owner says he got some much-needed breathing room from his share of the proceeds when the workers compensation insurance carrier went public this year. A couple says they now know they can afford to send a child to college.

The heartwarming tales are a happy ending few would have predicted nearly 15 years ago when the Nevada's workers compensation system appeared to be on the verge of collapse with $2.2 billion yes, billion of unfunded liabilities.

Employers Holdings, the company created to resolve the problem, last month distributed $850 million nearly $463 million in cash, the rest in stock that's traded on the New York Stock Exchange to the Nevada policyholders who previously were the company's owners.

The smallest of those checks was about $26,000. The average was about $126,000.

The story is one that combines some difficult decision-making by the state's elected officials, a gutsy bet on the California workers comp market and a big boost from the stock markets' bull rush of the late 1990s.

But to understand all that, you need to start at the beginning.

In the early 1990s, Nevada employers had one place to buy workers compensation insurance a state agency that had held state-authorized monopoly on the business since 1913.

A legislative audit of the agency shocked lawmakers and business owners alike.

Nevada's rates for workers compensation were among the highest in the country but still weren't adequate to cover rising medical costs. The system was losing $1 million a day. It was on the road to bankruptcy in about 18 months.

And that big number $2.2 billion in unfunded liabilities shouted from newspaper headlines.

The Nevada Legislature and Gov. Bob Miller approved a benefits-reform package in 1993, then took the big step in 1995 of opening the once-monopolistic system to competition. The plan was for a two-channel system in which the state agency would compete against private carriers that entered the market.

Executives of the state monopoly welcomed the move, says Douglas Dirks, who had been named chief financial officer of the state system in 1993. Today, he's the president and chief executive officer of Employers Holdings Inc.

"We said that a competitive marketplace, long-term, was the best solution," he recalls.

But the issue was contentious.

"Those were very difficult political decisions," Dirks says. "They put good policy ahead of good politics."

Unwinding more than 80 years of a monopoly system was a complicated task, and the Legislature set a 1999 deadline for the market to be opened to competition.

In 1999, meanwhile, newly elected Gov. Kenny Guinn convinced the Legislature to move a step farther, getting the state out of the workers compensation business entirely, privatizing the state system as a mutual insurance company and pushing it into the competitive arena at the start of 2000.

The high-speed transition from a state agency into private company essentially, it was completed in about six months proved to be a key element in the company's success.

"It forced this organization to come to grips with a customer focus more quickly than we would have otherwise," Dirks says. "Our customers now were our owners. That's a cultural change for people."

In the meantime, Dirks says, the state fund's managers had made what he calls "a calculated decision" to invest as heavily as possible into equities.

They caught the stock-market boom of the 1990s, and their decision trimmed the $2.2 billion deficit to $600 million by 1999.

The remaining liabilities, which included claims dates June 30, 1995, and earlier, were packaged and sold to big reinsurance outfits, and Employers had a statutory surplus of approximately $230 million essentially, the amount by which its assets exceeded its liabilities when it started business as a private company.

Managers of the newly privatized company had more worries than the capitalization of the company.

The state agency had employed about 1,100. During the privatization, they were given the option to find other jobs in the state an offer that was accepted by many senior staff members who had the most at stake with pensions and other benefits.

At the same time, the company dubbed Employers Insurance Company of Nevada didn't have a precise idea how many employees it would need.

Under the old system, it held a 100 percent market share. With its management's new plan to focus on small businesses in low- and moderate-risk categories, no one knew for certain where that market share figure would land.

Today, Employers holds about a 20 percent share of the Nevada market, estimates the insurance analyst Best's Ratings.

The company's employment these days stands at about 650, roughly half its pre-privatization figure even though the dollar volume of its business has doubled.

The company "has become a much more focused and efficient operation," Best's Reports observes.

Even as executives of the new company were getting their Nevada operations on the ground, they were scouting for opportunities to diversify their business, which Dirks describes as "mono-line, mono-state" only workers comp in only Nevada.

And they were watching the meltdown of the workers compensation system next door in California. Rates skyrocketed, and private workers comp carriers couldn't get out of the state fast enough.

But to Employers executives in Reno, Dirks says, the situation looked strikingly similar to that they'd experienced in Nevada a decade earlier. And they figured that reforms were inevitable although no one could predict the recall of Gov. Gray Davis, the election of Arnold Schwarzenegger, and the priority that Schwarzenegger would give to reforms.

Given the chance to acquire the California workers comp book of business from Fremont Insurance but not the company's liabilities for previous claims a subsidiary of Employers moved into the California market in 2002.

Last year, California accounted for 73.5 percent of the $393 million in premiums written by Employers. Best's Reports says the company has profited in California because it's not burdened with old claims it left them behind when it bought Fremont's business and because workers comp benefits have been reformed.

And the success in California, in turn, set the stage for the conversion of Employers from a mutual company owned by its policyholders to a stock company owned by public shareholders.

The company sold 23 million shares at $17 each on Jan. 31. Demand for the offering underwritten by Morgan Stanley was so strong that the IPO price was increased from the initial plan of $14 to $16 a share, and shares jumped to $19.97 in the first day of trading.

(The shares recently have traded in the range of $20 to $20.50.)

The new structure, Dirks says, provides Employers with greater flexibility for growth into new markets.

And the big payoff for the company's former owners, its policyholders, cast a glow that spread into Employers' South Meadows offices.

"That part of the story gives us the greatest pleasure," Dirks says.

SIDEBAR

Privatization: An economic jump-start

The privatization of the workers compensation system in Nevada appears to have paid benefits for the state's economy.

A 2005 study by the National Foundation for Unemployment Compensation & Workers Compensation found that Nevada's rates, among the 10 highest in the nation in 1996, had fallen near the national average.

Equally important, the foundation found that workers comp rates that had been much higher than those in California in 1996 were much lower in 2004.

That provided a big selling point to economic development agencies in Nevada that sought to woo manufacturers from the Golden State.

"Clearly, the decision of a company to locate in Nevada is based on more than the affordability of their workers' compensation premiums," the foundation's researchers wrote. "However, the reversal in the relationship between workers' compensation rates in California and Nevada must be considered as at least a contributor among the factors nurturing economic growth."

NNBW staff