Press Release - AUGUST 12, 2014

A.M. Best Special Report: State Funds' Net Premiums Written Increased For Third Straight Year in 2013


CONTACTS:
 
W. Dolson Smith, CFA
Senior Financial Analyst
(908) 439-2200, ext. 5379
w.dolson.smith@ambest.com

Michael J. Lagomarsino, CFA
Assistant Vice President
(908) 439-2200, ext. 5810 michael.lagomarsino@ambest.com

Christopher Sharkey
Manager, Public Relations
(908) 439-2200, ext. 5159
christopher.sharkey@ambest.com

Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644
james.peavy@ambest.com

FOR IMMEDIATE RELEASE

OLDWICK - AUGUST 12, 2014
Premium volume among state workers' compensation funds increased for the third consecutive year in 2013, buoyed in part by hardened pricing, improved macroeconomic activity and the likelihood of increased demand for residual market business, according to a Best's Special Report. Net premiums written (NPW) increased 7.1% in 2011, 13.7% in 2012 and 15.4% in 2013, reaching $7.7 billion last year, the group's highest level since 2007.

These state funds mainly compete for workers' compensation business while also serving as their respective states' guaranteed markets. Some businesses that find it more difficult to afford or secure coverage in the voluntary market during hard-market conditions often turn to state funds, underscoring the potential role these funds can play in a geographic region's economic development.

Each fund tends to develop its own, unique characteristics, largely depending on its business profile and growth initiatives. Some state funds maintain a steadfast role as the residual market and often contend with political pressure that can affect surplus and rate levels. Others have undergone transformations toward becoming private, mutual insurers. Some funds have taken to writing business beyond their state borders.

Some within the private sector take issue with the federal tax exemption that many state funds

have, contending that it can lead to an overcapitalized balance sheet that enables certain state funds to compete more broadly. This exemption has come under the scrutiny of the Internal Revenue Service's (IRS) Exempt Organizations division, which initiated a broad review of the tax-exempt status afforded state funds in 2012.

Indications are that the IRS continues to review several state funds as a follow-up measure to the earlier review. A.M. Best will continue to monitor the situation for developments, because the loss of a state fund's federal tax-exempt status could have significant impacts on its business strategies and operations. More specifically, it could bring IRS scrutiny of redundant loss reserves and likely would result in changes in the structure of a state fund's investment portfolio.

To access a copy of this special report, please visit: http://www3.ambest.com/bestweek/purchase.asp?record_code=227598 .

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