Pinnacol Assurance 'BBB+' Rating Affirmed; Outlook Stable

  • Pinnacol has strong operating performance and extremely strong capital adequacy.
  • We are affirming our 'BBB+' ratings on Pinnacol.
  • The outlook is stable based on maintenance of extremely strong capital, performance in line with the Workers Compensation industry, and a market share of at least 50% in the Colorado workers' compensation market.
NEW YORK (S&P Global Ratings) Sept. 6, 2019-- S&P Global Ratings said today it affirmed its 'BBB+' insurer financial strength and long-term issuer credit rating on operating company Pinnacol Assurance. We affirmed our 'BBB-' debt rating on the surplus note maturing in 2034. The outlook is stable.
The stable outlook reflects our expectations that Pinnacol will maintain excellent capital adequacy over the next 24 months, with performance in line with the broader workers' compensation (WC) industry, a dominant market share of at least 50%, and stable investment leverage, while sustaining its strong ability to service its surplus notes.
We may lower our ratings in the next 24 months if, contrary to our expectations, capital adequacy falls below the excellent level, investment leverage jumps modestly due to greater allocation to high-risk invested assets (high-yield debt, equities, and alternatives), or earnings or market share weaken to substantially less than our base-case assumptions resulting in deterioration in Pinnacol's competitive position.
Although unlikely in the next two years, we could raise our ratings if Pinnacol's business risk profile improves from geographic or product diversification (unlikely given state-mandated limitations) and maintenance of extremely strong capital adequacy.
Pinnacol has a long-standing position in the Colorado WC market with about 57% market share as of year-end 2018. This is enhanced by strong safety-control metrics and a customer-centric focus for policyholders throughout all underwriting cycles. The successful roll-out of a direct-to-consumer platform called Cake demonstrates Pinnacol's commitment of technological advancement to keep pace with the industry and improve efficiency for small policies. These strengths are offset by the limitations of its state mandate, which includes limitations to only write WC coverage in Colorado and being the insurer of last resort, which limits product and geographic diversification and can create earnings volatility in unfavorable cycles. To mitigate this, Pinnacol focuses on effective claim management and return-to-work initiatives, safety training for employees, and using multiple loss cost multipliers to best achieve pricing adequacy/flexibility.
Pinnacol's performance has been in line with the industry and top WC writers nationally, with a 5-year average (2014-2018) CR of 94.4% after policyholder dividends (87.7% combined ratio pre policyholder dividends)--which is ahead of the company's target of 95%-100% before policyholder dividends. Performance for workers comp continues to benefit from benign frequency and severity trends, minimal medical inflation, enhanced workplace safety conditions, and strong labor markets growing the top line. On the negative side, pressures are building from increased competition given performance levels, compounding rate decreases leading to softening market conditions, and full employment levels across the country leading to less experienced workers that could ultimately pressure loss cost trends. Nonetheless, management's favorable actions have boosted the quality of its underwriting performance given a focus on policyholder dividends as the return method of choice instead of more aggressive pricing cuts than the industry. For 2019, we expect Pinnacol to post a combined ratio of 98%-101% after policyholder dividends.
We view Pinnacol's financial risk profile as strong, bolstered by its ability to maintain capital adequacy consistent with the 'AAA' level under our risk-based capital model despite some noise from the Public Employees Retirement Assn. (PERA) liability. The company willingly adjust its dividend strategy to ensure sufficient capital. Given the uncertainty of movements in the PERA liability, we moderate the capital and earnings score by one notch. Due to the uncertainty around the exposure to the Public Employees Retirement Assn. (PERA) carried as a special surplus fund, higher than average levels of risky assets within the investment portfolio, and the long-tail nature of WC leading to exposure to macro factors affecting reserves, and regulated pricing environment challenging the ability to get rate adequacy in bad years we view the risk exposure as moderately high. Some of these risks are offset by minimal catastrophe risk as they write only WC business. In addition, they have favorable risk control practices and support from their sizeable capital redundancy at the 'AAA' level.
We regard Pinnacol's funding structure as neutral. This assessment reflects limited capital-market access as a mutual insurance company with the surplus note market as the only option. Offsetting the limited access, Pinnacol bolsters a strong balance sheet backed by limited financial leverage and strong coverage given current underwriting margins.
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