Kentucky Governor, Senate Committee Want KEMI to Share Its Wealth

Kentucky's quasi-public workers' compensation insurer is fighting attempts to force it to surrender 40% of its $154 million surplus in the form of rebates to customers.

The state Senate Economic Development, Tourism & Labor Committee backed S.B. 214 on March 17. The bill would require Kentucky Employers' Mutual Insurance to provide rebates to companies this year and in future years when feasible. KEMI Executive Vice President and Chief Financial Officer Jon Stewart said the legislation would improperly take away the authority of the insurers' board, which is considering smaller rebates.

"They just think we've got too much money," he said. "We're just shocked that someone would think that is appropriate."

Also, Gov. Steve Beshear recently wrote a letter to KEMI in which he asked it share its surplus with the small businesses that make up the majority of its policyholders. Beshear said state law would permit KEMI to declare and distribute funds in the form of premium discounts, dividends or a combination of both.

"While most businesses in our state have struggled over these last few years, it appears that KEMI is faring very well financially," Beshear wrote. "I think it's appropriate and prudent for your organization to consider providing some relief to our struggling Kentucky businesses in these unprecedented fiscal times. Until we find ways to create opportunities for businesses to grow and put people back to work, we will not realize the benefits of an economic recovery."

While KEMI was created by state statute in 1994, it is self-sustaining, Stewart said. The state's largest workers' compensation insurer, the nonprofit both competes for business and acts as the insurer of last resort, he said.

If S.B. 214 becomes law, KEMI can be expected to sue to block it, Stewart said. "I truly believe this will impair our rating," he said.

Viewed over both the recent five and 10-year period, the company has produced strong operating earnings, which outperform the workers' compensation industry as measured by pretax returns on equity, driven by solid underwriting results in combination with ongoing growth in investment income, according to BestLink, which provides online access to A.M. Best's Global Insurance & Banking Database. KEMI's profitable pretax operating earnings have historically been bolstered by both realized and unrealized capital gains resulting in total return measures, which compared favorably to industry composite norms through year end 2007. However, total return measures were negatively impacted in 2008 as KEMI incurred both realized and unrealized investment losses reflective of volatility within the investment markets.

Kentucky Employers' Mutual Insurance currently has a Best's Financial Strength Rating of A- (Excellent).

The top five writers of workers' compensation insurance in Kentucky in 2008, according to BestLink, were: Kentucky Employers' Mutual Insurance, with 24.3% market share; Liberty Mutual Insurance Cos., with 20.3%; American International Group Inc., with 15.8%; Zurich Financial Services NA Group, with 5.1% and Travelers Group with 3.6%.

(By Sean P. Carr, Washington Correspondent: sean.carr@ambest.com)