Transcript: Pinnacol Assurance CEO Ken Ross on State Separation, State of the Workers’ Comp Market

Pinnacol Assurance President and CEO Ken Ross sat for an interview with Washington Correspondent Sean Carr at a meeting of the American Association of State Compensation Insurance Funds in Washington, D.C. The following is a transcript of that conversation.

CARR: Welcome to BestDay Audio Spotlight. I'm Washington Correspondent Sean Carr here at the American Association of State Compensation Insurance Funds' National Issues Conference in Washington, D.C. With me is Ken Ross, president and CEO of Pinnacol Insurance, the state workers'' compensation fund of Colorado. Mr. Ross, welcome to the program.

ROSS: Thank you, Sean. It's good to see you.

CARR: Tell us about Pinnacol and what role does it play in the industry in Colorado and how does it compare to other state funds in focus and operation.

ROSS: Pinnacol was created in 1915, so it has a long history, when there was a wave of social reform and states enacting workers' comp legislation. It became a mandatory form of insurance. So many states, and Colorado is one of them, had to make sure that there was a mechanism for employers to get insurance. That's the genesis of Pinnacol. It was initially created as a state agency back then as part of the Department of Labor. From 1915 to this day, Pinnacol is very similar to other state funds in that we're the residual market carrier. Since it's a mandatory line of insurance, you have to make sure that form of insurance is available to all comers. So Pinnacol's role in Colorado is two-fold. We have been competing with other large national and regional carriers for workers' comp business but we also since 1915 have been the residual carrier. We can't turn away anyone who needs insurance as obviously our competitors can. They can decide to not even do business in Colorado. Our focus is, by statue, only writing workers' compensation insurance in Colorado. We insure about 55,000 employers in the state. That represents well over a million employees. So Pinnacol's role in Colorado and

the workers' comp market and the economy is quite important for the state as we slowly get out of this economic recession.

CARR: How does your focus and operations compare to that of other state funds? Do you have any government interference at this point or are you more or less independent? Where do you fall?

ROSS: It's odd. If you look at state funds and I'm a past president of AASCIF. I've been with this organization for over 15 years now and still on the executive board. So I've been in a position to really see how states operate, and they are very different. workers' compensation is a state mandated law. So it's very unique depending on the state laws. So depending on where you're sitting, the laws are different and the ways companies are structured are different in order to provide workers' compensation insurance.

Pinnacol is even more unique. We're described in statute as a political subdivision of the state, to be operated as a mutual insurance company. We have a board of directors that's appointed by the governor. They are independent. They are the policy setting group for Pinnacol. They hire me and we are not state employees. We take no tax dollars from the state. We have about 55% of our market share in Colorado and that's been pretty static. So I don't call it government interference, but because we are a creature of statute we're created by law. So we have that unique status compared to our competitors, we have some remaining government ties but the statute is very clear: Pinnacol is to be operated as a private mutual company. In fact it directs the CEO to run it as a private enterprise.

I joined Pinnacol five years ago as the president and CEO. Prior to that I had been the CEO of the New York State Insurance Fund. By comparison, that's a very different entity. That is a state agency that does have the back of and the full faith and credit of the state should they ever have problems paying their liabilities. Pinnacol is a stand-alone entity. We have to stand on our own feet. Since we're a mono-line, mono-state company, our focus is on Colorado and its employers I'm proud to say that we've done a very good job for our business owners in Colorado.

CARR: Well, it's certainly been a controversial couple of years for Pinnacol. You've dealt with a handful of bills that would affect your business in the most recent legislative session. You also advanced a plan to privatize. Why are you exploring that option and where do those talks stand now?

ROSS: There are no talks at the moment. Our session ended, I guess it was about the second week in May. We had been in discussions with the legislative leaders and the governor's office. We felt that the best plan for Pinnacol – it's not a privatization. We call it a separation from the state – to sever those last remaining ties with the state so that Pinnacol can truly be owned by its policyholders as a mutual company. We had an awful lot of discussions. We did an awful lot of analysis. We thought that it would be a good opportunity to try to pursue this legislation. As it got toward the end of the session it was clear that it was a bit too late. We needed more discussions, so the legislation was never introduced, to separate Pinnacol. We're open. My board of directors is still open to continuing those discussions in the future. It's a bit of a question mark, not knowing what will happen in November. So we don't know the political climate in 2011. But I would expect our board would want us to pursue that in the future and keep the door open.

CARR: I assume you're continuing to study that issue even when the legislature is out of session?

ROSS: Yes.

CARR: And the would-be sponsor of that bill said that he intends to bring it back next year, assuming he's back. So I assume you're continuing to work on this issue.

ROSS: We are. Our governor has indicated, even though the governor is not running for re-election he has to put a proposed budget into the legislature in November. Now it's not binding on the next governor, but it's a starting point. We would continue to have those discussions. Since we have a large budget gap that might be a way to create legislation to affect the separation, pay some consideration to the state and get that legislation passed next year. So we're open to continuing those discussions.

CARR: Now you had proposed I believe it was $300 million?

ROSS: $330 million.

CARR: $330 million. Some critics of the plan said a correct number would be more like five times that. I'm assuming you disagree with that finding.

ROSS: Vigorously. It's funny, these companies that are structured like Pinnacol across the country and as I said they're all different, have very different balance sheets. So they're not all the same. We have $2 billion of assets. We also have $1.3 billion of liability and those are payments that are going to injured workers', their families and dependents. For years, workers' comp is known as a long-tail line of insurance. We have a claim, granted it's unique, but we're still paying a claim from 1955. That's 55 years we've been paying that. Now it's not a lot of money and that's unusual but it's indicative that in workers' comp you have liabilities that could extend out decades.

That's why we have a very strong balance sheet. Not that long ago Pinnacol when it was more a part of the state in the mid-90s up until the early 2000s, had no surplus at all. If we were a private carrier we probably would have been taken under control by the Division of Insurance. But that didn't happen. We entered into an agreement with the Division of Insurance to rebuilt our surplus and over the past 10 years we have a very healthy balance sheet to pay for those liabilities way out in the future.

We think that the best model, and there are other states that have followed this, Maine, Minnesota, Utah, have while they're created in statute, they are true mutual companies. Their focus in still on their state, most of just writing workers' comp. we think that's the best way to go for Colorado in the future.

CARR: Here at the conference we've heard a lot of talk about the troubled state of the economy and some of the challenges facing the workers' comp market. What's your take on that and what does it mean for the future of Pinnacol?

ROSS: We're sound. It's difficult. Premium in workers' comp is based directly off of payrolls. So as payrolls go up more premium is collected. As payrolls go down, less premium is collected. We've seen a pretty dramatic drop in our premium based on two factors, the economy, less people working, lower payrolls. And also we've been fortunate based on our financial strength to reduce the rates that we charge our policyholders by 50% over the last five years. So that's on average. If you were paying a rate of $10 per $100 of payroll as an employer in 2005, you're now paying Pinnacol $5. That's been a great help to our business owners as they slowly try to get out of this recessionary period.

Now we don't see as we heard today a robust recovery. I think we're going to muddle through this through the end of this year and into 2011. We track payrolls weekly with our company and we don't see any pickup. I think, as we heard at this conference, employers will be very slow to start adding employees or expanding operations until they have more certainty as to what's going to happen on the economic front.

CARR: Mr. Ross, thank you for joining the program.

ROSS: Sean, a pleasure to be here.

The interview with Ken Ross can be heard at http://www.ambest.com/media/media.asp?RC=174679.

(By Sean P. Carr, Washington Correspondent: [email protected])