CopperPoint Deal Shows Transformation Potential for Former State Funds

Tuesday, January 23, 2018 | 0

Arizona-based CopperPoint Mutual Insurance Co. has finalized its acquisition of Pacific Compensation Insurance Co., extending its reach into California and illustrating one path of transformation for workers’ comp state funds.

CopperPoint bought PacificComp from Alleghany Insurance Holdings LLC, a subsidiary of Alleghany Corp., for $150 million in cash. CopperPoint announced last week that it had completed the deal, which was first announced in September.

And the PacificComp deal is likely not the end of expansion plans for the company, whose goal over the next few years is to underwrite policies under the CopperPoint name in 23 states, officials said previously. CopperPoint is also planning to add commercial lines of coverage to include property, general liability, commercial auto and umbrella.

The ambitious plans come only about five years since the company was Arizona’s state-chartered workers’ comp carrier, SCF Arizona. The state fund was privatized in 2013.

But the trajectory seen at CopperPoint is one example of how workers’ comp state funds can evolve.

Nevada’s former state fund was converted to a mutual insurance company, whose policyholders later sold their stake in the company in an initial public offering on the New York Stock Exchange. The company, Employers Holdings, is now a monoline carrier that writes workers’ comp business across the U.S.

Competitive state funds may have a significant financial advantage, such as a federal income tax exemption, compared to those that have privatized, according to a white paper on state funds from Willis Towers Watson. But with privatization comes freedom.

“Complete privatization offers a former state fund considerable freedom to define a risk appetite that reflects its underwriting criteria, and engage in more flexible pricing,” the authors state. “Private carriers can expand their book of business to new products (e.g., large deductibles), new market segments or other lines of business, or can become licensed to provide coverage in other states.”

West Virginia privatized its workers’ compensation system in 2006, when the Legislature created a quasi-private company, BrickStreet Mutual Insurance Co., lending the company $200 million to get started. The state opened up workers’ comp to a competitive market in July 2016.

In August, BrickStreet finalized the acquisition of Pittsburgh-based HM Insurance Group’s block of workers’ comp business. Also last year, BrickStreet affiliated with Motorists Insurance Group, which consists of property and casualty insurance, life insurance and insurance brokerage companies. Now a super-regional carrier, Motorists and BrickStreet have 10 offices writing in 29 states.

This month, BrickStreet said it has changed the corporate name of HM Casualty to AlleghenyPoint Insurance Co., effective Jan. 1.

But every state fund is different. In some cases, competitive state funds have undergone expansion while retaining their state fund status.

The Maine Employers' Mutual Insurance Co., or MEMIC, was formed in 1993 as a private mutual company that is a guaranteed source of workers' compensation insurance for Maine businesses. But the company has been actively expanding outside of Maine. In 2000, the company formed a New Hampshire-based subsidiary, MEMIC Indemnity Co., that is licensed to write business across the U.S. and now focuses on the East Coast, from Maine to Florida.

“Each fund tends to develop its own, unique characteristics, largely depending on its business profile and growth initiatives,” A.M. Best said in a 2016 report on state funds. “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 and to writing business beyond their state borders.”