Although dogged by high medical costs, this year's outlook forworkers' compensation insurers is a good one, but there will besome deterioration in loss ratio, a rating firm said yesterday.

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Standard & Poor's Ratings Services, in a report which rankedand rated the top 20 comp writers, said the ratings impact for compinsurers is expected to be neutral on the whole.

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Underwriting results for 2005, S&P said, are expected to bestrong based on nine-month figures and will continue to be strongthrough 2006, driven by the reduction of loss trends resulting frommultiple state reforms implemented over the past few years and byimproving claims frequency.

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But the rating firm said improvements will be partially offsetby long-term medical inflation (especially for prescription drugs),increased competition, and improving (though still deficient)reserve adequacy.

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The report said insurers specializing in the comp line orholding a book with a certain geographic concentrations have highexposure to risks, and that the ratings on such insurers are moresensitive to the market's vagaries.

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As a result, Standard & Poor's said ratings on workers' compspecialists are likely to be no higher than the 'A' ratingcategory.

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Among the U.S. Workers' Compensation Groups in 2004, S&Psaid the top five were California State Compensation InsuranceFund, Liberty Mutual Group Inc., American International Group Inc.companies, St. Paul Travelers Cos and affiliates and ZurichInsurance Co. Group.

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Titled "State Reforms, Strong Results Point To Good Outlook ForU.S. Workers' Compensation," the report says any unexpected ratingchanges in 2006 stemming from developments in workers' comp wouldmost likely be the result of larger-than-expected reservestrengthening by a few insurers for prior-year business (a negativefactor), or of better or worse than anticipated conditions inselect markets in which a workers' comp specialty insurer maintainsa business concentration.

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The report includes an examination of the four biggest markets,California, New York, Florida and Texas.

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Concerning California, which generated $16 billion direct earnedpremium in 2004, S&P said that while loss trends are favorableafter recent reforms to tighten medical treatment, its prospectiveview is "cautious."

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Rate decreases have been pushed before the savings from reformsare fully known, court challenges to reforms continue and the sizeof the State Compensation Insurance fund makes it a "huge,potentially disruptive market force," the report said.

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Among firms that are workers' comp specialists, the largest,Zenith National Insurance Group in California, has had strongearnings and premium growth driven by a favorable environment inFlorida and in California where it writes 95 percent of its comppremium, S&P said. In terms of direct comp premium written,S&P ranked Zenith eleventh in the nation.

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The report said the comp sector as among the most complex ininsurance, with a mixture of risk elements such as health care,long-tail claims settlements, and state regulation, as well as "anunusually significant dollop of political influence, that do notgenerally affect most other insurance lines."

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The report is available to subscribers of Standard & Poor'sWeb-based credit research and analysis system, atwww.ratingsdirect.com. Copies can be purchased for $400 apiece.

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