As we release this 2019 annual report in mid-2020, it’s undeniably strange to look back at Pinnacol’s most successful year ever while our economy is now in its worst trough since the Great Depression. Like every business, Pinnacol will experience a significant impact from the COVID-19 pandemic. Yet we are better prepared than many others to weather it.
There are many reasons for that statement. First and foremost, our policyholders — and the policymakers who review our finances — should be reassured by the strong foundation of our surplus. Not only has it enabled a very strong combined ratio (see the chart below
), but also, and most important, it is our surplus that best enables us to weather storms like the one we’re all experiencing now.
Pinnacol’s surplus is the equity designated to cover unexpected claims/losses and economic fluctuations (separate from the reserves we carry to cover the risks we know about). It serves as our own guaranty fund. Because we are required to accept all comers and write risky policies that commercial insurers can decline, we are not allowed to participate in the guaranty fund mechanism that other insurers can tap if they run into trouble. Our risk is also increased by the fact that we are restricted by law to only one line of business in one state, meaning we can’t diversify our operating risk in the same way other insurers can. In addition, we have a significant pension liability that commercial workers’ comp carriers don’t. Over the past three years, our surplus balance took a nearly 20% hit from additional Public Employees Retirement Association liabilities. And as we estimate the impact of COVID-19 on our business, another 15%-20% impact is not out of the question.
Accordingly, the capital adequacy Pinnacol’s surplus represents is essential for giving our policyholders and their employees peace of mind about their workers’ comp coverage at this time of unprecedented uncertainty.
Pinnacol’s stakeholders can count on other strengths too. Our migration to digital-first interactions has meant that we haven’t missed a beat with policyholders, injured workers and agents as the world abruptly shifted to virtual communications. Our customer-centric approach to developing our online tools and our relentless focus on customer satisfaction have resulted in industry-leading policyholder net promoter scores and injured worker satisfaction scores (see graphics below).
None of these improvements would be possible without our people. I would put Pinnacol’s employees up against anyone’s. Their empathy, dedication, curiosity, creativity and work ethic are the real engines that drive our results. They have worked tirelessly to create efficiency by developing better systems, retooling our training and improving our processes to enable our best-in-class customer service.
When our operating and investment returns are strong, as they were in 2019, we are able to return the resulting additional surplus to our policyholders in the form of dividends. We have paid $270 million to Colorado businesses through dividends in the past five years, including a $70 million dividend for 2019 that we paid out in March of this year, just as our policyholders were being devastated by the COVID-19 crisis. In addition, if our operating returns are stronger than expected, we are able to decrease our premium rates going forward. Over the past five years, we have decreased average premium rates by a total of 29%, including an average 7% decrease in 2020 rates. Unfortunately, in light of the impact COVID-19 is having on Colorado businesses, we don’t anticipate being able to release a dividend in 2021.
Even so, because of the strong foundation we have forged, our customers can be assured that we will be here for the long haul, still able to provide the caring protection they’ve come to depend on.