Zenith earnings show strength in workers' comp. (Up Front).

The state's workers' compensation market may finally be turning around after years of chaos caused by the failure of carriers in a deregulated environment.

Illustrating the healthier outlook is Zenith National Insurance Corp., the largest remaining California-based insurer and a market bellwether. It has posted rising profits in the last two quarters after losses of $48 million in 2000 and $24 million last year. Workers' comp underwriting results once were highly profitable for the company.

The Woodland Hills company, which maintained underwriting discipline in the 1990s and thus saw its market share dwindle, is posting its current profits on increased premium volume, which it expects to grow even more.

"I am still not convinced that California is out of the woods yet, but I think it's on the right track," said Robert Farnam, an analyst with rating agency A.M. Best Co., who tracks Zenith and the larger market.

The company's results come after a massive shakeout in the market, which saw the failures of big carriers such as Superior National and California Insurance and the growth of the State Compensation Insurance Fund, the nonprofit public carrier of last resort for businesses.

That has led to significant consolidation in the highly fragmented market--the insurance fund now has nearly half of it--and the ability of the remaining carriers to raise rates and make them stick.

Companies seeking insurance have reported their premiums doubling or more since the market bottomed out in 2000. Just this summer the state fund raised rates nearly 20 percent and the state workers' comp bureau is recommending that carriers raise rates at least another 11.9 percent next year.

Earlier this month, Zenith, which is the second largest private workers' comp carrier in California with 2.5 percent of the market, appeared to signal its growth expectations when it sold off peripheral real estate assets and homebuilding business in Las Vegas for $65 million. That money can now be used to help grow its primary worker's camp business.

"They have set themselves up pretty well," said Nils Wright, editor of the California Workers' Comp Executive, an industry newsletter. "Zenith has successfully started increasing its premium volume in large part because workers' comp rates have increased substantially and they are willing to write it again."

The company reported net income for the second quarter ended June 30 of $6.5 million, compared with $2.9 million for the like year-earlier quarter. Revenues were $165.3 million vs. $154.5 million.

Zenith, which does significant business in other workers' comp markets, also reported that its gross workers' compensation premiums in California had increased 27 percent for the quarter compared to the like period a year ago.

Even so, the company lost $38 million from the Sept. 11 terrorist attacks as a result of reinsurance agreements it signed with other carriers. Those losses cut the companies' capital and forced the parent holding company to give Zenith Insurance Co., the largest of its three subsidiaries, $47.5 million to cover potential losses from the increased workers' comp premium volume.

However, both A.M. Best and Fitch Ratings, another insurance ratings agency, affirmed the company's solid rating following reviews of the moves over the past several weeks.

Company officials did not return repeated telephone calls for comment.

Other good signs

The results at Zenith are not the only positive signs for the California market.

The state Department of Insurance recently approved Fremont Employers Insurance Co. to operate in the state. The company is a subsidiary of Employers Insurance Co. of Nevada, which bought Fremont General Corp.'s book of workers' comp business when that company decided to exit the California market earlier this year.

The state department also has received an application from another carrier to start underwriting workers' camp insurance in California, the first such application this year from a company with no ties to the market, said Nanci Kramer, a department spokeswoman.

"It's a good sign," she said. "It's our hope that we will start to turn the corner in the workers' camp market and move Out of crisis mode."

The department would not disclose the company seeking to enter the market, because the application is still pending, she said.

Meanwhile, officials with Employers Insurance said their initial results in the California market are positive, though they did not disclose any specific figures.

"It's safe to say we are ahead of projections," said Phil Levine, a company spokesman. "We recently hired some claims people in California to accurately reflect the current and projected book business."

After the market was deregulated in the mid-1990s, Fremont grew to be one of the largest carriers in the state, with premium volume that reached $1 billion. But its under-pricing led to losses that ballooned from $95 million in 1999 to $547 million in 2000.

In dumping the business this year, it decided to remake itself solely as a financial services firm. But Employers Insurance decided to enter the market, saying the time was ripe since premiums were on the rise.

However, the future of the California market still remains cloudy, especially given the decision by Gay. Gray Davis to sign a bill raising workers' camp benefits $2.5 billion starting in January. That could lead to bigger underwriting losses than now anticipated, though that was partially offset with reforms intended to minimize bogus claims, Farnam said.

[GRAPH OMITTED]

[GRAPH OMITTED]